Bankruptcy Regulations, 19324-19477 [2020-28300]
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Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 4, 41, and 190
RIN 3038–AE67
Bankruptcy Regulations
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
The Commodity Futures
Trading Commission (the
‘‘Commission’’) is amending its
regulations governing bankruptcy
proceedings of commodity brokers. The
amendments are meant
comprehensively to update those
regulations to reflect current market
practices and lessons learned from past
commodity broker bankruptcies.
DATES:
Effective date: The effective date for
this final rule is May 13, 2021.
Compliance date: The compliance
date for § 1.43 is April 13, 2022, for all
letters of credit accepted, and customer
agreements entered into, by a futures
commission merchant prior to May 13,
2021.
FOR FURTHER INFORMATION CONTACT:
Robert B. Wasserman, Chief Counsel
and Senior Advisor, 202–418–5092,
rwasserman@cftc.gov, Ward P. Griffin,
Senior Special Counsel, 202–418–5425,
wgriffin@cftc.gov, Jocelyn Partridge,
202–418–5926, jpartridge@cftc.gov,
Abigail S. Knauff, 202–418–5123,
aknauff@cftc.gov, Division of Clearing
and Risk; Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW, Washington, DC
20581.
SUMMARY:
SUPPLEMENTARY INFORMATION:
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Table of Contents
I. Background
A. Background of the Notice of Proposed
Rulemaking
B. Major Themes in the Revisions to Part
190
II. Finalized Regulations
A. Subpart A—General Provisions
1. Regulation § 190.00: Statutory Authority,
Organization, Core Concepts, Scope, and
Construction
2. Regulation § 190.01: Definitions
3. Regulation § 190.02: General
B. Subpart B—Futures Commission
Merchant (FCM) as Debtor
1. Regulation § 190.03: Notices and Proofs
of Claims
2. Regulation § 190.04: Operation of the
Debtor’s Estate—Customer Property
3. Regulation § 190.05: Operation of the
Debtor’s Estate—General
4. Regulation § 190.06: Making and Taking
Delivery Under Commodity Contracts
5. Regulation § 190.07: Transfers
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6. Regulation § 190.08: Calculation of
Funded Net Equity
7. Regulation § 190.09: Allocation of
Property and Allowance of Claims
8. Regulation § 190.10: Provisions
Applicable to Futures Commission
Merchants During Business as Usual
C. Subpart C—Clearing Organization as
Debtor
1. Regulation § 190.11: Scope and Purpose
of Subpart C
2. Regulation § 190.12: Required Reports
and Records
3. Regulation § 190.13: Prohibition on
Avoidance of Transfers
4. Regulation § 190.14: Operation of the
Estate of the Debtor Subsequent to the
Filing Date
5. Regulation § 190.15: Recovery and
Wind-Down Plans; Default Rules and
Procedures
6. Regulation § 190.16: Delivery
7. Regulation § 190.17: Calculation of Net
Equity
8. Regulation § 190.18: Treatment of
Property
9. Regulation § 190.19: Support of Daily
Settlement
D. Appendix A Forms
E. Appendix B Forms
F. Technical Corrections to Other Parts
1. Part 1
2. Part 4
3. Part 41
G. Additional Comments
H. Supplemental Proposal
III. Cost-Benefit Considerations
A. Introduction
1. Baseline
2. Overarching Concepts
a. Changes to Structure of Industry
b. Trustee Discretion
c. Cost Effectiveness and Promptness
Versus Precision
d. Unique Nature of Bankruptcy Events
e. Administrative Costs Are Costs to the
Estate, and Often to the Customers
f. Preference for Public Customers Over
Non-Public Customers and for Both Over
General Creditors
B. Subpart A—General Provisions
1. Regulation § 190.00: Statutory Authority,
Organization, Core Concepts, Scope, and
Construction: Consideration of Costs and
Benefits
2. Regulation § 190.01: Definitions:
Consideration of Costs and Benefits
3. Regulation § 190.02: General:
Consideration of Costs and Benefits
4. Section 15(a) Factors—Subpart A
C. Subpart B—Futures Commission
Merchant as Debtor
1. Regulation § 190.03: Notices and Proofs
of Claims: Consideration of Costs and
Benefits
2. Regulation § 190.04: Operation of the
Debtor’s Estate—Customer Property:
Consideration of Costs and Benefits
3. Regulation § 190.05: Operation of the
Debtor’s Estate—General: Consideration
of Costs and Benefits
4. Regulation § 190.06: Making and Taking
Delivery Under Commodity Contracts:
Consideration of Costs and Benefits
5. Regulation § 190.07: Transfers:
Consideration of Costs and Benefits
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6. Regulation § 190.08: Calculation of
Funded Net Equity: Consideration of
Costs and Benefits
7. Regulation § 190.09: Allocation of
Property and Allowance of Claims:
Consideration of Costs and Benefits
8. Regulation § 190.10: Provisions
Applicable to Futures Commission
Merchants During Business as Usual:
Consideration of Costs and Benefits
9. Section 15(a) Factors—Subpart B
D. Subpart C—Clearing Organization as
Debtor
1. Regulation § 190.11: Scope and Purpose
of Subpart C: Consideration of Costs and
Benefits
2. Regulation § 190.12: Required Reports
and Records: Consideration of Costs and
Benefits
3. Regulation § 190.13: Prohibitions on
Avoidance of Transfers: Consideration of
Costs and Benefits
4. Regulation § 190.14: Operation of the
Estate of the Debtor Subsequent to the
Filing Date: Consideration of Costs and
Benefits
5. Regulation § 190.15: Recovery and
Wind-Down Plans; Default Rules and
Procedures: Consideration of Costs and
Benefits
6. Regulation § 190.16: Delivery:
Consideration of Costs and Benefits
7. Regulation § 190.17: Calculation of Net
Equity: Consideration of Costs and
Benefits
8. Regulation § 190.18: Treatment of
Property: Consideration of Costs and
Benefits
9. Regulation § 190.19: Support of Daily
Settlement: Consideration of Costs and
Benefits
10. Section 15(a) Factors—Subpart C
E. Changes to Appendices A and B
F. Technical Corrections to Parts 1, 4, and
41
IV. Related Matters
A. Antitrust Considerations
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
1. Reporting Requirements in an FCM
Bankruptcy
2. Recordkeeping Requirements in an FCM
Bankruptcy
3. Third-Party Disclosure Requirements
Applicable to a Single Respondent in an
FCM Bankruptcy
4. Reporting Requirements in a Derivatives
Clearing Organization (DCO) Bankruptcy
5. Recordkeeping Requirements in a DCO
Bankruptcy
6. Third-Party Disclosure Requirements
Applicable to a Single Respondent in a
DCO Bankruptcy
7. Third-Party Disclosure Requirements
Applicable to Multiple Respondents
During Business as Usual
I. Background
A. Background of the Notice of
Proposed Rulemaking
The basic structure of the
Commission’s bankruptcy regulations,
part 190 of title 17 of the Code of
Federal Regulations, was proposed in
1981 and finalized in 1983. In April of
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this year, the Commission proposed a
comprehensive revision of part 190 (the
‘‘Proposal’’),1 and in September of this
year, the Commission issued a
supplemental proposal (the
‘‘Supplemental Proposal’’) 2 addressing
a particular issue involving the
interaction between bankruptcy and
resolution of a clearing organization
pursuant to Title II of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act 3 (hereinafter, ‘‘Title II’’
and ‘‘Dodd-Frank’’).
The Commission is revising part 190
comprehensively in light of several
major changes to the industry over the
37 years since part 190 was first
finalized. These changes include
exponential growth in the speed of
transactions and trade processing,
important lessons learned over prior
bankruptcies, and the increased
importance of derivatives clearing
organizations (‘‘DCOs’’) to the financial
system.
In promulgating these rules, the
Commission is exercising its broad
power under the Commodity Exchange
Act (‘‘CEA’’ or ‘‘Act’’) to make
regulations with respect to commodity
broker debtors. Specifically, section
20(a) states that notwithstanding title
11, the Commission may provide, with
respect to a commodity broker that is a
debtor under chapter 7 of title 11, by
rule or regulation (1) that certain cash,
securities, other property, or commodity
contracts are to be included in or
excluded from customer property or
member property; (2) that certain cash,
securities, other property, or commodity
contracts are to be specifically
identifiable to a particular customer in
a specific capacity; (3) the method by
which the business of such commodity
broker is to be conducted or liquidated
after the date of the filing of the petition
under such chapter, including the
payment and allocation of margin with
respect to commodity contracts not
specifically identifiable to a particular
customer pending their orderly
liquidation; (4) any persons to which
customer property and commodity
contracts may be transferred under
section 766 of title 11; and (5) how the
net equity of a customer is to be
determined.4
In developing this rulemaking, the
Commission benefited from outside
contributions. In particular, the
Proposal benefited from a thoughtful
and detailed model set of part 190 rules
submitted by the Part 190 Subcommittee
1 85
FR 36000 (June 12, 2020).
FR 60110 (Sept. 24, 2020).
3 Public Law 111–203 (July 21, 2010).
4 See CEA section 20(a), 7 U.S.C. 24(a).
2 85
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of the Business Law Section of the
American Bar Association (‘‘ABA
Subcommittee’’).5 In addition, and as
discussed further below, the
Commission benefited from thoughtful,
analytical, and detailed public
comments submitted in response to the
Proposal and Supplemental Proposal.
B. Major Themes in the Revisions to Part
190
The major themes in the revisions to
part 190 include the following:
(1) The Commission is adding
§ 190.00, which sets out the statutory
authority, organization, core concepts,
scope, and rules of construction for part
190. More generally, this section sets
out, after notice and comment
rulemaking, the Commission’s thinking
and intent regarding part 190 in order to
benefit and to enhance the
understanding of DCOs, FCMs, their
customers, trustees,6 and the public at
large.
(2) Some of the provisions support the
implementation of the requirements,
established consistent with section 4d of
the CEA, that shortfalls in segregated
property should be made up from the
FCM’s general assets, while others
further the preferences, arising from
both title 11 of the United States Code
(i.e., the ‘‘Bankruptcy Code’’), section
766(h), and Commission policy, that
with respect to customer property,
public customers are favored over nonpublic customers, and that public
customers are entitled inter se to a pro
rata distribution based on their
respective claims.
(3) Other provisions foster the
longstanding and continuing policy
preference for transferring (as opposed
to liquidating) positions of public
customers and those customers’
proportionate share of associated
collateral.7
(4) The Commission is promulgating a
new subpart C to part 190, governing the
bankruptcy of a clearing organization. In
doing so, the Commission is
establishing ex ante the approach to be
5 The submission by the ABA Subcommittee
cautioned that ‘‘[t]he views expressed in this letter,
and the proposed Model Part 190 Rules, are
presented on behalf of the [ABA Subcommittee].
They have not been approved by the House of
Delegates or Board of Governors of the ABA and,
accordingly, should not be construed as
representing the policy of the ABA. In addition,
they do not represent the position of the ABA
Business Law Section, nor do they necessarily
reflect the views of all members of the Committee.’’
6 Including bankruptcy and SIPA trustees, as well
as the FDIC in its role as a receiver.
7 This policy preference is manifest in section
764(b) of the Bankruptcy Code, 11 U.S.C. 764(b)
(protecting from avoidance transfers approved by
the Commission up to seven days after the order for
relief), and in current § 190.02(e).
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taken in addressing such a bankruptcy,
in order to foster prompt action in the
event such a bankruptcy occurs, and in
order to establish a more clear
counterfactual (i.e., ‘‘what would
creditors receive in a liquidation in
bankruptcy?’’) in the event of a
resolution of a clearing organization
pursuant to Title II of Dodd-Frank.8 The
Commission’s approach toward a DCO
bankruptcy is characterized by three
overarching concepts:
a. First, the trustee should follow, to
the extent practicable and appropriate,
the DCO’s pre-existing default
management rules and procedures and
recovery and wind-down plans that
have been submitted to the Commission.
These rules, procedures, and plans will,
in most cases,9 have been developed
pursuant to the Commission’s
regulations in part 39, and subject to
staff oversight. This approach relieves
the trustee of the burden of developing,
in the moment, models to address an
extraordinarily complex situation. It
would also enhance the clarity of the
counterfactual for purposes of
resolution under Title II. However, as
discussed further below, such plans are
not rigid formulae. Moreover, the
Commission’s approach gives the
trustee discretion in following those
plans. Accordingly, the approach seeks
to balance advance planning with
flexibility to tailor the implementation
to the specific circumstances.
b. Second, resources that are intended
to flow through to members as part of
daily settlement (including both daily
variation payments and default
resources) are devoted to that purpose,
rather than to the general estate.10
c. Third, other provisions draw, with
appropriate adaptations, from
provisions applicable to FCMs.11
(5) The Commission is noting the
applicability of part 190 in the context
8 Section 210(d)(2), 12 U.S.C. 5390(d)(2), provides
that the maximum liability of the FDIC, acting as
a receiver for a covered financial company in a
resolution under Title II, is the amount the claimant
would have received if the FDIC had not been
appointed receiver and the covered financial
company had instead been liquidated under chapter
7 of the Bankruptcy Code. Thus, in developing
resolution strategies for a DCO while mitigating
claims against the FDIC as receiver, it is important
to understand what would happen if the DCO was
instead liquidated pursuant to chapter 7 of the
Bankruptcy Code (and this part 190), and such a
liquidation is the counterfactual to resolution of
that DCO under Title II.
9 Only those DCOs that are subject to subpart C
of part 39 (i.e., those that have been designated as
systemically important by the Financial Stability
Oversight Council (FSOC) or that have elected to be
subject to subpart C of part 39) are subject to § 39.35
(default rules and procedures) and § 39.39 (recovery
and wind-down plans).
10 See generally § 190.19.
11 See, e.g., §§ 190.16, 190.17(c).
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of proceedings under the Securities
Investors Protection Act (‘‘SIPA’’) in the
case of FCMs subject to a SIPA
proceeding,12 and Title II of Dodd-Frank
in the case of a commodity broker where
the Federal Deposit Insurance
Corporation (‘‘FDIC’’) is acting as a
receiver.
(6) The Commission is enacting
changes to the treatment of letters of
credit as collateral, both during business
as usual and during bankruptcy, in
order to ensure that, consistent with the
pro rata distribution principle,
customers who post letters of credit as
collateral suffer the same proportional
loss as customers who post other types
of collateral.
(7) The Commission is granting
trustees enhanced discretion, based on
both practical necessity and positive
experience.
a. Recent commodity broker
bankruptcies have involved many
thousands of customers, with as many
as hundreds of thousands of commodity
contracts. Trustees must make decisions
as to how to handle such customers and
contracts in the days—in some cases,
the hours—after being appointed.
Moreover, each commodity broker
bankruptcy has unique characteristics,
and bankruptcy trustees need to adapt
correspondingly quickly to those unique
characteristics.
i. In order to foster the ability of the
trustee to operate effectively, some of
the changes would permit the trustee
enhanced discretion generally.
ii. Others, recognizing the difficulty in
treating large numbers of public
customers on a bespoke basis, would
permit the trustee to treat public
customers on an aggregate basis. These
changes represent a move from a model
where the trustee receives and complies
with instructions from individual public
customers, to a model—reflecting actual
practice in commodity broker
bankruptcies in recent decades—where
the trustee transfers as many open
commodity contracts as possible on an
omnibus basis.
b. These grants of discretion are also
supported by the Commission’s positive
experience working in cooperation and
consultation with bankruptcy and SIPA
trustees.
c. On a related note, and as discussed
further as the third overarching concept
in the section below on cost-benefit
considerations,13 part 190 favors cost
effectiveness and promptness over
12 Those would be FCMs that are also registered
as broker-dealers with the Securities and Exchange
Commission. See generally SIPA, 15 U.S.C. 78aaa et
seq.
13 See the overarching concept discussed in
section III.A.2.c below.
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precision in certain respects,
particularly with respect to the concept
of pro rata treatment. Following the
policy choice made by Congress in
section 766(h) of the Bankruptcy Code,
the Commission’s policy is that it is
more important to be cost effective and
prompt in the distribution of customer
property (i.e., in terms of being able to
treat customers as part of a class) than
it is to value each customer’s
entitlements on an individual basis. The
Commission believes that this approach
would lead to (1) in general, a faster
administration of the proceeding, (2)
customers receiving their share of the
debtor’s customer property more
quickly, and (3) a decrease in
administrative costs (and thus, in case
of a shortfall in customer property, a
greater return to customers).
(8) Many of the changes are intended
to update part 190 in light of changes to
the regulatory framework over the past
three decades, including crossreferences to other Commission
regulations. Some of these codify actual
practice in prior bankruptcies, such as
a requirement that an FCM notify the
Commission of its imminent intention
to file for voluntary bankruptcy. In
another case, the Commission is
addressing for the first time the
interaction between part 190 and recent
revisions to the Commission’s customer
protection rules.14
(9) Other changes follow from changes
to the technological ecosystem, in
particular changes from paper-based to
electronic-based means of
communication and recording, (for
example, the use of communication to
customers’ electronic addresses rather
than by paper mail, as well as the use
of websites as a means for the trustee to
communicate with customers on a
regular basis). The proposal would also
recognize the change from paper-based
to electronic recording of ‘‘documents of
title.’’ Many of these changes also
recognize the actual practice in prior
bankruptcies.
(10) Finally, many of the changes are
intended to clarify language in existing
regulations, without any intent to
change substantive results. While some
of these changes will, as discussed
below, address ambiguities that have
complicated past bankruptcies, this
comprehensive revision of part 190 has
also provided opportunities to clarify
language in order to avoid future
ambiguities, and to add provisions to
address circumstances that have not yet
arisen, in order to accomplish better and
more reliably the goals of promptly and
14 78 FR 68506 (Nov. 14, 2013). This refers to
§ 190.05(f) in section II.B.3 below.
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cost-effectively resolving commodity
broker bankruptcies while mitigating
systemic risk and protecting the
commodity broker’s customers.
The Commission invited comments
on all aspects of the proposed
rulemaking and received a total of 16
substantive comment letters in
response.15 The comments generally
supported the adoption of revisions to
part 190, though several provided
suggestions as to particular elements of
the proposal that should be modified,
clarified, deleted, or otherwise
improved. The Commission has adopted
many, though not all, of these
suggestions, and in some cases has
sought to address the concerns raised
through alternative drafting.16
II. Finalized Regulations
In the discussion below, the
Commission highlights topics of interest
to commenters and discusses comment
letters that are representative of the
views expressed on those topics. The
discussion does not explicitly respond
to every comment submitted; rather, it
addresses important issues raised by the
proposed rulemaking and analyzes
those issues in the context of specific
comments.
A. Subpart A—General Provisions 17
The Commission is adopting as
subpart A (§§ 190.00–190.02) general
provisions to address both debtors that
are both FCMs and debtors that are
DCOs.
15 The Commission received comment letters
submitted by the following: American Council of
Life Insurers (ACLI); Better Markets, Inc. (Better
Markets); Cboe Global Markets, Inc. (CBOE); CME
Group Inc. (CME); Commodity Markets Council
(CMC); Futures Industry Association (FIA);
Investment Company Institute (ICI);
Intercontinental Exchange Inc. (ICE); International
Swaps and Derivatives, Inc. (ISDA); LCH Group
(LCH); National Grain and Feed Association
(NGFA); Options Clearing Corporation (OCC); Part
190 Subcommittee of the Business Law Section of
the American Bar Association (ABA
Subcommittee); Securities Industry and Financial
Markets Asset Management Group and Managed
Funds Association (SIFMA AMG/MFA);); Kathryn
Trkla; Geoffrey Goodman; and Vincent Lazar, as
individuals (Subcommittee Members), and
Vanguard Group, Inc. (Vanguard).
16 The Commission also issued the Supplemental
Proposal, which withdrew proposed § 190.14(b)(2)
and (3), and proposed an alternative. The
Commission received 5 substantive comment letters
in response, each of which was from an entity that
had also submitted a comment letter on the
Proposal. For the reasons discussed in section II.H
below, the Commission is not adopting the
Supplemental Proposal.
17 The Commission is adopting the proposed
technical corrections and updates to parts 1, 4, and
41, which are discussed in section II.F. below.
Moreover, as discussed in section II.B.8, parts of
proposed § 190.10 are being adopted, but codified
in part 1.
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1. Regulation § 190.00: Statutory
Authority, Organization, Core Concepts,
Scope, and Construction
The Commission is adopting § 190.00
as proposed with the addition of
§ 190.00(c)(3)(i)(C) and the modification
to § 190.00(d)(3)(v), as set forth below.
The Commission is adopting § 190.00 to
set forth general provisions that state
facts and concepts that exist in the
Commission’s bankruptcy regulations. It
is applicable to all of part 190. The
Commission’s intent is to assist trustees,
bankruptcy courts, customers, clearing
members, clearing organizations, and
other interested parties in
understanding the Commission’s
rationale for, and intent in
promulgating, the specific provisions of
part 190. The Commission also believes
that the regulation may be particularly
useful in a time of crisis for those
individuals who may not have extensive
experience with the CEA or Commission
regulations.
The Commission requested comment
with respect to all aspects of proposed
§ 190.00. The Commission also raised
specific questions as to whether a
regulation setting forth core concepts
would be useful; whether the core
concepts were under or over inclusive;
and whether the definitions and
discussions for each core concept would
be helpful. The Commission received
several comments expressing support
for various aspects of proposed § 190.00,
including comments from SIFMA AMG/
MFA, CME, and the ABA
Subcommittee. CME noted in particular
that it believed that the regulation ‘‘may
prove particularly useful to a trustee
who has little experience with the CEA
or the Commission’s customer funds
segregation rules, as they try to get ‘up
to speed’ in the critical early hours and
days following the trustee’s
appointment when the trustee is
expected to act quickly on various
matters.’’
The Commission is adopting
§ 190.00(a) to set forth the Commission’s
statutory authority to adopt the
proposed part 190 regulations under
section 8a(5) of the CEA, which
empowers the Commission to make and
promulgate such rules and regulations
as are necessary to effectuate any of the
provisions or to accomplish any of the
purposes of the CEA, and section 20 of
the CEA, which provides that the
Commission may, notwithstanding the
Bankruptcy Code, adopt certain rules or
regulations governing a proceeding
involving a commodity broker that is a
debtor under subchapter IV of chapter 7
of the Bankruptcy Code. The
Commission received comments from
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CME and the ABA Subcommittee
specifically supporting the inclusion of
an explanation of the Commission’s
authority to adopt the part 190
regulations in § 190.00.
The Commission is adopting
§ 190.00(b) to explain that the part 190
regulations are organized into three
subparts. Subpart A contains general
provisions applicable in all cases.
Subpart B contains provisions that
apply when the debtor is an FCM, the
definition of which includes acting as a
foreign FCM.18 Subpart C contains
provisions that apply when the debtor is
a DCO, as defined by the CEA. The
Commission received comments from
the ABA Subcommittee, CME, and ICI
in support of the reorganization of part
190.
The Commission is adopting
§ 190.00(c) to set forth the core
concepts 19 of part 190 that are central
to understanding how a commodity
broker bankruptcy works. These include
concepts related to commodity brokers
and commodity contracts, account
classes, public customers and nonpublic customers, Commission
segregation requirements, member
property,20 porting of public customer
commodity contract positions, pro rata
distribution, and deliveries.
The Commission is adopting
§ 190.00(c)(1) to explain that subchapter
IV of chapter 7 of the Bankruptcy Code
applies to a debtor that is a ‘‘commodity
broker,’’ the definition of which requires
a ‘‘customer.’’ 21 Section 190.00(c)(1)
states that the regulations in part 190
apply to commodity brokers that are
FCMs as defined by the Act, or DCOs as
defined by the Act.
The Commission is adopting
§ 190.00(c)(2) to explain that the CEA
and Commission regulations provide
separate treatment and protections for
different types of cleared commodity
contracts or account classes. The four
account classes include the (domestic)
18 See CEA section 1a(28), 7 U.S.C. 1a(28). The
definition of foreign FCM involves soliciting or
accepting orders for the purchase or sale of a
commodity for future delivery executed on a foreign
board of trade, or by accepting property or
extending credit to margin, guarantee or secure any
trade or contract that results from such a
solicitation or acceptance. See section 761(12) of
the Bankruptcy Code, 11 U.S.C. 761(12).
19 The Commission is using to use the term ‘‘core
concepts’’ to avoid confusion with the core
principles applicable to registered entities. Cf. CEA
section 5b(c)(2), 7 U.S.C. 7a–1(c)(2).
20 ‘‘Member property’’ is defined in § 190.01 and
will be used to identify cash, securities, or property
available to pay the net equity claims of clearing
members based on their house account at the
clearing organization. Cf. 11 U.S.C. 761(16).
21 See 11 U.S.C. 101(6) (definition of ‘‘commodity
broker’’), 761(9) (definition of ‘‘customer’’ referred
to in 101(6)).
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futures account class (including options
on futures),22 the foreign futures
account class (including options on
foreign futures),23 the cleared swaps
account class for swaps cleared by a
registered DCO (including cleared
options other than options on futures or
foreign futures),24 and the delivery
account class for property held in an
account designated as a delivery
account. Delivery accounts are used for
effecting delivery under commodity
contracts that provide for settlement via
delivery of the underlying when a
commodity contract is held to
expiration or, in the case of an option
on a commodity, is exercised.25
The Commission is adopting
§ 190.00(c)(3)(i) to prescribe the separate
treatment of ‘‘public customers’’ and
‘‘non-public customers,’’ as defined in
§ 190.01, within each account class in
the event of a proceeding in which the
debtor is an FCM. It explains that, in a
bankruptcy, public customers are
generally entitled to a priority
distribution of cash, securities, or other
customer property over ‘‘non-public
customers,’’ and both are given a
priority over all other claimants (except
for claims relating to the administration
of customer property) pursuant to
section 766(h) of the Bankruptcy
Code.26 The Commission is adopting
§ 190.00(c)(3)(ii) to address the division
of customer property and member
property in proceedings in which the
debtor is a clearing organization. In such
a proceeding, customer property
consists of member property, which is
distributed to pay member claims based
on members’ house accounts, and
22 This corresponds to segregation pursuant to
section 4d(a) of the CEA, 7 U.S.C. 6d(a).
23 This corresponds to segregation pursuant to
§ 30.7 (enacted pursuant to section 4(b)(2)(A) of the
CEA, 7 U.S.C. 6(b)(2)(A).
24 This corresponds to segregation pursuant to
section 4d(f) of the CEA, 7 U.S.C. 6d(f).
25 Delivery accounts are discussed further below
in, e.g., §§ 190.00(c)(6), 190.01 (definition of
delivery account, cash delivery property, physical
delivery property) and 190.06.
26 Section 766(h) of the Bankruptcy Code
explicitly states that the trustee shall distribute
property ratably to customers in priority to all other
claims, except claims that are attributable to the
administration of customer property.
Notwithstanding any other provision of this
subsection, a customer net equity claim based on
a proprietary account may not be paid either in
whole or in part, directly or indirectly, out of
customer property unless all other customer net
equity claims have been paid in full. Thus, all
customer property will be allocated to public
customers so long as the funded balance in any
account class for public customers is less than one
hundred percent of public customer net equity
claims. Once all account classes for public
customers are fully funded (i.e., at one hundred
percent of net equity claims), any excess will be
allocated to non-public customers’ net equity
claims until all of those are fully funded.
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customer property other than member
property, which is reserved for payment
of claims for the benefit of members’
public customers. The Commission is
adopting § 190.00(c)(3)(iii) to address
the preferential assignment of property
among customer classes and account
classes in clearing organization
bankruptcies. Certain customer
property, as specified in § 190.18(c),
will be preferentially assigned to
‘‘customer property other than member
property’’ (i.e., property for the public
customers of members) instead of
‘‘member property’’ to the extent that
there is a shortfall in funded balances
for members’ public customer claims.
To the extent that there are excess
funded balances for members’ claims in
any customer class/account class
combination, that excess will also be
assigned preferentially to ‘‘customer
property other than member property’’
for other account classes to the extent of
any shortfall in funded balances for
members’ public customer claims in
such account classes. Where property
will be assigned to a particular customer
class with more than one account class,
it will be assigned on a least funded to
most funded basis among the account
classes.
The Commission is adopting
§ 190.00(c)(4) to explain that, in a
proceeding in which the debtor is an
FCM, part 190 details the policy
preference for transferring to another
FCM (commonly known as ‘‘porting’’),
the open commodity contract positions
of the debtor’s customers along with all
or a portion of such customers’ account
equity.27
The Commission is adopting
§ 190.00(c)(5) to address pro rata
distribution. It explains that, if the
aggregate value of customer property in
a particular account class is less than
the amount needed to satisfy the net
equity claims of public customers in
that account class (i.e., there is a
‘‘shortfall’’), customer property in that
account class will be distributed pro
27 Transfer or porting of customer positions
mitigates risks to both the customers of the debtor
FCM and to the markets. Specifically, porting
(rather than the alternative, liquidation) of customer
positions protects customers’ hedges from changes
in value between the time they are liquidated and
the time, if any, that the customer may be able to
re-establish them (and thus mitigates the market
risk that some customers use the futures markets to
counteract), and similarly protects customers’
directional positions. Moreover, not all customers
may be able to re-establish positions with the same
speed—in particular, smaller customers may be
subject to longer delays in re-establishing their
positions. In addition, liquidation of an FCM’s book
of positions can increase volatility in the markets,
to the detriment of all market participants (and also
contribute to making it more expensive for
customers to re-establish their hedges and other
positions).
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rata to those public customers. The pro
rata distribution principle carries forth
the statutory direction in section 766(h)
of the Bankruptcy Code. It ensures that
all public customers within an account
class will suffer the same proportional
loss, including those public customers
that post as collateral letters of credit or
specifically identifiable property.28 Any
customer property that is not
attributable to any particular account
class or which is in excess of public
customer net equity claims for the
account class to which it is attributed,
will be distributed to public customers
in respect of net equity claims in other
account classes where there is a
shortfall. Thus, as noted in
§ 190.00(c)(3), all public customer net
equity claims would receive priority
over non-public customer claims.
The Commission is adopting
§ 190.00(c)(6) to address deliveries. It
explains that the delivery provisions of
part 190 apply to any commodity that is
subject to delivery under a commodity
contract, including agricultural
commodities, other non-financial
commodities (such as metals or energy),
and commodities that are financial in
nature (including virtual currencies). In
the ordinary course of business,
commodity contracts with delivery
obligations are offset before reaching the
delivery stage (i.e., prior to triggering
bilateral delivery obligations).
Nonetheless, when delivery obligations
do arise, a delivery default could have
a disruptive effect on the cash market
for the commodity and could adversely
impact the parties to the transaction. In
a proceeding in which the debtor is an
FCM, the delivery provisions in part 190
reflect the policy preferences (A) to
liquidate commodity contracts that
settle via delivery before they move into
a delivery position and (B) when
contracts do move into a delivery
position, to allow the delivery to occur,
where practicable, outside the
administration of the debtor’s estate
(i.e., directly between the debtor’s
customer and the delivery counterparty
assigned by the clearing organization).
The Commission received several
comments expressing support for
certain provisions in § 190.00(c) and
two comments expressing concerns.
CME expressed support for ‘‘limiting the
scope of part 190 to the bankruptcy of
a commodity broker that is an FCM or
a DCO and to commodity contracts that
are cleared’’ as set forth § 190.00(c)(1).
28 In prior bankruptcies, some customers posting
letters of credit or specifically identifiable property
as collateral sought to escape pro rata treatment for
these categories of collateral, contrary to the
Commission’s intent. See discussion of
§ 190.04(d)(3) in section II.B.2 below.
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CME, OCC, Vanguard, and NGFA
supported the concept of preferring the
claims of public customers over nonpublic customers in a bankruptcy
proceeding. CME agreed with the
inclusion of the core concept set forth
§ 190.00(c)(3)(ii), noting that ‘‘it aids
understanding to explain how the
distinction between the public customer
class and the non-public customer class
is reflected at the DCO-level in the
distinctions made between customer
accounts and house accounts and
between the two categories of customer
property—customer property and
member property—that are available to
satisfy the net equity claims of each.’’
Better Markets supported the
clarification in § 190.00(c)(5)(ii) that
customers relying on letters of credit
must carry the same proportional losses
as customers posting other forms of
acceptable collateral.
NGFA supported the core concept of
prioritizing the prompt transfer of
customer accounts and positions to
another FCM as opposed to liquidating
customer accounts. OCC, however,
disagreed with this policy preference.
OCC supported ‘‘the Commission’s
objective to mitigate risk to an FCM’s
customers and limit market volatility,’’
noting that ‘‘[p]orting positions and
associated collateral in an FCM
bankruptcy proceeding can be an
effective way to achieve these objectives
in some instances.’’ OCC believed,
however, that the trustee should retain
broad discretion to decide, on a case-bycase basis and in consideration of
certain factors (e.g., the defaulting
FCM’s total book of positions and
market conditions) whether porting or
liquidating positions will achieve the
best result for customers involved in an
FCM’s bankruptcy. OCC further
commented that the market risk
associated with closing out and
reopening positions for certain
customers that may be introduced with
liquidation should be weighed against
potential drawbacks of porting,
including that ‘‘(i) a trustee (or DCO)
must first identify a transferee to accept
the open position[s] and collateral,
which depending on market conditions
could be a difficult and time consuming
process; (ii) until the transfer is
complete, the customer may face
uncertainty as to how its position and
associated collateral will be resolved
and may not be able to exit the position
in a timely and efficient manner; and
(iii) a customer may be required to post
additional collateral at a new FCM prior
to or immediately after a transfer.’’
In response to the concerns raised by
OCC, the Commission notes first that, as
OCC forthrightly acknowledges,
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liquidating customer positions may
introduce market risk associated with
closing out and reopening positions for
certain customers. Additionally,
liquidating a mass of customer positions
may roil the markets, if any, where
those positions are concentrated. For
these reasons, the policy preference in
favor of transfer is both supported by
statute and quite longstanding. It is
supported by § 764(b) of the Bankruptcy
Code, which explicitly permits transfers
of commodity contracts that are
authorized by the Commission up to
seven calendar days after the order for
relief. It is also embodied in current
§ 190.02(e), which requires the trustee to
immediately use its best efforts to effect
a transfer, and is continued in proposed
(and adopted) § 190.04(a)(1).
Furthermore, § 190.00(c)(4)
establishes, consistent with § 764(b), a
policy preference for porting, rather
than a mandate for porting. This
recognizes that finding willing and able
transferees for all customer positions
may or may not be practicable.
Moreover, § 190.04(a)(1) requires the
trustee to use its best efforts to effect a
transfer no later than the seventh
calendar day after the order for relief,29
and § 190.04(d) requires the trustee
promptly to liquidate most remaining
contracts after than time. Indeed, as a
practical matter, there is cause for doubt
that a DCO will permit the trustee of a
debtor that is a clearing member to hold
open contracts quite that long.30 Thus,
despite the preference for porting, there
are practical limits to how long
contracts will be held open before being
liquidated. This also imposes temporal
limits on the uncertainty customers will
face as to how their positions will be
resolved.
Finally, while a customer may indeed
be called for additional collateral at a
transferee FCM (particularly if less than
100% of the collateral is transferred
along with the positions), a customer
that is unwilling to meet such a call will
at the least be permitted to have their
positions liquidated. That would entitle
29 Indeed, the preference contained § 190.00(c)(4)
does not represent a departure from the existing
standards under current part 190. It merely
highlights the requirement in § 190.04(a)(1) that the
trustee use its best efforts to effect a transfer no later
than the seventh calendar day after the order for
relief; that requirement is substantially identical to
the requirement in current § 190.02(e).
30 For example, OCC Rule 1102(a) provides that
OCC may summarily suspend any Clearing Member
which is in such financial or operating difficulty
that OCC determines and so notifies the Securities
and Exchange Commission or the Commodity
Futures Trading Commission that suspension is
necessary for the protection of the Corporation,
other Clearing Members, or the general public. OCC
Rule 1106 permits OCC to close out the positions
of a suspended clearing member.
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the customer to prompt return by the
transferee FCM of the remaining
collateral that was transferred—which
may well be more prompt than a
distribution in the bankruptcy
proceeding of the debtor.
ICI expressed concerns with respect to
the discretion granted to the trustee
under the part 190 regulations. ICI
agreed with the Commission ‘‘that
trustees need flexibility given the
myriad of decisions they must make in
a short period of time and the unique
circumstances that each commodity
broker insolvency may present,’’ and
that ‘‘trustees to date have exercised
their discretion in a manner that has
generally promoted customer
protection.’’ ICI cautioned, however,
that the Commission should take steps
to help ensure that the trustee
prioritizes the protection of public
customers. ICI urged the Commission to
make clear in § 190.00 ‘‘that the trustee
must exercise [its] discretion in a
manner that it determines will result in
the greatest recovery for, and the least
disruption to, public customers.’’ With
respect to part 190 regulations that are
‘‘specifically aimed at protecting
customers,’’ ICI asserted the trustee’s
discretion should be more limited.
While ICI acknowledged that, at times,
compliance with such provisions ‘‘may
be impractical or impossible or may
cause harm to customers,’’ ICI was
concerned that a ‘‘reasonable efforts’’
standard ‘‘could signal that the trustee
has wider latitude to depart from the
requirement at issue.’’ ICI asked the
Commission to impose a ‘‘best efforts’’
standard in certain cases.
The Commission agrees with ICI that
the trustee should exercise its discretion
in a manner that best achieves the
overarching goal of protecting the
interests of public customers as a class,
and specifically should act in the
manner that it determines will result in
the greatest recovery for, and the least
disruption to, public customers. The
Commission notes that, at times, those
two sub-goals may be in tension.
Because the Commission does not
believe that there is a universally
optimal means to reconcile the two subgoals in aid of best achieving the
overarching goal of protecting the
interests of public customers, the
Commission concludes that it is best to
leave the balancing of the two sub-goals
to the discretion of the trustee. It is in
that context that the Commission has
decided to direct the trustee to exercise
‘‘reasonable efforts’’ rather than ‘‘best
efforts’’ to achieve certain standards. In
determining what efforts are
‘‘reasonable,’’ the trustee should act to
achieve the overarching goal.
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19329
In light of the foregoing and to
provide clarity with respect to the scope
of the trustee’s discretion, the
Commission is adopting new
§ 190.00(c)(3)(i)(C) which provides that
where a provision in part 190 affords
the trustee discretion, that discretion
should be exercised in a manner that the
trustee determines will best achieve the
overarching goal of protecting public
customers as a class by enhancing
recoveries for, and mitigating
disruptions to, public customers as a
class. In seeking to achieve that
overarching goal, the trustee has
discretion to balance those two subgoals
when they are in tension. Where the
trustee is directed to exercise
‘‘reasonable efforts’’ to meet a standard,
those efforts should only be less than
‘‘best efforts’’ to the extent that the
trustee determines that such an
approach would support the foregoing
goals.31
The Commission is adopting
§ 190.00(d)(1) to describe the scope of
commodity broker proceedings under
subchapter IV of chapter 7 of the
Bankruptcy Code,32 and the relationship
between part 190 to SIPA proceedings
(where the debtor is a commodity
broker) and to resolution of commodity
brokers under Title II of the Dodd-Frank
Act.’’
Section 190.00(d)(1)(i) acknowledges
that, while section 101(6) of the
Bankruptcy Code recognizes
‘‘commodity options dealers’’ and
‘‘leverage transaction merchants’’ (as
defined in sections 761(6) and (13) of
the Bankruptcy Code), as separate
categories of commodity brokers, there
are no commodity options dealers or
leverage transaction merchants
currently registered as such. As set forth
in the Note to paragraph (d)(1)(i)(B), the
Commission is declaring its intent to
adopt regulations with respect to
commodity options dealers and leverage
transaction merchants, respectively, at
such time as an entity registers as such.
Section 190.00(d)(1)(ii) explains that,
pursuant to section 7(b) of SIPA,33 the
31 While ‘‘ ‘[b]est efforts’ is a term which
necessarily takes its meaning from the
circumstances,’’ the trustee in exerting best efforts
to meet a standard must diligently exert efforts to
meet that standard ‘‘to the extent of its own total
capabilities.’’ See generally Bloor v. Falstaff
Brewing Corp, 454 F.Supp. 258, 266–67 aff’d 601
F.2d 609 (2nd. Cir. 1979). By contrast, in exerting
‘‘reasonable efforts’’ to meet a standard, the
Commission expects that the trustee will work in
good faith to meet the standard, but will also take
into account other considerations, including the
impact of the effort necessary to meet the standard
on the overarching goal of protecting public
customers as a class.
32 12 U.S.C. 5381 et seq.
33 15 U.S.C. 78aaa et seq.
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trustee in a SIPA proceeding where the
debtor is also a commodity broker has
the same duties as a trustee in a
proceeding under subchapter IV of
chapter 7 of the Bankruptcy Code, to the
extent consistent with SIPA or as
ordered by the court.34 This part
implements subchapter IV of chapter 7
by establishing the trustee’s duties
thereunder, consistent with the broad
authority granted to the Commission
pursuant to section 20 of the CEA.
Therefore, this part also applies to a
proceeding commenced under SIPA
with respect to a debtor that is
registered as a broker or dealer under
section 15 of the Securities Exchange
Act of 1934 35 when the debtor also is
an FCM.
Moreover, in the context of a
resolution proceeding under Title II of
Dodd-Frank, section 210(m)(1)(B) 36
provides that the FDIC (in its role as
resolution authority) must apply the
provisions of subchapter IV of chapter 7
of the Bankruptcy Code in respect of the
distribution of customer property and
member property of a resolution
entity 37 that is a commodity broker as
if the resolution entity were a debtor for
purposes of subchapter IV. Accordingly,
§ 190.00(d)(1)(iii) explains that this part
shall serve as guidance with respect to
the distribution of property in a
proceeding in which the FDIC acts as a
receiver for an FCM or DCO pursuant to
Title II of Dodd-Frank.38
The Commission is adopting
§ 190.00(d)(2)(i) to clarify that a trustee
may not recognize any account classes
not explicitly provided for in part 190.
Section 190.00(d)(2)(ii) provides that no
property that would otherwise be
included in customer property, as
defined in § 190.01, shall be excluded
from customer property because it is
considered to be held in a constructive
trust, resulting trust, or other trust that
is implied in equity.
Generally, in a commodity broker
bankruptcy, the basis for distributing
34 See SIPA section 7(b), 15 U.S.C. 78fff–1(b) (To
the extent consistent with the provisions of [SIPA]
or as otherwise ordered by the court, a trustee shall
be subject to the same duties as a trustee in a case
under chapter 7 of title 11, including, if the debtor
is a commodity broker, as defined under section
101 of such title, the duties specified in subchapter
IV of such chapter 7).
35 15 U.S.C. 78o.
36 12 U.S.C. 5390(m)(1)(B).
37 That is, the entity being resolved under Title
II. Section 210(m)(1)(b) refers to ‘‘any covered
financial company or bridge financial company.’’
38 12 U.S.C. 5390(m)(1)(B) provides that the FDIC
must apply the provisions of subchapter IV of
chapter 7 of the Code with respect to the
distribution of customer property and member
property in connection with the liquidation of a
commodity broker that is a ‘‘covered financial
company’’ or ‘‘bridge financial company’’ (terms
defined in 12 U.S.C. 5381(a)).
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segregated customer property is pro rata
treatment. To achieve this goal, the
FCM’s segregation records (including
account statements) and reporting to the
Commission and self-regulatory
organizations (‘‘SROs’’) and DCOs must
reflect what is actually available for
customers. This is necessary to enable
FCMs, SROs, DCOs, and the
Commission to ensure, during business
as usual, that (a) customer property is
being properly protected pursuant to the
segregation requirements of section 4d
of the CEA and the regulations
thereunder, and (b) customer property is
not subject to hidden arrangements that
cannot be accounted for transparently
and reliably. Through § 190.00(d)(2)(ii),
the Commission is making clear that
customer property cannot be burdened
by equitable trusts. Attempting to
account for such equitable trusts in a
bankruptcy proceeding under part 190
would undermine the Commission’s
implementation and enforcement of the
statutory scheme under the CEA.
Section 190.00(d)(3) provides that
certain transactions, contracts, or
agreements are excluded from the term
‘‘commodity contract.’’ 39 The excluded
agreements and transactions
traditionally have not been considered
to be commodity contracts for purposes
of segregation and customer protection,
while those that are excepted from these
exclusions are so considered, and thus
are covered by part 190.
The Commission received four
comments supportive of specific
provisions of proposed § 190.00(d) and
one comment requesting a modification
of the regulation. CME agreed that
removing provisions relating to
commodity option dealers and leverage
transaction merchants would ‘‘improve
the rules’ clarity.’’ CME and Cboe
expressed support for the clarification
in § 190.00(d)(1)(ii) of the applicability
of SIPA in the bankruptcy proceeding of
a firm that is dually registered as an
FCM and a broker-dealer where the
bankruptcy must be handled pursuant
39 The contracts that would be excluded include:
Options on commodities unless cleared by a DCO
(or, in the context of a foreign futures clearing
member, a foreign clearing organization); forwards
(defined as such pursuant to the exclusions in
sections 1a(27) or 1a(47)(B)(ii) of the CEA), unless
they are cleared by a DCO (or, in the context of a
foreign futures clearing member, a foreign clearing
organization); security futures products when they
are carried in a securities account; retail foreign
currency transactions described in sections
2(c)(2)(B) or (C) of the CEA; security-based swaps
or other securities carried in a securities account
(other than security futures products carried in an
enumerated account class); and retail commodity
transactions described in section (2)(c)(2)(D) of the
CEA (other than transactions executed on or subject
to the rules of a designated contract market
(‘‘DCM’’) or foreign board of trade (‘‘FBOT’’) as if
they were futures).
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to SIPA rather than by the FCM rules.
Cboe noted that such clarity will be
‘‘beneficial to the entire ecosystem,
including customers of FCMs and
broker-dealers’’ and will ‘‘further the
ability of market participants to utilize
portfolio margining and the associated
efficiencies.’’ CME expressed support
for § 190.00(d)(1)(iii). CME specifically
supported ‘‘setting out that Part 190
‘shall serve as guidance’ to the FDIC as
receiver for an FCM or DCO in a
proceeding under Title II of Dodd Frank,
with respect to the distribution of
customer property and member
property.’’ Noting that ‘‘Title II [of the
Dodd-Frank Act] directs the FDIC to
apply the provisions of subchapter IV of
chapter 7 of the [Bankruptcy] Code with
respect to such distributions,’’ CME
stated its belief that ‘‘it is reasonable to
read Title II’s cross-reference to
subchapter IV of chapter 7 ‘‘as indirectly
bringing [p]art 190 into the scope of that
provision given the need for
Commission regulations to give
specificity and meaning to the general
principles set out in subchapter IV.’’
SIFMA AMG/MFA supported the
principle of excluding property held in
a constructive trust from customer
property as set forth in § 190.00(d)(2)(ii),
noting that this principle ‘‘serves to
preserve the integrity of customer
property.’’ ICI strongly supported setting
forth the prohibition on excluding
property from ‘‘customer property’’
because it is considered to be held in a
trust implied in equity in
§ 190.00(d)(2)(ii), and the exclusion
from the term ‘‘commodity contract’’ of
off-exchange retail foreign currency
transactions in § 190.00(d)(3)(iv).
The ABA Subcommittee
recommended one modification to this
regulation. It asked the Commission to
amend proposed § 190.00(d)(3)(v) to
clarify that mixed swaps could be
commodity contracts subject to part 190.
In support of its position, the ABA
Subcommittee asserted that a DCO
could theoretically provide clearing
services to FCMs and their customers
with respect to mixed swaps, where the
mixed swap positions are carried in
accounts subject to part 22 and
customers are part of the cleared swap
account class under part 190. The ABA
Subcommittee analogized the inclusion
of mixed swaps within the ‘‘commodity
contract’’ definition to the
Commission’s proposal to not exclude
security futures products from the
commodity contract definition when the
security futures product is carried in an
account for which there is a
corresponding account class under part
190. The Commission agrees with the
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ABA Subcommittee’s reasoning with
respect to proposed § 190.00(d)(3)(v)
and is amending § 190.00(d)(3)(v) to
read in pertinent part, that ‘‘. . . a
security futures product or mixed swap
(as defined in 1a(47)(D) of the Act) that
is, in either case, carried in an account
for which there is a corresponding
account class under part 190 is not
excluded.’’
The Commission is adopting
§ 190.00(e) to explain the context in
which part 190 should be interpreted. It
states that any references to other
federal rules and regulations refer to the
most current versions of these rules and
regulations (i.e., ‘‘as the same may be
amended, superseded or renumbered’’)
and that, where they differ, the
definitions set forth in § 190.01 shall be
used instead of the defined terms set
forth in section 761 of the Bankruptcy
Code. The Commission notes that other
regulations in part 190 are designed to
be consistent with subchapter IV of
chapter 7 of the Bankruptcy Code.
Section 190.00(e) addresses account
classes in the context of portfolio
margining and cross margining
programs. Where commodity contracts
(and associated collateral) that would be
attributable to one account class are,
instead, commingled with the
commodity contracts (and associated
collateral) in a second account class (the
‘‘home field’’), then the trustee must
treat all such commodity contracts and
associated collateral as being held in,
and consistent with the regulations
applicable to, an account of the second
account class. The approach of
following the rules of the ‘‘home field’’
also pertains to securities positions held
in a commodity account class (and thus
treated in accord with the relevant
commodity account class) and
commodity contract positions (and
associated collateral) held in the
securities account, in which case the
rules applicable to the securities
account will apply, consistent with
section 16(2)(b)(ii) of SIPA, 15 U.S.C.
78lll(2)(b)(ii).
The Commission received two
comments on proposed § 190.00(e). ICI
and Cboe expressed support for the
clarity provided by § 190.00(e) with
respect to portfolio margining and cross
margining programs. ICI strongly
supported the ‘‘home field’’ rule in
proposed § 190.00(e), noting that
providing ‘‘clarity regarding how
transactions and margin that are
portfolio margined in the same account
will be treated in the event that an FCM
or broker-dealer becomes insolvent is a
‘‘prerequisite for an effective portfolio
margining regime.’’
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Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.00 as proposed with the addition
of § 190.00(c)(3)(i)(C) and the
modification to § 190.00(d)(3)(v), as set
forth above.
2. Regulation § 190.01: Definitions
The Commission is adopting § 190.01
as proposed with modifications set forth
below, to update the definitions for
revised part 190. Most of the changes in
§ 190.01 are conforming changes, such
as correcting cross-references and
deleting definitions of certain terms that
are not used in part 190, as amended.
Other changes tie the definitions in
§ 190.01 more closely to the definitions
in § 1.3 and other Commission
regulations, to reflect changes in
Commission regulations. In some cases,
the Commission is adopting more
substantive changes to the definitions,
such as amending or adding definitions
to further clarify and provide additional
details where the current definitions are
silent or unclear, or to reflect concepts
that are new to part 190. In particular,
the Commission is separating the
delivery account class into two
subclasses, a physical delivery account
class and a cash delivery account class;
the relevant terms are defined below.
The definitions of commodity contract
and physical delivery property codify
positions that the Commission has taken
in recent commodity broker
bankruptcies.40
The Commission is also amending
§ 190.01 to replace the paragraphs
identified with an alphabetic
designation for each defined term (e.g.,
‘‘§ 190.01(ll)’’) with a simple
alphabetized list, as is recommended by
the Office of the Federal Register, and as
recently implemented by the
Commission with respect to, e.g.,
§ 1.3.41
The Commission requested comment
with respect to all aspects of proposed
§ 190.01, including the usefulness and
any unintended consequences of the
revised definitions. The Commission
received a number of comments on the
proposed definitions in § 190.01. As
further detailed below, the Commission
is modifying some of the definitions in
response to comments. Unless stated
otherwise below, the Commission did
not receive any comments on a
40 Respectively, In Re Peregrine Financial Group,
Inc., No. 12–B27488 (Bankr. N.D. Ill.), and MF
Global, Inc.
41 See generally 83 FR 7979, 7979 & n.6 (Feb. 23,
2018).
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proposed definition in § 190.01 and is
adopting each definition as proposed.42
The Commission is adopting the
definition of ‘‘account class’’ as
proposed with the modifications
described below. The current definition
of the term ‘‘account class’’ specifies
that it includes certain types of
customer accounts, each of which is to
be recognized as a separate class of
account. The types are ‘‘futures
account,’’ ‘‘foreign futures accounts,’’
‘‘leverage accounts,’’ ‘‘delivery
accounts,’’ and ‘‘cleared swap
accounts.’’ The Commission is adding
detail to the definition of ‘‘account
class’’ by including therein definitions
of ‘‘futures account,’’ ‘‘foreign futures
accounts,’’ ‘‘cleared swaps accounts,’’
and ‘‘delivery accounts.’’ However, as
discussed above with respect to
§ 190.00(d)(1)(i), the Commission is
removing, at least temporarily, the
‘‘commodity options’’ and ‘‘leverage
account’’ account classes.43
42 The Commission did not receive comments
with respect to the following part 190 definitions
as proposed in § 190.00: Act, Bankruptcy code,
Business day, Calendar day, Cash delivery account
class, Cash equivalents, Clearing organization,
Commodity broker, Commodity contract account,
Court, Cover, Customer, Customer claim of record,
Customer class, Dealer option, Debtor, Distribution,
Equity, Exchange Act, FDIC, Filing Date, Final net
equity determination date, Foreign board of trade,
Foreign clearing organization, Foreign future,
Foreign futures commission merchant, Foreign
futures intermediary, Funded balance, Futures and
futures contract, In-the-money amount, Joint
account, Leverage contract, Leverage transaction
merchant, Member property, Net equity, Open
commodity contract, Order for relief, Person,
Premium, Primary liquidation date, Principal
contract, Securities Account, SIPA, Security, Short
term obligation, Specifically identifiable property,
Strike price, Substitute customer property, Swap,
Trustee, and Undermargined. Accordingly, the
Commission is adopting those definitions as
proposed, as discussed later in section II.A.2.
43 The Commission is adopting paragraph (2) of
the definition of account class to address
commingling orders and rules. Specifically, there
are cases where commodity contracts (and
associated collateral) that would be attributable to
one account class are held separately from contracts
and collateral associated with that first account
class, and instead are allocated to a different
account class and commingled with contracts and
collateral in that latter account class. This would
take place because the contracts in question are
risk-offsetting to contracts in the latter account
class. For example, this could involve portfolio
margining within a DCO or cross-margining
between a DCO and another central counterparty,
which may or may not be a DCO. This commingling
may be authorized pursuant to a Commission
regulation or order, or pursuant to a clearing
organization rule that is approved in accordance
with § 39.15(b)(2). The Commission is adopting
paragraph (2) to confirm that the trustee must treat
the commodity contracts in question (and the
associated collateral) as being held in an account of
the latter account class. The Commission is also
adopting paragraph (3) of the definition of account
class to address cases where the commodity broker
establishes internal books and records in which it
records a customer’s commodity contracts and
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The Commission is adopting the
definition of ‘‘futures account’’ to crossreference the definition of the same term
in § 1.3 of the Act, while the definition
of ‘‘cleared swaps account’’ crossreferences the definition of ‘‘cleared
swaps customer account’’ in § 22.1.
These definitions apply to both FCMs
and DCOs. The definition of ‘‘foreign
futures account’’ cross-references the
definition of ‘‘30.7 account’’ in § 30.1(g).
As that latter definition is limited to
FCMs, the Commission is adopting a
corresponding reference to such
accounts at a clearing organization, in
the event that a clearing organization
clears foreign futures transactions for
members that are FCMs, where those
accounts are maintained on behalf of
those FCM members’ 30.7 customers (as
that latter term is defined in § 30.1(f)).
The Commission clarifies that this
would not apply if a foreign clearing
organization is clearing foreign futures
for clearing members that are not subject
to the requirements of § 30.7.
The ABA Subcommittee and CME
recommended that the Commission
expand the definitions of ‘‘futures
account,’’ ‘‘foreign futures account,’’
and ‘‘cleared swaps account’’ within the
§ 190.01 definition of ‘‘account class’’ to
cover the accounts of non-public
customers. The ABA Subcommittee and
CME stated that as proposed, the crossreferences to § 1.3, the ‘‘30.7 account’’ in
30.1, and the ‘‘cleared swaps customer
account’’ in § 22.1 within the account
class definitions, limited the scope of
those definitions to only segregated
accounts of public customers despite
the Commission’s intention to use those
same account class distinctions for nonpublic customers elsewhere in the part
190 rules. The ABA Subcommittee and
CME suggested that those account class
distinctions are also relevant for the
non-public customer class (i.e., the
holders of proprietary accounts carried
by FCMs and for clearing members’
house accounts carried by DCOs).
The Commission is persuaded by the
comments that there are, in at least
some cases, account class distinctions
within the customer class for non-public
customers,44 and thus agrees that the
revised definitions of ‘‘futures account,’’
‘‘foreign futures account,’’ and ‘‘cleared
swaps account’’ within the § 190.01
collateral, and related activity. It confirms that the
commodity broker is considered to maintain such
an account for the customer regardless of whether
it has kept such books and records current or
accurate.
44 See, e.g., § 190.09(c)(2)(iv) (allocating residual
property to the non-public customer estate for each
account class in the same order as is prescribed in
paragraphs (c)(2)(i) through (iii) of this section for
the allocation of the customer estate among account
classes.)
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definition of ‘‘account class’’ should
address separately non-public
customers, and has amended the
definitions to do so.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting the
‘‘account class,’’ ‘‘futures account,’’
foreign futures account,’’ and ‘‘cleared
swaps account’’ definitions in § 190.01
as proposed with the modifications
referred to above.
The ‘‘delivery account’’ class is the
fourth type of account class. It is the
relevant account through which an FCM
or DCO accounts for the making or
taking of physical delivery under
commodity contracts whose terms
require settlement by delivery of a
commodity. The FCM or DCO
designates such account as a delivery
account on its books and records. The
Commission is adopting the definition
of ‘‘delivery account’’ as proposed
within paragraph (1)(iv) of the
definition of account class, with a
modification to conform to the issue
addressed in the preceding paragraph:
The delivery account applies to ‘‘both
public and non-public customers,
considered separately.’’ 45
The current definition of ‘‘delivery
account’’ in § 190.05(a)(2) refers to an
account that contains only property
described in three of the nine categories
of property in the current definition of
‘‘specifically identifiable property.’’ The
Commission has determined to adopt a
more functional definition of ‘‘delivery
account’’ in § 190.01. This revised
definition will focus on an account
maintained on the books and records of
an FCM or DCO for the purpose of
accounting for the making or taking of
delivery under commodity contracts
whose terms require settlement by
delivery of a commodity.46
The Commission is thus adopting
paragraph (1)(iv)(A)(1) to define
delivery accounts for FCMs. The
Commission is adopting paragraph
(1)(iv)(A)(2) to incorporate the same
concepts for clearing organizations, and
also permit a clearing organization to act
as a central depository for physical
delivery property represented by
electronic title documents, or otherwise
in electronic (dematerialized) form.
As set forth in paragraph (1)(iv)(B),
the delivery account class is being
subdivided into separate physical and
cash delivery account classes, as
provided in § 190.06(b), for purposes of
45 This separate consideration is a consequence of
the fact that, pursuant to Bankruptcy Code section
766(h), public customer claims must be paid in full
before non-public customer claims.
46 See § 190.01.
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pro rata distributions to customers for
their delivery claims. The definitions of
the terms ‘‘physical delivery property’’
and ‘‘cash delivery property’’ are
addressed in detail later in this section.
As customer property held in a
delivery account is not subject to the
Commission’s segregation requirements,
the Commission believes it may be more
challenging and time-consuming to
identify customer property for the cash
delivery account class,47 (and such cash
would thus be commingled with the
FCM’s own cash intended for
operations). Consequently, the
Commission believes separating (1)
most cash delivery property and
customer claims from (2) most physical
delivery property and customer claims
should promote more efficient and
prompter distribution of the latter to
customers. For these reasons, the
Commission is adopting the delivery
account definition to be further divided
into physical delivery and cash delivery
account classes, for purposes of pro rata
distributions to customers for their
delivery claims.
The claims with respect to the
physical delivery and cash delivery
subclasses are fixed on the ‘‘filing
date.’’ 48 Thus, the physical delivery
account class includes, in addition to
certain physical delivery property, cash
delivery property received post-filing
date in exchange for physical delivery
property held on the filing date that has
been delivered under a commodity
contract. Conversely, the cash delivery
account class includes, in addition to
certain cash delivery property, physical
delivery property that has been received
post-filing date in exchange for cash
delivery property held on the filing
date.
CME and ICE supported separate
subaccounts of the delivery account for
physical property (the property being
delivered) and cash property (cash used
47 The Commission agrees with a point previously
made by the ABA Committee: ‘‘Based on lessons
learned from the MF Global Bankruptcy, those
challenges are likely greater for tracing cash.
Physical delivery property, in particular when held
in the form of electronic documents of title as is
prevalent today, is more readily identifiable and
less vulnerable to loss, compared to cash delivery
property that an FCM may hold in an operating
bank account.’’ See Transmittal Letter from The Part
190 Subcommittee of the Business Law Section of
the American Bar Association accompanying Model
Part 190 Rules (‘‘ABA Cover Note’’), available at
https://comments.cftc.gov/PublicComments/
ViewComment.aspx?id=61330&SearchText at 14.
See also In re MF Global Inc., 2012 WL 1424670
(noting how physical delivery property was
traceable).
48 ‘‘Filing date’’ means the date that a petition
under the Bankruptcy Code or application under
SIPA commencing a proceeding is filed or on which
the FDIC is appointed as a receiver pursuant to 12
U.S.C. 5382(a).
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to pay for delivery). CME agreed with
the proposed definition of the delivery
account class and supported the
proposed separation of the delivery
account class into the cash delivery
account and physical delivery account
classes, as they delineate the customer
property that is available to distribute to
customers in each account class on a
pro rata basis. CME agreed that cash
delivery property should include cash
or cash equivalents recorded in a
customer’s delivery account as of the
filing date, along with any physical
delivery property subsequently received
in accepting a delivery, and likewise
that physical delivery property should
include any cash delivery property
received subsequent to the filing date in
exchange for making a delivery. CME
also had specific comments on each of
the two subaccount definitions as
discussed below.
CME noted that the Commission does
not impose segregation requirements on
FCMs with respect to the cash or
physical delivery property that an FCM
holds on behalf of its customers and
records in a delivery account. As
learned from the In re MF Global, Inc.
bankruptcy (hereinafter ‘‘MF Global’’),49
CME agreed that it can be more
challenging for a trustee to trace the
cash recorded in delivery accounts than
to trace physical delivery property. For
example, the MF Global trustee could
more readily identify physical delivery
property in the form of electronic title
documents, compared to identifying
non-segregated cash belonging to the
delivery account class given the
fungible nature of cash.
CME recommended that the
Commission address through a separate
rulemaking the broader issues around
whether customer property carried in
delivery accounts should be subject to
any special customer protections, such
as requirements that FCMs should hold
such property in custody accounts or
limitations on how long cash or cash
equivalents should be held in delivery
accounts that are not subject to custody
requirements.50
At this time, after consideration of the
comments and for the reasons stated
above the Commission is adopting the
definition of ‘‘delivery account’’ as
proposed, with the modification to note
that it applies to each of public and nonpublic customers, considered
separately.
The Commission is adopting the
definition of ‘‘cash delivery property’’ as
proposed with the modifications
described below. The Commission
proposed to define cash delivery
property to carry through the concepts
from current § 190.01(ll)(4) and (5) that
the cash or cash equivalents, or the
commodity must be identified on the
books and records of the debtor as
having been received, from or for the
account of a particular customer, on or
after three calendar days before the
relevant (i) first delivery notice date in
the case of a futures contract or (ii)
exercise date in the case of an option.
The Commission is adopting the cash
delivery property definition to mean
any cash or cash equivalents recorded in
a delivery account that is, as of the filing
date: (1) Credited to such account to pay
for receipt of delivery of a commodity
under a commodity contract; (2)
credited to such account to collateralize
or guarantee an obligation to make or
take delivery of a commodity under a
commodity contract, or (3) has been
credited to such account as payment
received in exchange for making
delivery of a commodity under a
commodity contract. It includes
property in the form of commodities
that have been delivered after the filing
date in exchange for cash or cash
equivalents held in a delivery account
as of the filing date. The definition also
requires that the cash or cash
equivalents, or the commodity, must be
identified on the books and the records
of the debtor as having been received,
from or for the account of a particular
customer, on or after seven calendar
days before the relevant (i) first delivery
notice date in the case of a futures
contract or (ii) exercise date in the case
of a cleared option.51 In response to
comments discussed below, the
Commission is adopting the definition
of cash delivery property to also include
any cash transferred by a customer to
the trustee on or after the filing date for
the purpose of paying for delivery,
consistent with § 190.06(a)(3)(ii)(B)(1).
The Commission is also adopting the
definition in response to comments that
requested that the Commission provide
that in the case of a contract where one
fiat currency is to be exchanged for
another fiat currency, each currency
will be considered cash delivery
property to the extent that it is recorded
in a delivery account.
Commenters generally supported
separate subaccounts of the delivery
account, and that cash delivery property
should include cash or cash equivalents
49 In re MF Global, No. 11–2790 (MG) (SIPA)
(Bankr. S.D.N.Y.).
50 This recommendation is addressed in section
II.G below.
51 As discussed below, the proposal had specified
a period of three calendar days; after consideration
of the comments, that period has been changed to
seven calendar days.
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19333
recorded in a customer’s delivery
accounts as of the filing date, along with
any delivery property subsequently
received in accepting a delivery.
However, the Commission also received
several comments on three aspects of
the proposed definition of cash delivery
property.
First, the ABA Subcommittee, CME,
ICE, FIA, and CMC recommended that
the Commission remove the threecalendar day restriction proposed in the
definition of cash delivery property in
§ 190.01. While several of these
commenters recognized the
Commission’s intention to encourage
customers and their FCMs to hold cash
in a segregated account where it is better
protected until needed to pay for a
delivery that is effected in the delivery
account, the commenters were
concerned that cash or cash equivalents
might be posted to delivery accounts
sooner than three days before the first
notice date or exercise date, and
therefore this property might be denied
the cash delivery property protection.
FIA stated that the Federal Register
release did not explain why the
Commission proposed to restrict cash
delivery property to cash and cash
equivalents received no earlier than
three calendar days before the relevant
first notice day or exercise date. FIA and
ICE could not identify any justification
as to why cash or cash equivalents that
may be received by a debtor FCM and
properly deposited in a cash delivery
account prior to this period should
receive different protections under part
190 than cash and cash equivalents
received within the three-calendar day
time frame. The ABA Subcommittee
noted that their Committee eliminated
this provision in the Model Part 190
Rules to avoid unintended
consequences.
CME recognized that the three-day
limitation is based on the limitation in
current part 190, but stated that it does
not make sense and if not eliminated
from the definition, it could be
detrimental to customers, which is
contrary to the goal of enhancing
customer protections. CME further
explained that if a customer posts cash
or cash equivalents to its delivery
account in anticipation of paying for an
upcoming delivery or to guarantee its
obligation to take delivery, the timing of
the payment should not matter. If the
parties intend to make and take
delivery, CME believed the trustee
should be able to follow the customers’
intention. CME explained that a
customer is unlikely to leave cash in an
unsegregated delivery account with an
FCM for any extended time, without
reason, when it would be better
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protected by holding the cash in a
segregated account or withdrawing the
cash if not needed to meet upcoming
delivery obligations. CME noted that
there can be times, though, when a
customer will legitimately post cash to
its delivery account sooner than the
definition would allow, for example, out
of caution to assure that the necessary
funds are available to pay for a delivery
when the first notice date or exercise
date immediately follows a weekend or
holiday, or to meet payment deadlines
imposed by the FCM, or based on
market convention. CME noted that
some FCMs may require customers to
post cash sooner than three days prior
to the relevant notice or exercise date,
as applicable, to satisfy a deliveryrelated obligation. CME believed it
could be potentially disruptive to the
delivery process to deny the customer
the protection of having its funds
classified as cash delivery property
because it posted the cash or cash
equivalents needed to complete an
upcoming delivery too soon.
CME also believed the three-day
timing element does not make sense
with respect to cash recorded in a
customer’s delivery account as of the
filing date, which the customer had
previously received as payment for
delivering a commodity under an
expired or exercised contract. CME
believed the Commission intended for
the timing limitation to apply to this
situation, but the proposed definition
does not exclude such cash from the
requirement.
CME understood that the Commission
proposed to keep the timing limitation
to encourage FCMs and their delivery
customers to hold cash intended to pay
for a delivery in a segregated account
until bilateral delivery obligations are
near at hand. However, CME questioned
whether the limitation was effective in
encouraging the desired behavior, in
particular when it is contained in
bankruptcy regulations and parties with
delivery obligations may not necessarily
be aware of it. As a result, CME
recommended that the Commission
address the protection of customer
property held in delivery accounts in a
more direct and transparent matter,
through a separate rulemaking.
Specifically, CME recommended that
the Commission revise the ‘‘cash
delivery property’’ definition to remove
the limitation that cash delivery
property must be recorded in the
delivery account no sooner than three
calendar days before the first notice date
or exercise date.
The Commission notes that part 190
currently contains the three-day
limitation, which serves to limit
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delivery property to property that is
transferred into a delivery account
shortly before the notice or exercise
date.52 Thus, the Commission
considered whether a change in the
current standard is warranted. As
discussed further below, the
Commission concludes that while the
case has been made to extend the
limitation from three calendar days to
seven calendar days, the case has not
been made to remove the limitation in
its entirety at this time.
While delivery accounts provide some
customer protection, in that they benefit
from favorable treatment in bankruptcy,
they lack the protection of segregation
requirements, in contrast to futures
account, foreign futures account, and
cleared swaps accounts. In the case of
the latter types of accounts, the FCM
must maintain in accounts, protected
from the claims of creditors of the FCM
other than the customers for whom they
are segregated, sufficient funds to repay
the claims of such customers in full, at
all times. Such segregation protections
are a very important means of ensuring
that sufficient funds are in fact available
to pay customers in full in the (highly
unlikely) event of the insolvency of an
FCM.
Accordingly, the Commission is of the
view that changing current part 190 to
completely remove any time limitation
for protecting property transferred into
a delivery account would, in light of
this lack of segregation protection, carry
the risk of significant unintended
consequences, e.g., customers being
encouraged to transfer funds
prematurely into an account without
such protection, and thus a bankruptcy
where a greater number of customers
receive less than the full amount of their
claims, and greater total shortfalls in
repayment of such claims.
CME, while noting their preference
for simply deleting the three-day
limitation, observed that protection of
customer property held in delivery
accounts should be addressed in a direct
and transparent manner through a
separate rulemaking. The Commission
concludes that deleting entirely the time
limitation on posting cash delivery
property should only be undertaken, if
at all, in the context of a separate,
dedicated, and explicit rulemaking, in
which moving property more quickly to
52 See current § 190.05(a)(2) (tying delivery
account to portions of the definition of specifically
identifiable property in § 190.01); § 190.01(ll)(4) and
(5) (limiting recognition of cash as specifically
identifiable property to cases where it is identified
on the books and records of the FCM as being
received from or for the account of a particular
customer on or after three calendar days before the
first notice date or exercise date specifically for the
purpose of a delivery or exercise).
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a delivery account is considered in
conjunction with segregation protection
for property in such an account.
However, the Commission believes
CME’s concerns about long weekends
raise important issues. For example, in
the context of an FCM’s global business,
there could be a bank holiday on a
Friday in the jurisdiction where a
customer is based, a Federal holiday on
the following Monday in the U.S., and
the exercise or notice date might be on
a Tuesday; in which event three
calendar days may be too short.
Similarly, in the vein of CME’s
comment, there may be legitimate
reasons to transfer the funds a day or
two in advance of when they are
needed, to account for the possibility of
a failure in the transfer process.
Weighing the concerns of having
funds for an extended time in an
account that is not protected by
segregation against the need to provide
a modest amount of flexibility in the
process, the Commission has
determined that a reasonable balance
can be achieved by changing the threeday (before notice or exercise date)
period to a seven-day period. The
Commission believes this extended time
period will address completely the
concern that a delivery date may come
after a holiday weekend, and should
mitigate concerns about FCM funding
requirements that extend beyond three
days. If and when a separate rulemaking
results in additional protection for
delivery accounts, it will be appropriate
to revisit this aspect of part 190 as part
of such a rulemaking.
Second, the ABA Subcommittee,
CME, and CMC recommended that the
Committee revise the definition of cash
delivery property to allow for the
possibility that cash or cash equivalents
could be posted after the filing date for
the purpose of paying for a delivery, and
to provide protection for such deposits.
The commenters requested that the
Commission expand the definition to
allow for the rare possibility that a
customer may be unable to post funds
needed to pay for a delivery in advance
of the filing date so that the definition
should also cover cash delivery property
received after the filing date in
anticipation of taking delivery of a
commodity. CME noted that as has been
seen with other FCM bankruptcies, the
days prior to actual filing can be chaotic
and customers may not have had the
opportunity to meet such a deadline. To
allow the delivery to be completed
reduces a potential disruptive situation
to commodities markets during an
otherwise tumultuous time.
This issue is illuminated by
considering the interplay of other
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regulations that affect delivery. The
Commission notes that while § 190.04(c)
continues the preference for the trustee
to liquidate contracts moving into
delivery position before they do so, and
§ 190.06(a)(2) continues the preference,
in cases where the trustee is unable to
do so, for the trustee to arrange for
delivery to occur outside the estate,
§ 190.06(a)(3) acknowledges that there
may be cases where the trustee will
need to facilitate the making or taking
of delivery. Regulation
§ 190.06(a)(3)(ii)(B)(1) refers to cases
where the trustee pays for delivery (in
whole or in part) with cash transferred
by the customer to the trustee on or after
the filing date for the purpose of paying
for delivery.
Thus, the Commission agrees with the
arguments made by the commenters
who suggested that the Commission
expand the definition of ‘‘cash delivery
property’’ in this context, and
consequently is adding an explicit
reference to the cash transferred from a
customer to the trustee after the filing
date, consistent with
§ 190.06(a)(3)(ii)(B)(1). Moreover, for
consistency, the Commission will
amend § 190.08(c)(1)(ii) as proposed to
explicitly give such post-petition
transfers treatment as 100% funded.
Finally, the ABA Subcommittee
suggested that the Commission clarify
that the delivery of two different fiat
currencies for foreign currency
commodity contract constitutes cash
delivery property. CME suggested a
similar technical change to clarify in the
definition that for a commodity contract
that settles by delivery of a foreign
currency as the underlying commodity
or by an exchange of a pair of
currencies, the USD or foreign currency
recorded to a delivery account in
connection with either side of the
delivery constitutes cash delivery
property.
In response to the ABA Subcommittee
comment regarding the delivery of two
fiat currencies, ‘‘[g]iven the fungible
nature of cash, regardless of currency
denomination,’’ the Commission has
determined to amend further the
definition of ‘‘cash delivery property’’ to
clarify that for foreign exchange
contracts, i.e., contracts where one fiat
currency is exchanged for another fiat
currency, both fiat currencies will be
treated as cash delivery property, and
neither currency will be considered
physical delivery property.
Accordingly, in consideration of the
comments and the reasons discussed
above, the Commission will adopt the
definition of ‘‘cash delivery property’’ in
§ 190.01 as modified, with the additions
referred to above.
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The Commission is adopting the
definition of ‘‘physical delivery
property’’ in § 190.01 as proposed with
modifications, as described below. The
Commission is adopting the definition
of ‘‘physical delivery property’’ to
include, under the four specified sets of
circumstances discussed below, a
commodity, whether tangible or
intangible, held in a form that can be
delivered to meet and fulfill delivery
obligations under a commodity contract
that settles via delivery if held to a
delivery position.53 The Commission is
adopting the definition to include
warehouse receipts, other documents of
title, or shipping certificates (including
electronic versions of the forgoing), for
the commodity, or the commodity itself.
The Commission is amending the
physical deliver property definition to
address changes in delivery practices
since the 1980s. The reference to
electronic versions of warehouse
receipts, other documents of title, or
shipping certificates explicitly
recognizes that title documents for
commodities are now commonly held in
dematerialized, electronic form, in lieu
of paper. Moreover, the types of
commodities that might be physically
delivered would extend beyond tangible
commodities to those that are
intangible, including Treasury
securities, foreign currencies, or virtual
currencies.54
For purposes of analytical clarity, the
Commission is adopting the definition
of physical delivery property as
subdivided into four categories:
First, the commodities or warehouse
receipts, other documents of title, or
shipping certificates (including
electronic versions of any of the
foregoing) for the commodity that the
debtor holds for the account of a
customer for purposes of making
delivery of such property and which, as
of the filing date or thereafter, can be
identified as held in a delivery account
for the benefit of such customer on the
books and records of the debtor.55
Second, the commodities or
warehouse receipts, other documents of
title, or shipping certificates (including
electronic versions of any of the
53 The current definition is found in
§ 190.01(ll)(3), and focuses on documents of title
and physical commodities.
54 See ABA Cover Note at 10, 12–13.
55 These first two categories together correspond
to current § 190.01(ll)(3), with the first category
corresponding to physical delivery property held
for the purpose of making delivery and the second
category corresponding to physical delivery
property held as a result of taking delivery. The
property that is (or should be) within these two
categories, as of the filing date, comprises the
property that will be distributed as part of the
physical delivery class.
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foregoing) for the commodity that the
debtor holds for the account of the
customer, where the customer received
or acquired such property by taking
delivery under an expired or exercised
commodity contract, and which, as of
the filing date or thereafter, can be
identified as held in a delivery account
for the benefit of such customer on the
books and records of the debtor.56
The third category addresses property
that (a) is in fact being used, or has in
fact been used, for the purpose of
making or taking delivery, but (b) is
held in a futures, foreign futures,
cleared swaps, or (if the commodity is
a security) securities account.57 This
property would be considered physical
delivery property solely for the purpose
of the obligations, pursuant to § 190.06,
to make or take delivery of physical
delivery property. The property in this
category would be distributed as part of
the account class in which it is held
(futures, foreign futures, or cleared
swaps, or, in the case of a securities
account, as part of a SIPA proceeding).
Fourth, where such commodities or
documents of title are not held by the
debtor, but are delivered or received by
a customer in accordance with
§ 190.06(a)(2) (either by itself in the case
of an FCM bankruptcy or in conjunction
with § 190.16(a) in the case of a clearing
organization bankruptcy), they will be
considered physical delivery property,
but, again, solely for purposes of
obligations to make or take delivery of
physical delivery property pursuant to
§ 190.06. As this property is held
outside of the debtor’s estate (and there
was no obligation to transmit it to the
debtor’s customer accounts), it is not
subject to pro rata distribution.
The Commission is also adding a
special case to correspond with the
special case for cash delivery property,
which states that where one fiat
currency is exchanged for another,
neither such currency, to the extent that
it is recorded in the delivery account,
will be considered physical delivery
property. The Commission is also, as
discussed further below, additionally
amending the physical delivery
property definition to address the
possibility of a negative delivery price
56 The current definition does not prescribe or
imply a limit to how long such received property
can be held in a delivery account, because there is
no principled basis to draw a bright line delineating
how long is too long. The definition the
Commission is adopting explicitly codifies that
position.
57 As the ABA Cover Note explained at 13,
‘‘[w]hen the FCM has a role in facilitating delivery,
deliveries may occur via title transfer in a futures
account, foreign futures account, cleared swaps
account, delivery account, or, if the commodity is
a security . . . in a securities account.’’
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where the party obliged to delivery
physical delivery property under an
expiring contract or an expired options
contract is also obliged to make a cash
payment to the buyer, as such cash or
cash equivalents constitute physical
delivery property.
CME and CMC agreed that physical
delivery property should include any
cash delivery property received
subsequent to the filing date in
exchange for making a delivery.
In light of the evolving nature of
intangible assets, and of the manner in
which they may be held, custodied or
transferred, ICE suggested that the
definition of physical delivery property
include, as examples (and not by way of
limitation), other electronic
representations of commodities
(whether or not technically ‘‘an
electronic title document’’) or any
property entitlement to a commodity
(such as for a commodity held as a
financial asset in a securities account
under Article 8 of the Uniform
Commercial Code (whether or not a
security) or similar structure).
ICE strongly agreed with the
Commission’s proposal to clarify that
intangible property received or held for
purposes of delivery is appropriately
regarded as subject to the delivery
account, without regard to whether it is
‘‘physical’’ as under the current rule.
ICE argued that any asset, tangible or
intangible, that can be delivered in
settlement of a contract should be
eligible to be treated as delivery
property, as set out in the proposed
definition of ‘‘physical delivery
property.’’ ICE believed this proposed
definition would avoid questions that
may otherwise arise in connection with
the delivery of digital currencies or
other novel digital assets. CME also
supported the decision to expand the
delivery account class to cover
intangible commodities.
Additionally, CME supported
modernizing the definition of physical
delivery property to recognize the use of
electronic delivery documents in
effecting deliveries under physical
delivery commodity contracts. CME
recommended that the Commission
further expand the physical delivery
property definition to cover within its
scope any cash or cash equivalents that
a seller may deposit in its delivery
account when its obligation to deliver
physical delivery property under an
expiring futures or exercised options
contract also includes an obligation to
make a cash payment to the buyer, as
could arise if the contract’s final
settlement price is negative. CME
acknowledged that this scenario would
be unprecedented and may never occur,
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but believed it prudent to contemplate
the possibility in light of events in April
2020 where certain physical-delivery oil
futures contracts traded below zero in
the days prior to establishment of the
final settlement prices.
CME also recommended a technical
correction to the definition relating to
the fact that shipping certificates are not
electronic title documents, and instead
represent the contractual obligation of a
facility to deliver the underlying
commodity to the buyer. Thus, for
clarity CME recommended that the
Commission revise the phrase
‘‘including warehouse receipts,
shipping certificates or other documents
of title (including electronic title
documents) for the commodity’’ to read
‘‘including warehouse receipts,
shipping certificates or other similar
documents (including electronic
versions thereof).’’ The Commission is
not amending the examples to explicitly
address additional ‘‘electronic
representations of commodities’’ within
the definition of physical delivery
property because the definition already
broadly covers ‘‘a commodity, whether
tangible or intangible, held in a form
that can be delivered to meet and fulfill
delivery obligations under a commodity
contract. . . .’’
The Commission is amending the
definition of physical delivery property
to address the technical correction
recommended by CME by
acknowledging that shipping certificates
are not documents of title while
avoiding the phrase ‘‘similar
documents’’ by instead amending the
last phrase to read ‘‘including
warehouse receipts, other documents of
title, or shipping certificates (including
electronic versions of any of the
foregoing) for the commodity, or the
commodity itself.’’
The Commission is also adding a
special case, corresponding to the
special case for cash delivery property,
stating that where one fiat currency is
exchanged for another, neither such
currency would be considered physical
delivery property.
The Commission is further amending
the physical delivery property
definition with a second special case in
response to CME’s suggestion to address
the possibility of a negative delivery
price. While negative prices for
deliverable commodities are rare, they
are not unprecedented (e.g., the price of
crude oil briefly went negative in April
2020). While a negative price for actual
delivery may be even rarer, it is
theoretically possible. Thus, the
Commission is amending the definition
of ‘‘physical delivery property’’ to
address this special case by adding the
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following: In a case where the final
settlement price is negative, i.e., where
the party obliged to deliver physical
delivery property under an expiring
futures contract or an expired options
contract is also obliged to make a cash
payment to the buyer, such cash or cash
equivalents constitute physical delivery
property.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting the
definition of ‘‘physical delivery
property’’ as proposed with the
appropriate modifications to the
structure, as set forth above, to
correspond to ‘‘(1) In general.’’ and to
address two special cases in ‘‘(2) Special
cases.’’ The Commission is adopting the
definition of ‘‘allowed net equity’’ as
proposed in § 190.01 and as modified to
become ‘‘funded net equity’’ as
described below. The Commission
proposed ‘‘allowed net equity’’ to
update cross-references and allow for
two definitions of the term (as used in
subparts B and C of part 190).
The ABA Subcommittee expressed
concern in their comment letter that the
definition and the use of the term
‘‘allowed net equity’’ as proposed in
§§ 190.01 and 190.08(a) could create
inconsistencies and confusion between
part 190 and the settled bankruptcy law
terminology in which ‘‘allowed’’
typically refers to the fixed amount of a
creditor’s claim rather than the amount
distributable on such claim. The ABA
Subcommittee recommended three
modifications to address this potential
confusion, including the deletion of the
definition of ‘‘allowed net equity’’ in
proposed §§ 190.01 and 190.08(a), as the
ABA Subcommittee believes the
remainder of proposed § 190.08 would
address how to calculate a customer’s
net equity claims and the funded
balances for each such claims.58
The Commission agrees with the ABA
Subcommittee that the inclusion of
‘‘allowed’’ in the defined term ‘‘allowed
net equity’’ could cause confusion in the
broader context of established
bankruptcy law, where ‘‘allowed’’ refers
to the trustee’s measure of the proper
amount of a claim, rather than to the
58 The ABA Subcommittee also recommended
that the Commission further amend § 190.02 by
adding new paragraph (g) to proposed § 190.02 to
state that the term ‘allowed’ in this part shall have
the meaning ascribed to it in the Bankruptcy Code.
The ABA Subcommittee believed that this would
confirm that ‘‘allowed’’ under part 190 equates with
the use of ‘‘allowed’’ under the Bankruptcy Code.
The ABA Subcommittee also recommended that the
Commission add ‘‘funded balance of’’ before ‘‘such
customer’s allowed net equity claim’’ in proposed
§ 190.09(d)(3). The Commission agrees that these
recommended amendments would avoid confusion
with the meaning of ‘‘allowed’’ in § 190.02(g) and
is therefore making these suggested changes.
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portion of a claim that is funded (in pro
rata distribution).
Accordingly, after consideration of
the comments, including the ABA
Subcommittee’s suggestion regarding
the funded portion of a customer’s
allowed claim throughout part 190, and
for the reasons stated above, the
Commission is changing the defined
term ‘‘allowed net equity’’ to ‘‘funded
net equity,’’ and adopting the definition
as so modified. The Commission is also
adding § 190.02(g) (as discussed below)
and adding ‘‘funded balance of’’ before
‘‘such customer’s allowed net equity
claim’’ in § 190.09(d)(3) as suggested.
The Commission is adopting the
definition of ‘‘commodity contract’’ in
§ 190.01 as proposed, in order to amend
the definition to incorporate and extend
in context (through references to current
Commission regulations) the definition
in section 761(4) of the Bankruptcy
Code.59
ICI strongly supported the proposed
amendments to the definition of
‘‘commodity contract’’ to include any
‘‘futures contract’’ and any ‘‘swap’’
thereby permitting transactions carried
in a futures or cleared swaps account in
accordance with the Commission’s
regulations to be eligible for the
protections that part 190 affords.
Accordingly, after consideration of
the comment and for the reasons stated
above, the Commission is adopting the
definition of ‘‘commodity contract’’ as
proposed.
The Commission is adopting the
definition of ‘‘customer property and
customer estate’’ as proposed to update
the definition to clarify cross-references
within part 190 and to note that
customer property distribution is
addressed in section 766(i) of the
Bankruptcy Code in addition to section
766(h).
ICE supported the Commission’s
decision to include forward contracts
that are traded on a DCM and cleared by
a DCO as customer property.
Accordingly, after consideration of
the comment, and for the reasons stated
above, the Commission is adopting the
definition of ‘‘Customer property,
customer estate’’ in § 190.01 as
proposed.
The Commission is adopting the
definition of ‘‘house account’’ with
modifications, as set forth below to
modify the existing definition to (a)
clarify the connection between the
59 It should be noted that, consistent with
§ 190.00(d)(3)(iv) and the decision In re Peregrine
Financial Group, Inc., 866 F.3d 775, 776 (7th Cir.
2017), adopting by reference Secure Leverage
Group, Inc. v. Bodenstein, 558 B.R. 226 (N.D. Ill.
2016), retail foreign exchange contracts do not fit
within the definition of commodity contracts.
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concept of a ‘‘house account’’ in part
190 and the concept of a proprietary
account in § 1.3, and (b) separately
define the term in relation to an FCM,
a foreign futures commission merchant,
and a DCO.
The ABA Subcommittee and CME
agreed with expanding the current
definition to cover the house accounts
that DCOs maintain for clearing
members. However, the commenters
noted that ‘‘house account’’ is used in
only three places for an FCM
proceeding: (i) Proposed § 190.06(a)(5),
which addresses deliveries made or
taken with respect to the debtor FCM’s
house account under open commodity
contracts; (ii) proposed § 190.07(c),
which prohibits transfer of the debtor
FCM’s house account after the filing
date; and (iii) proposed
§ 190.08(b)(2)(ix), which provides that
when a non-debtor FCM maintains an
omnibus account and a house account
with a debtor FCM, it holds the
accounts in a separate capacity for
purposes of calculating its net equity
claims against the debtor FCM.
Assuming the Commission intended to
expand the scope of these provisions in
each case, the ABA Subcommittee and
CME suggested that the Commission
modify the three provisions to clarify
that they apply to proprietary accounts
of FCMs, and to limit the defined term
to house accounts maintained by a DCO
for clearing members. The ABA
Subcommittee believed it was
unnecessary, potentially confusing, and
could preclude porting of proprietary
accounts.
The Commission agrees with the
commenters’ recommendation to
streamline the ‘‘house account’’
definition and amend the respective
subpart B provisions to limit the use of
‘‘house account’’ to the context of
clearing organization bankruptcies to
avoid any potential confusion regarding
the ability to port proprietary accounts.
Accordingly, after considering the
comments, and for the reasons stated
above, the Commission is adopting the
definition of ‘‘house account’’ in
§ 190.01, as modified.
The Commission is adopting the
definitions of ‘‘non-public customer’’
and ‘‘public customer’’ as proposed to
define who is considered a public
versus a non-public customer separately
for FCMs and for clearing organizations.
These definitions are complements (i.e.,
every customer is either a ‘‘public
customer’’ or a ‘‘non-public customer,’’
but never both).
In the case of a customer of an FCM,
the Commission is adopting the
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definition of ‘‘public customer,’’ 60
which would be analyzed separately for
each of the relevant account classes
(futures, foreign futures, cleared swaps,
and delivery) with the relevant crossreferences to other Commission
regulations. For the ‘‘futures account
class,’’ this would be a futures customer
as defined in § 1.3, whose futures
account is subject to the segregation
requirements of section 4d(a) of the Act
and the Commission regulations
thereunder; for the foreign futures
account class, a 30.7 customer as
defined in § 30.1, whose foreign futures
account is subject to the segregation
requirements of § 30.7; for the cleared
swaps account class, a cleared swaps
customer as defined in § 22.1, whose
cleared swaps account is subject to the
segregation requirements of part 22; and
for the delivery account class, a
customer that would be classified as a
‘‘public customer’’ if the property held
in the customer’s delivery account had
been held in an account described in
one of the prior three categories. The
Commission is tying the definition of
public customer for bankruptcy
purposes to the definitions of
‘‘customer’’ (and segregation
requirements) that apply during
business as usual. An FCM’s non-public
customers are customers that are not
public customers.
As part of the process for introducing
a bespoke regime for the bankruptcy of
a clearing organization, the Commission
is differentiating between public and
non-public customers such that
customers of clearing members (whether
such clearing members are FCMs or
foreign brokers) acting on behalf of their
proprietary (i.e., house) accounts, would
be non-public customers, while all other
customers of clearing members would
be public customers.
In the case of members of a DCO that
are foreign brokers, the determination as
to whether a customer of such a member
is a proprietary member would be based
on either the rules of the clearing
organization or the jurisdiction of
incorporation of such member: If either
designates the customer as a proprietary
member, then the customer would be
treated as a non-public customer.
Vanguard agreed that the proposed
definition of public customer in
§ 190.01 included any customer of an
FCM whose commodity contract is
subject to the Commission’s segregation
60 This is in contrast to the current definition in
§ 190.01(cc) and (ii), which explicitly define nonpublic customer, and define public customer as a
customer that is not a non-public customer. This
change is not substantive, but rather fosters closely
tying the account classes to business-as-usual
segregation requirements.
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requirements, and for a DCO, a person
whose account with the FCM is not
classified as a proprietary account. CME
also supported the proposed definitions
of public customer and non-public
customer as it believed they are more
understandable than the prior part 190
definitions.
CME, however, asked the Commission
to reconsider the recommendation of the
ABA Subcommittee to include non-U.S.
customers of foreign broker clearing
members of a DCO within the public
customer definition. CME noted that it
previously considered admitting foreign
brokers as clearing members to clear
trades of their non-U.S. customers in
futures or options on futures listed on
the CME or the other designated
contract markets (‘‘DCMs’’) owned by
CME Group, which would be analogous
to a foreign clearing organization
admitting FCMs as members to clear
trades of their public customers in
futures or options on futures listed by a
foreign board of trade. While that model
does not currently exist for U.S. DCOs
and the DCMs for which they provide
clearing services, CME believed it is
appropriate to include that flexibility in
part 190 to accommodate that
possibility. OCC also requested
clarification as to whether customers of
foreign brokers that access a DCO
through an FCM clearing member
affiliated with the foreign broker would
be treated as public customers.
The Commission is of the view that
including non-U.S. customers of
foreign-broker clearing members as
public customers should be considered
as part of a comprehensive review of the
issues at such time as the model of
admitting foreign brokers as clearing
members for U.S. DCOs becomes
empirical. Such a review of the issues,
including issues related to both
bankruptcy and risk management, can
be more reliably, and more efficiently,
be conducted in the context of empirical
rather than hypothetical circumstances.
In response to OCC’s request for
clarification, the Commission notes that
where a foreign broker clears the trades
of its (foreign) customers through an
affiliated FCM that is a clearing
member, those trades would be cleared
on an omnibus basis through the FCM’s
customer account, and would be
required to be kept separate from the
proprietary trades of the affiliated
foreign broker. Thus, those customers
would be treated as public customers. If
a foreign broker clears its own
proprietary trades through an
unaffiliated FCM (i.e., there is no
proprietary relationship between the
foreign broker and the FCM as set forth
in § 1.3), those trades would be
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considered as public customer trades at
the FCM, but would not be part of the
customer omnibus account of the
foreign broker at the FCM.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting the
definitions of ‘‘non-public customer’’
and ‘‘public customer’’ as proposed in
§ 190.01.
The Commission is adopting the
definitions of ‘‘variation settlement’’ as
proposed to define the payments that a
trustee may make with respect to open
commodity contracts. The definition of
variation settlement includes ‘‘variation
margin’’ as defined in § 1.3, and also
includes ‘‘all other daily settlement
amounts (such as price alignment
payments) that may be owed or owing
on the commodity contract’’ to cover all
of the potential obligations associated
with an open commodity contract.
CME supported defining variation
settlement and generally agreed with the
substance of the definition, but
recommended that the Commission
adopt one self-contained definition that
does not rely on cross-reference to
another Commission definition. CME
suggested that the Commission adopt
the ABA Subcommittee’s variation
settlement definition which would
cover ‘‘any amount paid or collected (or
to be paid or collected) on an open
commodity contract relating to changes
in the market value of the commodity
contract since the trade was executed or
the previous time the commodity
contract was marked to market along
with all other daily settlement amounts
(such as price alignment payments) that
may be owed or owing on the
commodity contract.’’
The ABA Subcommittee believed that
the definition of variation settlement
was not used consistently in the
Proposal and identified two places in
proposed § 190.14(b) where the term
‘‘variation’’ is used instead of ‘‘variation
settlement.’’ The ABA Committee
recommended using ‘‘variation
settlement’’ in both places, to avoid any
confusion as to whether ‘‘variation’’
refers to the Commission’s variation
margin definition or variation
settlement definition.
The Commission notes that the crossreferences in § 190.01 to definitions in
other parts of the Commission’s rules is
intentional to clarify the relationships
with those other definitions, and thus
the Commission declines to make the
change proposed by the commenters.61
61 The technical correction suggested by the ABA
subcommittee to § 190.14(b) (change ‘‘variation’’ to
‘‘variation settlement’’) will be adopted in one case;
the subsection where the second case was found
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Accordingly, after consideration of the
comments and for the reasons stated
above, the Commission is adopting the
definition of ‘‘variation settlement’’ in
§ 190.01 as proposed.
The Commission did not receive
comments on the remaining definitions
in § 190.01 and is therefore adopting
them as proposed.
The Commission is adopting the
definition of ‘‘Act’’ in § 190.01 to refer
to the Commodity Exchange Act.
The Commission is amending the
definition of ‘‘Bankruptcy Code’’ in
§ 190.01 to update cross-references.
The Commission is amending the
definition of ‘‘Business day’’ to define
what constitutes a Federal holiday and
clarify that the end of a business day is
one second before the beginning of the
next business day.
The Commission is amending the
definition of ‘‘Calendar day’’ to include
a reference to Washington, DC as the
reference location for the Calendar day.
The Commission is adopting the
definition of ‘‘Cash delivery account
class’’ to cross-reference it to the new
definition in ‘‘Account class.’’
The Commission is adopting the
definition of ‘‘Cash equivalents’’ to
define assets that might be accepted as
a substitute for United States dollar
cash.
The Commission is amending the
definition of ‘‘Cleared swaps account’’
in § 190.01 to cross-reference it to the
new definition in ‘‘Account class.’’
The Commission is adopting the
amended definition of ‘‘Clearing
organization’’ to update crossreferences.
The Commission is amending the
definition of ‘‘Commodity broker’’ to
reflect the current definition of
commodity broker in the Bankruptcy
Code and the relevant cross-references.
The Commission is adding the
definition of ‘‘Commodity contract
account’’ to refer to accounts of a
customer based on commodity contracts
in one of the four account classes, as
well as, for purposes of identifying
customer property for the foreign
futures account class (subject to
§ 190.09(a)(1)), accounts maintained by
foreign clearing organizations or foreign
futures intermediaries reflecting foreign
futures or options on futures executed
on or subject to the rules of a foreign
board of trade, including any account
maintained on behalf of the debtor’s
public customers.
The Commission is amending the
definition of ‘‘Court’’ to clarify that the
court having jurisdiction over the
has been removed entirely by the supplemental
notice of proposed rulemaking.
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debtor’s estate may not be a bankruptcy
court (e.g., in the event of a withdrawal
of the reference).62
The Commission is amending the
definition of ‘‘Cover’’ to improve clarity
without any substantive change to the
current definition.
The Commission is amending the
definition of ‘‘Customer’’ to reflect the
revisions to part 190 through this
rulemaking, specifically, noting the
different meanings of ‘‘customer’’ with
respect to an FCM in contrast to with
respect to a DCO.
The Commission is amending the
definition of ‘‘Customer claim of
record’’ to improve clarity without any
substantive changes to the current
definition.
The Commission is amending the
definition of ‘‘Customer class’’ to reflect
the revisions to part 190 through this
rulemaking, specifically emphasizing
the difference between public customers
and non-public customers.
The Commission is deleting the
definition of ‘‘Dealer option’’ as this
term is no longer used.
The Commission is amending the
definition of ‘‘Debtor’’ to explicitly refer
to commodity brokers involved in a
bankruptcy proceeding, a proceeding
under SIPA, or a proceeding under
which the FDIC is appointed as a
receiver.
The Commission is newly adopting a
definition of ‘‘Distribution’’ to include
the transfer of property on a customer’s
behalf, return of property to a customer,
as well as distributions to a customer of
valuable property that is different than
the property posted by that customer.
The Commission is amending the
definition of ‘‘Equity’’ to update a crossreference.
The Commission is adding definitions
for ‘‘Exchange Act’’ and ‘‘FDIC’’ to
incorporate the statute and regulator,
respectively, in part 190.
The Commission is revising the
definition of ‘‘Filing date’’ to include
the commencement date for proceedings
under SIPA or Title II of the Dodd-Frank
Act.63
62 Cf.
28 U.S.C. 157(d).
SIPA, the term ‘‘filing date’’ is defined to
occur earlier than the filing of an application for a
protective decree if the debtor is the subject of a
proceeding in which a receiver, trustee, or
liquidator for the debtor has been appointed and
such proceeding is commenced before the date on
which the application for a protective decree under
SIPA is filed. In such case, the term ‘‘filing date’’
is defined to mean the date on which such
proceeding is commenced. By contrast, this
rulemaking does not define the term ‘‘filing date’’
to occur earlier in such a case, although it would
(in § 190.02(f) as discussed below) authorize such
a to receiver themselves file a voluntary petition for
bankruptcy of the FCM.
This difference is due to the different uses of the
‘‘filing date’’ in these rules and in SIPA. For
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The Commission is revising the
definition of ‘‘Final net equity
determination date’’ stylistically, to
provide updated cross-references, and to
further clarify who the parties involved
are intended to be.
The Commission is adding the
definition of ‘‘Foreign board of trade’’
and adopting by reference the definition
in § 1.3 (which is consistent with
§ 48.2(a)).
The Commission is adding the
definition of ‘‘Foreign clearing
organization’’ to refer to a clearing
house, clearing association, clearing
corporation or similar entity, facility or
organization that clears and settles
transactions in futures or options on
futures executed on or subject to the
rules of a foreign board of trade.
The Commission is retaining the
definitions of ‘‘Foreign future’’ and
‘‘Foreign futures commission merchant’’
as proposed to be unchanged.
The Commission is adopting the
definition of ‘‘Foreign futures
intermediary’’ to refer to a foreign
futures or options broker, as defined in
§ 30.1, acting as an intermediary for
foreign futures contracts between a
foreign futures commission merchant
and a foreign clearing organization.
The Commission is revising the
definition of ‘‘Funded balance’’ to the
definition in § 190.08(c). That definition
is discussed further below in section
II.B.6.
The Commission is adding a
definition for ‘‘Futures’’ and ‘‘Futures
contract,’’ used interchangeably, to
clarify what these terms mean for
purposes of part 190.
The Commission is deleting the
definition of ‘‘In-the-money amount’’ as
the term will no longer be used and
replacing it with ‘‘in-the-money,’’ a term
that is Boolean, and is used in
§ 190.04(c).
The Commission is amending the
definition of ‘‘Joint account’’ to reflect
that a commodity pool must be a legal
entity.64 Thus, the Commission is
removing the reference to a commodity
pool that is not a legal entity.
The Commission is deleting the
definitions of ‘‘Leverage contract’’ and
‘‘Leverage transaction merchant’’
consistent with the discussion above
with respect to § 190.00(d)(1)(i)(B).
The Commission is removing the
definition of ‘‘Member property’’ from
purposes of part 190, ‘‘filing date’’ refers to the date
on and after which a commodity broker is treated
as a debtor in bankruptcy. See, e.g., §§ 190.00(c)(4),
190.06(a)(1) and (b)(1), 190.08(b)(4), and
190.09(a)(1)(ii)(A). For purposes of SIPA, by
contrast, the ‘‘filing date’’ is the date on which
securities are valued. See, e.g., SIPA sections 8(b),
8(c)(1), 8(d), 9 ff–2(b), (c)(1), (d), and 78fff–3(a)(3).
64 See § 4.20(a)(1).
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current § 190.09(a) and addressing it in
§ 190.01, and clarifying that member
property is the property that may be
used to pay net equity claims based on
both the members’ house account as
well as claims on behalf of non-public
customers of the member.
The Commission is revising the
definition of ‘‘Net equity’’ to update
cross-references, including the
difference between bankruptcy of an
FCM and of a clearing organization.
The Commission is revising the
definition of ‘‘Open commodity
contract’’ to improve clarity without any
substantive changes to the definition.
The Commission is revising the
definition of ‘‘Order for relief’’ to update
cross-references and incorporate
stylistic, non-substantive changes.
The Commission is adding the
definition of ‘‘Person’’ to clarify what
this term means in the context of part
190.
The Commission is adding the
definition of ‘‘Physical delivery account
class’’ to be cross-referenced to the new
definition in ‘‘Account class.’’
The Commission is deleting the
definition of ‘‘Premium’’ as that term is
no longer used.
The Commission is revising the
definition of ‘‘Primary liquidation date’’
to reflect the removal of the concept of
accounts being held open for later
transfer. As a result of such removal, the
Commission is also deleting current
§ 190.03(a), which set forth provisions
regarding the operation of accounts held
open for later transfer, since there will
no longer be any such accounts.
The Commission is deleting the
definition of ‘‘Principal contract’’ as that
term is no longer used. This term was
previously used to refer to contracts that
are not traded on designated contract
markets, but the definition excluded
cleared swaps.
The Commission is adding the
definition of the ‘‘Securities account’’
and ‘‘SIPA’’ to address the bankruptcy
of an FCM that is also subject to the
Securities Investor Protection Act.
These are based on appropriate crossreferences to the Exchange Act and
SIPA.
The Commission is amending the
definition of ‘‘Security’’ to update the
cross-reference to the Bankruptcy Code
without any substantive changes to the
definition.
The Commission is removing the
definition of ‘‘Short term obligation’’
from § 190.01 as the term is no longer
used within the definition of
‘‘specifically identifiable property.’’ The
Commission is instead amending the
‘‘specifically identifiable property’’
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definition with respect to securities, as
discussed immediately below.
The Commission is amending the
definition of ‘‘Specifically identifiable
property’’ to update and streamline the
definition in current § 190.01(ll).
Paragraph (1)(i) focuses on ‘‘futures
accounts,’’ ‘‘foreign futures accounts,’’
and ‘‘cleared swaps accounts.’’
Paragraph (1)(i)(A) corresponds in major
part to paragraphs (ll)(1) and (6) of the
current definition. For securities,
paragraph (1)(i)(A)(1) substantially
copies current paragraph (ll)(1)(i), but
clarifies that a security, to be included
as specifically identifiable property,
must have ‘‘a duration or maturity date
of more than 180 days.’’ Paragraph
(1)(i)(A)(2) reformats current paragraph
(ll)(6). For warehouse receipts, bills of
lading, or other documents of title
(paragraph (i)(B), corresponding to
current paragraph (ll)(1)(ii)), the
definition restates the corresponding
portion of the current definition.
Paragraph (1)(ii) of the definition
furthers the approach of providing
discretion to the trustee. It includes as
specifically identifiable property
commodity contracts that are treated as
such in accordance with § 190.03(c)(2).
As discussed further below,65 the latter
provision permits (but does not require)
the trustee, following consultation with
the Commission, to treat open
commodity contracts of public
customers as specifically identifiable
property if they are held in a futures
account, foreign futures account, or
cleared swaps account that is designated
as a hedging account in the debtor’s
books and records, and if the trustee
determines that treating the commodity
contracts as specifically identifiable
property is reasonably practicable under
the circumstances of the case. In
contrast, paragraph (ll)(2) of the current
definition is more prescriptive.
The Commission is amending the
definition of ‘‘Strike price’’ for brevity
without any substantive change.
The Commission is adding the
definition of ‘‘Substitute customer
property’’ to refer to the property (in the
form of cash or cash equivalents)
delivered to the trustee by or on behalf
of a customer in order to redeem either
specifically identifiable property or a
letter of credit.
The Commission is adopting the
definition of ‘‘Swap’’ to replace the
current definition of ‘‘Cleared swap’’ 66
in part 190. The definition of reflects the
current definition and meaning of the
term ‘‘swap’’ in section 1a(47) of the
CEA and Commission regulation § 1.3.
65 See
66 See
section II.B.1.c.
current § 190.01(pp).
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The Commission is also adopting the
definition to add as a swap, for purposes
of this part, ‘‘any other contract,
agreement or transaction that is carried
in a cleared swaps account pursuant to
a rule, regulation or order of the
Commission, provided, in each case,
that it is cleared by a clearing
organization [i.e., a DCO] as, or the same
as if it were, a swap.’’ 67
The Commission is amending the
definition of ‘‘Trustee’’ to include the
trustee in a SIPA proceeding.
The Commission is adopting a
definition of ‘‘Undermargined’’ for
purposes of part 190 to mean when the
funded balance of a debtor’s futures
account, foreign futures account, or
cleared swaps account is below the
minimum amount that the debtor is
required to collect and maintain for the
open commodity contracts in such
account under the rules of the relevant
clearing organization, foreign clearing
organization, DCM, Swap Execution
Facility (‘‘SEF’’), or FBOT. If any such
rules establish both an initial margin
requirement and a lower maintenance
margin 68 requirement applicable to any
commodity contracts (or to the entire
portfolio of commodity contracts or any
subset thereof) in a particular
commodity contract account of the
customer, the trustee will use the lower
maintenance margin level to determine
the customer’s minimum margin
requirement for such account. An
undermargined account may or may not
be in deficit.69
Accordingly, after consideration of
the comments, and for the reasons
discussed above, the Commission will
adopt § 190.01 as proposed, with the
amendments discussed above.
3. Regulation § 190.02: General
Regulation § 190.02 is being adopted
as proposed, with the addition of
paragraph (g) as described below. The
67 Cf. 11 U.S.C. 761(4)(F)(ii) (including as a
commodity contract ‘‘with respect to a futures
commission merchant or clearing organization, any
other contract, option, agreement, or transaction, in
each case, that is cleared by a clearing
organization’’).
68 For further discussion of maintenance margin
and its relationship to initial margin, see, e.g.,
https://www.cmegroup.com/education/courses/
introduction-to-futures/margin-know-whatisneeded.html.
69 An account is in deficit if the balance is
negative (i.e., the customer owes the debtor instead
of the reverse). An account can be undermargined
but not in deficit (if the balance is positive, but less
than the required margin). See discussion of
§ 190.04(b)(f). For example, if the margin
requirement is $100 and the account balance is $20,
the account is undermargined by $80, but is not in
deficit. If the account loses a further $35, the
balance would be ($15). The account would be in
deficit by $15, and would be undermargined by
$115.
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Commission is adopting § 190.02(a)(1)
based on current § 190.10(b)(1) with one
substantive change to permit a trustee to
request an exemption from the
Commission from any procedural
provision (rather than limiting such
requests to exemptions from, or
extension of, a time limit). Such an
exemption may be subject to conditions,
and must be consistent with the
purposes of this part and of subchapter
IV of the Bankruptcy Code. The
Commission is adopting § 190.02(a)(1)
consistent with major theme 7,
discussed in section I.B. above regarding
enhanced trustee discretion. Section
190.02(a)(1) allows the trustee to request
to be permitted to extend a deadline or
to amend a form.
The Commission is also adopting
§ 190.02(a)(2)(i) and (ii), (a)(3), and (b),
as derived from current §§ 190.10(b)(2),
(3), and (4) and 190.10(d), respectively,
with minor editorial and conforming
changes.
The Commission is adopting
§ 190.02(b) to delegate the functions of
the Commission set forth in part 190,
other than the authority to disapprove
pre-relief transfers pursuant to
§ 190.07(e)(1), to the Director of the
Division of Clearing and Risk, after
consultation with the Director of the
Market Participants Division 70 (with the
possibility of further delegations to
members of the respective Directors’
staffs).
The Commission is adopting
§ 190.02(c) to exclude from the
definition of ‘‘customer’’ entities who
hold claims against a debtor solely on
account of uncleared forward contracts.
The Commission is adopting § 190.02(d)
to provide that the Bankruptcy Code
will not be construed to prohibit a
commodity broker from doing certain
combinations of business, or to permit
any otherwise prohibited operation,
trade or business. The Commission is
adopting § 190.02(e) to provide that
security futures products held in a
securities account shall not be
considered to be part of commodity
futures or options accounts as those
terms are used in section 761(9) of the
Bankruptcy Code. The Commission is
adopting § 190.02(c) (forward contracts),
(d) (other), and (e) (rule of construction)
as transposed from current § 190.10(e),
(g), and (h), respectively.
The Commission continues to believe,
as stated in the proposal, that § 190.02(f)
should enhance customer protection in
cases where a receiver has been
70 The Market Participants Division is the
successor to the Division of Swap Dealer and
Intermediary Oversight, the title of that division at
the time of the Proposal.
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appointed (pursuant to e.g., section 6c
of the CEA) for an FCM due to a
violation or imminent violation 71 of the
customer property protection
requirements of section 4d of the CEA
or of the regulations thereunder, or of
the Commission’s capital rule (§ 1.17).
Section 190.02(f) explicitly permits such
a receiver to file a voluntary petition for
bankruptcy of such FCM in appropriate
cases. For example, the receiver may
determine that, due to a deficiency in
property in segregation, bankruptcy is
necessary to protect customers’ interests
in customer property.
The Commission requested comment
with respect to all aspects of proposed
§ 190.02. In particular, the Commission
requested comment as to whether it
would be appropriate to permit trustees
to request relief from procedural
provisions such as requirements as to
forms, in addition to requesting relief
from deadlines; whether it would be
appropriate to permit receivers for
FCMs to file voluntary petitions in
bankruptcy; and whether any portion of
proposed § 190.02 would likely to lead
to unintended consequences, and, if so,
how may these be mitigated.
The Commission received two
comments on proposed § 190.02. CME
generally supported proposed § 190.02,
including adding a provision that would
allow the trustee to request an
exemption from the procedural
requirements of the rules. CME also
favored adding the proposed provision
to clarify that a receiver appointed for
an FCM due to segregation or net capital
violations may, in an appropriate case,
file a petition for bankruptcy of the FCM
pursuant to section 301 of the
Bankruptcy Code. In contrast, FIA
recommended that the Commission
require a receiver to obtain the
Commission’s consent before the
receiver may file a voluntary petition in
bankruptcy on behalf of an FCM. FIA
believed that any receiver that may be
appointed by a court would be in
response to a proceeding initiated by the
Commission pursuant to section 6c of
the Act, which authorizes the
Commission to file an action in the
appropriate U.S. District Court when it
appears that a person has engaged, is
71 Section 6c of the CEA provides in relevant part
that whenever it shall appear to the Commission
that any person has engaged, is engaging, or is about
to engage in any act or practice constituting a
violation of any provision of this Act or any rule,
regulation, or order thereunder the Commission
may bring an action in the proper district court to
enjoin such act or practice, or to enforce
compliance with this Act (emphasis supplied).
Section 6c also refers to an order appointing a
temporary receiver to administer such restraining
order and to perform such other duties as the court
may consider appropriate. 7 U.S.C. 13a–1.
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engaging, or is about to engage in any
act or practice constituting a violation of
any provision of this Act or any rule,
regulation, or order thereunder. FIA
noted that there may be circumstances
in which a receiver may determine that
a voluntary petition under the
Bankruptcy Code is warranted.
However, in light of the fact that such
a petition would effectively close the
FCM, FIA believed that § 190.02(f)
should provide that the receiver may
file a voluntary petition only with the
prior consent of the Commission.
The Commission notes that § 190.02(f)
is limited to cases where the receiver
was appointed due to concerns about
either protection of customer property,
or of capital inadequacy, and the
appointment would be in response to a
proceeding initiated by the Commission.
In such a case, the Commission believes
that it would be appropriate and most
effective to defer to the judgment of the
appointed receiver as to the necessity of
the filing of a petition in bankruptcy.
As a technical point, the ABA
Subcommittee recommended
(consistent with their recommendation
in the definitions section, § 190.01, to
more precisely use the term ‘‘allowed
net equity’’) 72 that the Commission
further amend § 190.02 by adding new
paragraph (g) to proposed § 190.02 to
state that the term ‘‘allowed’’ in this part
shall have the meaning ascribed to it in
the Bankruptcy Code. The ABA
Subcommittee believed that this would
confirm that ‘‘allowed’’ under part 190
equates with the use of ‘‘allowed’’ under
the Bankruptcy Code. The Commission
agrees, and is making the change.
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is
adopting § 190.02 as proposed, with the
addition of paragraph (g).
B. Subpart B—Futures Commission
Merchant (FCM) as Debtor
The Commission is adopting subpart
B (§§ 190.03–190.10) to address debtors
that are FCMs.
1. Regulation § 190.03: Notices and
Proofs of Claims
The Commission is adopting § 190.03
as proposed with modifications to
§ 190.03(c)(2), as set forth below.
The Commission is adopting § 190.03
to set forth requirements for the notices
and proofs of claim that are applicable
to subpart B of part 190. It reorganizes
and revises much of current § 190.02,
and incorporates some portions of
current § 190.10.
72 See section II.A.2. (recommending that the
Commission instead use ‘‘funded net equity’’ as the
defined term in the § 190.01 definitions.)
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a. Regulation § 190.03(a): Notices—
Means of Providing
The Commission is adopting
§ 190.03(a) to set forth the means by
which notices required under subpart B
of part 190 are to be provided. Section
190.03(a)(1) is substantially similar to
current § 190.10(a), but, in an effort to
modernize part 190, the Commission is
deleting the requirement that notices be
given to it via overnight mail (i.e., in
hard copy). The Commission is
retaining the requirement that all such
notices be sent via electronic mail. The
Commission believes that overnight
hard copy delivery is unnecessary and
that removing the requirement to send
notices to the Commission via overnight
mail will result in cost savings.
The Commission is adopting
§ 190.03(a)(2) to provide a generalized
approach for giving notice to customers
under part 190. In light of evolving
technology, § 190.03(a)(2) replaces the
specific procedures for providing notice
to customers that appear in current
§ 190.02(b) with the requirement that
the trustee must establish and follow
procedures ‘‘reasonably designed’’ for
giving notice to customers under
subpart B of part 190. Such notice
procedures should generally include the
use of a website and customers’
electronic addresses. In the
Commission’s view, this new approach
provides trustees with the necessary
flexibility to determine the best way to
provide notice and is consistent with
the manner in which bankruptcy
trustees in recent FCM bankruptcy cases
have provided notice to customers. The
Commission also believes that adopting
a generalized notice requirement in lieu
of retaining more specific notice
obligations (e.g., newspaper publication)
will result in both cost savings for the
debtor’s estate, and more efficient and
effective notification of customers.
The Commission requested comment
on the approach to the notice
requirements set forth in proposed
§ 190.03(a). The Commission
specifically asked whether the proposed
changes would be helpful; would be
likely to lead to unintended
consequences; and how any unintended
consequences could be mitigated. CME
supported providing trustees with the
flexibility, in consultation with the
Commission, to establish appropriate
procedures for giving notice to
customers and moving away from
outdated and impractical notice
requirements. CME also agreed that the
changes align with how trustees in
recent FCM cases have communicated
with the FCM’s customers and are more
customer-friendly.
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b. Regulation § 190.03(b): Notices to the
Commission and Designated SelfRegulatory Organizations
Section 190.03(b)(1) is derived from
current § 190.02(a)(1), but includes
revised notice requirements that are
designed to ensure that the Commission
and the relevant designated selfregulatory organization (‘‘DSRO’’) 73 will
be aware of a voluntary or involuntary
bankruptcy filing or SIPA application as
soon as is practicable and to codify the
practices observed in recent bankruptcy
and SIPA cases.74 First, § 190.03(b)(1)
provides that, in the event of a
voluntary bankruptcy filing, the
commodity broker must notify the
Commission and the appropriate DSRO
as soon as practicable before, and in any
event no later than, the time of filing.
Second, § 190.03(b)(1) provides that, in
the event of an involuntary bankruptcy
filing or an application for a protective
decree under SIPA,75 the commodity
broker must notify the Commission and
the appropriate DSRO immediately
upon the filing of such petition or
application. The Commission notes that,
as a practical matter, a decision to file
for bankruptcy takes measurable time,
as does the preparation of the necessary
papers. In previous FCM voluntary
bankruptcy filings, the commodity
broker has provided the Commission
and its DSRO with notice ahead of the
bankruptcy filing. Section 190.03(b)(1)
merely codifies the expectation that
such advance notice should, in fact,
occur to the extent practicable. Section
190.03(b)(1) allows the commodity
broker to provide the relevant docket
number of the bankruptcy or SIPA
proceeding to the Commission and the
DSRO ‘‘as soon as known,’’ in order to
account for the fact that there may be a
time lag between the filing of a
proceeding and the assignment of a
docket number.
Section 190.03(b)(2) sets forth the
requirements for the provision of notice
to the Commission of an intent to
transfer or to apply to transfer open
commodity contracts in accordance
73 For further detail regarding SROs and DSROs
see generally § 1.52.
74 A voluntary case under a chapter of the
Bankruptcy Code is commenced by the debtor by
filing a petition under that chapter. Section 301(a)
of the Bankruptcy Code, 11 U.S.C. 301(a). Under
certain circumstances, creditors of a person may file
an involuntary case against that person pursuant to
section 303 of the Bankruptcy Code, 11 U.S.C. 303.
In such cases, the order for relief will be granted
only if the petition is not timely controverted or if
the court makes specific findings. Id. There is no
historical precedent for an involuntary petition in
bankruptcy being filed against a commodity broker.
75 A SIPA proceeding is commenced when the
Securities Investors Protection Corporation
(‘‘SIPC’’) files a petition for a protective order. See
generally SIPA section 5, 15 U.S.C. 78eee.
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with section 764(b) of the Bankruptcy
Code and relevant provisions of part
190. It is derived from current
§ 190.02(a)(2). While § 190.03(b)(2)
retains the requirement that such notice
be provided ‘‘[a]s soon as possible,’’ it
removes the requirement that such
notice be provided no later than three
days after the order for relief. The
Commission believes that the three-day
deadline set forth in current
§ 190.02(a)(2) is likely in many cases to
be too long, but may, in some cases, be
too short.
The Commission expects that the
bankruptcy trustee would begin working
on transferring any open commodity
contracts as soon as the trustee is
appointed and that, by the end of three
days following entry of the order for
relief, any such transfers likely will be
either completed, actively in process, or
determined not to be possible. Indeed,
the Commission expects that a DCO
would, in most cases, be reluctant to
hold a position open for more than three
days following the entry of the order for
relief unless a transfer is actively in
process and imminent. Thus, while the
Commission recognizes that the ‘‘[a]s
soon as possible’’ language is somewhat
vague, given past experience, the
Commission views the current
timeframe of three days after the entry
of the order for relief as generally too
long, and it is not clear what precise
shorter period of time would be
generally appropriate, given the
uniqueness of each case. Under different
circumstances, that is, where transfer
arrangements cannot be made within
three days after the order for relief, a
specified deadline for notification may
in fact be harmful, in that it could be
interpreted to prohibit notification after
the expiration of such deadline (and
thus, impliedly prohibit the trustee from
forming the intent to transfer after that
time).
In the event of an FCM bankruptcy,
the Commission anticipates that there
will be frequent contact between the
trustee, the relevant DSRO, any relevant
clearing organization(s), and
Commission staff. Thus, a specified
deadline for such notification would not
appear to be helpful. Section
190.03(b)(2) also clarifies that
notification should be made with
respect to a transfer of customer
property.
The Commission requested comment
on proposed § 190.03(b). Specifically,
the Commission asked whether
proposed § 190.03 would meet the
objective of ensuring that the
Commission and the relevant DSRO will
be aware of a bankruptcy filing or SIPA
proceeding as soon as is practicable.
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LCH expressed support for the
requirement that FCMs notify DSROs, in
addition to the CFTC, of involuntary
bankruptcy filings. LCH also requested
that the Commission consider ways in
which this information could be quickly
transmitted to the DCOs that may be
impacted, given the interconnectedness
of the derivatives market. While, as
noted above, staff would be in contact
with DCOs that might be impacted by a
bankruptcy proceeding involving an
FCM as a matter of supervisory practice,
this practice does not need to be
incorporated into regulation. Moreover,
the Commission notes that many DCOs,
including LCH, require as part of their
own rules and procedures that their
clearing members provide prompt
notice of a bankruptcy filing affecting
the clearing member.76
c. Regulation § 190.03(c): Notices to
Customers; Treatment of Hedging
Accounts and Treatment of Specifically
Identifiable Property
The Commission is adopting
§ 190.03(c) to address notices to
customers and the treatment of hedging
accounts and specifically identifiable
property.
Section 190.03(c)(1) requires the
trustee to use all reasonable efforts to
notify promptly any customer whose
futures account, foreign futures account,
or cleared swaps account includes
specifically identifiable property, other
than open commodity contracts, which
has not been liquidated, that such
property may be liquidated on and after
the seventh day after the order for relief
if the customer has not instructed the
trustee in writing before the deadline
specified in the notice to return such
property pursuant to the terms for
distribution of customer property
contained in part 190. It also requires
that the trustee’s notice to customers
with specifically identifiable property
include, where applicable, a reference to
substitute property.
Section 190.03(c)(1) is derived from
current § 190.02(b)(1), but replaces the
requirement that the trustee publish
such notice to customers in a newspaper
for two consecutive days prior to
liquidating the specifically identifiable
property with the requirement that the
trustee notify customers in accordance
with § 190.03(a)(2). This change is
intended to provide the trustee with
flexibility in notifying customers
regarding specifically identifiable
76 See, e.g., LCH Ltd.: FCM Procedures of the
Clearing House 1.6(b)(G) (‘‘All FCM Clearing
Members must provide the Clearing House in a
prompt and timely manner with: . . . notice if the
FCM Clearing Member becomes the subject of a
bankruptcy petition.’’).
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property and to modernize part 190 to
allow the trustee to provide notice to
customers in a way that will maximize
the number of customers reached. The
timeframe in which the Commission
would allow the trustee to commence
liquidation of specifically identifiable
property has been modified to reflect
the revised notice requirements.
Because § 190.03(c)(1) does not require
newspaper publication of customer
notice, the Commission is allowing the
trustee to commence liquidation of
specifically identifiable property on the
seventh day after the order for relief (or
such other date as specified by the
trustee with the approval of the
Commission or the court), so long as the
trustee has used all reasonable efforts
promptly to notify the customer under
§ 190.03(a)(2) and the customer has not
instructed the trustee in writing to
return such specifically identifiable
property.
The Commission is adopting
§ 190.03(c)(2) to address how a
bankruptcy trustee may treat open
commodity contracts carried in hedging
accounts. This regulation moves from
the bespoke approach of current
§ 190.02(b)(2) to a categorical approach,
in light of the practical difficulties of
treating large numbers of customers
with similar open contracts on a
bespoke basis.77 The Commission notes
that recent commodity broker
bankruptcies have involved thousands
of customers, with as many as hundreds
of thousands of commodity contracts.
Trustees must make decisions as to how
to handle such customers and contracts
within days—in some cases, hours—
after being appointed. Therefore, the
Commission is giving the trustee the
authority (i.e., an option, but not an
obligation) to treat open commodity
contracts of public customers held in
hedging accounts designated as such in
the debtor’s records as specifically
identifiable property, after consulting
with the Commission and when
practical under the circumstances. To
the extent the trustee exercises such
authority, the trustee is required to
notify each relevant public customer in
accordance with § 190.03(a)(2). As
proposed, § 190.03(c)(2) would have
required the trustee, in all cases, to
request that the customer provide
instructions as to whether to transfer or
liquidate the relevant open commodity
contracts.78 As discussed further below,
77 See
major theme 7 in section I.B. above.
Commission is also making other changes
that are intended to make it simpler for the trustee
to identify hedging positions and allow an FCM to
designate an account as a hedging account by
relying on explicit customer representations that
the account contains a hedging position. See § 1.41.
78 The
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in response to a comment, the
Commission is modifying this proposal
to address cases where, in the judgment
of the trustee, the books and records of
the debtor reveal a clear preference by
the public customer with respect to
transfer or liquidation of open
commodity contracts.
Section 190.03(c)(2) also delineates
certain information that the trustee must
include in the notice. As proposed, the
notice must inform the customer that (1)
if the customer does not provide
instructions in the prescribed manner
and by the prescribed deadline, the
customer’s open commodity contracts
will not be treated as specifically
identifiable property; (2) any transfer of
the open commodity contracts is subject
to the terms for distribution contained
in § 190.09(d)(2); (3) absent compliance
with any terms imposed by the trustee
or the court, the trustee may liquidate
the open commodity contracts; and (4)
providing instructions may not prevent
the open commodity contracts from
being liquidated. The Commission is
making conforming changes to this
portion of proposed § 190.03(c)(2) to
reflect the modification referenced
above. To the extent the trustee does not
exercise its authority to treat public
customer positions carried in a hedging
account as specifically identifiable
property, the trustee must endeavor to,
as the baseline expectation, treat open
commodity contracts of public
customers carried in hedging accounts
the same as other customer property and
effect a transfer of such contracts to the
extent possible.79 The Commission is
making these changes to reflect the
policy preference to port all positions of
public customers. Requiring a trustee to
identify hedging accounts and provide
hedging account holders the
opportunity to keep their positions open
may be a resource and time intensive
process, which the Commission believes
could interfere with the trustee’s ability
to take prudent and timely action to
manage the debtor FCM’s estate to
protect all of the FCM’s customers. The
Commission believes that allowing the
FCM to rely on representations made by
customers during business-as-usual will
alleviate this concern. In cases where it
may be practical, the trustee may elect
This would simplify the existing requirement that
FCMs provide a hedging instructions form when a
customer first opens up a hedging account. For
commodity contract accounts opened prior to the
effective date of the part 190 revisions, the
Commission is proposing that FCMs may rely on
written hedging instructions received from the
customer in accordance with current § 190.06(d).
See § 1.41(c).
79 See § 190.00(c)(4).
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to provide special hedging account
treatment.
The Commission is adopting
§ 190.03(c)(3) to make minor
modifications to the notice of the
commencement of an involuntary
proceeding that the trustee may provide
to customers prior to entry of an order
for relief, and upon leave of the court.
Such modifications include clarifying
that such notice must be in accordance
with the notice provisions set forth
§ 190.03(a)(2), amending certain
terminology, and removing unnecessary
references.
Section 190.03(c)(4) requires the
bankruptcy trustee to notify customers
that an order for relief has been entered
and instruct customers to file a proof of
customer claim. The regulation is
derived from current § 190.02(b)(4), but
adds that the notice must be provided
in accordance with § 190.03(a)(2).
Section 190.03(c)(4) replaces the term
‘‘customer of record’’ with the term
‘‘customer,’’ as ‘‘customer of record’’ is
not a defined term in part 190 and all
customers should receive notice that an
order of relief has been entered. Section
190.03(c)(4) also provides that the
trustee shall cause the proof of customer
claim form to set forth the bar date for
its filing consistent with the current
§ 190.03(a)(2).
The Commission requested comment
on proposed § 190.03(c). It specifically
asked whether the proposed changes to
the notice requirements would be
helpful; whether the discretion granted
to the trustee concerning the treatment
of hedging accounts as specifically
identifiable property is appropriately
tailored; whether the proposed revisions
appeared likely to lead to unintended
consequences; and how such
consequences; if any, could be
mitigated.
The Commission received three
comments on proposed § 190.03. CME
fully endorsed the policy preference
that the trustee should use their best
efforts to transfer all public customer
positions and related customer property
from the debtor FCM to one or more
other FCMs. Accordingly, CME
supported the provisions in § 190.03(c)
that grant the trustee the discretion to
not treat customer positions carried in
hedge accounts as specifically
identifiable property, unless the trustee
determines that doing so would be
practicable under the circumstances,
following consultation with the
Commission. CME asserted that this
discretion will allow the trustee to
devote their attention to transferring
open positions of all public customers,
along with their proportionate share of
the customer property, in the aggregate.
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SIFMA AMG/MFA also generally agreed
with § 190.03(c)(2) in that it grants to
the trustee the authority (that is, the
option but not the obligation) to treat
open commodity contracts of public
customers held in hedging accounts
designated as such in the debtor’s
record as specifically identifiable
property. SIFMA AMG/MFA stated that
permitting the trustee this flexibility
would serve the interest of customers as
a whole by facilitating a more rapid
transfer of customer positions and
property. SIFMA AMG/MFA
recommended, however, that the
Commission explicitly clarify that
§ 190.03(c)(2) is not intended to affect
the treatment of hedging accounts under
part 39 of the Commission’s regulations
and that, to the extent reasonably
practicable, the trustee’s goal will be to
maximize value to the public
customer.80 Additionally, in the context
of the treatment of hedging accounts,
SIFMA AMG/MFA recommended that,
if the trustee exercises the authority as
granted in this provision, the trustee
should be first required to consult the
instructions (regarding preferences with
respect to transfer or liquidation of open
commodity contracts) provided by a
public customer to the debtor at the
time of opening the relevant hedging
account, and only if such instructions
are missing or unclear should the
trustee require such customer to provide
it with written instructions as
contemplated by proposed
§ 190.03(c)(2). SIFMA AMG/MFA noted
that the notice sent by the trustee to the
customer can still provide that existing
or previously provided instructions may
not prevent the open commodity
contracts from being liquidated. SIFMA
AMG/MFA asserted that adding this
first step would further the goal of
expediency.
The Commission agrees with the
suggestion by SIFMA AMG/MFA that it
is more efficient to endeavor to follow
clear instructions previously provided
rather than to request new instructions.
Moreover, this approach mitigates the
risk that a customer who has already
made their preference patent will fail to
reply to the request and thus be treated
in a manner contrary to that previously
expressed preference.
Accordingly, the Commission is
amending and reorganizing
§ 190.03(c)(2) to implement that
suggestion. Specifically,
§ 190.03(c)(2)(ii)(B) is being amended to
provide, in pertinent part that: (1)
Where, in the judgment of the trustee,
the books and records of the debtor
80 This last point is addressed with the addition
of § 190.00(c)(3)(i)(C).
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reveal a clear preference by a relevant
public customer with respect to transfer
or liquidation of open commodity
contracts, the trustee shall endeavor, to
the extent reasonably practicable, to
comply with that preference; and (2)
Where, in the judgment of the trustee,
the books and records of the debtor do
not reveal a clear preference by a
relevant public customer with respect to
transfer or liquidation of open
commodity contracts, the trustee will
request the customer to provide written
instructions whether to transfer or
liquidate such open commodity
contracts. Such notice must specify the
manner for providing such instructions
and the deadline by which the customer
must provide instructions.
Other conforming changes are being
made to § 190.03(c)(2). With respect to
SIFMA AMG/MFA’s request that the
Commission explicitly clarify that
proposed § 190.03(c)(2) is not intended
to affect the treatment of hedging
accounts under part 39, the Commission
notes that § 190.03(c)(2) governs the
trustee’s actions, and does not govern
the actions a DCO may take under its
default rules or otherwise.
ACLI recommended that the
Commission amend proposed
§ 190.03(c)(2) to require a trustee to
transfer a public customer’s hedge
positions where the customer has
requested the transfer and met the
required terms unless, in consultation
with the Commission, it is determined
that it would be unreasonable to transfer
such positions. ACLI further
recommended that the Commission add
a threshold such as ‘‘impossibility’’ or
‘‘exigent circumstances’’ to limit a
trustee’s ability to liquidate a customer’s
hedge position in lieu of a requested
transfer. ACLI asserted that the
Commission’s oversight should be
specifically mandated. In response to
ACLI’s comment, the Commission notes
that § 190.00(c)(4) sets forth a preference
for the porting of all open commodity
contract positions of public customers,
along with all or a portion of such
customers’ account equity, and
§ 190.04(a)(1) instructs the trustee
promptly to use its best efforts to effect
a transfer of such positions and property
in accordance with § 190.07(c) and (d)
not later than seven calendar days after
the order for relief. The discretion
granted to the trustee in § 190.03(c)(2) is
based on the reality that, in light of
limited time and administrative
resources, achieving porting to the
maximum extent is fostered by treating
customers on an omnibus, rather than
an individualized, basis. For these
reasons, the Commission declines to
adopt ACLI’s specific suggestions.
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d. Regulation § 190.03(d): Notice of
Court Filings
Section 190.03(d) addresses notices of
court filings. It is derived from current
§ 190.10(f), but makes modernizing
changes to the terminology and method
of providing notice to the Commission.
The Commission requested comment on
proposed § 190.03(d). The Commission
specifically asked whether the proposed
revisions appeared likely to lead to
unintended consequences, and, if so,
how such consequences could be
mitigated. The Commission did not
receive any comments on proposed
§ 190.03(d).
e. Regulation § 190.03(e): Proof of
Customer Claim
The Commission is adopting
§ 190.03(e) to require a trustee to request
that customers provide information
sufficient to determine a customer’s
claim in accordance with the
regulations contained in part 190.
Section 190.03(e) lists certain
information that customers shall be
requested to provide, to the extent
reasonably practicable, but grants the
trustee discretion to adapt the request to
the facts of the particular case. Such
discretion is being granted to the trustee
in order to enable the trustee to tailor
the proof of claim form to the
information that is most appropriate in
light of the specifics of the types of
business that the debtor did (and did
not do), the way in which such types of
business were organized, and the
available records of the debtor (as well
as the reliability of those records).
Section 190.03(e) is generally derived
from current § 190.02(d), although
certain items on the list of information
to be requested of customers have been
revised and reorganized to: Inter alia,
improve clarity; tie the questions to
definitions of terms in part 190; give the
claimant an opportunity to provide a
more complete picture of its claims; and
provide its own view as to the value of
such open positions, unliquidated
securities or other unliquidated
property in order to support its claim
against the debtor.
The Commission requested comment
on proposed § 190.03(e). Specifically,
the Commission asked whether the
proposed changes would be helpful;
whether the discretion granted to the
trustee was appropriately tailored;
whether the proposed revisions
appeared likely to lead to unintended
consequences; and how such
consequences, if any, could be
mitigated. The Commission received
one comment on proposed § 190.03(e).
CME noted that the proposed regulation
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f. Regulation § 190.03(f): Proof of Claim
Form
Regulation § 190.03(f) provides that a
template proof of claim form is included
as appendix A to part 190.81 The
Commission substantially revised the
customer proof of claim form in order to
streamline it and better map it to the
information listed in § 190.03(e). The
revised customer proof of claim form
now includes, in each section, citations
to the location in the text of § 190.03(e)
where such information is listed.
Section 190.03(f)(1) provides that, to
the extent there are no open commodity
contracts that are being treated as
specifically identifiable property, the
bankruptcy trustee should modify the
proof of claim form to delete any
references to open commodity contracts
as specifically identifiable property. For
example, this would be the case if all
open commodity contracts had been
transferred or liquidated before the
proof of claim form is sent. Section
190.03(f)(2) makes clear that the trustee
has discretion as to whether to use the
template proof of claim form, and that
the proof of claim form should be
modified to reflect the specific facts and
circumstances of the case. The
provisions of § 190.03(f), taken together,
are meant to provide bankruptcy
trustees with appropriate flexibility to
determine the best and most efficient
way to compose the customer proof of
claim.
The Commission requested comment
on proposed § 190.03(f). Specifically,
the Commission asked whether the
proposed changes to the treatment of the
proof of customer claim form would be
helpful; whether they would lead to
unintended consequences; and how
such consequences, if any, could be
mitigated. The Commission also asked
whether the discretion granted to the
trustee was appropriately tailored and,
if not, what changes should be made.
CME commented that the proof of claim
form had been improved and supported
the flexibility provided to the trustee.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.03 as proposed, with
modifications to § 190.03(c)(2), as set
forth above.
2. Regulation § 190.04: Operation of the
Debtor’s Estate—Customer Property
The Commission is adopting § 190.04
as proposed with modifications, as set
forth below to address the collection of
81 Appendix
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margin and variation settlement, as well
as the liquidation and valuation of
positions. The Commission is adopting
§ 190.04 to clarify and update portions
of §§ 190.02, 190.03, and 190.04.
The Commission requested comment
with respect to all aspects of proposed
§ 190.04 including: Whether the
revisions create any unintended
conflicts with customer protection
regulations set forth in parts 1, 22, and
30; how any such conflicts may be
resolved; whether there are any
proposed clarification changes that are
likely to create unintended
consequences; and, if so, how might
those be avoided or mitigated.
a. Regulation § 190.04(a): Transfers
The Commission is adopting
§ 190.04(a) as proposed. Section
190.04(a) largely retains the current
provisions in current § 190.02(e)
regarding transfers for customers in a
bankruptcy proceeding. It also retains
the policy preference 82 that the trustee
should use its best efforts to transfer
open commodity contracts and property
held by the failed FCM for or on behalf
of its public customers to one or more
solvent FCMs.83 Regulation
§ 190.04(a)(1) provides that the trustee
‘‘shall promptly’’ use its best efforts to
effect such transfers, while current
§ 190.02(e)(1) states that the trustee
must ‘‘must immediately’’ do so. This
revision signals that the trustee must
take action to transfer open commodity
contracts as soon as practicable, while
avoiding potential pressure of the term
‘‘immediately’’ in light of the challenges
presented in an FCM bankruptcy.
Regulation § 190.04(a)(2) replaces the
term ‘‘equity’’ with ‘‘property’’ to clarify
that the trustee should endeavor to
transfer all types of property that the
commodity broker is holding on behalf
of customers; the transfer is not limited
to equity. The Commission is also
adding the word ‘‘public’’ before
‘‘customers’’ to clarify that the transfers
discussed in § 190.04(a)(1) relate to the
open commodity contracts and property
of the debtor’s public customers.84
82 The Commission discussed the rationale for
this policy preference in the discussion of
§ 190.00(c)(4). See section II.A.1. See also ABA
Cover Note at 14 (recommending explicitly
identifying in § 190.04(a) a clear policy that the
trustee should use best efforts to transfer open
commodity contracts and property held by the
failed FCM for or on behalf of its public customers
to one or more solvent FCMs).
83 The Commission is also adopting crossreferences in § 190.04(a) to other provisions within
proposed part 190 that discuss transfers of customer
property.
84 The Commission is adopting the same change—
addition of the word ‘‘public’’ before ‘‘customers’’—
to § 190.04(a)(2), as discussed below.
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The Commission is adopting
§ 190.04(a)(2), as derived from
§ 190.02(e)(2), to remove the
liquidation-only trading limitations on
an FCM that is subject to an involuntary
bankruptcy petition unless otherwise
directed by the Commission, by any
applicable self-regulatory organization,
or by court. The Commission is instead
adopting limitations on the business of
an FCM in bankruptcy in § 190.04(g) to
more generally address involuntary
proceedings.85
The Commission is adopting
§ 190.04(a)(2), as derived from current
§ 190.02(e)(2), to provide that if such
commodity broker demonstrates to the
Commission within a specified period
of time that it is in compliance with the
Commission’s segregation and financial
requirements on the filing date, the
Commission may determine to allow the
commodity broker to continue in
business. The Commission is retaining
this provision because any requirement
to transfer customers is properly
addressed pursuant to § 1.17(a)(4),
which deals with FCMs that do not meet
minimum financial requirements. The
Commission is of the view that an FCM
that does meet such requirements
should not be compelled to cease
business and transfer its customers
absent an appropriate finding by a court
or the Commission.
In addition, similar to § 190.04(a)(1),
as discussed above, the Commission is
replacing the term ‘‘equity’’ with
‘‘property’’ to clarify that the transfers
discussed in § 190.04(a)(2) are for all
types of property that the commodity
broker is holding on behalf of
customers, rather than limited to only
equity. Also, the Commission is adding
the word ‘‘public’’ before ‘‘customers’’
to clarify in § 190.04(a)(2) that the
transfers discussed in § 190.04(a)(1)
relate to the open commodity contracts
and property of the debtor’s public
customers.
The Commission did not receive any
comments on this aspect of the
Proposal. Accordingly, for the reasons
stated above, the Commission is
adopting § 190.04(a) as proposed.
b. Regulation § 190.04(b): Treatment of
Open Commodity Contracts
The Commission is adopting
§ 190.04(b) as proposed to clarify and
update the provisions in current
§ 190.02(g)(1), which allow a trustee to
make ‘‘variation and maintenance
margin payments’’ on behalf of the
85 The Commission is deleting the reference to
‘‘liquidation’’ in § 190.02(e)(4) accordingly since the
limitation to trading for liquidation only is being
deleted from § 190.04(a)(2).
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debtor FCM’s customers. The
Commission is adopting § 190.04(b) to
be generally consistent with the current
regulation but with a number of
substantive changes.
First, the Commission is adopting
§ 190.04(b) to permit the trustee to make
margin payments pending transfer or
liquidation; not just pending liquidation
as required by current § 190.02(g)(1).
The amendment is consistent with the
Commission’s longstanding policy for
the trustee to endeavor to transfer open
commodity contracts. The trustee has
two paths for the treatment of such
contracts: Transfer and, if transfer is not
possible, liquidation.
Second, the Commission is adopting
§ 190.04(b)(1) to delete the phrase
‘‘required to be liquidated under
paragraph (f)(1) of this section’’ in
current § 190.02(g)(1) to eliminate a
complete prohibition against paying
margin on open contracts. While
holding contracts open may or may not
be practicable given the particular
circumstances of the bankruptcy, a
complete prohibition against paying
margin on such open contracts would
undermine the point of having the
possibility to hold those contracts open.
Accordingly, the Commission is
deleting the phrase ‘‘required to be
liquidated under paragraph (f)(1) of this
section’’ and thus will instead apply
more broadly to any open commodity
contracts.
The Commission is also adopting
several technical amendments. Third,
the Commission is replacing the phrase
‘‘variation and maintenance margin
payments’’ with ‘‘payments of initial
margin and variation settlement’’ which,
in the Commission’s view, more
accurately describes the types of
payments being reflected in this
provision. Fourth, the Commission is
replacing the phrase ‘‘to a commodity
broker’’ with ‘‘to a clearing organization,
commodity broker, foreign clearing
organization or foreign futures
intermediary’’ to account for the various
types of entities to which a margin
payment described in this provision
may be made. Lastly, the Commission is
replacing the phrase ‘‘specifically
identifiable to a particular customer’’
with ‘‘specifically identifiable property
of a particular customer’’ in order to be
consistent with the definitions in part
190, which includes as a defined term
‘‘specifically identifiable property.’’
The Commission is adopting
§ 190.04(b)(1)(i), as derived from current
§ 190.02(g)(1)(i), to prevent the trustee
from making any payments on behalf of
any commodity contract account that is
in deficit, to the extent within the
trustee’s control. The Commission is
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including the phrase ‘‘to the extent
within the trustee’s control’’ to
recognize that certain commodity
contract accounts may be held on an
omnibus basis (i.e., on behalf of several
customers), so to the extent the trustee
is making a margin payment on behalf
of the omnibus account, it may be out
of the trustee’s control to identify and
only pay on behalf of those underlying
customer accounts (within the omnibus
account) that are not in deficit. The
Commission is including a proviso to
note that § 190.04(b)(1)(i) shall not be
construed to prevent a clearing
organization, foreign clearing
organization, FCM, or foreign futures
intermediary from exercising its rights
to the extent permitted under applicable
law. This proviso is intended to remove
any doubt that the right of these
‘‘upstream’’ entities to use collateral
posted by the FCM on an omnibus basis
is not affected by the prohibition on
making margin payments on behalf of
accounts that are in deficit.
The Commission is adopting
§ 190.04(b)(1)(ii) as a new provision to
prohibit the trustee from making an
upstream margin payment with respect
to a specific customer account that
would exceed the funded balance of that
account. This restriction is consistent
with the pro rata distribution principle
discussed in § 190.00(c)(5), in that any
payment in excess of a customer’s
funded balance would be to the
detriment of other customers.
The Commission is adopting some
non-substantive clarifications in
§ 190.04(b)(1)(iii), as derived from
current § 190.02(g)(1)(ii), to retain the
limitation that the trustee may not make
payments on behalf of non-public
customers of the debtor from funds that
are segregated for the benefit of public
customers.
The Commission is adopting
§ 190.04(b)(1)(iv)–(v) to clarify and
expand upon current
§ 190.02(g)(1)(iii),86 to require that
margin is used consistent with the
requirements of section 4d of the CEA.87
First, the Commission is adopting
§ 190.04(b)(1)(iv) to provide that, if the
trustee receives payments from a
customer in response to a margin call,
then to the extent within the trustee’s
control,88 the trustee must use such
payments to make margin payments for
86 Current § 190.02(g)(1)(iii) provides that the
trustee must make margin payments if payments of
margin are received from customers after
bankruptcy in response to margin calls.
87 See 7 U.S.C. 6d.
88 The phrase ‘‘to the extent within the trustee’s
control’’ recognizes the reality that certain accounts
are held on an omnibus basis. See discussion of
§ 190.04(b)(1)(i) above.
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the open commodity contract positions
of such customer. Second, the
Commission is adopting
§ 190.04(b)(1)(v) to provide that the
trustee may not use payments received
from one public customer to meet the
margin (or any other) obligations of any
other customer. Given the restriction in
paragraph (b)(1)(v), the Commission
believes it may in some cases be
impracticable for a trustee to follow
paragraph (b)(1)(iv). In such a situation,
therefore the trustee would hold onto
the funds received in response to a
margin payment and such funds would
be credited to the account of the
customer that made the payment.89
Regulation § 190.04(b)(1)(vi) builds
upon current § 190.02(g)(1)(iv), which
provides that no payments need to be
made to restore initial margin, thus
noting that such payments are not
required but implicitly allowed to be
made. Revised § 190.04(b)(1)(vi)
explains in this in more detail and
provides more comprehensive guidance
to the trustee about when such
payments may be made. Specifically,
§ 190.04(b)(1)(vi) provides that, in the
event that the funds segregated for the
benefit of public customers in a
particular account class exceed the
aggregate net equity claims for all
customers in that account class, the
trustee is permitted to use such funds to
meet the margin obligations for any
public customer in such account class
whose account is undermargined, but
not in deficit, and sets conditions
around such use.
Regulation § 190.04(b)(2) updates
current § 190.02(g)(2), which concerns
margin calls made by trustee with
respect to undermargined accounts of
public customers. The Commission is
removing the current requirement in
§ 190.02(g)(2) that the trustee issue
margin calls, by replacing the term
‘‘must issue margin calls’’ with ‘‘may
issue a margin call,’’ in light of the
possibility that the trustee will
determine it impracticable or inefficient
to do so. Current § 190.02(g)(2), which
sets up a retail-level analysis on issuing
mandatory margin calls based on the
funded balance of the account, is based
on a model of the FCM continuing in
business. Revised § 190.04(b)(d)
recognizes that an FCM in bankruptcy
will be operated in crisis mode, and
may be pending wholesale transfer or
liquidation of open positions.90
Therefore, the Commission is allowing
for the possibility that the trustee may
issue margin calls. The specification of
89 See
§ 190.08(c)(1)(ii).
generally major theme 7 discussed in
section I.B. above.
90 See
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highly prescriptive conditions for
issuing such calls is no longer
appropriate, given the Commission
whether or not to make a margin call is
now based on the trustee’s discretion.
Regulation § 190.04(b)(3), as derived
from current § 190.02(g)(3) with updated
cross-references, retains the important
concept that margin payments made by
a customer in response to a trustee’s
margin call are fully credited to the
customer’s funded balance. As these
post-petition payments made by the
customer are fully counted toward the
customer’s funded net equity claims
under § 190.04(b)(3), they are not
subject to pro rata distribution (in
contrast to the treatment of the debtor
commodity broker’s pre-petition
obligations to customers).
Regulation § 190.04(b)(4) is derived
from a combination of current
§§ 190.03(b)(1) and (2) and 190.04(e)(4),
and addresses the trustee’s obligation to
liquidate certain open commodity
contracts; in particular, those in deficit
and those where the customer has failed
to promptly meet a margin call. During
business-as-usual, an FCM is required to
cover, at all times, any customer
accounts in deficit (i.e., those with debit
balances) with its own capital.91 The
FCM is also required to cover with its
own capital any undermargined
amounts in customer accounts each day
by no later than the Residual Interest
Deadline.92 These ongoing requirements
are intended to protect other customers
with positive account balances.
An FCM in bankruptcy will generally
not have capital available to protect
other customers by covering these
obligations; rather, any loss suffered by
customers whose accounts are in deficit
will be at the risk of those other
customers.93 The Commission intends
for § 190.04(b)(4) to mitigate the risk to
those other customers by directing the
trustee to liquidate such accounts.
In light of the importance of
mitigating this fellow-customer risk,
§ 190.04(b)(4), in contrast to many of the
other proposed changes to part 190,
curtails the trustee’s discretion.
Specifically, § 190.04(b)(4), as derived
from current § 190.03(b)(1) and (2),
provides that the trustee shall, as soon
as practicable, liquidate all open
commodity contract accounts in any
commodity contract account (i) that is
in deficit; (ii) for which any mark-tomarket calculation would result in a
deficit; or (iii) for which the customer
91 See,
e.g., §§ 1.22(i)(4), 1.23(a)(2).
e.g., § 1.22(c)(3).
93 While the trustee may seek to recover any debit
balance from a customer, see § 190.09(a)(1)(ii)(E),
§ 190.04(b)(4) proceeds from the conservative
assumption that such efforts will be unsuccessful.
92 See,
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fails to meet a margin call made by the
trustee within a reasonable time.
Pursuant to current § 190.03(b)(1), a
trustee must liquidate open commodity
contracts if any payment of margin
would result in a deficit in the account
in which they are held.94 Revised
§ 190.04(b)(4) adds a requirement to
liquidate all open commodity contracts
in any commodity contract account that
is in deficit. The existing language
applies to an account that is on the
threshold of deficit; the Commission is
revising the language to clarify that the
provision also applies to an account that
is already in deficit. Moreover, the
change from ‘‘payment of margin’’ to
‘‘mark-to-market’’ calculations
addresses the case where the trustee is
aware, based on mark-to-market
calculations, that the account is in
deficit. In order to protect other
customers more effectively, the trustee
should begin the liquidation process
immediately upon gaining that
awareness, rather than delaying until
the time when a margin payment is due.
Regulation § 190.04(b)(4) also
provides that, absent exigent
circumstances or unless otherwise
provided, a reasonable time for meeting
margin calls made by a trustee shall be
one hour or such greater period not to
exceed one business day, as determined
by the trustee.95 This language is largely
reflective of current § 190.04(e)(4), but
adds the concept of ‘‘exigent
circumstances’’ as a new exception to
the general and long-established rule
94 An account is in deficit if the balance is
negative (i.e., the customer owes the debtor instead
of the reverse). An account can be undermargined
but not in deficit (if the balance is positive, but less
than the amount of required margin). For example,
a customer may have a margin requirement of $100
and an equity balance of $80. Such customer is
undermargined by $20, but is not in deficit, because
the liquidation value of the commodity contracts is
positive.
95 See Morgan Stanley & Co. Inc. v. Peak Ridge
Master SPC Ltd., 930 F.Supp.2d 532, 539–540
(S.D.N.Y. 2013)(Morgan Stanley, in its business
discretion, determined Peak Ridge’s account had
assumed overly risky positions, necessitating an
increase in the margin requirement and giving Peak
Ridge a limited amount of time to bring the account
into compliance. ‘‘Courts have held that as little as
one hour is sufficient notice under similar
circumstances.’’). See also Capital Options Invs.,
Inc. v. Goldberg Bros. Commodities, Inc., 958 F.2d
186, 190 (7th Cir. 1992) (‘‘One-hour notice to post
additional margin . . . is reasonable where a
contract specifically provides for margin calls on
options at any time and without notice.’’);
Prudential–Bache Sec., Inc. v. Stricklin, 890 F.2d
704, 706–07 (4th Cir. 1989) (rejecting a claim that
24-hour notice, which the broker normally gave to
customers, was necessary before broker could
liquidate an under-margined account and
upholding notice of one hour as in accordance with
the customer agreement); Modern Settings, Inc. v.
Prudential–Bache Sec. Inc., 936 F.2d 640, 645 (2d
Cir. 1991) (upholding a provision of a customer
agreement allowing Defendant-broker to liquidate
an under-margined account without notice).
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19347
that a minimum of one hour is sufficient
notice for a trustee to liquidate an
undermargined account. The
Commission intends this revision to
provide the trustee with the discretion
to deem a period of less than one hour
as sufficient notice to liquidate an
undermargined account if the ‘‘exigent
circumstances’’ so require.
The Commission is deleting current
§ 190.03(b)(3) to permit the trustee to
liquidate open commodity contracts
where the trustee has received no
customer instructions with respect to
such contracts by the sixth calendar day
following the entry of the order for
relief. The Commission is adopting this
change as part of a model where the
trustee receives and complies with
instructions from individual customers
to a model—that reflects actual practice
in commodity broker bankruptcies in
recent decades—where the trustee
transfers as many open commodity
contracts as possible.96
The Commission is adopting new
§ 190.04(b)(5) to provide guidance to the
trustee in assigning liquidating
positions 97 to the debtor FCM’s
customers when only a portion of the
open commodity contracts in an
omnibus account are liquidated. The
new guidance is designed to protect the
customer account as a whole, in light of
the fact that any losses which cause a
customer account to go into deficit are,
as discussed in connection with
§ 190.04(b)(4), at the risk of other
customers. To mitigate the risk of such
losses, § 190.04(b)(5) establishes a
preference, subject to the trustee’s
exercise of reasonable business
judgment, for assigning liquidating
transactions to individual customer
accounts in a risk-reducing manner.
Specifically, the trustee should
endeavor to assign such liquidating
transactions first, in a risk-reducing
manner, to commodity contract
accounts that are in deficit; second, in
a risk-reducing manner, to commodity
contract accounts that are
undermargined; 98 and finally to
liquidate any remaining open
commodity contracts. Where there are
multiple accounts in any of these
groups, the trustee is instructed to, as
practicable, to allocate such liquidating
transactions pro rata. The term ‘‘riskreducing manner’’ is measured by the
margin methodology and parameters
96 Cf.
major theme 7 in section I.B above.
liquidating position or transaction is one that
offsets a position held by the debtor, in whole or
in part. Thus, if the debtor has three long March ’21
corn contracts, then three (or two, or one) short
March ’21 corn contracts would be a liquidating
transaction.
98 And thus are next at risk of going into deficit.
97 A
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followed by the DCO at which such
contracts are cleared. Specifically,
where allocating a transaction to a
particular customer account reduces the
margin requirement for that account,
such an allocation is ‘‘risk-reducing.’’
The Commission requested comment
on whether the revised approach in
proposed § 190.04(b)(4) regarding the
required liquidation of certain open
commodity contract accounts would
provide the trustee with an appropriate
amount of discretion and is practicable;
whether customers, who believe they
did not benefit from those decisions,
would likely challenge the trustee’s
choices given the level of discretion
provided; whether such challenges
could materially slow down the
distribution of customer property
relative to a context where the trustee
was granted less discretion; and
whether the proposed approach in
§ 190.04(b)(5) for the assignment of
liquidating positions to debtor FCM
customers in a ‘‘risk-reducing manner’’
is practicable when only a portion of the
open commodity contracts in an
omnibus account are liquidated.
SIFMA AMG/MFA supported most of
the substantive amendments in subpart
B of part 190 and believed such changes
are generally helpful for purposes of
reducing risk for market participants
and allowing the trustee to act as
efficiently as possible. SIFMA AMG/
MFA approved of the inclusion of
transfers in addition to liquidation, and
the clarification to apply the proposed
regulation to any open commodity
contracts in proposed § 190.04(b).
CME agreed with the general concept
of providing the trustee for a debtor
FCM with significant flexibility to
operate the FCM and favored any
provision that encourages the transfer of
customer positions and property and
continuation of margin payments on
behalf of the debtor FCM pending
transfer or liquidation of positions. ICE
suggested that the Commission should
clarify that any trustee discretion
proposed in § 190.04 for managing a
failed FCM should be subject to the
obligations of the defaulting clearing
member and the rights of the DCO as
provided by the DCO’s rules.
ICE supported the Commission’s
proposal in § 190.04(b)(1) to clarify that
a trustee may make variation margin
payments on open contracts, pending
their liquidation or transfer. ICI agreed
with proposed § 190.04(b)(1)(ii), which
prohibits a trustee from making any
margin payments with respect to a
customer account that would exceed the
funded balance for that account.
ICI and Vanguard agreed with the
preservation of the existing requirement
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within proposed § 190.04(b)(3) that the
trustee fully credit the customer’s
funded balance for any margin payment
made by a customer in response to
trustee’s margin call. Vanguard noted
that any customer concerns as to the
ability to fully recover margin would
surely de-incentivize customers to post
additional margin in critical times.
SIFMA AMG/MFA generally
supported proposed § 190.04(b), but had
concerns regarding the calculation of
whether a customer is undermargined,
and the timing of margin calls. SIFMA
AMG/MFA questioned whether the
trustee would be able to calculate
accurately whether a customer is
undermargined, particularly if the
FCM’s books and records do not
accurately reflect margin amounts
transferred by such customer to the
FCM. SIFMA AMG/MFA requested that
the Commission clarify how the trustee
will try to protect customers from being
called upon to provide duplicate margin
amounts. SIFMA AMG/MFA
recommended that the Commission
amend proposed § 190.04(b) to provide
customers with the opportunity to
demonstrate that a margin payment was
made even if the FCM’s books and
records do not yet reflect its receipt.
SIFMA AMG/MFA disagreed that
absent exigent circumstances, a
reasonable time for meeting margin calls
made by the trustee shall be deemed to
be one hour, or such greater period not
to exceed one business day, as the
trustee may determine in its sole
discretion. SIFMA AMG/MFA stated
that the necessary assets may not be
readily available to customers and urged
the Commission to require the trustee to
defer to the margin call timings present
in the applicable underlying agreements
entered into by the customer pursuant
to § 39.13 when determining a
reasonable time for meeting margin
calls. SIFMA AMG/MFA opined that
this is a reasonable level of deference,
since the trustee will have access to
these agreements, which are already in
place with the Commission regulations,
and will allow for customers to satisfy
margin calls without causing needless
market panic.
ICI and Vanguard agreed with
proposed § 190.04(b)(4), which would
require the trustee to liquidate any
customer account in deficit. ICI
supported maintaining the existing
requirement that the trustee promptly
liquidate any customer account when a
customer fails to meet a margin call in
a reasonable time or where any payment
of margin from the account would result
in an account deficit. ICI agreed with
the proposal that a debtor FCM will
generally not have capital available to
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protect other customers by covering
account deficits, so any loss suffered by
customers whose accounts are in deficit
will be at risk of those other nondefaulting customers. As a result, ICI
noted that it is vital that the trustee be
required to swiftly crystallize, and
therefore cap the losses resulting from,
such deficits by promptly liquidating
accounts in deficit or for which a
customer has failed to meet a margin
call. ICI cautioned that if the accounts
were allowed to remain open, additional
losses on the delinquent customers’
transactions would be borne by the
FCM’s non-defaulting customers, which
could dissuade non-defaulting
customers from continuing to meet their
margin obligations post-petition.
OCC was concerned that the proposed
definition of ‘‘undermargined’’ in
§§ 190.01 and 190.04(b)(2) and (4) could
create a situation in which a trustee
offers one public customer an
opportunity to deposit additional
margin that ultimately prevents an
account deficit and resulting liquidation
of the public customer’s account, but
exercises discretion not to offer another
public customer the same opportunity
to deposit margin and subsequently
must liquidate the account because it is
in deficit, notwithstanding the
customer’s willingness to post
additional margin to keep its positions
open. OCC was concerned that the use
of such trustee discretion would expose
a trustee to challenge by a public
customer that asserts, though it was
similarly situated to a public customer
that was given this opportunity, it was
not given this opportunity and received
inequitable treatment.
In response to SIFMA AMG/MFA’s
comment, the Commission notes that, in
the case of an FCM in bankruptcy, any
deficit in the account of one customer
may come at the expense of
distributions to other customers. As ICI
noted, the normal buffer of the capital
of an FCM in continuing operation
cannot be relied upon. Accordingly,
where a trustee believes, based on the
records and limited time available to
them, that a customer is undermargined,
it is important that they act on that
belief in order to protect other
customers. Similarly, in a case where a
customer fails to meet a margin call
within what the trustee determines, in
their sole discretion, is a reasonable
time, the trustee should liquidate the
contracts of that customer to protect
other customers. Forcing the trustee to
defer to margin call timings in prebankruptcy agreements, or to give the
customer an opportunity to demonstrate
that a margin payment was made, as
requested by the comment, may
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increase: (1) The risk that such customer
would default; (2) the risk that delaying
liquidation of such a customer’s
positions increases the potential for and
likelihood that they would do so with
a debit balance; and (3) the risk that the
size of that debit balance would increase
as a result of that delay, thereby
reducing the funded balances of other
customers. The Commission is of the
view that timeframes that may have
been acceptable during business-asusual cannot bind the trustee in
addressing the context of an FCM in
bankruptcy, because any post-petition
losses incurred by a customer will be at
the cost of other customers (without the
normal buffer of the capital of a goingconcern FCM). Moreover, the
Commission agrees with the view
championed by ICI and Vanguard that
the trustee should be required to swiftly
crystallize and therefore cap the losses
resulting from deficit balances by
promptly liquidating accounts in deficit
and those for which a customer has
failed to meet a margin call. OCC’s
concerns about treating customers
equitably inter se are understandable,
but, in the Commission’s view, ensuring
complete equity may not be practicable.
A trustee must make decisions within a
severely limited timeframe in a situation
that is likely to be chaotic and with
information that is limited and may be
imperfect. In these circumstances, the
Commission is of the view that it is
appropriate to defer to the trustee’s
discretion to make the best decisions
they can under the circumstances.
Accordingly, the Commission believes
that, where a trustee makes in good faith
decisions with regard to margin and
liquidation of accounts, that are, in
retrospect, inequitable, the
Commission’s regulations should
discourage challenges to such a decision
(and, if such a challenge is made,
should reduce the likelihood that it is
successful).
While the trustee retains discretion, as
specified in, inter alia, proposed
§ 190.04, to manage the affairs of the
debtor FCM, the Commission can
confirm, as requested by ICE, that a DCO
of which that FCM is a member retains
its rights to act under its rules.99
SIFMA AMG/MFA recommended that
the Commission amend proposed
§ 190.04(b) to clearly state that, to the
extent gains-based haircutting has been
utilized by a DCO in respect of customer
positions, the trustee should give
99 See, e.g., § 190.04(b)(1) (while trustee shall, to
the extent within its control, not make payments on
behalf of an account in deficit, this shall not be
construed to prevent a clearing organization from
exercising its rights to the extent permitted under
applicable law).
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customers of an FCM credit for any
gains that were haircut during such
gains-based haircutting. With respect to
this suggestion, the Commission notes
that, where a DCO at which a debtor
FCM is a member applies gains-based
haircutting under that DCO’s rules, the
measure of the claim of a customer
whose account at the debtor FCM
contains contracts cleared on that DCO
will be based on the customer
agreement between that customer and
the debtor FCM. If, outside of the FCM’s
bankruptcy and pursuant to that
customer agreement, the customer’s
gains would have been reduced by X%
or $Y, then the amount of the
customer’s claim in bankruptcy would
be adjusted accordingly.100
Accordingly, the Commission does not
accept that suggestion.
ICI and Vanguard agreed with
proposed § 190.04(b)(5) which prohibits
a trustee from making margin payments
that would exceed the customer’s
funded account balance or transfer a
customer’s transactions or property and
thereby increase the exposure of other
customers. Vanguard supported
addressing situations where the trustee
could allow certain customers to avoid
the core customer protection of pro rata
treatment at the expense of other
customers.
Accordingly, after consideration of
the comments, and for the reasons
stated above, § 190.04(b) will be adopted
as proposed.
c. Regulation § 190.04(c): Contracts
Moving Into Delivery
The Commission is adopting
§ 190.04(c), as proposed, to direct the
trustee to use its best efforts to avoid
delivery obligations concerning
contracts held through the debtor FCM
by transferring or liquidating such
contracts before they move into delivery
position. The Commission is adopting
§ 190.04(c) based on its analog in
current § 190.03(b)(5) and is
incorporating a portion of current
§ 190.02(f)(1)(ii). Current § 190.03(b)(5)
instructs the trustee to liquidate
promptly, and in an orderly manner,
commodity contracts that are not settled
in cash (implicitly, those that settle via
physical delivery of a commodity)
where the contract would remain open
beyond the earlier of (i) the last day of
100 Moreover, there are other reasons to forego an
approach that would reverse the effects of gainsbased haircutting. As discussed in more detail in
section II.C.7 below, there is a limited amount of
customer property available. Any increase in some
customers claims (and thus their distributions) due
to the reversal of gains-based haircutting would
thus come at the expense of a reduced share of that
limited customer property, and thus reduced
distributions, to other customers.
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19349
trading or (ii) the first day on which
notice of delivery may be tendered—
that is, where the contract would move
into delivery position. The Commission
intends § 190.04(c) to have the same
purpose as its predecessors, but uses
more explicit language regarding
physical delivery to refer to ‘‘any open
commodity contract that settles upon
expiration or exercise via the making or
taking of delivery of a commodity,’’ and
that is moving into the delivery
position. The Commission also intends
§ 190.04(c) to expand current
§ 190.03(b)(5), with the incorporation of
some aspects of current § 190.02(f)(1)(ii),
to include an explicit reference to how
options on commodities move into
delivery position.
CME supported proposed § 190.04(c),
which directs the trustee to use their
best efforts to liquidate open physical
delivery commodity contracts that have
not been transferred before the contracts
move into a delivery position as CME
believed this would avoid unnecessary
disruptions to the delivery process by
customers that did not intend to
participate in making or taking delivery.
ICI supported adding provisions that
clarify the standards applicable to an
FCM’s liquidation of a debtor FCM’s
transactions and the way a trustee must
assign liquidating transactions in the
context of a partial liquidation.
According, after consideration of the
comments, and for the reasons stated
above, the Commission is adopting
§ 190.04(c) as proposed.
d. Regulation § 190.04(d): Liquidation or
Offset
The Commission is adopting
§ 190.04(d) as proposed with
modifications, as set forth below.
Regulation § 190.04(d), as derived from
current §§ 190.02(f) and 190.04(d), sets
forth the categories of commodity
contracts and other property held by or
for the account of a debtor that must be
liquidated by the trustee in the market
or by book entry offset, promptly, and
in an orderly manner.101
Importantly, the Commission is
retaining the requirement, present in the
header language to current § 190.02(f),
that the trustee must effect such
101 The Commission is also adopting three nonsubstantive changes in the header language to
proposed § 190.04(d) from that in current
§ 190.02(f): (1) The addition of the phrase ‘‘except
as otherwise set forth in this paragraph (d)’’ to
account for any exceptions that are included in the
paragraphs under the header language; (2) the
addition of cross-references to proposed § 190.04(e)
when discussing liquidation, as that provision
contains instructions on how to effect liquidation;
and (3) the deletion of the phrase ‘‘subject to limit
moves and to applicable procedures under the
Bankruptcy Code.’’
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liquidation ‘‘in an orderly manner.’’
Regulation § 190.04(d) recognizes that
any factor which, in the trustee’s
discretion, makes it imprudent to
liquidate a position at a particular point
in time would contribute to the trustee’s
judgment as to what constitutes
liquidation ‘‘in an orderly manner.’’
Section 190.04(d)(1), as derived from
§ 190.02(f)(1), requires that all open
commodity contracts must be
liquidated, subject to two exceptions: (1)
Commodity contracts that are
specifically identifiable property and
are subject to customer instructions to
transfer as provided in proposed
§ 190.03(c)(2); and (2) open commodity
contract positions that are in a delivery
position.102 In the former case
(specifically identifiable property), the
Commission is adopting § 190.04(d)(1)
to revise the language of current
§ 190.02(f)(1)(ii) to add references to the
provisions of § 190.03(c)(2) (concerning
the trustee’s option to treat hedging
accounts as specifically identifiable
property) and § 190.09(d)(2) (concerning
the payments that customers on whose
behalf specifically identifiable
commodity contracts will be transferred
must make to ensure that they do not
receive property in excess of their pro
rata share).103 The latter exception, for
open commodity contract positions that
are in a delivery position is new, and
provides that such positions should be
treated in accordance with § 190.06,
which concerns delivery.104
Regulation § 190.04(d)(2) describes
when specifically identifiable property,
other than open commodity contracts or
physical delivery property, must be
liquidated. The Commission derived
§ 190.04(d)(2) from current
§ 190.02(f)(2), with a number of
revisions.
First, the provision applies to
specifically identifiable property, other
than open commodity contracts or
physical delivery property, while the
current regulation applies only to
specifically identifiable property other
than open commodity contracts. The
Commission intends for this change to
provide the trustee with discretion to
avoid interfering with the physical
delivery process.
Second, while the current regulation
would require liquidation of such
102 Regulation § 190.04(d)(1) deletes the reference
in current § 190.02(f)(1)(i) to dealer option contracts
since such term is no longer used.
103 The Commission is incorporating part of
current § 190.02(f)(1)(ii) into § 190.04(c), and
therefore that will not appear in § 190.04(d)(1).
104 As noted in section II.A.1 above in the
discussion of § 190.00(c)(6), a delivery default could
have a disruptive effect on the cash market for the
commodity and could adversely impact the parties
to the transaction.
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property if the fair market value of the
property drops below 90% of its value
on the date of the entry of the order for
relief,105 § 190.04(d)(2)(i) changes that
standard to 75% of the fair market
value, in order to provide greater
discretion to the trustee to forego or
postpone liquidation in appropriate
cases.
Third, revised § 190.04(d)(2)(ii) adds
an additional condition that will require
liquidation where failure to liquidate
the specifically identifiable property
may result in a deficit balance in the
applicable customer account, which
corresponds to the general policy of
liquidating any accounts that are in
deficit.
Lastly, § 190.04(d)(2)(iii), which is
similar to current § 190.02(f)(2)(ii),
includes updated cross-references to the
provisions in proposed part 190 that
discuss the return of specifically
identifiable property.
Regulation § 190.04(d)(3) is a new
provision that codifies the
Commission’s longstanding policies of
pro rata distribution and equitable
treatment of customers in bankruptcy,
as described in § 190.00(c)(5) above, as
applied to letters of credit posted as
margin.106 Accordingly, customers who
post letters of credit as margin will be
treated no differently than other
customers and thus would suffer the
same pro rata loss.
The implementation of this policy in
current § 190.08(a)(1)(i)(E) was
challenged in an adversary proceeding
in the MF Global bankruptcy; 107 the
codification of this policy in
§§ 190.00(c)(5) (clarifying policy),
190.04(d)(3) (treatment in bankruptcy),
and 1.43 (treatment during business-asusual) are intended to implement the
policy effectively and to forestall any
future challenge.
Regulation § 190.04(d)(3) provides
that the trustee may request that such a
customer deliver substitute customer
property with respect to any letter of
credit received, acquired or held to
margin, guarantee, secure, purchase, or
sell a commodity contract. This applies
whether the letter of credit is held by
105 See
current § 190.02(f)(2)(i).
e.g., 48 FR 8716, 8718–19 (March 1, 1983)
(Commission intends to assure that customers using
a letter of credit to meet original margin obligations
would be treated no differently than customers
depositing other forms of non-cash margin or
customers with excess cash margin deposits. If
letters of credit are treated differently than Treasury
bills or other non-cash deposits, there would be a
substantial incentive to use and accept such letters
of credit as margin as they would be a means of
avoiding the pro rata distribution of margin funds,
contrary to the intent of the Bankruptcy Code (11
U.S.C. 766).)
107 See ConocoPhillips v. Giddens, No. 12 Civ.
6014, 2012 WL 4757866 (S.D.N.Y. 2012).
106 See,
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the trustee on behalf of the debtor’s
estate, a DCO, a foreign broker, or
foreign clearing organization, and
whether it is held on a pass-through or
other basis. The amount of the
substitute customer property to be
posted may be less than the full-face
amount of the letter of credit, in the
trustee’s discretion, if such lesser
amount is sufficient to ensure pro rata
treatment consistent with proposed
§§ 190.08 and 190.09. If required, the
trustee may require the customer to post
property equal to the full-face amount of
the letter of credit to ensure pro rata
treatment. Regulation § 190.04(d)(3)(i)
provides that, if such a customer fails to
provide substitute customer property
within a reasonable time specified by
the trustee, the trustee may draw upon
the full amount of the letter of credit or
any portion thereof.
Regulation § 190.04(d)(3)(ii) addresses
cases where a letter of credit received,
acquired or held to margin, guarantee,
secure, purchase, or sell a commodity
contract is not fully drawn upon. The
trustee is instructed to treat any portion
of the letter of credit that is not fully
drawn upon as having been distributed
to the customer. However, the amount
treated as having been distributed will
be reduced by the value of any
substitute customer property delivered
by the customer to the trustee. For
example, if the face amount of the letter
of credit is $1,000,000, the customer
delivers $250,000 in substitute customer
property, and no portion of the letter of
credit is drawn upon, then the trustee
will treat the customer as having
received a distribution of $750,000. In
order to avoid an effective transfer of
value, due to an expiration of the letter
of credit on or after the date of the order
for relief, to the customer who posted
the letter of credit, this calculation will
not be changed due to such an
expiration.
Regulation § 190.04(d)(3)(iii) confirms
that any proceeds of a letter of credit
drawn by the trustee, or substitute
customer property posted by a
customer, shall be considered customer
property in the account class applicable
to the original letter of credit.
Regulation § 190.04(d)(4), as derived
from current § 190.02(f)(3), provides for
the liquidation of all other property not
required to be transferred or returned
pursuant to customer instructions and
which has not been liquidated.
Regulation § 190.04(d)(4) excepts from
the liquidation requirement any
‘‘physical delivery property held for
delivery in accordance with the
provision of’’ § 190.06, in order to avoid
interfering with the physical delivery
process.
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Several commenters supported
proposed § 190.04(d)(3). SIFMA AMG/
MFA, ICI, and Vanguard strongly
supported proposed § 190.04(d)(3)
because it permits a trustee to demand
substitute margin so that other
customers’ margin need not be accessed
to meet any shortfall occasioned by the
inability to draw on the letters of credit.
SIFMA AMG/MFA noted that the
addition of proposed § 190.04(d)(3)
would ensure that customers using
letters of credit to meet original margin
obligations will be treated no differently
from customers depositing other forms
of non-cash margin or excess cash
margin deposits. SIFMA AMG/MFA
‘‘agree[d] that most letters of credit
currently in use by the industry follow
the Joint Audit Committee forms [and
believed] that the impact of these
additional requirements concerning
letters of credit will result in clearer
guidance for more equitable treatment of
customers within each account class.’’
However, SIFMA AMG/MFA
‘‘questione[d] the one-year transition
period and urge[d] the Commission to
shorten it in the interest of investor
protection. For example, if an FCM were
to enter bankruptcy proceedings during
the one-year transition period,’’ SIFMA
AMG/MFA inquired as to how the
letters of credit would be treated in such
proceeding.
OCC also supported proposed
§ 190.04(d)(3) and the pro rata loss
policy objective. OCC stated that it
‘‘expects that it would generally, to the
extent permitted by OCC’s rules and
default management arrangements, draw
on a defaulted member’s letter of credit
collateral as soon as practicable after a
declaration of default. OCC would
attempt to do so, whether or not it has
immediately identified a need to draw
on a letter of credit to meet the
defaulted member’s settlement
obligations, as a protective action in
anticipation of any potential increase in
the credit risk associated with the letter
of credit. In such cases, a trustee would
obtain any remaining proceeds from the
drawn-down letter to distribute pro rata
among the FCM’s customers as
appropriate.’’
However, several commenters
including CME, FIA, and CMC believed
the policy reasons for the trustee’s
general right to demand substitute
collateral do not exist with respect in
the narrow context of a delivery letter of
credit.
CME agreed ‘‘that a letter of credit
posted to secure obligations under open
commodity contracts (whether drawn
upon or not) must be deemed as part of
the customer’s property, in addition to
any additional collateral posted by the
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customer, for purposes of distribution
calculations. [CME agreed] that it is
prudent to make clear that the trustee in
either an FCM or DCO bankruptcy can
draw upon posted letters of credit.’’
CME supported ‘‘granting the trustee the
power to require a customer to deliver
substitute customer property to the
estate and allowing the trustee to draw
on the letter of credit if the customer
does not post additional collateral,
provided that those conditions apply
only to letters of credit letter that are
received, acquired, or held to guarantee
or secure a customer’s obligations under
open commodity contracts, and do not
apply to delivery letters of credit.’’
With respect to a delivery letter of
credit posted as collateral to secure the
customer’s obligation to pay for delivery
of a commodity it will receive, CME and
CMC believed it was ‘‘critically
important that the letter of credit be
available to draw upon if the customer
defaults or is expected to default on its
obligation to pay the seller.’’ However,
CME, CMC, and FIA recommended that
the Commission revise proposed
§ 190.04(d)(3) to confirm that the
authority of the trustee to require a
customer that posts a letter of credit to
deliver substitute customer property
does not extend to letters of credit
posted to a delivery account.
CME argued that ‘‘[c]ustomers
routinely post letters of credit in
connection with delivery obligations
under certain physical delivery futures
contracts held to maturity.’’ CME noted
that this is the case for deliveries under
certain oil futures listed on the New
York Mercantile Exchange. ‘‘The buyers
are required to post collateral for the full
payment amount owed because actual
delivery is effected via physical transfer
of oil and thus is typically completed 30
days or so after buyers and sellers are
matched for bilateral delivery
obligations. Given the substantial dollar
amounts involved, often hundreds of
millions, letters of credit are often
posted as collateral.’’ CMC emphasized
that ‘‘unlike other situations, a delivery
[letter of credit] simply serves as
collateral for delivery of a futures
contract after expiry but before delivery
is taken and while the seller still has
possession of the commodity for
delivery.’’ CME stated that ‘‘[t]he value
available to CME under such a letter of
credit is wholly independent from the
solvency of an FCM, unlike a letter of
credit posted as performance bond,
which decays when utilized to meet
margin or variation calls post-FCM
bankruptcy.’’ CME posited that the
delivery letter of credit does not pose
the same issues that the Commission
encountered in the MF Global
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19351
bankruptcy. FIA argued that ‘‘[a]
purchaser that takes delivery under a
commodity contract frequently is not
required to take delivery for a
significant period of time after the
purchaser and seller have been
matched. In these circumstances, the
purchaser may be required to post a
letter of credit as security for full
payment when delivery is made.’’
CME, CMC, and FIA warned that a
trustee’s decision to request substitute
collateral of cash or cash equivalents for
a delivery letter of credit or risk having
the letter of credit drawn down prior to
the time that delivery is made would
create a sudden and unexpected
liquidity need for the delivery
participant and introduce unnecessary
strain into physical and derivatives
markets. The commenters were
concerned that because the parties’
obligations under the delivery account
arise from a commodity account, a
trustee’s authority under proposed
§ 190.04(d)(3) could be interpreted to
apply to letters of credit held in a
delivery account. Accordingly, CME and
CMC recommended ‘‘that the
Commission limit or eliminate the
trustee’s powers to request that a market
participant substitute other forms of
collateral for a delivery letter of credit
upon which the DCO is a beneficiary.’’
Specifically, CME and FIA
recommended that the Commission
revise proposed § 190.04(d)(3) to
exclude delivery letters of credit, i.e.,
letters of credit posted by buyers to
guarantee their payment for
commodities that they are contractually
obligated to purchase under an expired
futures or exercised commodity option
contract.
CME also requested clarity in the
context of § 190.06 ‘‘that when a
customer posts a delivery letter of credit
directly with the DCO or with its
delivery counterparty, and not with or
through the FCM, the letter of credit is
outside the delivery account class, i.e.,
it does not constitute cash delivery
property (or property of the debtor’s
estate), and the provisions in other parts
of the proposed revisions regarding
treatment of letters of credit posted with
or through the debtor FCM do not
apply.’’
The Commission notes that, despite
the comments of CME, CMC, and FIA,
there are reasons to forego excluding
delivery letters of credit as a class from
the application of § 190.04(d)(3), and to
adopt § 190.04(d)(3) as proposed, as
supported by ICI, SIFMA AMG/MFA,
and Vanguard: If, at the end of the
bankruptcy proceeding, there are
shortfalls in customer property in the
cash delivery account class, those
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shortfalls will necessarily be borne by
public customers. If public customers
posting letters of credit (including in the
delivery account) are shielded from
such losses, they will be borne in greater
proportion by other public customers.
That result would be inconsistent with
the Commission’s longstanding policy,
embodied in section 766(h) of the
Bankruptcy Code, to treat all customers
on a pro rata basis.108
However, the concerns raised by
commenters regarding sudden and
unexpected liquidity needs are
important ones. They are important both
in the context of delivery letters of
credit, as discussed by some
commenters, and more broadly as
well.109 The Commission agrees that
these concerns can and should be
mitigated. Specifically, the trustee has
discretion in managing this process with
respect to letters of credit, and should
exercise that discretion with the goal of
achieving pro rata treatment among
customers in a manner that mitigates, to
the extent practicable, the adverse
effects upon customers that have posted
letters of credit.
First, with regard to timing, the
commenters expressed concern that
requests for substitute property would
cause ‘‘sudden’’ liquidity needs.
Regulation § 190.04(d)(3)(i) states that
the trustee may draw upon the letter of
credit if the customer fails to provide
substitute customer property within a
reasonable time specified by the trustee.
If the expiry date of the letter of credit
is not imminent, the Commission
expects that a ‘‘reasonable time’’ would
be sufficiently long to enable the
customer to mitigate liquidity concerns
(consistent with the trustee’s plans to
make distributions). If the expiry date of
the letter of credit is imminent, and the
customer can and does arrange to have
that expiry date extended, the parties
could work in the context of that
extended expiry date. However, if the
expiry date is imminent, and cannot be
extended, then the trustee will need to
take promptly whatever steps are, in
their discretion, necessary to ensure pro
rata treatment among customers.
Second, with regard to the amount
requested, § 190.04(d)(3) provides that
the trustee may request that a customer
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108 Pursuant
to § 190.08(c)(1)(ii), the customer’s
funded balance includes 100% of margin posted
after the order for relief. Accordingly, this principle
would not apply to a delivery letter of credit posted
after the order for relief (unless the letter of credit
was delivered in substitution for a pre-bankruptcy
letter of credit).
109 Moreover, and for the avoidance of doubt, as
delivery is simply a stage in the life of a commodity
contract, § 190.04(d)(3) applies to letters of credit in
connection with delivery obligations under a
commodity contract.
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deliver substitute customer property
with respect to a letter of credit, and
that the amount of the request may
equal the full face amount of the letter
of credit or any portion thereof, to the
extent required or may be required, in
the trustee’s discretion to ensure pro
rata treatment among customer claims
within each account class, consistent
with §§ 190.08 and 190.09. Thus, the
amount of the substitute customer
property requested (or, if substitute
customer property is not provided, the
amount of the letter of credit drawn
upon (if partial draws are permitted))
should be proportionate to the amount
required or may be required, in the
trustee’s discretion, to ensure pro rata
treatment among customer claims. If the
amount of the shortfall in the relevant
account class (whether cash delivery
property or otherwise) is estimated to be
a small percentage, the amount of
substitute customer property requested
would also be a small percentage
(subject to the trustee adding an
appropriate buffer for later corrections
in estimates, and taking into account
any need to use the letter of credit as
ongoing performance bond for the
customer’s obligations).
To re-enforce these concepts, the
Commission is adding a new
§ 190.04(d)(3)(iv), which provides that
the trustee shall, in exercising their
discretion with regard to addressing
letters of credit, including as to the
timing and amount of a request for
substitute customer property, endeavor
to mitigate, to the extent practicable, the
adverse effects upon customers that
have posted letters of credit in a manner
that achieves pro rata treatment among
customer claims. The Commission
intends that this new paragraph will
confirm to trustees that they should
steer their discretion in the specified
manner, and will provide assurance to
customers that have posted letters of
credit that the trustees will exercise
their discretion in that manner. The
Commission believes that this provision
will appropriately address concerns
regarding the manner in which the
trustee ensures that customers that have
posted letters of credit are treated
economically in the same manner as
customers who have posted other forms
of collateral
Moreover, in the context of § 190.06,
CME requested that the Commission
confirm that ‘‘when a customer posts a
delivery letter of credit directly with the
DCO or with its delivery counterparty,
and not with or through the FCM, the
letter of credit is outside the delivery
account class, i.e., it does not constitute
cash delivery property (or property of
the debtor’s estate), and the provisions
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in other parts of the proposed revisions
regarding treatment of letters of credit
posted with or through the debtor FCM
do not apply.’’
For example, the Commission
understands that upon expiry of certain
deliverable contracts and assignment of
delivery obligation, the long/buyer of
the contract must post collateral to the
DCO against its final payment obligation
on the delivery. In certain cases,
collateral in the form of a delivery letter
of credit collateral is posted by the
customer directly to the DCO. The
delivery letters of credit in these cases
are subject to uniform terms that name
the DCO as the sole beneficiary on the
instrument. These delivery letters of
credit do not create an obligation of or
to a customer’s FCM as they are posted
directly to the DCO and the FCM is not
a named beneficiary on the
instrument.110
In the context of a delivery letter of
credit that is posted directly with the
DCO or with the delivery counterparty,
rather than with or through the FCM,
and for which the FCM is not a named
beneficiary, the Commission confirms
that the letter of credit is outside the
delivery account class, i.e., it does not
constitute cash delivery property (or
property of the debtor’s estate), and the
provisions in other parts of the
proposed revisions regarding treatment
of letters of credit posted with or
through the debtor FCM do not
apply.111
The Commission believes that this
clarification, in combination with the
new provision directing the trustee’s
discretion in the context of letters of
credit, will ameliorate the commenters
concerns regarding delivery letters of
credit.
The foregoing applies to the trustee.
DCOs remain free to exercise any of the
rights and powers in their rules vis-a`-vis
their clearing members, in particular
with respect to risk management,
limited only by requirements within the
Commission’s regulations.112 However,
in this context, the Commission would
encourage DCOs holding letters of credit
posted by customers of FCMs in
bankruptcy to exercise their rights
under such letters of credit in a
110 Similarly, CMC’s concerns focus on ‘‘a
delivery LOC upon which the DCO is beneficiary.’’
111 The Commission was not requested to opine
on whether this approach vis-a`-vis letters of credit
is permissible outside of the context of the delivery
account class, and expresses no view on that
question.
112 See, e.g., § 190.04(e) (Rules providing for
liquidation other than on the open market shall be
designed to achieve, to the extent feasible under
market conditions at the time of liquidation, a
process for liquidating open commodity contracts
that results in competitive pricing.)
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measured fashion, in order to achieve
risk management goals fully but in a
manner that mitigates, to the extent
practicable, adverse effects upon
customers that have posted letters of
credit.113
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.04(d) as proposed, with the
addition of new § 190.04(d)(3)(iv) as set
forth above.
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e. Regulation § 190.04(e): Liquidation of
Open Commodity Contracts
The Commission is adopting
§ 190.04(e) as proposed to provide
details regarding the liquidation and
valuation of open positions.114
Paragraph (e) is derived from current
§ 190.04(d), subject to a number of
changes.
The Commission is adopting
§ 190.04(e)(1)(i), as derived from current
§ 190.04(d)(1)(ii), to describe the process
of liquidating open commodity
contracts when the debtor is a member
of a clearing organization. Regulation
§ 190.04(e)(1)(i), like its predecessor,
emphasizes the goal of competitive
pricing to the extent feasible under
market conditions at the time of
liquidation. Treatment under the CEA of
clearing organization rules has evolved
from a pre-approval regime to a
primarily self-certification regime. The
Commission is of the view that the
various processes set forth in part 40 of
the Commission’s regulations (including
self-certifications under § 40.6,
voluntary submission for rule approval
under § 40.5, and Commission review of
certain rules of systemically important
DCOs under § 40.10) are sufficient, and
that a separate rule approval process for
rules regarding settlement price in the
context of a bankruptcy is no longer
necessary. The Commission is
accordingly adopting § 190.04(e)(1)(i) to
delete the requirement contained in
current § 190.04(d)(1)(i) that a clearing
organization must obtain approval
pursuant to section 5c(c) of the CEA for
its rules regarding liquidation of open
commodity contracts.
Section 190.04(e)(1)(i) also adds a
provision regarding open commodity
contracts that are futures or options on
113 In this connection, the Commission notes that
OCC Rule 1104(a)(ii) permits OCC, if the issuer of
a letter of credit agrees to extend the irrevocability
of its commitment thereunder in a manner
satisfactory to OCC, to ‘‘demand only such amounts
as it may from time to time deem necessary to meet
anticipated disbursements.’’
114 The Commission is amending § 190.08(d) to
also clarify the process by which customer
positions and other customer property are valued
for purposes of determining the amount of a
customer’s claim.
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futures that were established on or
subject to the rules of a foreign board of
trade and cleared by the debtor as a
member of a foreign clearing
organization, providing that such
contracts shall by liquidated pursuant to
the rules of the foreign clearing
organization or foreign board of trade or,
in the absence of such rules, in the
manner the trustee deems appropriate.
This the new provision is analogous to
the existing provision but would extend
to cases where the debtor FCM is a
member of a foreign clearing
organization.
Section 190.04(e)(1)(ii) provides
instructions to the trustee regarding the
liquidation of open commodity
contracts where the debtor is not a
member of a DCO or foreign clearing
organization, but instead clears through
one or more accounts established with
an FCM or a foreign futures
intermediary. In such a case,
§ 190.04(e)(1)(ii) provides that the
trustee shall use commercially
reasonable efforts to liquidate the open
commodity contracts to achieve
competitive pricing, to the extent
feasible under market conditions at the
time of liquidation. The Commission is
adding this provision to account for
those circumstances where the trustee
must liquidate open commodity
contracts for a debtor that is not a
clearing member.
As with § 190.04(e)(1)(i), the
Commission is adopting § 190.04(e)(2)
to delete the rule approval requirement,
for the same reasons stated above.
Regulation § 190.04(e)(2) is derived from
current § 190.04(d)(1)(ii) which requires
a trustee or clearing organization to
apply to the Commission for permission
to liquidate open commodity contracts
by book entry. In such a case, the
settlement price for such commodity
contracts shall be determined by the
clearing organization in accordance
with its rules, which shall be designed
to establish, to the extent feasible under
market conditions at the time of
liquidation, such settlement prices in a
competitive manner.
The Commission is adopting
§ 190.04(e)(3) to recognize that an FCM
or foreign futures intermediary through
which a debtor FCM carries open
commodity contracts will generally
have enforceable contractual rights to
liquidate such commodity contracts.
New § 190.04(e)(3) confirms that the
upstream intermediary may exercise
such rights. However, the liquidating
FCM or foreign futures intermediary
shall use commercially reasonable
efforts to liquidate the open commodity
contracts to achieve competitive pricing,
to the extent feasible under market
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conditions at the time of liquidation and
subject to any rules or orders of the
relevant clearing organization, foreign
clearing organization, DCM, SEF or
foreign board of trade governing its
liquidation of such open commodity
contracts.
If the liquidating FCM or foreign
futures intermediary fails to do so, the
trustee may seek damages reflecting the
difference in price(s) resulting from
such failure. However, such damages
would be the trustee’s sole available
remedy as the regulation makes clear
that ‘‘[i]n no event shall any such
liquidation be voided.’’
The Commission is adopting
§ 190.04(e)(4)(i) and (ii) based on
current § 190.04(d)(2) and (3),
respectively, with some minor nonsubstantive language changes and
updated cross-references.
The Commission requested comment
in particular on the treatment of letters
of credit in bankruptcy, as set forth in
proposed § 190.04(e). The Commission
did not receive any comments on this
aspect of the Proposal. Accordingly, for
the reasons stated above, the
Commission is adopting § 190.04(e) as
proposed.
f. Regulation § 190.04(f): Long Option
Contracts
The Commission is adopting
§ 190.04(f) as proposed to contain only
minor non-substantive changes from the
current § 190.04(e)(5), including (1) a
cross-reference to the liquidation
provisions in proposed § 190.04(d) and
(e), and (2) a clarification that the
provision is referring to commodity
contracts that are long option contracts,
rather than to long option contracts
more generally.
The Commission did not receive any
comments on this aspect of the
Proposal. Accordingly, for the reasons
stated above, the Commission is
adopting § 190.04(f) as proposed.
3. Regulation § 190.05: Operation of the
Debtor’s Estate—General
The Commission is adopting § 190.05
to revise parts of current § 190.04 and
add new provisions to (1) require a
trustee to use all reasonable efforts to
continue to issue account statements for
customer accounts holding open
commodity contracts or other property
and (2) clarify the trustee’s obligation
with respect to residual interest. The
Commission requested comment with
respect to all aspects of proposed
§ 190.05.
The Commission is adopting
§ 190.05(a) to amend the requirement in
current § 190.04(a) that the trustee
‘‘shall’’ comply with all provisions of
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the CEA and of the regulations
thereunder as if it were the debtor, to
state that the trustee ‘‘shall use
reasonable efforts to comply’’ with all
provisions of the CEA and of the
regulations thereunder as if it were the
debtor. This change is intended to
provide the trustee with some flexibility
in making decisions in an emergency
bankruptcy situation, subject to the
requirements of the Bankruptcy Code.
Given that an FCM bankruptcy will
likely be a fast-paced situation requiring
the trustee to make decisions with little
time for consideration, the Commission
recognizes that there may be
circumstances under which strict
compliance with the CEA and the
regulations thereunder may not be
practicable. The Commission did not
receive any comments on proposed
§ 190.05(a).115
The Commission is adopting
§ 190.05(b) to address the computation
of funded balances. It is derived from,
and makes several revisions to,
§ 190.04(b). The Commission’s objective
in making such revisions is to provide
the bankruptcy trustee with the latitude
to act reasonably given the
circumstances with which the trustee is
confronted, recognizing that information
may be more reliable and/or accurate in
some insolvency situations than in
others and permitting an approach that,
to an appropriate extent, favors cost
effectiveness and promptness over
precision.116 First, whereas current
§ 190.04(b) provides that a trustee
‘‘must’’ compute a daily funded balance
for the relevant customer accounts,
§ 190.05(b) requires the trustee to use
‘‘reasonable efforts’’ to make such
computations. Such computations are
required to be ‘‘as accurate as
reasonably practicable under the
circumstances, including the reliability
and availability of information.’’
Second, § 190.05(b) increases the scope
of customer accounts for which the
bankruptcy trustee is obligated to
compute a funded balance from
accounts that contain open commodity
contracts to accounts that contain open
commodity contracts or other property.
In the Commission’s view, there is no
reason to exclude customer accounts
that contain only property (the value of
which may change) from the scope of
those for which bankruptcy trustees
115 To the extent that ICI’s comment raising
concerns about trustee discretion applies here, the
Commission notes that the addition of
§ 190.00(c)(3)(i)(C), which directs the trustee to use
their discretion with the overarching goal of
protecting public customers, should mitigate that
concern.
116 See major theme 7 discussed in section I.B
above.
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must compute a daily funded balance.
Third, § 190.05(b) revises the length of
time that the trustee is obligated to
compute the funded balance of
customer accounts from ‘‘until the final
liquidation date’’ to until the open
commodity contracts and other property
in the account have been transferred or
liquidated. This change ties the
computation requirement to each
specific account, such that a bankruptcy
trustee is not required to continue to
compute the funded balance of
customer accounts that do not contain
any open commodity contracts or other
property. Lastly, the specific deadline
by which the computation must be
completed is being removed. The
Commission does not believe that the
deadline in current § 190.04(b) (by noon
the next business day) is crucial in a
bankruptcy context (as it is with respect
to an FCM conducting ongoing daily
business).117 Such computation would,
however, inherently need to be
accomplished prior to performing any
action where knowledge of funded
balances is essential, such as transfers of
accounts or property.
The Commission received one
comment regarding proposed
§ 190.05(b). CME agreed that allowing
the trustee to compute the funded
balance for customers’ accounts before
transferring or liquidating customer
positions or property using ‘‘reasonable
efforts’’ to be ‘‘as accurate as reasonably
practicable under the circumstances,
including the reliability and availability
of information’’ ‘‘should allow the
trustee to act more promptly to transfer
the positions of public customers and
their pro rata share of the customer
property than if the trustee were held to
a strict standard of precision in
calculating funded balances before it
could undertake such transfers.’’ This is
consistent with the Commission’s view.
The Commission is adopting
§ 190.05(c)(1) to amend the record
retention requirements in current
§ 190.04(c) to be more comprehensive.
Section 190.05(c)(1) expands the
referenced records from ‘‘computations
required by this [p]art’’ to ‘‘records
required under this chapter to be
maintained by the debtor, including
records of the computations required by
this part.’’ To enable the trustee to
mitigate the expenses of record
retention, however, it reduces the time
that records are required to be retained
from ‘‘the greater of the period required
by § 1.31 of this chapter or for a period
of one year after the close of the
bankruptcy proceeding for which they
were compiled’’ to ‘‘until such time as
117 See,
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the debtor’s case is closed.’’ Section
190.05(c)(2) simplifies the
corresponding portion of current
§ 190.04(c)(2) by omitting the
requirement that the records required in
§ 190.05(c)(1) be available to the Court
and parties in interest. The requirement
that such records be available to the
Commission and the United States
Department of Justice is being retained.
A court generally will not itself look at
records, and any parties in interest
should have access to records under the
discovery provisions of the Federal
Rules of Bankruptcy Procedure and the
Federal Rules of Civil Procedure, as
applicable. The Commission did not
receive any comments on proposed
§ 190.05(c).
The Commission is adopting new
§ 190.05(d) to facilitate the ability of
customers of the bankrupt FCM with
open commodity contracts or property
to keep track of such open commodity
contracts or property even during
insolvency, and promptly to make them
aware of the specifics of the liquidation
or transfer of such contracts or property.
Section 190.05(d) requires the trustee to
use all reasonable efforts to continue to
issue account statements with respect to
any customer for whose account open
commodity contracts or other property
is held that has not been liquidated or
transferred. Section 190.05(d) also
requires the trustee to issue an account
statement reflecting any liquidation or
transfer that has taken place with
respect to a customer account promptly
after such liquidation or transfer has
occurred.
The Commission sought comment on
the practicability of the proposed
requirements regarding the issuance of
account statements. ICI commented in
support of the account statement
requirements.
The Commission is adopting
§ 190.05(e)(1) to amend the requirement
in current § 190.04(e)(2) that a trustee
must obtain court approval to make
disbursements to customers, to
specifically carve out transfers of
customer property made in accordance
with § 190.07. The Commission is
making this change to reflect the policy
preference to transfer as many public
customer positions as practicable in the
event of an FCM insolvency.118 The
Commission notes, however, that this
118 The Commission notes that current § 190.08(d)
provides for the return of specifically identifiable
property other than commodity contracts under
certain circumstances (namely, where the customer
makes good any pro rata loss related to that
property) without court approval; however, the
Commission is deleting this provision in favor of
allowing transfers without court approval for the
reasons stated above.
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carve out does not detract from the
trustee’s ability to, in their discretion,
nonetheless seek and obtain court
approval for certain transfers of
property. The Commission recognizes
that there is an inherent tension
between distributing to public
customers as much customer property
as possible from the debtor’s estate, as
quickly as possible, and ensuring
accuracy in distribution, and believes
that § 190.05(e)(1) strikes the right
balance between these competing
objectives.119
Section 190.05(e)(2) addresses how a
bankruptcy trustee may invest the
proceeds 120 from the liquidation of
open commodity contracts and
specifically identifiable property, and
other customer property. It is derived
from, and retains much of, current
§ 190.04(e)(3), but it expands the
provision permitting the bankruptcy
trustee to ‘‘invest any customer equity
in accounts which remain open in
accordance with § 190.03’’ to permit the
investment of ‘‘any other customer
property.’’ It continues to limit the
permissible investments to obligations
of, or fully guaranteed by, the United
States, and to limit the location of
permissible depositories to those
located in the United States or its
territories or possessions. The
Commission did not receive any
comments on proposed § 190.05(e).
The Commission is adopting new
§ 190.05(f) to require a bankruptcy
trustee to apply the residual interest
provisions contained in § 1.11 ‘‘in a
manner appropriate to the context of
their responsibilities as a bankruptcy
trustee’’ and ‘‘in light of the existence of
a surplus or deficit in customer property
available to pay customer claims.’’ The
purpose of the residual interest
provisions is to have the FCM maintain
a sufficient buffer in segregated funds
‘‘to reasonably ensure that the [FCM]
. . . remains in compliance with the
segregated funds requirements at all
times.’’ 121 The Commission requested
comment with respect to all aspects of
proposed § 190.05. Specifically, the
Commission sought comment on the
practicability and appropriateness of
proposed § 190.05(f).
The Commission received supportive
comments from CME, SIFMA AMG/
119 The concept of prioritizing cost effectiveness
and promptness over precision is discussed in
detail in major theme 7 in section I.B above and in
overarching concept three in the cost-benefit
considerations, section III.A.2.iii below.
120 Section 190.05(e)(2) uses the term ‘‘proceeds’’
rather than the term ‘‘equity,’’ which is used in
current § 190.04(e)(3). This change in wording is
not meant to be a substantive.
121 Section 1.11(e)(3)(i)(D).
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MFA, ICI, and Vanguard. CME
supported adding clarity that the trustee
should use reasonable efforts to operate
the debtor FCM’s estate in compliance
with the CEA and CFTC regulations
governing FCMs, including to apply the
residual interest provisions in § 1.11, in
a manner appropriate to the context of
their responsibilities and in light of the
existence of a surplus or deficit in
customer property available to pay
customer claims. ICI and Vanguard
supported the clarification in proposed
§ 190.05(f) that an FCM’s residual
interest is to be applied to public
customer claims. Vanguard noted its
belief that ‘‘FCM residual interest is a
valuable buffer to insulate FCM
customers from the risk of delayed or
failed margin transfers from other
customers.’’ Vanguard was ‘‘pleased that
the Commission has confirmed that,
while residual interest is fronted by
FCMs, it must be used to support
customers through an FCM insolvency,’’
noting that its ‘‘purpose is to enhance
core customer protections.’’ SIFMA
AMG/MFA also believed that ‘‘the
proposed use of residual interest as
contemplated by proposed §§ 190.05(f)
and 190.09 is appropriate,’’ and agreed
with the Commission that ‘‘the residual
interest provisions contained in § 1.11
remain important.’’
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.05 as proposed.
4. Regulation § 190.06: Making and
Taking Delivery Under Commodity
Contracts
The Commission is adopting § 190.06
as proposed. The Commission is
adopting § 190.06 to provide more
specificity regarding making and taking
deliveries on commodity contracts in
the context of an FCM bankruptcy and
to reflect current delivery practices.
Section 190.06 is derived from current
§ 190.05, but implements new concepts
(with respect to delivery practices,
intangible commodities, and separation
of physical and cash delivery property),
as discussed further below.
Generally, open positions may enter a
delivery position where the parties
incur bilateral contractual delivery
obligations.122 It is important to address
deliveries to avoid disruption to the
cash market for the commodity and to
122 The timing of the entry of the order for relief
in a subchapter IV proceeding relative to when
physical delivery contracts move into a delivery
positions will generally influence whether a
delivery issue may arise. Additionally, during
business as usual, market participants typically
offset contracts before incurring delivery
obligations.
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19355
avoid adverse consequences to parties
that may be relying on delivery taking
place in connection with their business
operations.
The delivery provisions in the current
regulations largely reflect the delivery
practices at the time current part 190
was adopted in 1983. At that time,
delivery was effected largely by
tendering paper warehouse receipts or
certificates. In contrast, most deliverable
title documents today are held and
transferred in electronic form, typically
with the clearing organization serving as
the central depository for such
instruments. Under the terms of some
contracts (such as oil or gas futures) the
party with the contractual obligation to
make delivery will physically transfer a
tangible commodity to meet its
obligations. In other cases, intangible
commodities may be delivered,
including virtual currencies. As noted
previously, in the definitions section
(§ 190.01), the Commission is dividing
the delivery account class into physical
delivery and cash delivery account
subclasses to recognize the differing
issues that apply to physical delivery
property versus cash delivery property.
The Commission is also recognizing
that, consistent with current practice,
physical deliveries 123 may be effected
in different types of accounts.124 For
example, when an FCM has a role in
facilitating delivery, deliveries may
occur via title transfer in a futures
account, foreign futures account, cleared
swaps account, delivery account, or, if
the commodity is a security, in a
securities account. 125
Section 190.06(a) applies to
commodity contracts that settle upon
expiration or exercise by making or
taking delivery of physical delivery
property, if such commodity contracts
are in a delivery position on the filing
date or the trustee is unable to liquidate
such commodity contracts in
accordance with § 190.04(c) to prevent
them from moving into a delivery
position.126 The Commission is
123 Current § 190.05 applies to the delivery of a
physical commodity, or of documents of title to
physical commodities. Section 190.06 applies to
any type of commodity that is subject to delivery,
whether tangible or intangible. This is captured in
the definition of physical property. Given the
different ways in which delivery may take place,
physical delivery property is not limited to property
that an FCM holds for or on behalf of a customer
in a delivery account. For a discussion of those
different ways, see the third and fourth categories
under the definition of physical delivery property
in § 190.01 in section II.A.2 above.
124 See also § 1.42.
125 See also § 1.42.
126 As discussed above, § 190.04(c) directs the
trustee to use its best efforts to avoid delivery
obligations concerning contracts held through the
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adopting § 190.06(a)(2) to address
delivery made or taken on behalf of a
customer outside of the administration
of the debtor’s estate, (i.e., directly
between the debtor’s customer and the
delivery counterparty assigned by the
clearing organization). It replaces
current § 190.05(b). Current § 190.05(b)
requires a DCO, DCM, or SEF to enact
rules that permit parties to make or take
delivery under a commodity contract
outside the debtor’s estate, through
substitution of the customer for the
commodity broker. The Commission
believes that deliveries should occur in
this manner only where feasible.
Deliveries may not always happen in
this manner, as customers largely rely
on their FCMs to hold physical delivery
property on their behalf in electronic
form.127
Section 190.06(a)(2)(i) 128 directs the
trustee to use ‘‘reasonable efforts’’ to
allow a customer to deliver physical
delivery property that is held directly by
the customer in settlement of a
commodity contract, and to allow
payment in exchange for such delivery,
to occur outside the debtor’s estate,
where the rules of the exchange or
clearing organization prescribe a process
for delivery that allows delivery to be
fulfilled either (A) in the ordinary
course by the customer, (B) by
substitution of the customer for the
commodity broker, or (C) through
agreement of the buyer and seller to
alternative delivery procedures. In
adopting a ‘‘reasonable efforts’’ standard
rather than (as in current § 190.05(a)(1))
‘‘best efforts,’’ the Commission is
recognizing that, in the event that the
trustee is unable to transfer or earlier
liquidate the positions, delivery
involves a significant degree of bespoke
administration. Moreover, requiring the
trustee’s ‘‘best efforts’’ for delivery
might require the trustee to spend an
inordinate amount of time focusing on
the needs of a few customers and detract
from the trustee’s ability to manage the
short term challenges of the
administration of the estate in the days
immediately following the filing date.
Section 190.06(a)(2)(ii) addresses the
circumstance where, while the customer
debtor FCM by transferring or liquidating such
contracts before they move into delivery position.
127 The requirement for registered entity rules to
be submitted for approval in accordance with
section 5c(c) of the Act has been deleted for reasons
discussed in section II.B.2 above with respect to
§ 190.04(e)(1) and (2).
128 The Commission notes that § 190.04(c) directs
the trustee to use its best efforts to avoid delivery
obligations concerning contracts held through the
debtor FCM by transferring or liquidating such
contracts before they move into delivery position.
Section 190.06(a)(2) applies where the trustee is
unable to do so.
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makes physical delivery in satisfaction
of a commodity contract using property
that is outside the administration of the
estate of the debtor, the customer
nonetheless has property held in
connection with that contract at the
debtor (i.e., collateral posted in
connection with that contract prepetition). Consistent with current
§ 190.05(b)(2), § 190.06(a)(2)(ii) provides
that the property held at the debtor
becomes part of the customer’s claim
and can only be distributed pro rata,
despite the customer fulfilling the
delivery obligation outside the
administration of the debtor’s estate.
Section 190.06(a)(3) applies when it is
not practicable to effect delivery outside
the estate. Section 190.06(a)(3) clarifies
that which was implied, but was not
addressed, in current § 190.05(c)(1)–(2),
by providing additional details for when
delivery is made or taken within the
debtor’s estate. It contains provisions for
the trustee to deliver physical or cash
delivery property on a customer’s
behalf, or return such property to the
customer so that the customer may
fulfill its delivery obligation. The
regulation also includes restrictions
designed to assure that a customer does
not receive (or otherwise benefit from)
a distribution of customer property (or
other use of such property that benefits
the customer) that exceeds the
customer’s pro rata share of the relevant
customer property pool.
The Commission is adopting new
§ 190.06(a)(4) to recognize that delivery
may need to be made in a securities
account if an open commodity contract
held in a futures account, foreign
futures account, or cleared swaps
account requires the delivery of
securities, and property from any of
these accounts is transferred to the
securities account for the purpose of
effecting delivery. The value of the
property transferred to the securities
account must be limited to the
customer’s funded balance for a
commodity contract account, and only
to the extent that funded balance
exceeds (i.e., the surplus over) the
customer’s minimum margin
requirements for that account. Such a
transfer may not be made if the
customer is undermargined or has a
deficit balance in any other commodity
contract accounts.
Section 190.06(a)(5), as proposed,
addressed deliveries made or taken on
behalf of ‘‘a house account of the
debtor.’’ It was derived from current
§ 190.05(c)(3), with some clarifying
wording. Consistent with the suggestion
from the ABA Subcommittee, as
discussed in section II.A.2 above, the
Commission is deleting in this final rule
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the definition of house account as it
applies to FCMs. The reference in the
provision as proposed to ‘‘a house
account of the debtor’’ is being replaced
in the final rule with a reference to ‘‘the
debtor’s own account or the account of
any non-public customer of the debtor.’’
No substantive change vis-a`-vis either
the current regulation or the regulation
as proposed is intended.
The Commission is adopting new
§ 190.06(b) to divide the delivery
account class into separate physical
delivery and cash delivery account
subclasses, for purposes of pro rata
distributions to customers in the
delivery account class on their net
equity claims. Because claims in each
subclass are fixed as of the filing date,
§ 190.06(b)(1)(i) provides that the
physical delivery account class includes
physical delivery property held in
delivery accounts as of the filing date,
and the proceeds of any such physical
delivery property received subsequently
(i.e., cash received after the filing date,
in exchange for physical delivery
property on which delivery was made),
and § 190.06(b)(ii) provides the cash
delivery account class includes cash
delivery property in delivery accounts
as of the filing date, along with physical
delivery property for which delivery is
subsequently taken (i.e., in exchange for
cash delivery property paid after the
filing date) on behalf of a customer in
accordance with § 190.06(a)(3).
Section 190.06(b)(2) describes the
customer property included in the cash
delivery account class and in the
physical delivery account class. Section
190.06(b)(2) provides that customer
property in the cash delivery account
class includes cash or cash equivalents
that are held in an account under a
name, or in a manner, that clearly
indicates that the account holds
property for the purpose of making
payment for taking delivery of a
commodity under commodity contracts.
Customer property in the cash delivery
account class also includes any other
property that is (A) not segregated for
the benefit of customers in the futures,
foreign futures, or cleared swaps
account classes) and (B) traceable
(through, e.g., account statements) as
having been received after the filing
date as part of taking delivery.
Section 190.06(b)(2) also provides,
conversely, that customer property in
the physical delivery account class
includes cash or cash equivalents that
are held in an account under a name, or
in a manner, that clearly indicates that
the account holds property received in
payment for making delivery of a
commodity under a commodity
contract. Customer property in the
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physical delivery account class also
includes any other property that is (A)
not segregated for the benefit of
customers in the futures, foreign futures,
or cleared swaps account classes) and
(B) traceable (through, e.g., account
statements) as having been held for the
purpose of making delivery of a
commodity under a commodity
contract, or held as of the filing date as
a result of taking delivery.
The Commission requested comment
on all aspects of proposed § 190.06. In
particular, the Commission sought
comment on the implications of
subdividing the delivery account class
into separate physical delivery and cash
delivery account subclasses, including
any additional challenges or benefits
that the Commission did not consider.
CME expressed support for specific
aspects of proposed § 190.06, such as:
(1) The proposed enhancements to the
delivery account class, including
separating the account class into
physical and cash delivery account
classes; (2) the additional detail
provided to the trustee on how to
facilitate the completion of deliveries
including, in particular, the requirement
for the trustee to use reasonable efforts
to allow delivery to occur outside
administration of the debtor FCM’s
estate when the rules of the relevant
exchange or DCO prescribe a process for
allowing deliveries to be accomplished
as set forth in the proposal; and (3) the
clarification that cash or cash
equivalents held by the debtor FCM in
an account maintained at a bank, DCO,
foreign clearing organization or
elsewhere constitutes customer property
when it is held under a name or in a
manner clearly indicating the property
in the account relates to deliveries. As
to the latter, CME believes that this will
facilitate identifying cash delivery
property available to distribute to
customers in the cash delivery account
class.129
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.06 as proposed, with
modifications to § 190.06(a)(5) as set
forth above.
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5. Regulation § 190.07: Transfers
Regulation § 190.07 was proposed to
set forth detailed provisions governing
transfers, consistent with the policy
129 CME noted that its support was ‘‘subject to
CME’s comments which request changes to the cash
delivery property and physical delivery property
definitions.’’ Specifically, CME requested that the
Commission adopt more formal requirements with
respect to delivery accounts through a separate
rulemaking. That request is addressed in section
II.G below.
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preference, explained in § 190.00(c)(4),
for transferring (or ‘‘porting’’) public
customer commodity contract positions,
as well as all or a portion of such
customers’ account equity. It is being
adopted as proposed with modifications
to § 190.07(b), (d), and (e), as set forth
below.
The Commission requested comment
with respect to all aspects of proposed
§ 190.07, and raised particular questions
with respect to the proposed six-month
post-transfer period to complete
customer diligence, partial transfers,
and estimates of customer claims.
Section 190.07(a) addresses rules that
clearing organizations and SROs may
‘‘adopt, maintain in effect, or enforce’’
that may affect transfers.
In § 190.07, paragraphs (a)(1) and (2)
states that these organizations may not
have such rules that, respectively, ‘‘are
inconsistent with the provisions of’’ part
190 or that interfere with the acceptance
by their members of commodity
contracts and collateral from FCMs that
are required to transfer accounts
pursuant to § 1.17(a)(4). These
provisions are derived from current
§ 190.06(a)(1) and (2), with technical
changes. No comments were received
with respect to these provisions.
Section 190.07(a)(3) is intended to
promote transfers, to the extent
consistent with good risk management.
It provides that no clearing organization
or other SRO may adopt, maintain in
effect, or enforce rules that ‘‘interfere
with the acceptance by its members of
transfers of commodity contracts, and
the property margining or securing such
contracts, from [an FCM that is a debtor]
if such transfers have been approved by
the Commission . . .’’ Paragraph (a)(3)
includes a proviso, however, that it
shall not (i) ‘‘[l]imit the exercise of any
contractual right of a clearing
organization or other registered entity to
liquidate or transfer open commodity
contracts’’; or (ii) ‘‘[b]e interpreted to
limit a clearing organization’s ability
adequately to manage risk.’’
FIA supported the proviso, and CME
‘‘agree[ed] that transfers should be made
consistent with sound risk management
principles, and in that regard
welcome[d] the proposed clarification
that the requirements under the
proposed rule do not limit the rights of
a DCO (or a DCM or swap execution
facility as ‘‘registered entities’’ as
defined in the CEA) to liquidate or
transfer open commodity contracts.’’
ICE, by contrast, was concerned that the
term ‘‘interfere with’’ is overly broad,
and requested that the Commission
‘‘clarify that a clearing organization is
not precluded from managing the risks
presented by any such transfer,
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including through bona fide changes in
margin requirements and guarantee
fund contributions for transferee
clearing members.’’
As discussed immediately above, the
provision already states that ‘‘this
paragraph (a)(3) shall not . . . be
interpreted to limit a clearing
organization’s ability adequately to
manage risk.’’ Moreover, recognizing the
different or additional margin
requirements or guarantee fund
contribution requirements resulting
from the additional positions carried by
a transferee clearing member is not a
rule that interferes with the acceptance
of a transfer of commodity contracts.130
Accordingly, the Commission concludes
that § 190.07(a)(3) appropriately meets
the goal of promoting transfers to the
extent consistent with good risk
management.
Regulation § 190.07(b) concerns
requirements for transferees. Paragraph
(b)(1) clarifies that it is the duty of the
transferee—not of anyone else—to
assure that the transfer will not cause
the transferee to be in violation of the
minimum financial requirements.
Paragraph (b)(2) notes that the transferee
accepts the transfer subject to any loss
arising from deficit balances that cannot
be recovered from the customer, and, in
the case of customer accounts, must
keep such counts open for at least one
business day (unless the customer fails
to respond to a margin call within a
reasonable time) and may not collect
commissions with respect to the
transfer.
As stated in the proposal, the
Commission understands that customer
diligence processes would have already
been required to have been completed
by the debtor FCM with respect to each
of its customers as part of opening their
accounts. Regulation § 190.07(b)(3) thus
provides that a transferee may accept
open commodity contracts and
property, and may open accounts on its
records prior to completing customer
diligence, provided that account
opening diligence as required is
performed as soon as practicable but no
later than six months after transfer,
unless the time is extended, by the
Commission, for a particular account,
transfer, or debtor. This provision is
consistent with past practice in FCM
bankruptcies.
CME supported this provision as a
‘‘practical change’’ that should assist in
finding willing transferees, while ICI
believed that it will help mitigate or
130 The Commission understands ICE’s reference
to ‘‘bona fide changes in margin requirements and
guarantee fund contributions’’ to mean changes that
are not based on the fact that positions were
acquired by transfer.
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eliminate ‘‘speed bumps’’ to porting.
Vanguard supported the flexibility
advanced by the Commission here, but
urged the Commission to work to
harmonize that flexibility across other
regulatory regimes applicable at FCMs,
particularly for those dually registered
as broker-dealers.
FIA supported the policy underlying
paragraph (b)(3), and noted that it is
essential to realize the policy of favoring
porting over liquidation of customer
accounts. FIA also agreed that six
months is a reasonable period of time
for this process, subject to the
Commission’s authority to grant
additional time in particular
circumstances. FIA was, however, of the
view that this regulation should
‘‘provide transferee FCMs more specific
relief from applicable law relating to
‘customer diligence.’ ’’
FIA encouraged the Commission to
specify the customer diligence rules
from which transferee FCMs will have
temporary relief. FIA stated that
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‘‘such rules may include, but not be limited
to: (i) rules relating to anti-money laundering
requirements (including rules requiring
FCMs to implement customer identification
programs and know your customer
requirements and all corresponding selfregulatory organization (‘‘SRO’’)
requirements); (ii) rules relating to risk and
other disclosures (§§ 1.55, 30.6, 33.7 and
similar SRO disclosure requirements); (iii)
rules relating to capital and residual interest
requirements (§§ 1.11, 1.17, 1.22, 1.23, 22.2,
22.17, 30.7 and 41.48 and related SRO
requirements); (iv) rules relating to account
statements required under § 1.33 in the event
positions transfer with inadequate contact
information (§ 1.33 and related SRO
requirements); and [(v)] rules relating to
margin in the event accounts transfer without
adequate margin (§§ 1.17, 39.13, 41.42–41.49
and related SRO requirements).’’
The Commission has considered each
of the five types of requirements
discussed by FIA:
With respect to anti-money
laundering requirements, the
Commission notes that, for purposes of
the Customer Identification Program
(‘‘CIP’’) requirements applicable to
futures commission merchants pursuant
to 31 CFR 1026.220, the term ‘‘account’’
is defined to exclude ‘‘[a]n account that
the futures commission merchant
acquires through any acquisition,
merger, purchase of assets, or
assumption of liabilities.’’ 31 CFR
1026.100(a)(2)(i). Thus, transferred
accounts are not subject to the CIP
requirements.
However, the Customer Due Diligence
(‘‘CDD’’) requirements of 31 CFR
1026.210(b)(5) do appear to apply.
These include a requirement for
‘‘[a]ppropriate risk-based procedures for
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conducting ongoing customer due
diligence, to include . . .
[u]nderstanding the nature and purpose
of customer relationships for the
purpose of developing a customer risk
profile . . . .’’ 31 CFR 1026.210(b)(5)(i).
The Commission is of the view that
§ 190.07(b)(3) would inform the
determination of what constitutes
appropriate risk-based procedures in
the exigent context of an FCM accepting
a transfer of accounts from an FCM that
is a debtor in bankruptcy.
While FIA appears to request a
reference to the account opening
disclosure requirements in §§ 1.55, 30.6,
and 33.7, these would appear to be
addressed by the bulk transfer
provisions of § 1.65. The Commission is
amending § 190.07(b)(3) to include a
parenthetical statement that explicitly
refers to ‘‘the risk disclosures referred to
in § 1.65(a)(3).’’ This will modify the
sixty-day requirement of that paragraph.
The Commission declines to amend
the regulation to extend the time to
comply with capital and residual
interest requirements. To do so would
risk permitting a transfer of accounts to
result in contagion of financial
weakness. The Commission reiterates
the importance of § 190.07(b)(1), which
provides that ‘‘it is the duty of each
transferee to assure that it will not
accept a transfer that would cause the
transferee to be in violation of the
minimum financial requirements set
forth in this chapter.’’
However, to the extent that shortfalls
in compliance with these requirements
are due to errors or shortfalls in the data
received by the transferee from the
transferor FCM, and the transferee acts
with reasonable and appropriate
diligence in seeking to detect such
errors or shortfalls in data, and, where
detected, in investigating and correcting
them, such shortfalls in compliance
would not be considered violations of
such requirements.
Similarly, where account statements
required by § 1.33 do not reach the
customer due to errors or shortfalls in
the contact information provided to the
transferee, there would be no violation
so long as the transferee takes
reasonable steps to detect such errors or
shortfalls (e.g., by reacting promptly to
rejected email or returned postal mail,
or to complaints by a transferred
customer that they are not receiving
such statements) and to correct the
situation once detected. The proposed
regulation does not need to be amended
to achieve this result.
Finally, with respect to FIA’s request
for relief with respect to regulations
‘‘relating to margin in the event
accounts transfer without adequate
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margin,’’ the Commission believes that
the determination of whether a
transferee FCM is promptly collecting
such margin should be informed by the
exigencies of the situation. There is,
however, no basis for a general
exemption for transferee accounts from
the requirements of § 39.13(g)(8)(iii),
providing that a DCO shall require that
its members do not permit customers to
withdraw funds from their accounts
unless the accounts would be fully
margined after such withdrawal. If the
transferee FCM is not confident of the
information it has regarding the
transferred account, it would seem
appropriate to risk manage with caution.
Once the transferee FCM is confident
that it fully understands the situation,
the transferee can act in accordance
with its normal procedures.131
Similarly, there is no basis to provide a
general exemption from undermargined
account capital charges in accordance
with § 1.17.
In all of these cases, the Commission
encourages DCOs and SROs to take
similar approaches.
While the Commission has declined,
in many of the above cases, to provide
general relief by regulation, this is
without prejudice to the possibility that
more targeted relief may be appropriate
in particular cases. Specifically, any
further relief that might be appropriate
in a particular situation could be
requested by, e.g., the transferee, in light
of the relevant facts and circumstances.
The Commission observes that its staff
have traditionally responded to requests
for relief in emergency situations with
great dispatch, and expects, and thus
instructs staff, to continue to do so in
this context in the future.132
OCC recommended that ‘‘the
Commission adopt a parallel regulation
permitting a DCO to postpone any due
diligence the DCO would typically have
to perform on an FCM member
accepting transferred positions from a
bankrupt FCM.’’ This would include the
requirements of, e.g., § 39.12, requiring
a DCO to have ‘‘continuing participation
requirements for clearing members of
the [DCO] that are objective, publicly
available, and risk-based.’’
The Commission does not agree that
the situations are parallel: An FCM is
required to perform individualized due
131 Such normal procedures would include the
‘‘ordinary course of business’’ referred to in Letter
19–17, or any successor letter or regulation. See
CFTC Letter 19–17, https://www.cftc.gov/node/
217076.
132 For the avoidance of doubt, the nature of the
expectation and the instruction is that staff will
provide a response to such requests with great
dispatch. The nature of the response, whether
affirmative, affirmative in part, or negative, will
depend on the relevant facts and circumstances.
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diligence on each of its customers,
which in the case of a transfer such as
was seen in historical situations such as
MF Global, would amount to hundreds
or even thousands of customers. By
contrast, the focus of a DCO is on the
financial and operational capability of
each of its clearing members that is a
transferee to manage, in the aggregate,
the customer portfolios of which it
accepts transfer. The number of
transferee FCM clearing members is
likely to be no more than a dozen.
In any event, the Commission expects
that a DCO would, and would be
permitted to, conduct its due diligence
procedures in a manner consistent with
balancing risk management
requirements (see, e.g., § 190.07(a)(3)(ii)
(restrictions on a DCO interfering with
the acceptance of transfers from a debtor
FCM ‘‘shall not be interpreted to limit
a clearing organization’s ability
adequately to manage risk’’) with the
exigencies of the situation.
Section 190.07(b)(4) is designed to
clarify what the account agreement
between the transferred customer and
the transferee is at and after the time the
transfer becomes effective. This
includes situations where an account is
partially transferred. As proposed, it
provides that any account agreements
governing a transferred account shall be
deemed assigned to the transferee and
shall govern the customer’s relationship
unless and until a new agreement is
reached. It also provides that a breach
of the agreement prior to a transfer does
not constitute a breach on the part of the
transferee. CME, ICI, and Vanguard
supported this provision.
FIA appreciated the need for legal
certainty as to the terms of the
relationship between a transferee FCM
and each transferred customer, but was
concerned that the transferee FCM
might be disadvantaged by being subject
to an account agreement between the
transferred customer and the transferor
(debtor) FCM. There are two possible
situations with respect to each
customer: Either the customer does, or
does not, have a pre-existing account
agreement with the transferee FCM.
FIA noted that many large customers,
in particular, may maintain accounts at
more than one FCM, and thus it may be
the case that the customer already has
an account agreement in place with the
transferee FCM. FIA asked the
Commission to confirm their view that,
in this context, the transferee would not
be required to manage the ported
account(s) in accordance with the
agreement with the transferor FCM. The
Commission agrees with this view, and
is modifying proposed § 190.07(b)(4) to
state this explicitly: The proposed text
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will be renumbered as § 190.07(b)(4)(i),
and paragraph (b)(4)(ii) will be added to
provide that paragraph (b)(4)(i) shall not
apply where the customer has a preexisting account agreement with the
transferee futures commission
merchant. In such a case, the transferred
account will be governed by that preexisting account agreement.
However, where the transferred
customer does not have a pre-existing
account agreement with the transferee
FCM, FIA conceded that ‘‘the account
agreement [between the transferor and
the customer] should stay in place for a
short defined interim period during
which the parties may
renegotiate. . . .’’ FIA did not specify
how long that ‘‘short defined interim
period’’ should last, nor what should
happen at the end of that period if the
parties fail to reach agreement. The
Commission notes that nothing prevents
either the transferee FCM or customer
from negotiating at any time to change
the (in this case, assigned) account
agreement between them, and that,
aside from § 190.07(b)(2)(ii)(A)
(requiring the transferee to keep the
customer’s commodity contracts open at
least one business day after their receipt
unless the customer fails to meet
promptly a margin call), nothing in the
Commission’s regulations prevents
either the transferee or customer from
terminating their relationship if they
cannot reach agreement as to the terms
under which that relationship should
continue, on what either party believes
is a timely basis. Accordingly, the
Commission declines to modify
§ 190.07(b)(4) in this context.
Lastly, FIA observed that a customer’s
account may not always be able to be
physically transferred from the debtor
FCM to the transferee FCM. The
Commission notes that the reference in
§ 190.07(b)(4) to assignment of account
agreements does not refer to the
movement of physical documents.133 As
requested by FIA, the Commission can
thus confirm that assignment of the
agreement does not depend upon such
movement.
Regulation § 190.07(b)(5) provides
that customer instructions received by
the debtor with respect to open
commodity contracts or specifically
identifiable property that has been, or
will be, transferred in accordance with
section 764(b) of the Bankruptcy Code,
should be transmitted to any transferee,
which shall comply therewith to the
extent practicable (if the transferee
subsequently enters insolvency).
133 To be sure, a transfer agreement would likely
include transfers of records or at least copies of
records as a matter of good practice.
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19359
Regulation § 190.07(c) addresses
eligibility of accounts for transfer under
section 764(b) of the Bankruptcy Code.
This provision states that ‘‘[a]ll
commodity contract accounts (including
accounts with no open commodity
contract positions) are eligible for
transfer. . . .’’ This language recognizes
that accounts can be transferred even if
they are intended for trading
commodities but do not include any
open commodity contracts at the time of
the order for relief.134
Regulation § 190.07(d) addresses
special rules for transfers under section
764(b) of the Bankruptcy Code.
Paragraph (d)(1) instructs the trustee to
‘‘use its best efforts to effect a transfer
to one or more other commodity brokers
of all eligible commodity contract
accounts, open commodity contracts
and property held by the debtor for or
on behalf of its customers, based on
customer claims of record, no later than
the seventh calendar day after the order
for relief.’’ The Commission will correct
a typographical error in the proposal,
and refer to ‘‘customer claims of record’’
rather than ‘‘customer claims or record.’’
Regulation § 190.07(d)(2) addresses
cases of partial transfers and multiple
transferees. It includes a requirement
that ‘‘a partial transfer of contracts and
property may be made so long as such
transfer would not result in an increase
in the amount of any customer’s net
equity claim.’’ The added language is
intended to caution against partial
transfers that would break netting sets
and make the customer worse off. The
Commission has also decided to state
that one way to accomplish a partial
transfer is ‘‘by liquidating a portion of
the open commodity contracts held by
a customer such that sufficient value is
realized, or margin requirements are
reduced to an extent sufficient, to
permit the transfer of some or all of the
remaining open commodity contracts
and property.’’ This language is
intended to clarify that the liquidation
may either crystalize gains or have the
effect of reducing the required margin.
Finally, with regards to the transfer of
part of a spread or a straddle,
134 Cf. 11 U.S.C. 761(9)(A)(ii)(II) (customer means,
with respect to an FCM, an entity that holds a claim
against the FCM arising out of ‘‘a deposit or
payment of cash, security, or other property with
such [FCM] for the purpose of making or margining
[a] commodity contract’’) (emphasis added).
Thus, where a person opens a customer account
and deposits collateral on day 1, intending to trade
on day 3 (or some subsequent day when the
customer determines that it is propitious to trade)
and the FCM becomes a debtor on day 2 (or some
other day when the customer has no positions
open) such person nonetheless qualifies as a
customer, and their claim would be a customer
claim.
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§ 190.07(d)(2)(ii) states that ‘‘to the
extent practicable under the
circumstances,’’ each side of the spread
or straddle must be transferred or none
of the open commodity contracts
comprising the spread or straddle may
be transferred. This language is
intended to clarify that the trustee is
required to protect customers holding
spread or straddle positions from the
breaking of netting sets, but only to the
extent practicable given the
circumstances.
Regulation § 190.07(d)(3) provides
details regarding the treatment and
transfer of letters of credit used as
margin, consistent with other proposed
provisions related to letters of credit. In
particular, this provision states that a
transfer of a letter of credit cannot be
made if it would result in a recovery
that exceeds the amount to which the
customer is entitled in §§ 190.08 and
190.09. If the letter of credit cannot be
transferred and the customer does not
deliver substitute property, the trustee
may draw upon a portion or upon all of
the letter of credit, the proceeds of
which will be treated as customer
property in the applicable account class.
The Commission believes a regulation
detailing how letters of credit are to be
treated in a transfer will provide more
certainty, as there is currently no such
regulation, and that the proposed
treatment is both practical and
consistent with the policy of pro rata
distribution.135
Regulation § 190.07(d)(4) requires a
trustee to use reasonable efforts to
prevent physical delivery property from
being separated from commodity
contract positions under which the
property is deliverable. The
Commission is proposing this regulation
to clarify its expectations in such
situations, specifically, to promote the
delivery process.
Regulation § 190.07(d)(5) is intended
to prevent prejudice to customers
generally by prohibiting the trustee from
making a transfer that would result in
insufficient customer property being
available to make equivalent percentage
distributions to all equity claim holders
in the applicable account class. It
clarifies that the trustee should make
determinations in this context based on
customer claims reflected in the FCM’s
records, and, for customer claims that
are not consistent with those records,
should make estimates using reasonable
discretion based in each case on
available information as of the calendar
day immediately preceding transfer.
135 See also discussion of treatment of letters of
credit in bankruptcy under § 190.04(d)(3) in section
II.B.2.
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Regulation § 190.07(e) addresses the
prohibition on avoidance of transfers
under section 764(b) of the Bankruptcy
Code. It explicitly approves specific
types of transfers, unless such transfers
are disapproved by the Commission.
Section 190.07(e)(1) approves (i)
transfers that were made before the
order for relief in compliance with
§ 1.17(a)(4) (FCM fails to meet capital
requirements); (ii) pre-relief transfers,
withdrawals or settlements at the
request of public customers, unless the
customer acted in collusion with the
debtor to obtain a greater share than it
would otherwise be entitled to; and (iii)
pre-relief transfers of customer accounts
or commodity contracts and other
related property, either by a clearing
organization or a receiver that has been
appointed for the FCM that is now a
debtor. In this context, ‘‘public
customers’’ would include a lower-level
(i.e., downstream) FCM acting on behalf
of its own public customers (e.g.,
cleared at the debtor on an omnibus
basis).
Regulation § 190.07(e)(2) pertains to
post-relief transfers. Section 764(b) of
the bankruptcy code permits the
Commission to approve, and thus
protect from avoidance, transfers that
occur up to seven days after the order
for relief. Section 190.07(e)(2)(i)
approves transfers of eligible
commodity contract accounts or
customer property made by the trustee
or any clearing organization. Section
190.07(e)(2)(ii) approves transfers made
at the direction of the Commission upon
such terms and conditions as the
Commission may deem appropriate and
in the public interest.
Regulation § 190.07(e)(3) was referred
to in preamble to the proposal as
derived from current § 190.06(g)(3). It
was inadvertently omitted from the rule
text in the proposal.
Section 190.07(e)(3) pertains to prerelief withdrawals by customers (in
contrast to the transfers dealt with
previously in § 190.07(e)(1)(ii)). It states
(in terms analogous to § 190.07(e)(1)(ii))
that notwithstanding the provisions of
paragraphs (c) and (d) of this section,
the following transfers are approved and
may not be avoided under sections 544,
546, 547, 548, 549 or 724(a) of the
Bankruptcy Code: The withdrawal or
settlement of a commodity contract
account by a public customer, including
a public customer which is a
commodity broker, prior to the filing
date unless: (i) The customer making the
withdrawal or settlement acted in
collusion with the debtor or its
principals to obtain a greater share of
the bankruptcy estate than that to which
such customer would be entitled in a
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bankruptcy distribution; or (ii) The
withdrawal or settlement is disapproved
by the Commission.
Regulation § 190.07(f) provides that,
notwithstanding the other provisions of
this section (with exceptions discussed
below), the Commission may prohibit
the transfer of a particular set or sets of
the commodity contract accounts and
customer property, or permit the
transfer of a particular set or sets of
commodity contract accounts and
customer property that do not comply
with the requirements of the section.
The exceptions are the policy in favor
of avoiding the breaking of netting sets
in § 190.07(d)(2)(ii), and the avoidance
of prejudice to other customers in
§ 190.07(d)(5).
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.07 as proposed with modifications
to § 190.07(b), (d), and (e), as set forth
above.
6. Regulation § 190.08: Calculation of
Funded Net Equity
Section 190.08 is being adopted as
proposed with a number of technical
modifications, as set forth below.
The Commission requested comment
with respect to all aspects of proposed
§ 190.08, and raised particular questions
with respect to the revisions to the
calculation of the equity balance of a
commodity contract set forth in
proposed § 190.08(b)(1), and the
appropriateness of the proposal to
determine the value of an open
commodity contract at the end of the
last settlement cycle on the day
preceding the transfer rather than at the
end of the day of the transfer, as set
forth in § 190.08(d)(1)–(2).
As proposed, § 190.08(a) stated that
the ‘‘allowed net equity claim of a
customer shall be equal to the aggregate
of the funded balances of such
customer’s net equity claim for each
account class.’’ As discussed above, the
ABA Subcommittee urged that there
should be more precise use of the term
‘‘allowed claim.’’ 136 The Commission
agrees with this recommendation.
Accordingly, the Commission is
amending the language in the proposal
to replace the term ‘‘allowed net equity’’
with the term ‘‘funded net equity’’ in
the final rule in both § 190.08(a) and in
the title of § 190.08.137
136 See discussion of ‘‘funded claim’’ in section
II.A.2 above.
137 Proposed § 190.08(a) is derived from current
§ 190.07(a), but reflects the fact that, under the
revised definition of the term ‘‘primary liquidation
date,’’ all commodity contracts will be liquidated or
transferred prior to the primary liquidation date.
Since no (relevant) operations will occur
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Section 190.08(b) sets forth the steps
for a trustee to follow when calculating
each customer’s net equity.138 Section
190.08(b)(1), equity determination, sets
forth the steps for a trustee to follow
when calculating the equity balance of
each commodity contract account of a
customer. When calculating the
customer’s claim against the debtor, the
basis for calculating such claim is the
data that appears in the debtor’s records.
Once the customer’s claim based on the
debtor’s records is calculated, the
customer will have the opportunity to
dispute such claim based on their own
records, and the trustee may adjust the
debtor’s records if it is persuaded by the
customer. There were no comments
directed specifically to this provision.
Section 190.08(b)(2), customer
determination (aggregation), provides
instructions to the trustee regarding how
to aggregate the credit and debit equity
balances of all accounts of the same
class held by a customer. Specifically,
the regulation sets forth how to
determine whether accounts are held in
the same capacity or in separate
capacities. There were two comments
applicable to this provision.
As proposed, § 190.08(b)(2)(ix)
referred to the fact that an omnibus
customer accounts is held in a separate
capacity from the ‘‘house account.’’ As
noted above,139 the ABA Subcommittee
has suggested the deletion of the term
‘‘house account’’ in the context of FCM
bankruptcies, and the Commission has
accepted this suggestion. Consistent
with that approach, the Commission is
accepting the ABA Subcommittee’s
revised drafting for this provision: An
omnibus customer account for public
customers of a futures commission
merchant maintained with a debtor
shall be deemed to be held in a separate
capacity from any omnibus customer
account for non-public customers of
such futures commission merchant and
from any account maintained with the
debtor on its own behalf or on behalf of
any non-public customer (emphasis
added only for illustration).
As proposed, § 190.08(b)(2)(xii)
provided that except as otherwise
provided in this section, an account
maintained with a debtor by an agent or
nominee for a principal or a beneficial
owner shall be deemed to be an account
held in the individual capacity of such
principal or beneficial owner.
subsequent to the liquidation date, provisions that
address how to deal with commodity contracts after
that time are moot.
138 Pursuant to section 20(a)(5) of the CEA, 7
U.S.C. 24(a)(5), the Commission has the power to
provide how the net equity of a customer is to be
determined.
139 See section II.A.2 above.
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SIFMA AMG/MFA urged the
Commission to amend this provision to
‘‘treat accounts of the same principal or
beneficial owner maintained by
different agents or nominees as separate
accounts,’’ noting that this approach
would ‘‘reduce the administrative
difficulties the trustee would face in
consolidating all accounts of the same
principal or beneficial owner’’ and
would ‘‘avoid[] any confusion as to the
treatment of separate accounts that
could arise with the overlay of the timelimited relief provided by Letter 19–
17.’’ 140 SIFMA AMG/MFA asserted that
this change would be similar to the
approach taken by the Commission in
proposed § 190.08(b)(2)(xiv), which
provides that accounts held by a
customer in separate capacities shall be
deemed to be accounts of different
customers.
The Commission notes that CFTC
Letter 19–17 conditioned such relief on
the FCM performing ‘‘stress testing and
credit limits . . . on a combined
account basis’’ and ‘‘provid[ing] each
beneficial owner using separate
accounts with a disclosure that under
CFTC [p]art 190 rules all separate
accounts of the beneficial owner will be
combined in the event of an FCM
bankruptcy.’’ 141 Thus, treating separate
accounts of the same beneficial owner
on a combined basis is entirely
consistent with the approach taken in
Letter 19–17. Nor is the situation of
separate accounts for the same
beneficial owner analogous to a
customer holding accounts in separate
capacities, as referred to in
§ 190.08(b)(2)(xiv) (e.g., in their personal
capacity versus in their capacity as
trustee for X, or in their capacity as
trustee for Y versus their capacity as
trustee for Z.). In those latter cases, the
same legal owner is acting for separate
beneficial owners. Accordingly, the
Commission is declining to amend
§ 190.08(b)(2)(xii).
Section 190.08(b)(3), setoffs, sets forth
instructions regarding how and when to
set off positive and negative equity
balances.
Section 190.08(b)(4), correction for
distributions, provides that the value of
property that has been transferred or
distributed must be added to the net
equity amount calculated for that
customer after performing the steps
contained in § 190.08(b)(1) through (3).
Section 190.08(b)(4) also includes a
proviso that clarifies that the calculation
of net equity for any late-filed claims (in
cases where all accounts for which there
140 See CFTC Letter 19–17, https://www.cftc.gov/
node/217076.
141 Id. at 5 (emphasis supplied).
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19361
are customer claims of record as of the
filing date are transferred with all of the
equity pertaining thereto) will be based
on the allowed amount of such claims.
Section 190.08(b)(5), correction for
ongoing events, provides that the
calculation of net equity will be
adjusted to correct for misestimates or
errors, including corrections for the
liquidation of claims or specifically
identifiable property at a value different
from the estimate value previously used
in computing net equity.
As proposed, § 190.08(c) set forth the
method for calculation of a customer’s
funded balance, i.e., ‘‘a customer’s pro
rata share of the customer estate with
respect to each account class available
for distribution to customers of the same
customer class.’’ Section 190.08(c)(1)
sets forth instructions for calculating the
funded balance of any customer claim,
while § 190.08(c)(2) requires the funded
balance to be adjusted to correct for
ongoing events.
One change is being made to
paragraph (c)(1), as a result of
addressing a comment that affected a
prior section. As proposed,
§ 190.08(c)(1)(ii) addressed giving
customers credit for 100% of margin
payments made after the order for relief.
As discussed above,142 a number of
commenters (ABA Subcommittee, CME,
CMC), suggested that the definition of
cash delivery property be expanded to
address the possibility of post-filingdate payments made by customers to the
FCM to pay for delivery. Such payments
should be credited in full to the
customer’s funded balance. Indeed,
§ 190.06(a)(3)(ii)(B)(2) provides that the
trustee could issue payment calls in this
context and that ‘‘the full amount of any
payment made by the customer in
response to a payment call must be
credited to the funded balance of the
particular account for which such
payment is made.’’
In order to be consistent with the
principle that 100% of post-filing-date
payments are credited to a customer’s
funded balance, proposed
§ 190.08(c)(1)(ii) is being amended, with
the proposed language addressing postfiling-date margin payments to be
codified as § 190.08(c)(1)(ii)(A), and the
addition of § 190.08(c)(1)(ii)(B) to
address post-filing-date payments for
deliveries, to read as follows: ‘‘[then
adding 100% of] . . . [f]or cash delivery
property, any cash transferred to the
trustee on or after the filing date for the
purpose of paying for delivery.’’
Section 190.08(d), valuation, sets
forth instructions about how to value
142 See discussion of cash delivery property in
section II.A.2, above.
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commodity contracts and other property
for purposes of calculating net equity as
set forth in the rest of § 190.08.
Section 190.08(d)(1) sets forth
instructions regarding how to value
commodity contracts, separately
addressing: (i) Open commodity
contracts, and (ii) liquidated commodity
contracts.
As proposed, § 190.08(d)(1)(i),
regarding the valuation of open
commodity contracts, states that ‘‘if an
open commodity contract is transferred
to another commodity broker, its value
on the debtor’s books and records shall
be determined as of the end of the last
settlement cycle on the day preceding
such transfer.’’ The Commission noted
in the proposal that ‘‘[t]his would allow
the value of the open commodity
contract to be known prior to the
transfer,’’ 143 and, as discussed above,
specifically sought comments on this
issue.
The Commission received contrasting
comments on this provision. ICE ‘‘d[id]
not believe that valuation is the right
one, particularly because the market
may move significantly on the date of
transfer.’’ By contrast, CME ‘‘agree[d]’’
with valuation as of the end the last
settlement cycle on the day preceding
transfer, because it aligns with
calculations of funded balances under
proposed § 190.08(c), and noted that
‘‘any mark-to-market gains or losses on
the date of the transfer should be
reflected by the receiving FCM(s) in the
customer account statements as a result
of that day’s settlement cycle.’’ The
Commission is persuaded by the latter
comment, and will adopt the provision
as proposed, both for the reasons stated
by the latter commenter, and because of
concerns regarding practicability.
Markets move on a continuous basis so
long as they are open and, considering
markets around the world, some
markets on which futures, foreign
futures, or cleared swaps are traded are
moving at all times other than over a
weekend.
Section 190.08(d)(1)(ii)(A) allows the
trustee to use the weighted average of
liquidation prices for identical
commodity contracts that are liquidated
within a 24-hour period or business day,
but not at the same price.
Section 190.08(d)(1)(ii)(B) provides
instructions on how to value commodity
contracts that are liquidated as part of
a bulk auction by a clearing organization
or similarly outside of the open market.
As proposed, this provision would
value a commodity contract that is
liquidated as part of a bulk auction at
the settlement price calculated by the
143 85
FR 36028.
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clearing organization as of the end of the
settlement cycle during which the
commodity contract was liquidated. ICE
disagreed with this approach, stating
that ‘‘the price achieved in the auction
should be used.’’ However, as the
Commission noted in the proposing
release, the units being auctioned will
often be a heterogenous (though riskrelated) set of products, tenors (e.g.,
contract months), and directions (e.g.,
long or short). Different auctioned
portfolios may contain the same or
similar contracts. In this context, setting
the price of a particular contract based
on the auction price for a portfolio
would require considerable
interpretation. Accordingly, the
Commission will implement the
approach from the proposal.
Section 190.08(d)(2) sets forth the
approach for valuing listed securities,
and incorporates the same weighted
average concept discussed above with
respect to § 190.08(d)(1)(ii)(A).
Section 190.08(d)(3) sets forth the
approach for valuing commodities held
in inventory, directing the trustee to use
fair market value. If such fair market
value is not readily ascertainable from
public sources of prices, the trustee is
directed to use the approach in
§ 190.08(d)(5), discussed below.
Section 190.08(d)(4) addresses the
valuation of letters of credit. The trustee
is directed to use the face amount (less
amounts, if any, drawn and
outstanding). However, if the trustee
makes a determination in good faith that
a draw is unlikely to be honored on
either a temporary or permanent basis,
they are directed to use the approach in
paragraph (d)(5).
Section 190.08(d)(5) provides the
trustee with pragmatic flexibility in
determining the value of customer
property by allowing the trustee, in their
sole discretion, to enlist the use of
professional assistance to value all other
customer property.144 This provision
further notes that, if such property is
sold, its value for purposes of the
calculations required by this part is
equal to the actual value realized on sale
of such property (the trustee, of course,
retains discretion to engage professional
assistance to allocate such value among
a heterogenous set of items sold as a
unit). Finally, the provision notes that
any such sale shall be made in
compliance with all applicable statutes,
rules, and orders of any court or
governmental entity with jurisdiction
thereover.
144 The trustee’s employment of professionals
remains subject to the requirements of section 327
of the Bankruptcy Code.
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Accordingly, after consideration of
the comments and for the reasons stated
above, § 190.08 is being adopted as
proposed, with modifications to the title
and to § 190.08(a), (b), and (c), as set
forth above.
7. Regulation § 190.09: Allocation of
Property and Allowance of Claims
Section 190.09 is being adopted to set
forth rules governing the scope of
customer property, the allocation of
customer property between customer
and account classes, and distribution of
customer property. It was derived from
current § 190.08. It is being adopted as
proposed with modifications to
§ 190.09(d)(3), as set forth below.
The Commission requested comment
with respect to all aspects of proposed
§ 190.09. The Commission also raised
particular questions with respect to:
Whether the proposed revisions to
§ 190.09(a)(1) would appropriately
preserve customer property for the
benefit of customers; whether proposed
§ 190.09(a)(1)(ii)(G), concerning
property that other regulations require
to be placed into segregation, and
§ 190.09(a)(1)(ii)(L), concerning
remaining shortfalls, are appropriately
crafted; whether it is advisable to permit
customers to post ‘‘substitute customer
property’’ rather than ‘‘cash’’ in
proposed § 190.09(d); and whether it is
appropriate to clarify the term ‘‘likekind securities’’ by reference to the
concept, derived from SIPA, of
‘‘securities of the same class and series
of an issuer?’’
There are three substantive changes in
new § 190.09, as compared to current
regulations:
Section 190.09(a)(1)(ii)(G) and (L) are
two categories of property that are
defined to be included in customer
property in order better to protect
customers from shortfalls in customer
property (i.e., cases where customer
property is insufficient to cover claims
for customer property).
Section 190.09(a)(1)(ii)(G) is a new
category of property that constitutes
customer property. It includes any cash,
securities, or other property which
constitutes current assets of the debtor,
including the debtor’s trading or
operating accounts and commodities of
the debtor held in inventory, in the
greater of (i) the amount of the debtor’s
targeted residual interest amount
pursuant to § 1.11 with respect to each
account class, or (ii) the debtor’s
obligations to cover debit balances or
undermargined amounts as provided in
§§ 1.20, 1.22, 22.2 and, 30.7. Each of the
sets of regulations referred to in
proposed § 190.09(a)(1)(ii)(G) requires
an FCM to put certain funds into
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segregation on behalf of customers. To
the extent the FCM has failed to comply
with those regulatory requirements prior
to the filing of the bankruptcy, this
provision requires the bankruptcy
trustee to fulfill that requirement, and
allows the trustee to use the current
assets of the debtor to do that.
CME stated that this new provision is
a ‘‘substantial improvement over the
current rule,’’ and it was also supported
by ICI and Vanguard.
Section 190.09(a)(1)(ii)(L) is the
analog to current § 190.08(a)(1)(ii)(J) but
with updated cross-references (and a
new second sentence, discussed in the
next paragraph). It states that customer
property includes any cash, securities,
or other property in the debtor’s estate,
but only to the extent that the customer
property under the other definitional
elements is insufficient to satisfy in full
all claims of the FCM’s public
customers.145
A new second sentence of
§ 190.09(a)(1)(ii)(L) notes explicitly that
customer property for purposes of these
regulations includes any ‘‘customer
property,’’ as that term is defined in
SIPA, that remains after satisfaction of
the provisions in SIPA regarding
allocation of (securities) customer
property. SIPA provides that such
remaining customer property would be
allocated to the general estate of the
debtor.146 Any securities customer
property that remains after satisfaction
in full of securities claims provided for
in that section of SIPA proceeding and
would accordingly become property of
the general estate should, to the extent
otherwise provided in proposed
§ 190.09(a)(1)(ii)(L), and for the same
reasons, become customer property in
the FCM bankruptcy proceeding.
Section 190.09(d) governs the
distribution of customer property, and
has its analog in current § 190.08(d).
Section 190.09(d)(1)(i) and (ii) and (d)(2)
require customers to deposit ‘‘substitute
customer property,’’ to obtain the return
or transfer of specifically identifiable
property. ‘‘Substitute customer
property’’ is defined in § 190.01 to mean
(in relevant part) ‘‘cash or cash
equivalents.’’ ‘‘Cash equivalents,’’ in
turn, are defined as ‘‘assets, other than
United States dollar cash, that are
highly liquid such that they may be
converted into United States dollar cash
within one business day without
material discount in value.’’
145 ICE notes that the issues with respect to this
provision may be complicated, and that it may
warrant further consideration, but ultimately
expresses no view on it.
146 See generally SIPA section 8(c)(1), 15 U.S.C.
78fff–2(c)(1).
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The purpose of requiring customers
to, in essence, ‘‘buy back’’ specifically
identifiable property is to implement
the pro rata distribution principle set
forth in section 766(h) of the
Bankruptcy Code, and discussed in
§ 190.00(d)(5). Permitting customers to
redeem specifically identifiable
property with either cash or cash
equivalents, rather than requiring cash,
may mitigate the difficulty (and costs)
such customers face in obtaining
redemption, but will in any event fully
implement the pro rata distribution
principle.
As a technical point, the ABA
Subcommittee recommended
(consistent with their recommendation
in the definitions section, § 190.01, to
more precisely use the term ‘‘allowed
net equity’’) that the reference in
proposed § 190.09(d)(3) to the amount
distributable on a customer’s claim be
amended to add ‘‘[the] funded balance
of’’ before the phrase ‘‘such customers
allowed net equity claim.’’ The
Commission agrees, and is making the
change.
The remaining provisions of revised
§ 190.09 include only technical changes
to the current regulations.
Accordingly, after consideration of
the comments, and for the reasons
stated above, § 190.09 will be adopted as
proposed, with the modification to
§ 190.09(d)(3) referred to above.
8. Regulation § 190.10: Provisions
Applicable to Futures Commission
Merchants During Business as Usual
The Commission proposed § 190.10 to
contain new and relocated provisions
that set forth an FCM’s obligations
during business as usual. The
Commission requested comment with
respect to all aspects of proposed
§ 190.10, and specifically with respect
to (1) the impact of proposed § 190.10(b)
regarding the designation of hedging
accounts, (2) the impact of proposed
§ 190.10(c) regarding the establishment
of delivery accounts during business as
usual, (3) the changes in proposed
§ 190.10(d) to the business as usual
requirements for acceptance of letters of
credit, and in particular (a) whether its
understanding is correct that most
letters of credit currently in use by the
industry follow the JAC forms, (b) the
impact of additional requirements
concerning letters of credit (as well as
any alternative methods of achieving the
goal of treating customers posting letters
of credit consistent with the treatment
of other customers), and (c) whether the
proposed one year transition period is
reasonable, and (4) the disclosure
statement for non-cash margin set out in
proposed § 190.10(e) (whether the
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19363
statement is helpful, legally or
practically, whether it should be
changed, or whether it should be
deleted).
Section 190.10 will be adopted as
proposed with modifications. In
particular, the ABA Subcommittee and
CME suggested that the provisions in
proposed § 190.10 be codified in part 1,
along with other regulations that pertain
to an FCM’s business as usual. The ABA
Subcommittee stated that, while they
had originally suggested that these
provisions belong in § 190.10, ‘‘[u]pon
further reflection, the Committee
believes that such a rule more logically
belongs in the Commission’s Part 1
Regulations, along with other rules that
apply to FCMs during business as usual.
Compliance and legal personnel could
inadvertently overlook obligations that
are not located in the Commission rule
set where they would expect to find
them.’’
The Commission agrees with the
commenters that transparency would be
fostered by putting the ‘‘business as
usual’’ requirements proposed for
§ 190.10 into part 1 of the Commission’s
regulations. Accordingly, as discussed
further below, most of the paragraphs of
the regulation that was proposed as
§ 190.10 are being renumbered and will
be codified in specified places in part 1.
The provisions of proposed § 190.10
will otherwise be adopted as proposed.
The provision proposed as § 190.10(a)
notes that an FCM is required to
maintain current records relating to its
customer accounts, pursuant to §§ 1.31,
1.35, 1.36, and 1.37, and in a manner
that would permit them to be provided
to another FCM in connection with the
transfer of open customer contracts of
other customer property. This provision
recognizes that current and accurate
records are imperative in arranging for
the transfer of customer contracts and
other property, both for the trustee of
the estate of the defaulter and for an
FCM that is accepting the transfer.
Nonetheless, it does not add to an
FCM’s obligations under the specified
regulations, but rather is useful as a
reference for the trustee. Accordingly,
this provision will not be moved to part
1.
No comments were received with
respect to the substance of proposed
§ 190.10(a). As the remaining
paragraphs of proposed § 190.10 will be
moved to part 1, this provision will be
codified as § 190.10.
The provision proposed as § 190.10(b)
concerns the designation of hedging
accounts. It incorporates concepts
contained in current §§ 190.04(e) and
190.06(d) and the current Bankruptcy
appendix form 3 instructions. As it sets
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forth obligations for an FCM during
business as usual, it will be moved to
part 1. As it does not fit under any
existing part 1 regulation, it will be
moved under the miscellaneous heading
of part 1, and codified as § 1.41.
For purposes of § 1.41, a customer
will not need to provide, and an FCM
will not be required to judge, evidence
of hedging intent for purposes of
bankruptcy treatment. Rather, § 1.41
will permit the FCM to treat the account
as a hedging account for such purposes
based solely upon the written record of
the customer’s representation. Hedging
treatment for these bankruptcy purposes
will not be determinative for any other
purpose.
Section 1.41(a) will require an FCM to
provide a customer an opportunity to
designate an account as a hedging
account when the customer first opens
the account, rather than when the
customer undertakes its first hedging
contract, as specified in current
§ 190.06(d)(1). This provision will also
require that the FCM indicate
prominently in its accounting records
for each customer account whether the
account is designated as a hedging
account.
Section 1.41(b) will set forth the
requirements for an FCM to treat an
account as a hedging account: If, but
only if, the FCM obtains the customer’s
written representation that the
customer’s trading in the account will
constitute hedging as defined under any
relevant Commission regulation or rule
of a DCO, DCM, SEF, or FBOT. CME
supported this approach, and the clarity
it adds.
In order to avoid the significant
burden that would be associated with
requiring FCMs to re-obtain hedging
instructions for existing accounts,
§ 1.41(c) will provide that the
requirements of § 1.41(a) and (b) do not
apply to commodity contract accounts
opened prior to the effective date of
these revisions. Rather, the provision
will recognize expressly that an FCM
may continue to designate existing
accounts as hedging accounts based on
written hedging instructions obtained
under former § 190.06(d).
Finally, § 1.41(d) will permit an FCM
to designate an existing futures, foreign
futures or cleared swaps account of a
particular customer as a hedging
account, provided that the FCM obtains
the representation required under
§ 1.41(b).
The provision proposed as § 190.10(c)
addresses the establishment of delivery
accounts during business as usual.147 As
147 See § 190.06 regarding the making and taking
of deliveries during bankruptcy.
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it sets forth obligations for an FCM
during business as usual, it will be
moved to part 1. As it does not fit under
any existing part 1 regulation, it will be
moved under the miscellaneous
heading, and codified as § 1.42.
When a commodity contract is in the
delivery phase, or when a customer has
taken delivery of commodities that are
physically delivered, associated
property may be held in a ‘‘delivery
account’’ rather than in the segregated
accounts pursuant to, e.g., § 1.20 or
§ 22.2. Section 1.42 recognizes that
when an FCM facilitates delivery under
a customer’s physical delivery contract,
and such delivery is effected outside of
a futures account, foreign futures
account, or cleared swaps account, it
must be effected through (and the
associated property held in) a delivery
account. If, however, the commodity
that is subject to delivery is a security,
the FCM may effect delivery through
(and the property may be held in) a
securities account. The regulation
clarifies that the property must be held
in one of these types of accounts. ICE
and CME generally support this
provision.148
The provision proposed as § 190.10(d)
addresses letters of credit that an FCM
accepts as collateral. As it sets forth
obligations for an FCM during business
as usual, it will be moved to part 1. As
it does not fit under any existing part 1
regulation, it will be moved under the
miscellaneous heading, and codified as
§ 1.43.
Section 1.43 will prohibit an FCM
from accepting a letter of credit as
collateral unless certain conditions (1)
are met at the time of acceptance and (2)
remain true through its date of
expiration.
First, pursuant to § 1.43(a), the trustee
must be able to draw upon the letter of
credit, in full or in part, in the event of
a bankruptcy proceeding, the entry of a
protective decree under SIPA, or the
appointment of FDIC as receiver
pursuant to Title II of the Dodd-Frank
Act. Second, pursuant to § 1.43(b), if the
letter of credit is permitted to be and is
passed through to a clearing
organization, the bankruptcy trustee for
such clearing organization or (if
applicable) FDIC must be able to draw
upon the letter of credit, in full or in
part, in the event of a bankruptcy
proceeding, or where the FDIC is
appointed as receiver pursuant to Title
II.
The Commission has considered the
impact that implementation of this
148 CME again recommended that the Commission
consider adopting customer protection
requirements with respect to delivery accounts via
a separate rulemaking.
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regulation would have on FCMs and
their customers, since letters of credit
are currently in use by the industry.149
The Commission proposed that, upon
the effective date of the regulation, what
is now codified as § 1.43 would apply
only to new letters of credit and
customer agreements. In order to
mitigate the impact of implementing
this regulation with respect to existing
letters of credit and customer
agreements, the Commission proposed a
transition period of one year from the
effective date until § 1.43 will apply to
existing letters of credit and customer
agreements.
CME supported this one-year
transition period. By contrast, SIFMA
AMG/MFA urged the Commission to
shorten it in the interest of investor
protection. They asked how letters of
credit would be treated if an FCM were
to go into bankruptcy during the
transition period?
The provisions in this rulemaking
regarding letters of credit are intended
to codify the Commission’s
longstanding policy that ‘‘customers
using a letter of credit to meet original
margin obligations [sh]ould be treated
no differently than customers depositing
other forms of non-cash margin or
customers with excess cash margin
deposits.’’ 150 This is the policy that has
been advanced by the Commission,
including in litigation,151 under the
current rules. Moreover, this policy is
supported by the provision in revised
§ 190.04(d)(3)(ii) that, for a letter of
credit posted as collateral, ‘‘the trustee
shall treat any portion that is not drawn
upon (less the value of any substitute
customer property delivered by the
customer) as having been distributed to
the customer for purposes of calculating
entitlements to distribution or transfer.’’
That provision is not subject to the oneyear transition period.
While the Commission will decline to
shorten the one-year transition period
for existing letters of credit, trustees will
be expected to treat such letters of credit
in accordance with the Commission’s
policy.
The provision proposed as § 190.10(e)
concerns the disclosure statement for
non-cash margin. No comments were
received specific to this provision.
149 The Joint Audit Committee (‘‘JAC’’) forms for
an Irrevocable Standby Letter of Credit (both PassThrough and Non Pass-Through) appear to be
consistent with the requirements of § 1.43.
150 See, e.g., 48 FR 8716, 8718 (March 1, 1983)
(Adopting release for part 190); Proposal, 86 FR at
36019 & n. 103.
151 See, e.g. Brief of the Commodity Futures
Trading Commission In Support Of The Trustee’s
Motion To Confirm in ConocoPhillips v. Giddens,
Case No. 1:12–cv–06014–KBF, Document 33.
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As it sets forth obligations for an FCM
during business as usual, it will be
moved to part 1. This provision does fit
under existing § 1.55 (Public disclosures
by futures commission merchants), and
will be added at the end, codified as
§ 1.55(p).
Accordingly, after consideration of
the comments, and for the reasons
stated above, § 190.10 will be adopted as
proposed, with modifications: Proposed
§ 190.10(a) will be codified as § 190.10,
proposed § 190.10(b) will be codified as
§ 1.41, proposed § 190.10(c) will be
codified as § 1.42, proposed § 190.10(d)
will be codified as § 1.43, and proposed
§ 190.10(e) will be codified as § 1.55(p).
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C. Subpart C—Clearing Organization as
Debtor
The Commission is adopting a new
subpart C of part 190 (proposed
§§ 190.11–190.19), with certain
modifications discussed below, to
address the currently unprecedented
scenario of a clearing organization as
debtor.152
The customers of a clearing
organization are its members,
considered separately in two roles: (1)
Each member may have a proprietary
(also known as ‘‘house’’) account at the
clearing organization, on behalf of itself
and its non-public customers (i.e.,
affiliates). The property that the clearing
organization holds in respect of these
accounts is referred to as ‘‘member
property.’’ (2) Each member may have
one or more accounts (e.g., futures,
cleared swaps) for that members’ public
customers. The property that the
clearing organization holds in respect of
these accounts is referred to as
‘‘customer property other than member
property.’’ Many clearing members will
have both such types of accounts,
although some may have only one or the
other.
1. Regulation § 190.11: Scope and
Purpose of Subpart C
The Commission is adopting § 190.11
as proposed, but designated as new
paragraph (a), and adding a new
paragraph (b), as set forth below. The
Commission is adopting § 190.11 to
establish that subpart C of part 190 will
apply to proceedings under subchapter
IV to chapter 7 of the Bankruptcy Code
where the debtor is a clearing
organization.
When originally proposing part 190 in
1981, the Commission proposed to (and
152 After considering comments that were
received on the original Proposal, the Commission
subsequently issued a Supplemental Proposal that
withdrew § 190.14(b)(2) and (3), and proposed other
revisions to § 190.14. Bankruptcy Regulations, 85
FR 60110 (Sept. 24, 2020).
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ultimately did) forego providing
generally applicable rules for the
bankruptcy of a clearing organization.153
The Commission explained that it had
proposed no other rules with respect to
the operation of clearing organization
debtors—other than proposing that all
open commodity contracts, even those
in a deliverable position, be liquidated
in the event of a clearing organization
bankruptcy—because the Commission
viewed it as highly unlikely that an
exchange could maintain a properly
functioning futures market in the event
of the collapse of its clearing
organization. The Commission noted
that, under section 764(b)(2) of the
Bankruptcy Code, it had the power to
permit a distribution of the proceeds of
a clearing organization liquidation free
from the avoidance powers of the
trustee. The Commission further
explained that it was not proposing a
general rule, because the bankruptcy of
a clearing organization would be
unique. Instead, the Commission was
inclined to take a case-by-case approach
with respect to clearing organizations,
given the potential for market
disruption and disruption of the
nation’s economy as a whole, in the case
of a clearing organization bankruptcy, as
well as the desirability of the
Commission’s active participation in
developing a means of meeting such an
emergency.154
Much has changed in the intervening
39 years. Markets move much more
quickly, and thus the importance of
quick action in respect to the
bankruptcy of a clearing organization
has increased. The Commodity Futures
Modernization Act established DCOs as
a separate registration category.155 The
bankruptcy of a clearing organization
would remain unique—it remains the
case that no clearing organization
registered with the Commission has ever
entered bankruptcy—and thus the need
for significant flexibility remains, but
the balance has shifted towards
establishing ex ante the approach that
would be taken.
Two clearing organizations for which
the Commission has been designated the
agency with primary jurisdiction have
been designated as systemically
important to the United States financial
system pursuant to Title VIII of Dodd153 At the time, the definition of clearing
organization in section 761(2) of the Bankruptcy
Code was an ‘‘organization that clears commodity
contracts on, or subject to the rules of, a contract
market or board of trade.’’ See Public Law 95–598
(1978), 92 Stat 2549.
154 46 FR 57535, 57545 (Nov. 24, 1981).
155 Commodity Futures Modernization Act of
2000 Public Law 106–554 section 1(a)(5); Appendix
E, section 112(f).
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Frank.156 If any clearing organization
were to approach insolvency, it is
possible, though not certain, that such
an entity would be resolved pursuant to
Title II of Dodd-Frank.157
Administration of a resolution under
Title II of Dodd-Frank depends, in part,
on clarity as to entitlements under
chapter 7 of the Bankruptcy Code.
Specifically, section 210(a)(7)(B) of
Dodd-Frank 158 provides with respect to
claims against the covered financial
agency in resolution, that ‘‘a creditor
shall, in no event, receive less than the
amount that the creditor is entitled to
under paragraphs (2) and (3) of
subsection (d), as applicable.’’ Tracing
to the cross-referenced subsection,
section 210(d)(2) 159 provides that the
maximum liability of the FDIC to a
claimant is the amount that the claimant
would have received if the FDIC had not
been appointed receiver, and (instead),
the covered financial company had been
liquidated under chapter 7 of the
Bankruptcy Code.160 Thus, it is
important to have a clear
‘‘counterfactual’’ that establishes what
creditors would be entitled to in the
case of the liquidation of a clearing
156 See Dodd-Frank section 804 (designation of
systemic importance), section 803(8) (definition of
‘‘supervisory agency’’), 12 U.S.C. 5463, 5462(8).
These are CME and ICE Clear Credit. A third
clearing organization (Options Clearing
Corporation) has also been so designated, but the
SEC is the supervisory agency in that case.
157 Resolution under Title II would require a
recommendation concerning factors specified in
section 203(a)(2) of Dodd-Frank, 12 U.S.C.
5383(a)(2), by a 2⁄3 majority of the members then
serving of each of the Board of Governors of the
Federal Reserve System and of the FDIC, followed
by a determination concerning a related set of
factors specified in section 203(b), 12 U.S.C.
5383(b), by the Secretary of the Treasury in
consultation with the President. Thus, the choice of
resolution versus bankruptcy for a DCO that is, in
the terminology of Dodd-Frank, ‘‘in default or in
danger of default,’’ see Dodd-Frank section
203(c)(4), 12 U.S.C. 5383(c)(4), cannot be
considered certain.
It is, however, clear that Title II applies to
clearing organizations. See, e.g., Dodd-Frank section
210(m), 12 U.S.C. 5390(m) (applying ‘‘the
provisions of subchapter IV of chapter 7 of the
bankruptcy code’’ to ‘‘member property’’ of
‘‘commodity brokers’’). Pursuant to section 761(16)
of the Bankruptcy Code, ‘‘member property’’
applies only to a debtor that is a ‘‘clearing
organization.’’ 11 U.S.C. 761(16).
158 12 U.S.C. 5390(a)(7)(B).
159 12 U.S.C. 5390(d)(2).
160 For the sake of completeness, it should be
noted that section 210(d)(2), 12 U.S.C. 5390(d)(2),
provides, as an additional comparator, ‘‘any similar
provision of State insolvency law applicable to the
covered financial company.’’ Given Federal
regulation of DCOs, it would appear that this phrase
is inapplicable. Similarly, section 210(d)(3), 12
U.S.C. 5390(d)(3), which refers to covered financial
companies that are brokers or dealers resolved by
SIPC, is also inapplicable here, given the
inconsistency in being both a DCO and a brokerdealer.
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organization under chapter 7
(subchapter IV) of the Bankruptcy Code.
Although the Commission believes
that the potential—albeit
unprecedented—scenario of a clearing
organization as debtor would require
significant flexibility, the Commission
also believes it necessary and
appropriate to establish an ex ante set
of regulations for such a scenario.
The Commission requested comment
regarding the proposed scope of subpart
C, as set forth in proposed § 190.11. The
Commission also specifically asked
commenters whether they supported or
opposed the establishment of an
explicit, bespoke set of regulations for
the bankruptcy of a clearing
organization.
The Commission received two
comments that raised concerns about
how the proposed subpart C regulations
would apply in the case of a debtor
clearing organization that is organized
and/or domiciled in a foreign country.
SIFMA AMG/MFA commented that
‘‘Part 190 should include a clear
statement of public policy . . . that if an
insolvency proceeding is commenced in
respect of a DCO located outside the
United States, such home country
proceeding should take precedence over
any case under the [U.S.] Bankruptcy
Code.’’
ICE commented that such a clearing
organization, if insolvent, ‘‘is likely to
be subject to an insolvency proceeding
in its home jurisdiction.’’ ICE also
commented that many such DCOs ‘‘have
significant assets (including for this
purpose, the assets of clearing members
and their customers.’’ In particular, ICE
stated that ‘‘a foreign DCO may have, in
addition to the customer account classes
contemplated by the CEA and CFTC
regulations (and the Part 190
regulations), one or more classes of
customer accounts that are required to
be segregated or separately accounted
for under applicable foreign law,
generally for the protection of foreign
clearing members and their customers.’’
ICE further commented that, ‘‘[t]o the
extent the Part 190 rules mandate a
distribution scheme for property of the
[DCO in bankruptcy] that would be
inconsistent with foreign law applicable
to the DCO, and that could disadvantage
foreign members or their customers,
significant conflicts may arise . . . .’’
ICE suggested two alternative
approaches for the Commission to
consider: (1) The ‘‘Commission could
provide that the new Part 190
regulations would not apply to a foreign
DCO;’’ or (2) ‘‘[a]lternatively, the
Commission could provide that the new
Part 190 regulations, including the
distributional regime, would apply only
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to the separate customer account class
structure provided for under U.S. law
(futures, cleared swaps and foreign
futures), to the extent carried through
FCM clearing members.’’
After considering the comments, the
Commission is adopting § 190.11 with
modifications. With respect to the
protection of customer property in
connection with foreign DCOs, the
Commission has traditionally focused
its efforts on the protection of the public
customers of FCM members of such
foreign DCOs. While protecting public
customers of FCM members of foreign
DCOs would not be well served by
disapplying part 190 in the case of
foreign DCOs, as suggested in ICE’s first
approach, as well as in the comment by
SIFMA AMG/MFA, balancing the goal
of protecting public customers of FCM
members with the goal of mitigating
conflict with foreign proceedings would
appear to be supported by following
ICE’s second approach, and limiting the
applicability of part 190, in the case of
a foreign DCO subject to a proceeding in
its home jurisdiction, to focus on the
contracts and property of public
customers of FCM members.
In order to balance the goal of
protecting public customers of FCM
members with the goal of mitigating
conflict with foreign proceedings, the
Commission believes it to be
appropriate that, in a situation where a
debtor clearing organization is
organized outside the United States and
is subject to a foreign bankruptcy
proceeding, part 190 should apply as
follows. First, the Commission believes
it to be appropriate that subpart A
should apply to such proceedings, given
that those provisions set forth core
concepts, definitions and general
provisions. Second, the Commission
believes it to be appropriate that
§ 190.12 should apply to such
proceedings, given that the regulation
sets forth requirements for records and
reporting, which are critical in such
proceedings. And third, the Commission
believes it to be appropriate that three
regulations should be applicable in a
limited fashion, to focus on the
contracts and property of public
customers of FCM members: 161 (1)
§ 190.13, setting forth the prohibition on
avoidance of transfers, but only with
respect to futures and cleared swaps
contracts cleared by FCM clearing
members on behalf of their public
161 As noted above, the Commission has
traditionally focused its efforts on the protection of
the public customers of FCM members of such
foreign DCOs. In a DCO bankruptcy, the
Commission believes that the application of these
three regulations would be critical to fulfilling the
agency’s mission to protect customers.
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customers; (2) § 190.17, setting forth the
calculation of net equity; and (3)
§ 190.18, setting forth the treatment of
property. In such a scenario, §§ 190.13,
190.17, and 190.18 would only apply
with respect to: (1) Claims of FCM
clearing members on behalf of their
public customers; and (2) property that
is or should have been segregated for the
benefit of FCM clearing members’
public customers, or that has been
recovered for the benefit of FCM
clearing members’ public customers.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is: (1) Adopting
the language of § 190.11 as proposed,
but designated as new paragraph (a);
and (2) modifying proposed § 190.11 by
adding the following as new paragraph
(b): If the debtor clearing organization is
organized outside the United States, and
is subject to a foreign proceeding, as
defined in 11 U.S.C. 101(23), in the
jurisdiction in which it is organized,
then only the following provisions of
part 190 shall apply: (1) Subpart A; (2)
§ 190.12; (3) § 190.13, but only with
respect to futures contracts and cleared
swaps contracts cleared by FCM
clearing members on behalf of their
public customers and the property
margining or securing such contracts;
and (4) §§ 190.17 and 190.18, but only
with respect to claims of FCM clearing
members on behalf of their public
customers, as well as property that is or
should have been segregated for the
benefit of FCM clearing members’
public customers, or that has been
recovered for the benefit of FCM
clearing members’ public customers.’’
2. Regulation § 190.12: Required Reports
and Records
The Commission is adopting § 190.12
to establish the recordkeeping and
reporting obligations of a debtor clearing
organization and/or trustee in a
bankruptcy proceeding under subpart C.
The operations of a clearing
organization are extremely timesensitive. For example, § 39.14 requires
that a clearing organization complete
settlement with each clearing member at
least once every business day. It is thus
critical that the Commission receive
notice of a DCO bankruptcy in an
extraordinarily rapid manner. Similarly,
the trustee that is appointed (as well as
the Commission) must receive critical
documents rapidly, and proper notice
should be provided to the DCO’s
members.
Regulation § 190.12 sets forth the
timing and content of notices that must
be provided to the Commission and the
DCO’s members, as well as the timing
and content of reports and records that
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must be provided to the Commission
and trustee.
Section 190.12(a)(1) is analogous to
§ 190.03(a), as amended herein, in that
it would provide instructions regarding
how to give notice to the Commission
and to a clearing organization’s
members, where such notice would be
required under subpart C of part 190.162
Section 190.12(a)(2) would require the
clearing organization to notify the
Commission either in advance of, or at
the time of, filing a petition in
bankruptcy (or within three hours of
receiving notice of a filing of an
involuntary petition against it).163
Notice would need to include the filing
date and the court in which the
proceeding has been or will be filed.
While the clearing organization would
also need to provide notice of the docket
number, if the docket number is not
immediately assigned, that information
would be provided separately as soon as
available.
It is also important to permit the
trustee to begin to understand the
business of the clearing organization as
soon as practicable, and within hours.
Accordingly, § 190.12(b)(1) requires the
clearing organization to provide to the
trustee copies of each of the most recent
reports filed with the Commission
under § 39.19(c), which includes
§ 39.19(c)(1) (daily reports, including
initial margin required and on deposit
by clearing member, daily variation and
end-of-day positions (by member, by
house and customer origin), and other
daily cash flows), § 39.19(c)(2)
(quarterly reports, including of financial
resources), § 39.19(c)(3) (annual
reporting, including audited financial
statements and a report of the chief
compliance officer), § 39.14(c)(4) (eventspecific reporting, which would include
the most up-to-date version of any
recovery and wind-down plans the
debtor maintained pursuant to
§ 39.39(b),164 and which may well
include events that contributed to the
162 While § 190.03(a)(2), as amended herein,
applies to notice to an FCM’s customers, and
§ 190.12(a)(1)(ii) applies to notice to a clearing
organization’s members, the means of giving notice
are identical. For a discussion of how these notice
provisions differ from the prior iteration of part 190,
please refer to the discussion of § 190.03(a) above.
163 Commodity broker bankruptcies are rare, and
outside the experience of most chapter 7 trustees,
who are chosen from a panel of private trustees
eligible to serve as such for all chapter 7 cases. See
generally 11 U.S.C. 701(a)(1), 28 U.S.C. 586(a)(1).
Historically, Commission staff, on being notified of
an impending commodity broker bankruptcy, have
worked with the office of the relevant regional
United States Trustee, see generally 28 U.S.C. 581
et seq., to identify, and have then briefed, the
chapter 7 trustee that would then be appointed.
This would be even more important in the context
of a clearing organization bankruptcy.
164 See § 39.19(c)(4)(xxiv).
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clearing organization’s bankruptcy), and
§ 39.19(c)(5) (reporting specially
requested by the Commission or, by
delegated authority, staff). In order to
provide the trustee with an initial
overview of the business and status of
the clearing organization, with respect
to quarterly, annual, or event-specific
reports, the clearing organization would
be required to provide any such reports
filed during the preceding 12 months.
These reports would need to be
provided to the trustee as soon as
practicable, but in any event no later
than three hours following the later of
the commencement of the proceeding or
the appointment of the trustee. It is the
Commission’s expectation that in the
event of an impending bankruptcy
event, staff at the DCO would, as soon
as practicable, be preparing these
materials for transmission to the trustee.
Similarly, § 190.12(b)(2) requires the
debtor clearing organization, in the
same time-frame, to provide the trustee
and the Commission with copies of the
default management plan and default
rules and procedures maintained by the
debtor pursuant to § 39.16 and, as
applicable, § 39.35. While some of this
information may have previously been
filed with the Commission pursuant to
§ 39.19, it is important that the
Commission have readily available what
the clearing organization believes are
the most up-to-date versions of these
documents. Moreover, given that these
documents must be provided to the
trustee, providing copies to the
Commission should impose minimal
additional burden (particularly if the
documents are provided in electronic
form).
Regulation § 39.20(a) requires a DCO
to maintain records of all activities
related to its business as such, and sets
forth a non-exclusive list of the records
that are included in that term. To enable
the trustee and the Commission further
to understand the business of the
clearing organization, § 190.12(c)
requires the debtor clearing organization
to make copies of such records available
to the trustee and to the Commission no
later than the business day after the
commencement of the proceeding. In
order to inform the trustee and the
Commission better concerning the
enforceability in bankruptcy of the
clearing organization’s rules and
procedures, the clearing organization is
similarly required to make available any
opinions of counsel or other legal
memoranda provided to the debtor, by
inside or outside counsel, in the five
years preceding the commencement of
the proceeding, relating to the
enforceability of those arrangements in
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the event of an insolvency proceeding
involving the debtor.165
The Commission requested comment
with respect to all aspects of proposed
§ 190.12. The Commission raised
specific questions as to whether the
reports and records identified in
proposed § 190.12 to be provided to the
Commission are useful and appropriate,
and whether additional reports and
records should be included. The
Commission also asked if the proposed
time deadlines are appropriate.
The Commission received two
comments on proposed § 190.12.
CME expressed support for proposed
§ 190.12, and agreed with the
Commission that ‘‘the reports and
records identified in [the proposed
regulation] would be useful for the
trustee and the Commission.’’ CME also
agreed with the Commission that certain
items, such as the DCO’s default rules
and recovery and wind-down plans,
should be furnished as soon as possible.
OCC ‘‘generally support[ed] a
requirement for a DCO to provide a
trustee and the Commission with
information they need for efficient
resolution of the DCO,’’ recognizing that
‘‘time would be of the essence in such
a proceeding.’’ OCC also noted that,
because the ‘‘information is periodically
reported to, or filed with, the
Commission,’’ OCC did not ‘‘foresee any
challenge in identifying and providing
this information without delay.’’
However, OCC requested that proposed
§ 190.12(b) be amended to require a
DCO to provide the information
delineated therein ‘‘as soon as
practicable.’’ OCC ‘‘believe[d] that a
specific deadline of three hours is
overly prescriptive.’’
After considering the comments, the
Commission is adopting § 190.12 as
proposed. As the commenters observed,
the information specified in § 190.12 is
165 The trustee of a corporation in bankruptcy
controls the corporation’s attorney-client privilege
for pre-bankruptcy communications. Commodity
Futures Trading Comm’n v. Weintraub, 471 U.S.
343 (1985). Production to the Commission pursuant
to the proposed regulation would not waive that
privilege (although voluntary production would).
See, e.g., U.S. v. de la Jara, 973 F.2d 746, 749 (9th
Cir. 1992) (‘‘a party does not waive the attorneyclient privilege for documents which he is
compelled to produce’’) (emphasis in original);
Office of Comptroller of the Currency Interpretative
Letter, 1991 WL 338409 (with respect to ‘‘internal
Bank documents’’ that are ‘‘subject to the attorneyclient privilege’’ and are ‘‘requested by OCC
examiners for their use during examinations of the
Bank,’’ OCC ‘‘has the power to request and receive
materials from national banks in carrying out its
supervisory duties. It follows that national banks
must comply with such requests. That being the
case, it is our position that when national banks
furnish documents to us at our request they are not
acting voluntarily and do not waive any attorneyclient privilege that may attach to such
documents.’’).
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important for the trustee and the
Commission, and time would be of the
essence in a DCO bankruptcy. Moreover,
the prescribed task in § 190.12 is to
gather and transmit documents that
already exist, rather than to generate
new information. The documents to be
sent to the trustee are documents that
were recently sent to the Commission,
and the documents to be sent to the
trustee and to the Commission are
documents that one would expect, as
the commenter noted, to be readily
accessible. In this context, the
Commission believes that a deadline of
‘‘as soon as practicable and in any event
no later than three hours following the
commencement of the proceeding’’ (or,
where appropriate, the appointment of
the trustee) is reasonable and will set
clear expectations for relevant parties
that will facilitate DCOs’ contingency
planning.
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is
adopting § 190.12 as proposed.
3. Regulation § 190.13: Prohibition on
Avoidance of Transfers
The Commission is adopting § 190.13
as proposed, to implement section
764(b) of the U.S. Bankruptcy Code,
protecting certain transfers from
avoidance (sometimes referred to as
‘‘claw-back’’) with respect to a debtor
clearing organization. Regulation
§ 190.13 is analogous to new § 190.07(e)
(and current § 190.06(g)), with certain
changes. Specifically, while § 190.07(e)
allows FCM transfers unless they are
explicitly disapproved by the
Commission, § 190.13 requires explicit
Commission approval for DCO transfers.
The difference in approach is rooted in
the inherent difference between FCM
transfers and DCO transfers: Whereas an
FCM is capable of transferring only a
portion of its customer positions, a DCO
would be expected to transfer all of its
customer positions (or at least all
positions in a given product set)
simultaneously in order to maintain a
balanced book. Given the importance of
transferring all open commodity
contracts—and the property margining
such contracts—in the event of a DCO
bankruptcy, the Commission believes
that any such transfer should require
explicit Commission approval, either
before or after such transfer.
Thus, whereas § 190.07(e)(1) provides
that a pre-relief transfer by a clearing
organization cannot be avoided as long
as it is not disapproved by the
Commission, § 190.13(a) instead
provides that a pre-relief transfer of
open commodity contracts and the
property margining or securing such
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contracts cannot be avoided as long as
it was approved by the Commission,
either before or after such transfer.
Similarly, whereas § 190.07(e)(2)(i)
provides (for all commodity brokers,
including clearing organizations) that a
post-relief transfer of a customer
account cannot be avoided as long as it
is not disapproved by the Commission,
§ 190.13(b) instead provides that a postrelief transfer of open commodity
contracts and the property margining or
securing such contracts made to another
clearing organization cannot be avoided
as long as it was approved by the
Commission, either before or after such
transfer.
The Commission requested comment
with respect to all aspects of proposed
§ 190.13, and in particular, the
Commission asked whether commenters
agreed with the proposed approach of
requiring explicit Commission approval
of transfers by debtor DCOs.
The Commission received one
comment on proposed § 190.13. CME
expressed support for proposed
§ 190.13, particularly the allowance for
Commission approval of transfers after
such transfers have occurred. CME
noted that porting customer positions to
a DCO would be the preferred course of
action in a bankruptcy, and a DCO may
need to act quickly.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.13 as proposed.
an alternative path. Subsequent to the
issuance of the Proposal, the
Commission received several comments
on proposed § 190.14(b), and based on
its consideration of those comments, the
Commission determined it to be
appropriate to issue the Supplemental
Proposal. The Supplemental Proposal
modified proposed § 190.14(b) in
several respects, including the
withdrawal of proposed § 190.14(b)(2)
and (3) and the new proposal of an
alternative approach.166 Further
discussion of the Supplemental
Proposal, including the Commission’s
consideration of comments received in
response to the Supplemental Proposal,
is set forth in section II.H below.
Section 190.14(c)(1) requires the
trustee to liquidate, no later than seven
calendar days after the order for relief,
all open commodity contracts that had
not earlier been terminated, liquidated
or transferred. However, in the Proposal,
paragraph (c)(1) also provided that such
liquidation would not be required if the
Commission (whether at the request of
the trustee or sua sponte) determined
that such liquidation would be
inconsistent with the avoidance of
systemic risk 167 or, in the expert
judgment of the Commission, would not
be in the best interests of the debtor
clearing organization’s estate.168 In such
a situation, the trustee would be
directed to carry out such liquidation in
accordance with the rules and
procedures of the debtor clearing
4. Regulation § 190.14: Operation of the
Estate of the Debtor Subsequent to the
Filing Date
The Commission is adopting § 190.14
as proposed, with certain modifications
discussed below.
Section 190.14(a) provides discretion
to the trustee to design the proof of
claim form and to specify the
information that is required. The
Commission believes that broad
discretion is appropriate in this context,
given the bespoke nature of a clearing
organization bankruptcy.
Section 190.14(b) addresses the
operation of a debtor clearing
organization in bankruptcy and
provides that, after the order for relief,
the DCO shall cease making calls for
either variation or initial margin.
As originally proposed, § 190.14(b)
included additional provisions that
were intended to provide a brief
opportunity, after the order for relief, to
enable paths alternative to liquidation—
that is, resolution under Title II of the
Dodd-Frank Act, or transfer of clearing
operations to another DCO—in cases
where a short delay (i.e., less than or
equal to six days) might facilitate such
166 In withdrawing proposed § 190.14(b)(2) and
(3), the Commission determined, after considering
the comments, that those provisions would not be
a practicable and effective way to foster the transfer
of clearing operations—to the extent that such an
opportunity presents itself—at an acceptable cost.
The Commission also endeavored to propose (in the
Supplemental Proposal) a more cost-effective
alternative to foster the resolution of a DCO—in
particular, a systemically important DCO—under
Title II of the Dodd-Frank Act. Specifically, as set
forth in the Supplemental Proposal, the
Commission proposed ‘‘a limited revision to the
Proposal that would (1) stay the termination of
SIDCO contracts for a brief time after bankruptcy in
order to foster the success of a Title II Resolution,
if the FDIC is appointed receiver in such a
Resolution within that time, but (2) do so in a
manner that does not undermine the QMNA status
of SIDCO rules.’’
The Commission sought comment on the
Supplemental Proposal, and in particular, whether
the new approach could reasonably be expected to
achieve the Commission’s stated goals, would be
feasible, would be the best design for such a
solution, and appropriately reflected consideration
of benefits and costs.
167 See section 3(b) of the CEA, 7 U.S.C. 5(b) (‘‘It
is the purpose of [the CEA] . . . to ensure . . . the
avoidance of systemic risk . . . .’’).
168 See section 20(a)(3) of the CEA, 7 U.S.C.
24(a)(3) (‘‘Notwithstanding title 11 . . . , the
Commission may provide, with respect to a
commodity broker that is a debtor . . . [,] the
method by which the business of such commodity
broker is to be conducted or liquidated after the
date of the filing of the petition . . . .’’).
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organization, to the extent applicable
and practicable.169
Section 190.14(c)(2) permits the
trustee to make distributions to
members in the form of securities that
are equivalent (i.e., securities of the
same class and series of an issuer) to
those that were originally delivered to
the debtor by the clearing member or
such member’s customer, rather than
liquidating securities and making
distributions in the form of cash.
Section 190.14(c)(2) is analogous to
§ 190.09(d)(3), discussed above in
section II.B.7.
Section 190.14(d) requires the trustee
to use reasonable efforts to compute the
funded balance of each customer
account immediately prior to the
distribution of any property in the
account, ‘‘which shall be as accurate as
reasonably practicable under the
circumstances, including the reliability
and availability of information.’’ Section
190.14(d) is analogous to § 190.05(b),
discussed above in section II.B.3, but is
modified for the context of a DCO
bankruptcy. Similar to § 190.05(b), the
Commission’s objective in § 190.14(d) is
to provide the bankruptcy trustee with
the latitude to act reasonably, given the
circumstances they are confronted with,
recognizing that information may be
more reliable and/or accurate in some
insolvency situations than in others.
However, at a minimum, the trustee is
required to calculate each customer’s
funded balance prior to distributing
property, to achieve an appropriate
allocation of property between
customers.
The Commission requested comment
with respect to all aspects of proposed
§ 190.14. The Commission also raised
specific questions regarding
§ 190.14(b)(2).170 The comments
received in response to those specific
questions on § 190.14(b)(2) have already
been considered by the Commission in
the Supplemental Proposal, wherein the
Commission ultimately withdrew
§ 190.14(b)(2) and (3). Although such
comments on the Proposal relate to
169 As discussed below, § 190.14(c)(1) is being
modified to remove language that commenters
stated would raise uncertainties concerning the
enforceability of close-out netting provisions in a
DCO bankruptcy.
170 In particular, the Commission asked about the
framing of the concepts of usefulness and
practicability in the context of permitting the
trustee to continue to operate a DCO in insolvency,
in accordance with proposed § 190.14(b)(2), in
order to facilitate the transfer of clearing operations
to another DCO or placing the debtor DCO into
resolution pursuant to Title II of the Dodd-Frank
Act. The Commission also asked whether there is
a better way to frame either of those terms, and
whether it is appropriate to provide for the
possibility that the trustee may be permitted to
delay liquidating contracts.
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proposed paragraphs that were
withdrawn in the Supplemental
Proposal, the comments relating to
proposed § 190.14(b)(2) and (3)
nonetheless are noted below.171
The Commission received some
comments that related to § 190.14
generally. ICI commented in favor of the
requirement proposed in § 190.14 that
‘‘any decision to continue operating a
DCO in liquidation must be made with
[the Commission’s] input and consent.’’
ICI asserted, however, that the
Commission should only approve an
application from a trustee to continue
operating a DCO in liquidation if the
Commission determines that the trustee
‘‘has the knowledge and experience to
manage such operations.’’ Noting that
the continued operation of a DCO has
the potential to result in significant
continued losses for customers and
exacerbate stress, ICI further asserted
that, ‘‘[i]n considering whether to grant
a request to allow a failed DCO to
continue operating, the Commission
should consider the potential harm to
customers and should request input
from both DCO members and
customers.’’ OCC commented that
additional considerations should be
considered in determining ‘‘whether
continued operation of a DCO in
bankruptcy would be practical.’’
Specifically, OCC stated that ‘‘a DCO
may . . . maintain contractual
arrangements with various
counterparties . . . that are necessary
for the DCO’s continued operation,’’
such as contract markets and other trade
sources, other DCOs, banking and
liquidity providers, and information
technology vendors). OCC asserted that
‘‘a trustee would need to review the
DCO’s recovery and wind-down plan[s]
and/or consult with a DCO to determine
whether such arrangements necessary
for the DCO’s continued operation
would—or could—be terminated [by the
counterparties] upon the DCO’s entry
into bankruptcy and, if so, determine
whether the counterparties . . . would
continue to provide those necessary
services for a period of time.’’
The Commission also received
comments on § 190.14(a). CME
commented in support of paragraph (a).
ICE commented that § 190.14(a) did not
clearly account for ‘‘non-CFTCregulated clearing or other activity
occurring at a DCO, including securitybased swaps and other securities,
cleared forward contracts or spot
contracts to the extent such instruments
are not carried in a CFTC regulated
171 For further discussion of the Supplemental
Proposal and the Commission’s consideration of
comments received thereto, see section II.H below.
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19369
futures or swap account.’’ ICE
recommended that while ‘‘such activity
may be outside the scope of the Part 190
regulations, claims of members with
respect to such activity, whether for
their proprietary or customer accounts,
need to be properly accounted for in a
DCO’s bankruptcy and should not be
disadvantaged.’’
Several commenters expressed
concern that proposed § 190.14(b)
would inadvertently create legal
uncertainty with respect to the
enforceability of a DCO’s close-out
netting rules and related issues, and
requested that the Commission address
these concerns in varying ways.
ICE did not object to proposed
§ 190.14(b), but believed that the
Commission ‘‘should clarify that the
rule does not interfere with either the
automatic termination of contracts upon
insolvency or clearing member rights to
terminate contracts upon insolvency.’’
Noting ‘‘that clearing member capital
and accounting often take into account
the ability of a clearing member to
terminate, or the automatic termination
of, its cleared positions in the event of
a clearinghouse insolvency,’’ ICE
asserted that it would be important that
the final rules ‘‘not upset settled
expectations of clearing members’’ in
this regard. ICE further noted that
‘‘automatic termination is common,’’
and thus, continuing the operations of a
clearinghouse after insolvency would
likely be infeasible, in practice.
CME requested that the Commission
add a provision to § 190.14 stating that:
‘‘if the Commission permits the trustee
to continue to operate the DCO, that the
action is not in derogation of, and
clearing members fully retain and may
exercise, their right under the DCO’s
rules and procedures with respect to
close-out netting.’’ CME stated that
‘‘[s]ome have expressed concern that
proposed Regulation 190.14 creates
uncertainty around the enforceability of
close-out netting rules if the trustee is
allowed to continue the DCO’s
operations under the conditions as
drafted.’’ CME asserted that it would be
‘‘critical that any decision to continue to
operate the DCO not be contrary to the
DCO’s rules or be construed in any way
to abrogate clearing members’ close-out
netting rights under the rules.’’ CME
noted that the enforceability of close-out
rights is of ‘‘paramount importance’’ to
clearing members as part of their
contract with the DCO, and that CME
and other DCOs have obtained detailed
legal analyses on the enforceability of
their close-out netting rules and other
features of their default rules to assure
clearing members of their rights. CME
commented that it did not believe that
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proposed § 190.14 would create an issue
with respect to its own close-out netting
rules or netting opinions, because its
own rules ‘‘would compel termination
of open contracts upon a CME
bankruptcy event and, thus the
conditions of Regulation 190.14(b)
would not be satisfied and the trustee
could not continue CME’s DCO
operations.’’ Nonetheless, CME
speculated that other DCOs ‘‘could
potentially have rules that permit a
clearing member to terminate open
positions at their discretion without
compelling termination.’’
ISDA supported the provision in
proposed § 190.14(b) that would
‘‘prevent the trustee from continuing
operation of the DCO subsequent to the
order for relief if the DCO’s rules
contain closeout netting provisions.’’
However, ISDA also recommended that
the Commission modify proposed
§ 190.14(c)(1) to delete the second
sentence and amend the first sentence to
affirmatively provide that:
‘‘notwithstanding anything else to the
contrary in Subpart C, the trustee shall
liquidate all open contracts in
accordance with the close-out needing
provisions in the DCO’s rules (or
bylaws) and, in any event, no later than
seven calendar days after the entry of
the order for relief.’’ ISDA commented
that it is ‘‘critical’’ that ‘‘all aspects of
[the] Part 190 regulations . . . support,
and in no event be inconsistent with,
. . . exposure netting.’’ ISDA noted that
‘‘[e]nforceable close-out netting rights
provide the legal basis for netting of
exposures between derivative
counterparties, which reduces costs,
increases market liquidity and reduces
credit and systemic risks.’’ ISDA stated
that a ‘‘firm’s right to terminate
outstanding transactions with a
counterparty following an event of
default and calculate the net amount
due to one party by another is the
primary means of mitigating credit risks
associated with financial contracts.’’
ISDA further argued that, [w]ithout
enforceable close-out netting rights,
firms would need to manage their credit
risk on a gross basis, dramatically
reducing liquidity and credit capacity.’’
OCC commented that ‘‘the
Commission should continue to consult
with DCOs and market participants who
rely on closeout netting opinions to
ensure that the proposed rules[,
including proposed § 190.14(b)(2),] do
not raise uncertainty related to the
enforceability of DCOs’ closeout netting
rules or have other unintended
consequences.’’
FIA commented that proposed
§ 190.14(b)(2) and proposed § 190.14(c)
are ‘‘fundamentally flawed and should
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not be adopted.’’ FIA raised concerns
that those provisions may inadvertently
create ‘‘an unacceptable level of legal
uncertainty related to the enforcement
of closeout netting provisions’’ set out
in DCO rulebooks, which all but four
DCOs maintain. FIA asserted that, if
proposed § 190.14(b)(2)(ii)(A) ‘‘could be
read to provide the trustee some level of
discretion to determine whether or
when DCO rules may ‘compel’ the
termination of contracts, such
discretion, in turn, may call into
question whether the DCO’s rules
constitute a ‘qualifying master netting
agreement’ as described in the rules of
the several bank regulatory authorities.’’
FIA also commented that the
‘‘continued operation of a DCO after an
order for relief would be ill-advised’’
and impracticable. FIA stated that a
trustee with no familiarity or
understanding of central clearing would
be highly unlikely to be able to manage
effectively the operation of a bankrupt
DCO. In the case of SIDCOs, FIA noted
that ‘‘the prospect of a bankruptcy
trustee operating the DCO for even a
brief interim period prior to
commencement of Title II [resolution]
proceedings could result in a loss of
market confidence and a destabilizing
rush to exit by clearing members and
their clients, [thereby] potentially
frustrat[ing] the successful resolution of
the DCO.’’ In the case of other DCOs,
FIA commented that ‘‘the post-filing
transfer of . . . clearing operations to
another DCO would be difficult at best,’’
and ‘‘clearing members and their clients
should not be expected to take the
execution risk of being forced to
continue clearing through a bankrupt
DCO when successful completion of a
transfer to a new DCO in bankruptcy is
not certain.’’ FIA also stated its belief
that ‘‘non-defaulting clearing members
or their clients would be [unwilling] to
continue to pay margin to the estate of
a bankrupt DCO.’’
The ABA Subcommittee requested
that the Commission revise proposed
§ 190.14(b) ‘‘to clarify that the DCO’s
close-out netting rules remain in effect
and are enforceable as written,
notwithstanding any decision under
[proposed § ] 190.14(b) by the
Commission to allow the trustee to
continue making calls for variation
settlement and margin.’’ The ABA
Subcommittee raised a concern that
proposed § 190.14(b) ‘‘may create
unintended ambiguity’’ regarding the
enforceability of such rules.
After considering the comments, the
Commission is adopting § 190.14(a) as
proposed. The Commission notes that
§ 190.14(a) provides that the trustee
shall ‘‘instruct each customer [a term
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that, in the context of a debtor DCO,
includes members] to file a proof of
claim containing such information as is
deemed appropriate by the trustee.’’ To
the extent that the DCO is conducting
non-CFTC-regulated activity that is
outside the scope of the part 190
regulations, the proof of claim form
should include an opportunity to claim
for debts of the DCO related to activity
that is not regulated by the CFTC. These
would be payable from the general
estate (outside of customer property) or,
if secured, from the property securing
the debts. Thus, such activity will be
properly accounted for in the DCO
bankruptcy, and members will not be
disadvantaged. For those reasons, the
Commission does not believe that
§ 190.14(a) should be modified in the
manner recommended by ICE.
The Commission is adopting
§ 190.14(b)(1) as proposed, with two
modifications that reflect the
Commission’s previous withdrawal of
paragraphs (b)(2) and (3) in the
Supplemental Proposal: (1) Proposed
paragraph (b)(1) is re-designated as
paragraph (b); and (2) new paragraph (b)
is modified to remove the phrase:
‘‘except as otherwise explicitly provided
in this paragraph (b).’’ 172
Several commenters expressed
concern that proposed § 190.14(b)
inadvertently creates legal uncertainty
with respect to the enforceability of a
DCO’s close-out netting rules and
requested that the Commission address
this concern in varying ways.173 The
Commission considered those
comments in advance of issuing the
Supplemental Proposal, and determined
that § 190.14(b)(2) and (3) would not be
a practicable and effective way to foster
the transfer of clearing operations—to
the extent that such an opportunity
presents itself—at an acceptable cost.
Consequently, the Commission
withdrew § 190.14(b)(2) and (3) in the
Supplemental Proposal and instead
proposed an alternative approach. The
Supplemental Proposal, including the
Commission’s consideration of
comments thereto, is discussed below in
section II.H of this adopting release.
Commenters’ concerns regarding the
legal uncertainty of close-out netting
rules in the context of § 190.14(b) also
apply to § 190.14(c), as proposed,
specifically the language that states that
the trustee shall liquidate all open
positions no later than seven calendar
days after the order for relief ‘‘unless the
172 See 85 FR at 60112 n.12 (‘‘The Commission
will make appropriate edits to the language in
proposed § 190.14(b)(1) as part of the process of
finalizing the [p]art 190 rule proposal.’’).
173 See comment letters from ICE, CME.
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Commission determines that liquidation
would be inconsistent with the
avoidance of systemic risk or would not
be in the best interests of the debtor’s
estate’’ (the ‘‘Unless Clause’’). Some
commenters—including FIA and
ISDA—explicitly raised this issue in the
context of § 190.14(c), to the extent that
the proposed language would afford the
trustee with some level of discretion to
determine whether or when a DCO rule
may ‘‘compel’’ the termination of
contracts. Although the Commission
believes that commenters’ concerns
were largely addressed in the
Supplemental Proposal through the
withdrawal of § 190.14(b)(2) and (3), the
Commission agrees that the Unless
Clause raises similar concerns, in that it
suggests that the Commission may
decide that a DCO’s contracts should
not be terminated in bankruptcy, and
accordingly that paragraph (c)(1) should
be modified by removing the Unless
Clause. Thus, after considering the
comments, the Commission is adopting
§ 190.14(c) as proposed, with a
modification to paragraph (c)(1) by
deleting the phrase: ‘‘unless the
Commission determines that liquidation
would be inconsistent with the
avoidance of systemic risk or would not
be in the best interests of the debtor’s
estate.’’ This modification—when taken
in conjunction with the Commission’s
prior withdrawal of § 190.14(b)(2) and
(3)—should remove any lingering
uncertainties in § 190.14 concerning the
enforceability of close-out netting
provisions in a DCO bankruptcy.
The Commission received no specific
comments on the proposed language of
§ 190.14(d) and, thus, is adopting that
paragraph as proposed.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.14 as proposed, with the deletion
of paragraphs (b)(2) and (3) and
modifications to paragraphs (b)(1) and
(c)(1), as set forth above.174
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5. Regulation § 190.15: Recovery and
Wind-Down Plans; Default Rules and
Procedures
The Commission is adopting § 190.15
substantially as proposed (with a
modification, as discussed below), to
favor the implementation of a debtor
clearing organization’s default rules and
174 The modifications to paragraph (b)(1) include
both the addition of the language described above
and the re-designation of proposed paragraph (b)(1)
as new paragraph (b), in light of the withdrawal of
proposed paragraphs (b)(2) and (3) in the
Supplemental Proposal.
For further discussion of the Supplemental
Proposal and the Commission’s consideration of
comments thereto, see section II.H below.
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procedures maintained pursuant to
§ 39.16 and, as applicable, § 39.35, and
any recovery and wind-down plans
maintained by the debtor and filed with
the Commission, pursuant to §§ 39.39
and 39.19, respectively. Section 39.16
requires each DCO to, among other
things, ‘‘adopt rules and procedures
designed to allow for the efficient, fair,
and safe management of events during
which clearing members become
insolvent or default on the obligations of
such clearing members to the’’ DCO. In
adopting § 39.35, the Commission
explained that it ‘‘was designed to
protect SIDCOs, [s]ubpart C DCOs, their
clearing members, customers of clearing
members, and the financial system more
broadly by requiring SIDCOs and
[s]ubpart C DCOs to have plans and
procedures to address credit losses and
liquidity shortfalls beyond their
prefunded resources.’’ 175 Similarly, in
adopting § 39.39, the Commission
explained that it was ‘‘designed to
protect the members of such DCOs and
their customers, as well as the financial
system more broadly, from the
consequences of a disorderly failure of
such a DCO.’’ 176
Section 190.15(a) states that the
trustee shall not avoid or prohibit any
action taken by the debtor DCO that was
reasonably within the scope of, and was
provided for, in any recovery and winddown plans maintained by the debtor
and filed with the Commission, subject
to section 766 of the Bankruptcy Code.
The Commission’s intent is to provide
finality and legal certainty to actions
taken by a DCO to implement its
recovery and wind-down plans, which
are developed subject to Commission
regulations.
Section 190.15(b) instructs the trustee
to implement, in consultation with the
Commission, the debtor DCO’s default
rules and procedures maintained
pursuant to § 39.16, and, as applicable,
§ 39.35, as well as any termination,
close-out and liquidation provisions
included in the rules of the debtor,
subject to the trustee’s reasonable
discretion and to the extent that
implementation of such default rules
and procedures is practicable.
Similarly, § 190.15(c), as proposed,
instructs the trustee, in consultation
with the Commission, to take actions in
accordance with any recovery and
wind-down plans maintained by the
debtor and filed with the Commission,
to the extent reasonable and practicable.
The Commission’s intent is to provide
the trustee, who will need to take
prompt action to manage the DCO (and
175 78
176 Id.
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any member default), with a roadmap to
manage such action. The Commission
further intends that the roadmap be
based on the rules, procedures, and
plans that the DCO has developed in
advance, and that are subject to the
requirements of the Commission’s
regulations.
The Commission requested comment
with respect to all aspects of proposed
§ 190.15. The Commission also raised
specific questions as to whether it is
appropriate to steer the trustee towards
implementation of the debtor DCO’s
default rules and procedures and
recovery and wind-down plans, and
whether the proposed language
concerning discretion, reasonability,
and practicability is appropriate and
sufficient.
The Commission received several
comments on proposed § 190.15. CME
and ICE generally supported the
proposal, although ICE raised concerns
about the discretion afforded to the
trustee. In contrast, Vanguard, FIA,
ACLI, SIFMA AMG/MFA, and ICI
expressed concerns with the proposed
rule, in whole or in part.
ICE, while generally supporting the
proposal, objected to the language in
§ 190.15 that a ‘‘trustee’s obligation to
[follow a DCO’s default rules and
recovery and wind-down plans] is
‘subject to the reasonable discretion’ of
the trustee or is limited ‘to the extent
reasonable and practicable.’ ’’ While ICE
acknowledged ‘‘the need for some
degree of flexibility in the conduct of a
bankruptcy proceeding,’’ it contended
that ‘‘the Commission should make
clear that the trustee cannot override the
DCO rules . . . [or] deviate from an
approved recovery or wind-down plan.’’
Vanguard requested that proposed
§ 190.15(a) be removed, arguing that it
would be ‘‘imprudent to give deference’’
to a DCO’s rules because such rules ‘‘do
not set forth a comprehensive roadmap
to dealing with DCO insolvency.’’
Vanguard noted that ‘‘DCO rulebooks
set forth a variety of powers the DCO
may employ’’ (e.g., ‘‘assessments,
variation margin gains haircutting, and
tear-ups’’), and that such rules ‘‘lack
[the] necessary specificity and detail to
provide certainty to FCMs and
customers, or to the trustee,’’ with
respect to what would follow in DCO
insolvency. Vanguard was concerned
that such uncertainty may ‘‘contribute
to further market stresses during a
critical time,’’ and that expressly
instructing the trustee to implement a
DCO’s default rules and procedures
‘‘where practicable,’’ permits a DCO to
‘‘override the fundamental customer
protections intended by Part 190.’’
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FIA did not support the adoption of
proposed § 190.15(b) and (c),
commenting that the proposal’s postbankruptcy implementation of all DCO
default rules and procedures and
recovery and wind-down plans is
‘‘inappropriate.’’ FIA was concerned
that the proposal’s ‘‘concept of ‘default
rules and procedures’ could encompass
a number of different tools or actions,
some of which would be inappropriate
and risky for a bankruptcy trustee to
attempt to execute.’’ In addition, ‘‘to the
extent that the Commission would
select some but not other default rules
and procedures for a trustee to
implement,’’ uncertainty with respect to
possible bankruptcy scenarios would
increase. FIA stated that a DCO’s default
rules and procedures should not be used
‘‘for any purpose other than to ensure
enforcement of a DCO’s closeout netting
provisions,’’ and that, ‘‘[b]y their terms,
the default rules and procedures . . .
represent contractual arrangements
between a DCO and its members whose
purpose is to provide resources and
tools to the DCO to prevent its
bankruptcy.’’ FIA argued that ‘‘a
fundamental term’’ of these
arrangements is that ‘‘such resources
and tools are only available prior to
bankruptcy,’’ and that instructing a
trustee in bankruptcy to implement,
with discretion, the DCO’s default rules
and procedures would ‘‘undermine the
long-standing and settled expectations
of DCOs and their members.’’ In the
alternative, FIA recommended that the
Commission revise proposed § 190.15(b)
‘‘to confirm that, in administering a
proceeding under Subpart C, the trustee
must implement any termination, closeout and liquidation provisions included
in the rules (or bylaws) of the debtor’’
(including loss allocation provisions).
FIA raised further concerns about the
treatment of a DCO’s recovery plans in
proposed § 190.15. FIA asserted that
such plans are intended to address
‘‘actions to be taken prior to the DCO’s
bankruptcy and [are] not relevant postfiling.’’ FIA also stated that such plans
‘‘would provide no meaningful
guidance to a trustee’’ because they ‘‘do
not prescribe a particular course of
action.’’ Rather, they ‘‘present a menu of
options that a DCO might consider.’’
FIA asserted that reliance on a DCO’s
recovery and wind-down plans is
‘‘particularly inappropriate’’ because
some of them ‘‘have been developed
with no input or opportunity for
comment by clearing members and
other market participants.’’
ACLI also expressed concern with the
deference that a trustee in bankruptcy
would be required to afford a DCO’s
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rules and procedures and recovery and
wind-down plans under proposed
§ 190.15(a) and (c). ACLI claimed that
‘‘DCO recovery and wind-down plans
include such drastic measures as
Variation Margin Gains Haircutting . . .
and Partial Tear-Up . . . [that] are not
subject to routine public input at the
DCO level or at the Commission.’’ ACLI
identified several circumstances in
which deference to the DCO’s rules or
recovery and wind-down plans should
be reduced. ACLI asserted that: (a) A
trustee should not be expected to defer
to recovery and wind-down measures
unless they were originally adopted
with public input at the DCO level and
made public for a reasonable period
before the bankruptcy proceeding; (b)
the trustee should ‘‘have discretion to
override a DCO’s recovery or winddown actions if they violate proposed
[p]art 190’s goal of protecting customer
property on no worse than a pro rata
basis’’; and (c) consistent with proposed
§ 190.15(b), the trustee should be able to
avoid or prohibit any DCO action that it
determines, in consultation with the
Commission, is not ‘‘reasonable and
practicable.’’
SIFMA AMG/MFA commented that
requiring a trustee to defer to a DCO’s
recovery and wind-down plans as set
forth in proposed § 190.15(a) and (c) is
‘‘inadvisable’’ and, in some cases,
‘‘unworkable,’’ and recommended that
the provisions be deleted. SIFMA AMG/
MFA recommend that, if the
Commission retains proposed
§ 190.15(a), the provision be amended to
remove the words ‘‘was reasonably in
the scope of’’ and replace references to
the DCO’s recovery and wind-down
plans with references to the DCO’s
default rules and procedures. In support
of their position, SIFMA AMG/MFA
asserted that recovery and wind-down
plans are insufficiently prescriptive, and
that because they tend to be drafted as
a menu of options, such plans are not
likely to provide the trustee with clear
direction, effectively causing the trustee
to defer to the judgment of the debtor
itself. SIFMA AMG/MFA also asserted
that recovery and wind-down plans do
not require Commission approval or
reflect significant input from customers,
and because DCOs are not required to
make such plans public, the plans are
not a fair reflection of the ex ante
expectations of a DCO’s stakeholders.
SIFMA AMG/MFA further asserted that
‘‘requiring the trustee . . . to defer to
the debtor’s resolution plans would be
inconsistent with other regimes for the
resolution of systemically important
financial institutions.’’ SIFMA AMG/
MFA requested that the Commission
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add a new clause to proposed § 190.15
requiring the trustee and Commission,
in implementing § 190.15, to ‘‘consider
whether implementation of the debtor’s
default rules and procedures [and
recovery and wind-down plans] may
undermine the core principles set forth
in § 190.00 or may pose additional
systemic risk.’’ 177 If the trustee and
Commission determine that such
implementation would have that effect,
SIFMA AMG/MFA suggested that the
provision permit the trustee to override
the rules, procedures, and plans. SIFMA
AMG/MFA further commented that, in
the event that deference to a DCO’s
default management rules and
procedures and recovery and winddown plans is mandated in subpart C of
the proposal, the Commission should
amend parts 39 and 40 of the
Commission’s regulations ‘‘to ensure
that customers have the opportunity to
provide meaningful input during the
development and application of such
rules, procedures, and plans.’’
ICI did not support the proposal’s
deference to a DCO’s loss allocation,
recovery, and wind-down rules in a
DCO liquidation. ICI asserted that such
rules are neither ‘‘clear’’ nor ‘‘wellvetted.’’ ICI stated that DCO rules ‘‘do
not provide the level of specificity and
detail that is required to give certainty
to market participants,’’ but rather, they
‘‘enumerate a wide variety of tools that
a DCO may deploy to recover losses,’’
some of which ‘‘have the capacity to
alter the entitlements of customers’’
under part 190 (e.g., ‘‘a customer would
only be entitled to such a pro rata share
of customer property to the extent the
DCO rules did not modify the
distribution of the DCO’s assets’’
through variation margin gains
haircutting or partial tear-up). ICI
recommended that, ‘‘[b]efore the
Commission gives effect to any DCO
loss allocation, recovery, and winddown rules in a [p]art 190 proceeding,
. . . the Commission should develop
and codify minimum principles that
must be reflected in [those rules,] . . .
review both existing DCO rules and
proposed rule changes to ensure that
they are consistent with the
Commission’s minimum principles . . .
[, and] require DCOs to change their
governance process for rule changes to
give stakeholders greater opportunity for
input.’’
As an initial matter, the Commission
notes that some commenters, including
ACLI, FIA, ICI, and SIFMA AMG/MFA,
objected to the application of DCO
recovery and wind-down plans and
rules, in particular the application of
177 Alteration
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variation margin gains haircutting,
because they believed that changes
should be made to the process by which
parts 39 and 40 permit DCOs to adopt
such plans and rules.
Amendments to parts 39 and 40 are
beyond the scope of this rulemaking,
and the Commission does not believe
that these concerns with the content and
operation of parts 39 and 40 should
inhibit the use of such plans and rules
in the context of part 190. However, the
Commission continues actively to
review these issues, in particular with
respect to governance, as they relate to
parts 39 and 40.
The Commission also notes that other
commenters, including FIA, believed
that default rules and procedures and
recovery plans are designed to avoid
bankruptcy, and should not be applied
if they fail in achieving that goal.
However, the DCO’s rules, procedures,
and plans set forth ex ante the manner
in which losses are allocated—that is,
who is exposed to them, and to what
extent. In the event that losses must be
borne in bankruptcy, the Commission
believes, as was noted in the preamble
to the proposal, that ‘‘allocation of
losses should not depend on the
happenstance of when default
management or recovery tools were
used—e.g., when assessments were
called for, or when such assessments
were met.’’ The Commission does not
believe that the comments offer a
persuasive reason why the allocation of
losses—who wins, who loses, and how
much—should change on the basis of
when a bankruptcy is filed.
The Commission further notes that a
number of commenters, including ACLI
and Vanguard, were concerned with the
application in bankruptcy of recovery
tools such as variation margin gains
haircutting and partial tear-up.
Variation margin gains haircutting, to
the extent set forth in DCO rules, will
be applied in bankruptcy, in that it
represents the ex ante manner in which
losses are allocated.178 By contrast,
partial tear-up of contracts will not be
applied; rather, pursuant to
§ 190.14(c)(1), ‘‘the trustee shall
liquidate all open commodity contracts
that have not been terminated,
liquidated or transferred no later than
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178 Moreover,
as discussed in more detail in
section II.C.7 below, there is a limited amount of
customer property available. Any increase in some
customers claims (and thus, their distributions) due
to the disapplication of gains-based haircutting
would come at the expense of a reduced share of
that limited customer property (i.e., reduced
distributions) to other customers, which could total
less than the amount of their claim arising from
initial margin.
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seven calendar days after entry of the
order for relief’’ (emphasis added).
Turning to SIFMA AMG/MFA’s
suggestion that ‘‘the trustee and the
Commission should explicitly be
required to consider the core concepts
set forth in proposed § 190.00 and
systemic risk in implementing a debtor
DCO’s rules procedures and plans’’:
With respect to the core concepts,
§ 190.00(c) states that ‘‘the specific
requirements in [part 190] should be
interpreted and applied consistently
with these core concepts.’’ In short, that
requirement is already present.
Moreover, the Commission has added
§ 190.00(c)(3)(i)(C) to provide that where
a provision in part 190 affords the
trustee discretion, that discretion should
be exercised in a manner that the trustee
determines will best achieve the
overarching goal of protecting public
customers by enhancing recoveries for,
and mitigating disruptions to, public
customers as a class. Thus, in exercising
their discretion to determine what is
‘‘reasonable’’ for purposes of § 190.15,
the trustee is already directed to focus
on the ‘‘core concepts’’ in § 190.00(c),
and, in particular, the ‘‘overarching goal
of protecting public customers.’’
However, while a DCO’s default rules
and procedures are required to be made
public, posted on the DCO’s website,179
the same is not true for the DCO’s
recovery and wind-down plans. Thus,
in implementing the DCO’s default rules
and procedures, the trustee would be
implementing rules and procedures
that, prior to the bankruptcy, were both
subject to the supervision of the
Commission and transparently available
to both clearing members and their
customers. By contrast, in implementing
the DCO’s recovery and wind-down
plans, the trustee would be
implementing plans that, prior to the
bankruptcy, were subject to the
supervision of the Commission,180 but
may not have been transparently
available to clearing members or their
customers. In light of this distinction, a
more customer-protective approach
seems appropriate in the latter context.
Accordingly, the Commission is
modifying proposed § 190.15(c), which
reads that in administering a proceeding
under this subpart, the trustee shall, in
consultation with the Commission, take
actions in accordance with any recovery
and wind-down plans maintained by
the debtor and filed with the
Commission pursuant to § 39.39, to the
extent reasonable and practicable—to
179 See
§ 39.21(c)(6).
that § 190.15(c) only applies to recovery
and wind-down plans that were ‘‘filed with the
Commission pursuant to § 39.39 of this chapter.’’
180 Note
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19373
add at the end the qualifier that these
actions should also only be taken to the
extent consistent with the protection of
customers.181
With respect to systemic risk, while
the Commission, as a governmental
agency, is attentive to considerations of
mitigating systemic risk in all that it
does,182 it may be difficult for a trustee
to make meaningful determinations as
to how to do so. Moreover, the trustee
is the representative of the bankruptcy
estate, see 11 U.S.C. 323(a), with
fiduciary duties to estate
beneficiaries,183 rather than to the
financial system as a whole.
Accordingly, the Commission does not
believe it appropriate to add an explicit
requirement concerning considerations
of systemic risk, as suggested by SIFMA
AMG/MFA.
The Commission does not agree that
FIA’s observation that DCO recovery
and wind-down plans may ‘‘not
prescribe a particular course of action
but, rather, present a menu of options
that a DCO may consider’’ supports
FIA’s conclusion that ‘‘these plans
would appear to provide no meaningful
guidance to a trustee.’’ To the contrary,
the Commission believes that providing
a ‘‘menu of options’’ among which the
trustee may select (and adapt) in a
manner that is ‘‘reasonable and
practicable’’ would provide the
trustee—who would be stepping into a
complex and difficult situation with
little preparation—with a helpful
roadmap to determine strategy and
tactics, in order to act in a prompt and
cost-effective manner.
The Commission also declines to
provide that the trustee cannot override
the DCO’s rules or deviate from an
approved recovery or wind-down plan.
Even if part 39 were to require that such
plans be ‘‘approved’’—and it does not—
they are designed in the context of
operation of the DCO outside of
bankruptcy. Thus, the Commission
believes it to be appropriate for the
trustee to apply them with flexibility to
the extent reasonable and practicable.
Accordingly, after consideration of
the comments and for the reasons stated
above, the Commission is adopting
§ 190.15 as proposed, with the
modification to § 190.15(c) discussed
above.
181 The ‘‘customers’’ of a DCO are, as noted at the
top of this section II.C, the clearing members with
respect to their public customers, as well as the
clearing members with respect to their proprietary
or ‘‘house’’ accounts.
182 See CEA section 3(b), 7 U.S.C. 5(b) (purposes
of the CEA include ‘‘the avoidance of systemic
risk’’).
183 See U.S. Department of Justice, Executive
Office for United States Trustees, Handbook for
Chapter 7 Trustees Section 4.B, at 4–2.
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6. Regulation § 190.16: Delivery
The Commission is adopting § 190.16
as proposed with a modification to
paragraph (a), as set forth below.
Regulation § 190.16(a) instructs the
trustee to use reasonable efforts to
facilitate and cooperate with completion
of delivery in a manner consistent with
§ 190.06(a) (which instructs trustees of
FCMs in bankruptcy to foster delivery
where a contract has entered delivery
phase before the filing date or where it
is not practicable for the trustee to
liquidate a contract moving into
delivery position after the filing date)
and the pro rata distribution principle
in § 190.00(c)(5). The Commission
believes that it is important to address
deliveries to avoid disruption to the
cash market for the commodity and to
avoid adverse consequences to parties
that may be relying on delivery taking
place in connection with their business
operations. However, given the potential
for competing demands on the trustee’s
resources, including time, this
instruction is limited to requiring
‘‘reasonable efforts.’’
Regulation § 190.16(b) carries
forward, to the context of a DCO in
bankruptcy, the delineation between the
physical delivery property account class
and the cash delivery property account
class in § 190.06(b), as discussed above.
Specifically, physical delivery property
that is held in delivery accounts for the
purpose of making delivery shall be
treated as physical delivery property, as
will the proceeds from any sale of such
property. By contrast, cash delivery
property that is held in delivery
accounts for the purpose of paying for
delivery shall be treated as cash delivery
property, as would any physical
delivery property for which delivery is
subsequently taken.
The Commission requested comment
with respect to all aspects of proposed
§ 190.16. The Commission raised
specific questions as to whether it is
appropriate, in the context of a clearing
organization bankruptcy, to separate the
physical delivery account class from the
cash delivery account class, and if so,
whether the physical delivery account
class should be further sub-divided. The
Commission also asked whether the
delivery account class should be treated
as a single, undivided account class.
CME supported the requirement in
proposed § 190.16 that the trustee use
reasonable efforts to facilitate deliveries
of commodity contracts that have
moved into delivery prior to the date
and time of relief on behalf of a clearing
member or customer, but asked that the
Commission ‘‘expand the rule to require
the trustee to facilitate deliveries’’ under
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contracts that move into delivery
position after the filing and that the
trustee is unable to liquidate. CME
stated that ‘‘[i]t is equally important to
protect deliveries under [such] contracts
. . . to protect against disruption to
commercial markets and operations,’’
and that the trustee may not be able to
terminate them.
The ABA Subcommittee similarly
expressed concern that proposed
§ 190.16(a) ‘‘does not address contracts
that are unable to be liquidated and that
then move into delivery position,’’
noting that ‘‘it may be impossible or
impracticable for a trustee to liquidate
every’’ physical-delivery commodity
contract that is open at the date and
time of the order for relief before the
contract moves into delivery position.
The ABA Subcommittee recommended
that the Commission ‘‘remove the
timing limitation in Proposed Rule
190.16(a),’’ and add language stating
that ‘‘the trustee should use reasonable
efforts to liquidate open physical
delivery commodity contracts before
they move into a delivery position.’’
The Commission agrees with
comments raised by CME and the ABA
Subcommittee that deliveries should be
facilitated after the order for relief for
contracts that are not otherwise
terminated, liquidated, or transferred.
The Commission believes that
modifying the proposal to address that
scenario is appropriate to avoid
disruption to the cash market and to
avoid adverse consequences to parties
that may be relying on delivery taking
place in connection with their business
operations.
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is
adopting § 190.16 with a modification to
apply paragraph (a) to any contract that
‘‘moves into delivery after [the date and
time of the order for relief], but before
being terminated, liquidated, or
transferred.’’
7. Regulation § 190.17: Calculation of
Net Equity
The Commission is adopting § 190.17
as proposed, with a modification to
§ 190.17(b)(2), as discussed below.
Section 190.17 establishes net equity
calculations to be used in determining
the claims against the debtor DCO (and
the allocation of losses) among members
and their accounts.
Section 190.17(a) with respect to net
equity is parallel to § 190.18(a) with
respect to the treatment of customer
property. Section 190.17(a)(1) confirms
that a member of a clearing organization
may have claims in separate capacities.
Specifically, a member may have claims
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on behalf of its public customers
(customer account) and claims on behalf
of itself and its non-public customers
(i.e., affiliates) (house account), and,
within those separate customer classes,
the claims may be further separated by
account class. The member shall be
treated as part of the public customer
class with respect to claims based on
commodity customer accounts carried
as ‘‘customer accounts’’ by the clearing
organization for the benefit of the
member’s public customers, and as part
of the non-public customer class with
respect to claims based on its house
account. Section 190.17(a)(2) directs
that net equity shall be calculated
separately with respect to each customer
capacity and, within such customer
capacity, by account class.
Section 190.17(b) sets forth how a
debtor DCO’s pre-existing rules and
procedures governing the allocation of
losses—including the default rules and
procedures—should be applied in a
DCO bankruptcy.
Section 190.17(b)(1) confirms that the
calculation of members’ net equity
claims—and, thus, the allocation of
losses among members and their
accounts—shall be based on the full
application of the debtors’ loss
allocation rules and procedures,
including the default rules and
procedures referred to in §§ 39.16 and
39.35. These pre-existing loss allocation
rules and procedures are the contract
between and among the members and
the DCO, and the Commission believes
that it is appropriate to give them effect
regardless of the bankruptcy of the DCO
or the timing of any such bankruptcy. In
other words, the pre-existing loss
allocation rules and procedures (such as
member assessments) should be given
the same effect in a bankruptcy,
regardless of whether default
management or recovery tools were
fully applied prior to the order for relief.
While certain DCOs may have
discretion, consistent with governance
procedures, as to precisely when they
call for members to meet assessment
obligations, the Commission believes
that allocation of losses should not
depend on the happenstance of when
default management or recovery tools
were used—e.g., when assessments were
called for, or when such assessments
were met.
Section 190.17(b) also addresses DCO
rules that govern how recoveries on
claims against defaulting members are
allocated to non-defaulting members’
accounts,184 which effectively ‘‘reverse
184 These recoveries might be based on
prosecution of such claims in an insolvency or
receivership proceeding, or, in the reasonable
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the waterfall’’ by allocating recovered
assets to member accounts in reverse
order of the allocation of the losses to
those member accounts.185 Section
190.17(b)(2) implements such DCO rules
in bankruptcy, thereby adjusting
members’ net equity claims (and the
basis for distributing any such
recoveries) in light of such recoveries.
The provision similarly implements
DCO loss allocation rules in other
contexts, for example, (i) rights to
portions of mutualized default resources
that are either prefunded or assessed
and collected, and, in either event, not
used, as well as (ii) rules that would
allocate to members recoveries against
third parties for non-default losses that
are, under the DCO’s rules, originally
borne by members.
Section 190.17(c) adopts by reference
the equity calculations set forth in
proposed § 190.08, to the extent
applicable.
Finally, § 190.17(d) implements
section 766(i) of the Bankruptcy Code,
which: (1) Allocates a debtor DCO’s
customer property (other than member
property) to the DCO’s customers (i.e.,
clearing members) ratably based on the
clearing members’ net equity claims
based on their (public) customer
accounts; and (2) allocates a debtor
DCO’s member property to the DCO’s
clearing members ratably based on the
clearing members’ net equity claims
based on their proprietary (i.e., house)
accounts. To implement section 766(i),
§ 190.17(d) defines ‘‘funded balance’’ as
a clearing member’s pro rata share of
member property (for a clearing
member’s house accounts) or customer
property other than member property
(for accounts for a clearing member’s
public customers). The pro rata amount
shall be calculated with respect to each
account class available for distribution
to customers of the same customer class.
Moreover, given that the calculation of
commercial judgment of the DCO, the settlement or
sale of such claims.
185 For example, if the DCO rules allocate losses
in excess of the defaulters’ available resources first
to the DCO’s own contributions, second to the
mutualized default fund contributions of members
other than the defaulter, third to assessments, and
fourth to gains-based haircutting (pro rata), all of
which tools were in fact used in a particular case,
then recoveries on claims against the defaulting
members would be allocated (to the extent
available) first to those member accounts for which
gains were haircut, pro rata based on the aggregate
amount of such haircuts per member account, until
all such haircuts have been reversed, second to
those members who paid assessments, pro rata
based on the amount of such assessments paid,
until all such assessments have been repaid, third
to members whose mutualized default-fund
contributions were consumed, pro rata based on
such default-fund contributions, until all such
contributions have been repaid, and fourth to the
DCO to the extent of its own contribution.
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funded balance for FCMs is an
analogous exercise, the Commission
intends that such calculations under
§ 190.17(d) will be made in the manner
provided in § 190.08(c), to the extent
applicable.
The Commission requested comment
with respect to all aspects of proposed
§ 190.17. The Commission raised a
specific question as to whether it is
appropriate to base the calculations
proposed § 190.17 on the full
application of the debtors’ loss
allocation rules and procedures,
including the DCO’s default rules and
procedures.
Commenters addressed the proposed
language of paragraph (b), or of § 190.17
generally, but did not offer specific
comments on the proposed language of
paragraph (a), (c), or (d).
CME commented in support of
§ 190.17(b)(1)’s application of ‘‘the
DCO’s loss allocation rules and
procedures, including the DCO’s default
rules and procedures, to the calculation
of clearing members’ net equity claims,’’
but suggested a clarification to the
proposed rule. Specifically, CME
suggested that the Commission ‘‘clarify
that ‘full application’ of the DCO’s loss
allocation rules and procedures to the
calculation of clearing members’ house
net equity claims means that
assessments or similar loss allocation
arrangements thereunder are part of the
calculation only if and to the extent that
the DCO’s rules and procedures provide
for post-filing assessments and
payments.’’ CME noted that a ‘‘DCO’s
rules are the contract between and
among the members and the DCO,’’ and
that, ‘‘[i]f the calculation of net equity
claims deviates from the DCO’s loss
allocation under its rules, including
determination of amounts owned under
close-out netting rules, that could
adversely affect CME’s netting opinion
as to the enforceability of its netting
rules.’’ CME also commented in support
of ‘‘giving effect to provisions in the
debtor DCO’s loss allocation rules that
entitle clearing members to return of
guaranty fund deposits or other
mutualized default resources that are
not used, or to payments out of amounts
that the DCO recovers on claims against
a defaulting clearing member, through
adjustments to clearing member’s net
equity claims against member property
to reflect their entitlement to such
payments.’’ CME also commented in
support of § 190.17(b)(2).
The ABA Subcommittee expressed
concern with respect to perceived
ambiguity in § 190.17(b)(1) regarding
‘‘how assessments that were not called
for, or that were called for but not paid
before the filing date, would impact the
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calculation of a clearing member’s net
equity claim with respect to its house
account.’’ The ABA Subcommittee
requested that the Commission modify
the proposed regulation to clarify that
‘‘house account net equity claims would
be adjusted to reflect post-filing
obligations only if and to the extent that
the DCO’s rules and procedures impose
obligations on clearing members to
continue making such payments
following the DCO’s bankruptcy.’’
Specifically, the ABA Subcommittee
suggested that the following phrase be
added to the end of § 190.17(b)(1): If and
to the extent that the debtor’s loss
allocation rules and procedures impose
obligations on clearing members to
make such payments on or after the
filing date.
FIA did not support the adoption of
§ 190.17(b)(1). FIA stated that it would
be ‘‘inappropriate to require a clearing
member to reduce the value of its net
equity claim by the amount of an
assessment that, under the rules of the
relevant DCO, either may no longer be
made or are not required to be paid.’’
FIA asserted that a DCO’s default fund
is ‘‘a multilateral indemnification
arrangement between the DCO and its
members pursuant to which members’
contributions are used to cover the
DCO’s losses resulting from member
default(s) and thereby prevent the
DCO’s bankruptcy.’’ FIA stated that a
‘‘DCO has no authority under its rules
to request or to apply these funds for
any other purpose, nor do we believe
that a trustee would have any authority
under the [Bankruptcy] Code to do so.’’
FIA noted further that, ‘‘by requiring
that a clearing member’s net equity
claim must include the full application
of the DCO’s loss allocation rules and
procedures, proposed Rule 190.17(b)(1)
appears to have the effect of reducing a
clearing member’s potential recovery,
even when the full application of the
DCO’s loss allocation rules is not
necessary to meet the DCO’s obligations
to non-defaulting clearing members,’’
thereby impermissibly benefitting the
DCO’s general creditors and
shareholders to the detriment of clearing
members.
ICE commented that the Commission
should refrain from adopting § 190.17(b)
or providing ‘‘specific guidance as to
what assumptions the CFTC would
make and how the net equity claim is
to be calculated hypothetically.’’ ICE
stated that, in determining a clearing
member’s net equity claim, it is neither
appropriate nor feasible to consider a
potential assessment that could have
been called for before a bankruptcy
filing but was not. ICE asserted that a
DCO’s determination of whether ‘‘to call
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for an assessment and/or implement
other loss allocation arrangements’’
accounts for many considerations that
would not be appropriate to revisit in an
insolvency. ICE also asserted that
calculating the full application of loss
allocation rules, or determining what
would have happened in any full
allocation, may not be possible. ICE
noted, for example: (a) Because a DCO
is not obligated to impose assessments
against its clearing members, it is
unclear how the CFTC or the trustee
would determine how many
assessments the DCO should have made;
(b) in the event that ‘‘clearing members
have the right to cap their liability by
terminating their membership in a
DCO,’’ it is unclear how the CFTC or the
trustee would determine whether a
clearing member should have
terminated its membership; 186 and (c) it
‘‘may not be possible to determine
definitively what the [DCO’s] losses . . .
would have been if additional loss
allocation steps, such as variation
margin gains haircutting or tear-up, had
been taken.’’
SIFMA AMG/MFA commented that
§§ 190.17 and 190.18(b)(1) should be
modified to explicitly state that any
gains that were haircut during gainsbased haircutting will be treated as
customer property and included in the
net equity claims of the clearing
members and customers whose gains
were haircut. SIFMA AMG/MFA further
commented in support of § 190.17(b) but
suggested that the proposal be modified
to provide that, if a debtor DCO either
(i) does not have ‘‘reverse the waterfall’’
rules or (ii) has ‘‘reverse the waterfall’’
rules that do not address each level of
the debtor DCO’s waterfall, the net
equity clams of the debtor DCO’s
clearing members and customers will be
calculated as though the debtor DCO, in
fact, ‘‘has ‘reverse the waterfall’ rules
that address each level of the DCO’s
waterfall.
Vanguard commented on
§ 190.17(b)(1)’s requirement that a
trustee’s calculation of DCO members’
net equity claims include the full
application of DCO loss allocation rules
and procedures. Vanguard expressed
concern that the requirement would
186 But see ICE Clear Credit Rules 806, 807. To
mitigate the risk that their members will ‘‘rush to
the exits’’ after a default, DCOs generally hold
departing members liable for assessments due to the
defaults that occurred before they withdrew from
membership, as well as during a ‘‘cooling-off’’
period that extends past the date the member gives
notice of intent to withdraw. The ICE Clear Credit
rules cited, which include a ‘‘cooling-off period’’ of
at least 30 days, are examples of this phenomenon.
Thus, the possibility that clearing members would
withdraw is not likely to affect their liability for
assessments in this context.
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result in a customer being entitled to
only ‘‘a pro rata share to the extent the
DCO rules did not modify the
distribution of the DCO’s asset, whether
pre- or post-petition, through measures
such as variation margin gains
haircutting or partial tear-up of
transactions.’’ Vanguard noted the
possibility that, ‘‘as the DCO begins to
fail,’’ the DCO’s rules ‘‘could be changed
without the appropriate vetting by
FCMs and customers who presently bear
an inordinate share of the risk.’’
Vanguard believed that ‘‘any application
of non-defaulting customer gains
haircutting, or any other margin
haircutting, should be prohibited as
being fundamentally at odds with
normal insolvency practice and highly
counterproductive to incentivizing
customers not to abandon a failing
DCO.’’ Vanguard asserted that, if
haircutting is to be allowed, customers
should ‘‘receive full compensation in
the form of a credit or equity claim
against the DCO [that is] superior to that
of other creditors.’’ Vanguard also
suggested that § 190.17(b)(2) be
modified in the same manner as
suggested by SIFMA AMG/MFA, with
respect to situations in which a debtor
DCO does not have ‘‘reverse the
waterfall’’ rules, or has ‘‘reverse the
waterfall’’ rules that do not address each
level of the debtor DCO’s waterfall.
ICI expressed concern that
§ 190.17(b)(1) would permit a DCO’s
loss allocation, recovery, and winddown rules ‘‘to override the
fundamental customer protections that
Part 190 and Subchapter IV [of the
Bankruptcy Code] are meant to
safeguard,’’ because they would ‘‘no
longer guarantee to a customer a pro
rata share of customer property based
on its transactions and margin in
accordance with Subchapter IV.’’ In that
scenario, ICI commented that ‘‘a
customer would only be entitled to such
a pro rata share to the extent the DCO
rules did not modify the distribution of
the DCO’s assets, whether pre- or postpetition, through measures such as
variation gains haircutting or partial
tear-up of transactions.’’
Having received no specific
comments on the proposed language of
paragraphs (a), (c), and (d) of § 190.17,
the Commission is adopting those
paragraphs as proposed.
As described above, the Commission
received several comments on
paragraph (b). After considering the
comments, the Commission notes that
DCO default rules and procedures (also
referred to as ‘‘default waterfalls’’), as a
general matter, first use the resources of
the defaulter (i.e., the defaulter’s initial
margin and contribution to the default
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fund) to cover a shortfall. Should those
resources be insufficient to cover the
shortfall, such default waterfalls
generally proceed to use the DCO’s own
capital contribution, and only after
those resources are extinguished is the
remaining shortfall mutualized among
the clearing members: (1) First, through
the prefunded default fund
contributions of non-defaulting clearing
members; (2) then, through limited
assessment powers against those nondefaulting clearing members, which are
generally set as a multiple of each
clearing member’s prior contributions to
the default fund; and (3) finally, through
gains-based haircuts that affect both
clearing members and (through
customer agreements) the customers of
clearing members (i.e., public
customers).
The Commission notes two important
takeaways from the general structure of
default waterfalls. First, each clearing
member knows, in advance of a default,
the maximum amount of its exposure to
contribute to mutualized loss through
the guarantee fund and the DCO’s
assessment powers. Second, should
there be any reduction in the amount of
funds collected through such
assessments, then any losses in excess
of the waterfall (i.e., up through the
assessments) would instead be allocated
to both clearing members and their
public customers. In other words, if the
losses are large enough, a reduced
allocation of losses to clearing members
would necessarily mean that their
public customers would bear an
increased allocation of losses.
The Commission remains of the view
that, as discussed in the proposal,
‘‘[w]hile certain DCOs may have
discretion, consistent with governance
procedures, as to precisely when they
call for members to meet assessment
obligations, . . . allocation of losses
should not depend on the happenstance
of when default management or
recovery tools were used—e.g., when
assessments were called for, or when
such assessments were met.’’ 187 As
discussed above, the losses in a DCO
bankruptcy ultimately would be
allocated between clearing members and
customers, and clearing members’
exposure to this allocation of losses is
already capped by the ex ante limits on
assessment powers. If the Commission
were to modify the language of
paragraph (b) in the manner suggested
by multiple commenters, the
modification would effectively decrease
the allocation of losses that would be
borne by clearing members—below the
ex ante limits of which they are on
187 85
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notice—and correspondingly increase
the allocation of losses that would be
borne by customers. In other words, in
such a scenario, the Commission
believes that the suggested language
could harm customers and run counter
to the Commission’s policy that, with
respect to customer property, public
customers be favored over non-public
customers. For those reasons, the
Commission declines to adopt
commenters’ suggestions to modify the
net equity calculations in § 190.17(b) by
limiting (or eliminating) the allocation
of assessments that were not exercised
prior to a bankruptcy filing.
By contrast, gains-based haircuts are
also part of the pre-bankruptcy
arrangements for allocating losses. If
that part of the ‘‘waterfall’’ is reached,
then that ex ante arrangement should be
followed. Moreover, there is a limited
amount of customer property available.
Thus, to the extent the application of
gains-based haircuts was to be reversed,
and some customers would realize
increases in the allowed amounts of
their claims (and thus a greater share of
customer property), other customers
would suffer a decreased share of
customer property; indeed, the latter
customers may, as a result, receive less
than the amount of their claims for
initial margin. This could have the
effect of reducing those customers’
recoveries below the initial margin they
have posted. The Commission stands
firmly against initial margin haircutting
as inimical to the principles of
segregation. Thus, the Commission
declines to adopt the suggestion by
SIFMA AMG/MFA and Vanguard to
reverse the application of gains-based
haircutting in a DCO bankruptcy.
FIA’s comment letter raised two
points that should be further addressed.
First, FIA stated that a DCO, under its
rules, lacks the authority to apply the
DCO’s default fund for any purpose
other than preventing the DCO’s
bankruptcy, and a trustee would
similarly lack the authority to do so
under the Bankruptcy Code.188 FIA
further argued that, as a result of that
limitation, the DCO’s authority to make
new assessments or otherwise require
that members contribute additional
funds to a DCO’s default fund would not
continue into bankruptcy.
Consequently, FIA argued that a
clearing member’s net equity claim
should not be reduced in bankruptcy by
the amount of an assessment that would
no longer be required to be paid under
the DCO’s rules. However, the
Commission notes that § 190.17(b)(1)
does not instruct the trustee to call any
188 FIA
189 In the bankruptcy of a clearing organization,
clearing members are a species of customer.
at 9.
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clearing member to pay in additional
funds; rather, paragraph (b)(1) reduces
the clearing member’s net equity claim
against the estate of the DCO, to account
for uncalled or uncollected assessments.
Pursuant to section 20(a)(5) of the CEA,
the Commission has the power to
provide, with respect to a commodity
broker in bankruptcy, ‘‘how the net
equity of a customer is to be
determined,’’ 189 and the Commission
believes that by setting the net equity
calculation as proposed, the rule would
appropriately set such calculations in a
manner that does ‘‘not depend on the
happenstance of when default
management or recovery tools were
used,’’ as discussed more fully above.
Second, FIA noted that, ‘‘by requiring
that a clearing member’s net equity
claim must include the full application
of the DCO’s loss allocation rules and
procedures, proposed [§ ] 190.17(b)(1)
appears to have the effect of reducing a
clearing member’s potential recovery,
even when the full application of the
DCO’s loss allocation rules is not
necessary to meet the DCO’s obligations
to non-defaulting clearing members’’
and that ‘‘[s]uch a result would
impermissibly benefit the DCO’s general
creditors and shareholders to the
detriment of clearing members.’’ The
Commission did not intend for the
potential outcome suggested by FIA;
rather, in proposed § 190.17(b)(2)(i), the
Commission intended to provide that,
where the full amount of assessment
powers is not needed to cover a default,
an appropriate adjustment shall be
made to the net equity claims of clearing
members. The Commission believes that
the rule text should be modified in
order to communicate its intent more
clearly, and avoid the possibility of the
unintended outcome raised by FIA.
Accordingly, the Commission is
modifying § 190.17(b)(1) to clarify that
the DCO’s ‘‘loss allocation arrangements
shall be applied to the extent necessary
to address losses arising from default by
clearing members.’’
This modification separates paragraph
(b)(1) into two separate parts. First,
paragraph (b)(1)(i) will provide that the
calculation of a clearing member’s net
equity claim shall include the full
application of the debtor’s loss
allocation rules and procedures,
including the default rules and
procedures referred to in § 39.16 and, if
applicable, § 39.35. Second, paragraph
(b)(1)(ii) will provide that the
calculation in paragraph (b)(1)(i) will
include, with respect to the clearing
member’s house account, any
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19377
assessments or similar loss allocation
arrangements provided for under those
rules and procedures that were not
called for before the filing date, or, if
called for, have not been paid. Such loss
allocation arrangements shall be applied
to the extent necessary to address losses
arising from default by clearing
members.
The ABA Subcommittee, in its
comment letter, was concerned that the
proposed rule is ambiguous on whether
assessments or similar loss allocation
arrangements would be included in the
calculation where the clearing
organization’s rules do not impose
obligations on clearing members to
make such payments on or after the
filing date. The modified structure of
paragraph (b)(1), as described above,
should remove that ambiguity, albeit not
in the direction that the ABA
Subcommittee would prefer: The
calculation ‘‘will include, with respect
to the clearing member’s house account,
any assessments or similar loss
allocation arrangements that were not
called for before the filing date . . . to
the extent necessary to address losses
arising from default . . .’’ (emphasis
added).
CME’s comment letter also raises a
concern that should be addressed. In
particular, CME is concerned that
deviating from the DCO’s rules with
respect to loss allocation in this context
could adversely affect the DCO’s netting
opinion as to the enforceability of its
netting rules. The Commission notes
that this argument conflates bank capital
charge calculations for cleared
transactions with capital charge
calculations for default fund
contributions. Pursuant to, e.g., 12 CFR
217.133(a)(2), a clearing member that is
(or is part of) a bank holding company
regulated by the Federal Reserve Board
and that uses the internal ratings and
advanced measurement approaches to
bank capital requirements is required to
use the methodologies described in the
applicable paragraph of 12 CFR 217.133
to calculate its risk-weighted assets for
a cleared transaction (that is, paragraph
(c) of that section) and the
methodologies described in a different
paragraph to calculate its risk-weighted
assets for its default fund contribution
to a CCP (that is, paragraph (d) of that
section).190 Netting opinions are
necessary to treat cleared transactions
190 There are analogous provisions for bank
holding companies regulated by the Federal Reserve
Board that use the standardized approach for
calculating bank capital requirements (12 CFR
217.35) as well as banks regulated by the FDIC and
the Office of the Comptroller of the Currency.
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on a net basis,191 while assessments are
related to default fund contributions.
Thus, the treatment of assessment
obligations is irrelevant to netting
opinions for cleared transactions.
The Commission also received
comments on proposed § 190.17(b)(2)
concerning the treatment of ‘‘reverse the
waterfall’’ rules in the context of a DCO
bankruptcy. After considering the
comments, the Commission continues to
believe that it is useful and appropriate
to use ‘‘reverse the waterfall’’ rules for
recoveries made by a clearing
organization (including a debtor
clearing organization). Some
commenters suggested that proposed
§ 190.17(b)(2) be modified to address
situations where the debtor DCO lacks
‘‘reverse the waterfall’’ rules, or where
such rules do not address each level of
the debtor clearing organization’s
waterfall. Although the commenters did
not provide specific language that could
be used to apply to such situations, the
Commission believes that such a
complicated modification is beyond the
bounds of what was proposed, and thus,
the Commission declines to make the
modification here. Nonetheless, the
commenters’ suggestion is well taken,
and the Commission may consider
further work on that issue in the future.
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is: (1)
Adopting § 190.17(a), (b)(1), (c), and (d)
as proposed; and (2) adopting
§ 190.17(b)(2) with the modification
discussed above.
8. Regulation § 190.18: Treatment of
Property
The Commission is adopting § 190.18
to establish the allocation of the debtor
DCO’s estate in order to satisfy claims
of clearing members, as customers of the
debtor. The Commission is adopting
§ 190.18 as proposed, with the following
modifications: (1) Adding new
paragraph (b)(1)(iv), as described below;
and (2) removing paragraph (c)(1) and
renumbering the remaining paragraphs
of paragraph (c).
Section 190.18(a) with respect to
customer property is parallel to
§ 190.17(a) with respect to net equity.
Paragraph (a) provides that property of
the debtor clearing organization’s estate
is allocated between member property,
and customer property other than
member property, in order to satisfy
claims of clearing members as
customers of the debtor. Such property
would constitute a separate estate of the
customer class (i.e., member property,
and customer property other than
191 See
12 CFR 217.3(d).
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member property) and the account class
to which it is allocated, and would be
designated by reference to such
customer class and account class.
Section 190.18(b) sets out the scope of
customer property for a clearing
organization,192 and is based in large
part on § 190.09(a). Specifically, in
§ 190.18, paragraphs (b)(1)(i)(A) through
(G) are based on § 190.09(a)(1)(i)(A)
through (G). Section 190.18(b)(1)(i) does
not include a provision that is parallel
to § 190.09(a)(1)(i)(H), because loans of
margin are not applicable to DCOs. In
§ 190.18, paragraphs (b)(1)(ii)(A)
through (D) are based on
§ 190.09(a)(1)(ii)(A), (D), (E), and (F),
while § 190.18(b)(1)(ii)(E) adopts by
reference § 190.09(a)(1)(ii)(H) through
(K) as if the term debtor used therein
refers to a clearing organization as
debtor. Section 190.18(b)(1)(ii) does not
include provisions that are parallel to
§ 190.09(a)(1)(ii)(B), (C), (G), and (L),
because they would not be applicable
due to the differences in business
models, structures, and activities of
DCOs and FCMs, respectively. Section
190.18(b)(1)(iii) is unique to clearing
organizations, and includes as customer
property any guarantee fund deposit,
assessment, or similar payment or
deposit made by a member, to the extent
any remains following administration of
the debtor’s default rules and
procedures. Section 190.18(b)(1)(iii) also
includes any other property of a
member that, pursuant to the debtor’s
rules and procedures, is available to
satisfy claims made by or on behalf of
public customers of a member. Finally,
§ 190.18(b)(2), which identifies property
that is not included in customer
property, adopts by reference
§ 190.09(a)(2) as if the term debtor used
therein refers to a clearing organization
as debtor and to the extent relevant to
a clearing organization.
Section 190.18(c) allocates customer
property between customer classes,
favoring allocation to customer property
other than member property over
allocation to member property, so long
as the funded balance in any account
class for members’ public customers is
less than one hundred percent of net
equity claims. Once all account classes
for customer property other than
member property are fully funded (i.e.,
at one hundred percent of net equity
claims), any excess could be allocated to
member property. Section 190.18(c)(1),
as proposed (but not adopted herein, as
discussed below), would allocate any
property referred to in § 190.18(b)(1)(iii)
192 This is another provision prescribed pursuant
to the Commission’s authority under section
20(a)(1) of the CEA, 7 U.S.C. 24(a)(1).
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(guarantee deposits, assessments, etc.)
first to customer property other than
member property, to the extent that any
account class therein is not fully
funded, and then to member property.
In proposing this provision, the
Commission intended such treatment of
property to favor public customers over
non-public customers. Section
190.18(c)(2) allocates any excess funds
in any account class for members’ house
accounts first to customer property
other than member property to the
extent that any account class therein is
not fully funded, and then any
remaining excess to house accounts to
the extent that any account class therein
is not fully funded. Finally,
§ 190.18(c)(3) allocates any excess funds
in any account for members’ customer
accounts first to customer property
other than member property to the
extent that any account class therein is
not fully funded, and then any
remaining excess to house accounts, to
the extent that any account class therein
is not fully funded.
Section 190.18(d) allocates customer
property among account classes within
customer classes. Section 190.18(d)(1)
confirms that, where customer property
is tied to a specific account class—that
is, where it is segregated on behalf of,
readily traceable on the filing date to, or
recovered by the trustee on behalf of or
for the benefit of an account class
within a customer class—the property
must be allocated to the customer estate
of that account class (that is, the account
class for which it is segregated, to which
it is readily traceable, or for which it is
recovered). Section 190.18(d)(2)
provides that customer property that
cannot be allocated in accordance with
paragraph (d)(1) shall be allocated in a
manner that promotes equality of
percentage distribution among account
classes within a customer class. Thus, in
such a scenario, such property would be
allocated first to the account class for
which funded balance—that is, the
percentage that each member’s net
equity claim is funded—is the lowest.
This would continue until the funded
balance percentage of that account class
equals the funded balance percentage of
the account class with the next lowest
percentage of funded claims. The
remaining customer property would be
allocated to those two account classes so
that the funded balance for each such
account class remains equal. This would
continue until the funded balance
percentage of those two account classes
is equal to the funded balance of the
account class with the next lowest
percentage of funded claims, and so
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forth, until all account classes within
the customer class are fully funded.
Section 190.18(e) confirms, however,
that where the debtor DCO has, prior to
the order for relief, kept initial margin
for house accounts in accounts without
separation by account class, then
member property will be considered to
be in a single account class.
Section 190.18(f) reserves the right of
the trustee to assert claims against any
person to recover the shortfall of
property enumerated in
§ 190.18(b)(1)(i)(E) and (b)(1)(ii) and
(iii). Paragraph (f) is analogous in the
DCO context to § 190.09(a)(3) in the
context of FCMs. The purpose of
paragraph (f), as with § 190.09(a)(3), is
to clarify that any claims that the trustee
may have against a person to recover
customer property will not be
undermined or reduced by the fact that
the trustee may have been able to satisfy
customer claims by other means.
The Commission requested comment
with respect to all aspects of proposed
§ 190.18. The Commission raised a
specific question about the
comprehensiveness of the scope of
customer property for a clearing
organization in proposed § 190.18(b).
The Commission also asked specifically
about the appropriateness of the
proposed allocation of customer
property between customer classes in
proposed § 190.18(c) and within
customer classes in proposed
§ 190.18(d).
The Commission received several
comments on the proposal. Whereas
some commenters supported the
proposal, in whole or in part, others
raised concerns particularly with
respect to the scope of customer
property in proposed § 190.18(b) and
the treatment of guarantee fund deposits
and other payments in proposed
§ 190.18(c)(1), among other issues.
ICI commented in support of the
proposal and agreed with the
Commission that the proposal is
necessary to further the policy in
section 766(h) of the Bankruptcy Code
of prioritizing the claims of public
customers over the claims of non-public
customers. ICI stated that public
customers need the proposed
protections because they ‘‘typically have
no direct participation in the DCO’s risk
management and no insight into the
transactions other customers have with
the DCO.’’ ICI also stated that public
customers may have less access to
information concerning the DCO’s
financial health, and may have fewer
tools available to protect themselves
against losses, when compared to DCO
members.
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The ABA Subcommittee commented
that the treatment of clearing members’
guaranty fund deposits and similar
payments in proposed § 190.18(c)(1)
represents a ‘‘significant policy change’’
with ‘‘significant competing policy
considerations and complex issues’’ that
warrant consideration outside of the
Proposal. The ABA Subcommittee
contended, for example, that such
payments ‘‘may be exposed to risk in
asset classes in which [the clearing
member] does not trade, and which the
clearing member does not expect to
assume based on the DCO’s rules.’’
Without taking a formal position on the
proposal, the ABA Subcommittee
identified issues that it believed warrant
further attention by the Commission and
market participants, including whether
the language in paragraph (c)(1): (a)
Should be implemented ‘‘through a Part
190 rule that would have the effect of
overruling inconsistent DCO rules,’’ or
through an amendment to part 39 to
require DCOs ‘‘to have loss allocation
rules that align with [the] policy
change’’; (b) would place U.S. DCOs ’’at
a competitive disadvantage to non-U.S.
DCOs’’; (c) would ‘‘discourage firms
from becoming or remaining direct
clearing members of a DCO for the
purpose of clearing trades solely for
their own account or for non-public
customers’’; and/or (d) would ‘‘create a
risk that U.S. banking regulators will
want to revisit the methodology for
determining the amount of regulatory
capital that bank and bank-affiliated
clearing members must hold with
respect to cleared derivatives.’’ The
ABA Subcommittee therefore
recommended that the Commission
maintain the status quo by revising
proposed § 190.18(c)(1) ‘‘to confirm that
customer property described in Rule
190.09(b)(1) will be allocated to member
property after such property is applied
to cover losses in accordance with the
DCO’s rules . . . [until] the Commission
separately considers the merits of the
[proposed] policy change.’’
SIFMA AMG/MFA requested that the
Commission amend proposed
§ 190.18(b)(1) to provide explicitly ‘‘that
customer property includes property a
debtor DCO contributes to its default
waterfall,’’ as seemingly was intended
by proposed § 190.18(b)(1)(ii)(E).
Consistent with its comments on
proposed § 190.17(b), FIA commented
that customer property should not
include guaranty fund deposits as set
forth in proposed § 190.18(b)(1)(iii) and
recommended that the Commission
remove that provision. FIA stated that a
‘‘default fund represents a multilateral
indemnification arrangement between
the DCO and its members pursuant to
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19379
which members’ contributions are used
to cover the DCO’s losses resulting from
member default(s) and thereby prevent
the DCO’s bankruptcy.’’ FIA contended
that a DCO has no authority under its
rules, and a trustee has no authority
under the Bankruptcy Code, ‘‘to request
or to apply these funds for any other
purpose.’’
CME commented in support of the
decision to set forth the elements that
comprise customer property in
proposed § 190.18(b)(1). CME
specifically agreed that the scope of
customer property should include any
guaranty fund deposit, assessment or
similar deposit made by a clearing
member or recovered by the trustee, to
the extent any remains following
administration of the debtor’s default
rules and procedures, and any other
property of a member available under
the debtor’s default rules and
procedures to satisfy claims made by or
on behalf of pubic customers of a
member. For clarity and transparency,
CME encouraged the Commission to
expand the scope of customer property
to explicitly include the amounts that
the DCO commits to the financial
resources in the waterfall under its
rules, to the extent that those resources
have not already been applied under the
DCO’s default rules. CME stated,
however, that the Commission should
eliminate the requirement set forth in
proposed § 190.18(c)(1) that the
payments described in proposed
§ 190.18(b)(1) be allocated to customer
property other than member property
for use ‘‘to cover a shortfall in the
funded balances for clearing members’
customer accounts in any account class’’
and, instead, ‘‘reaffirm that guaranty
fund deposits are to be applied to cover
losses in accordance with the DCO’s
rules, with any remaining funds
allocated to member property.’’ In
support of its view, CME stated that
such requirement set forth in proposed
§ 190.18(c)(1): (1) Would materially
change ‘‘the definition of member
property in current Regulation 190.10,
under which any guaranty funds
remaining after payments in accordance
with the DCO’s rules would be returned
to clearing members as member
property’’; (2) ‘‘may significantly alter
how clearing members assess the risks
they have assumed in joining CME,’’ by
undermining CME’s ‘‘rules limiting use
of clearing members’ guaranty fund
deposits to cover losses in the relevant
product class to which they have
contributed to the guaranty fund and in
which they participate’’; and (3) would
‘‘compromise CME’s ability under
Regulation 39.27 to ‘operate pursuant to
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a well-founded, transparent, and
enforceable legal framework that
addresses each aspect’ of CME’s
obligations as a DCO, including netting
arrangements and ‘other significant
aspects’ of CME’s ‘operations, risk
management procedures, and related
requirements’ as a DCO.’’ 193 CME also
asserted that: (a) Proposed § 190.18(c)(1)
‘‘is vulnerable to legal challenge as
exceeding the Commission’s authority’’
in section 20 of the CEA, because such
authority is not being exercised
consistent with the Bankruptcy Code
and other provisions of the CEA; 194 (b)
the Commission does not have the
authority under the CEA ‘‘to adopt rules
that have the effect of directly rewriting
a DCO’s rules,’’ and that doing so would
be contrary to the reasonable discretion
afforded to DCOs under section 5b of
the CEA to comply with DCO core
principles and Commission regulations;
(c) the Commission may not alter or
supplement the rules of a registered
entity until it satisfies the requirement
under section 8a(7) of the CEA to
request that the registered entity amend
its rules and provide the registered
entity with notice and an opportunity
for a hearing if it does not do so; (d)
amending the contract between and
among clearing members and the DCO
through a Commission regulation
‘‘would call into question . . . the
enforceability of the DCO’s rules’’; and
(e) ‘‘a proposed rule impacting the
manner in which bank or bank-affiliated
clearing members’ guaranty fund
deposits and assessment obligations can
be utilized may drive subsequent
changes to the methodology and
resulting amount of capital such
members must hold for those exposures
under the Cleared Transactions
Framework in the Regulatory Capital
Rules.’’
ICE agreed with the Commission’s
approach not to propose ‘‘that property
in an insolvent DCO’s general estate can
be treated as customer property where
customer property is otherwise
insufficient to pay customer claims.’’
ICE suggested that the Commission
clarify ‘‘that any ability to use residual
assets should be only to the extent such
assets are not required to be used for
any other purpose under other
applicable law (e.g.[,] for other classes of
customers or for other products).’’ ICE
suggested that ‘‘[t]he definition of
193 Emphasis
in original.
commented that the proposal would be
contrary to the Bankruptcy Code’s definition of
‘‘member property’’ as ‘‘customer property received,
acquired, or held by or for the account of a debtor
that is a clearing organization, from or for the
proprietary account of a customer that is a clearing
member of the debtor.’’
194 CME
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customer property should also respect
any express limitations on recourse that
have been implemented under DCO
rules.’’ ICE did not believe that the
distributional preference for public
customers over clearing members and
any non-public customers of clearing
members, as established by proposed
§ 190.18, is appropriate in the context of
a DCO failure, because it could ‘‘impose
losses, or greater losses, on nondefaulting clearing members in a
manner that overrides the negotiated
and approved frameworks in the DCO’s
rules.’’ ICE asserted that this ‘‘change
could require fundamental restructuring
of DCO operations,’’ and should be
‘‘part of a separate rulemaking that
addresses the interaction [of the
proposal] with the Part 39
requirements.’’ ICE also noted that the
liability caps that limit the overall
amount of a clearing member’s
contributions and assessments—and the
manner in which they may be used for
a particular default—are important for
the clearing members’ risk management
and are often necessary under such
clearing members’ capital requirements.
ICE stated that requiring the use of
contributions or assessments for
purposes other than what is set forth in
the DCO’s rules ‘‘would render such
caps and limitations ineffective.’’ ICE
further posited that proposed § 190.18 is
‘‘unworkable for clearing houses that
have separate guaranty funds for
separate products, or other limited
recourse provisions in their rulebooks
[that are used] to designate particular
default resources for particular
products, and to ring-fence the liability
of clearing members from particular
products that they may choose not to
clear.’’ ICE also raised a concern that
proposed § 190.18’s potential
subordination of the claims of the selfclearing members of a defaulting DCO to
customers of other clearing members
could serve as a ‘‘significant
disincentive’’ to self-clearing, sponsored
clearing, or direct clearing. ICE
commented that proposed § 190.18
‘‘should not be applied to require the
use of clearing member guarantee fund,
margin, or other resources in the context
of a non-default loss where the rules of
the DCO specifically do not contemplate
(or expressly forbid) the use of such
assets for such purposes.’’ On that issue,
ICE noted that many DCOs have sought
to address separately the allocation of
non-default losses through rules that
‘‘may allocate certain losses, and not
others, to clearing members and/or to
the clearing organization itself, and/or
provide for the sharing of certain losses
in certain amounts.’’
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After considering the comments, the
Commission is adopting § 190.18 with
modifications, specifically with respect
to paragraphs (b)(1) and (c)(1).
Multiple commenters suggested that
the Commission modify § 190.18(b)(1) to
make explicit that customer property
includes the amounts of its own funds
that a debtor DCO had committed as
part of its loss allocation rules. Given
that the DCO’s commitment, in DCO
rules, of a specified amount of its own
funds to loss allocation sets a marketwide understanding and expectation
that such an amount will be used for
such a purpose, the Commission agrees
that this clarification is warranted.
Therefore, the Commission is modifying
§ 190.18(b)(1) by adding a new
paragraph (b)(1)(iv), which will
explicitly include in customer property:
‘‘Amounts of its own funds that the
debtor had committed as part of its loss
allocation rules, to the extent that such
amounts have not already been applied
under such rules.’’
Multiple commenters addressed
proposed § 190.18(c)(1)(i), which
assigned guarantee funds to customer
property other than member property
(i.e., to the benefit of members’ public
customers) if and to the extent that a
shortfall existed in the funded balance
for such customers. The proposal was
supported by ICI, but opposed by CME,
FIA, and ICE, while the ABA
Subcommittee also noted potential
issues.
The Commission separately
considered each of the arguments raised
by the commenters in opposition to
proposed § 190.18(c)(1). In the
discussion below, the Commission
reviews the arguments raised by the
commenters and explains why it is
modifying the proposal by not adopting
proposed § 190.18(c)(1), and
renumbering the remaining paragraphs
of proposed § 190.18(c).
In response to concerns that the
Commission lacks the authority to
implement this provision, the
Commission notes that it has the
authority under section 20(a)(1) of the
CEA to determine, ‘‘[n]otwithstanding
title 11 of the United States Code’’ (i.e.,
the Bankruptcy Code) both ‘‘(1) that
certain . . . property [including, e.g.,
guarantee fund deposits] [is] to be
included in or excluded from . . .
member property’’ and ‘‘(5) how the net
equity of a customer is to be
determined.’’ Thus, § 190.18(c)(1) is
legally sound because of the
‘‘notwithstanding title 11’’ clause in
section 20 of the CEA.
Moreover, proposed § 190.18(c)(1)
would allocate guarantee fund deposits
to customer property other than member
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property only where the funded balance
is less than one hundred percent of net
equity claims for members’ public
customers in an account class, i.e.,
where the DCO had failed to maintain
in segregation sufficient funds to pay
members’ public customer account
balances in full. In other words, in that
scenario, the debtor DCO would be noncompliant with Commission
regulations. This is not a re-writing of
the DCO’s rules,195 nor a re-writing of
the contract between the DCO and its
members, nor an undermining of the
DCO’s ‘‘well-founded, transparent, and
enforceable legal framework,’’ but an
allocation of shortfall in a bankruptcy
case where the DCO is non-compliant
with Commission regulations.
The use of guarantee funds in the
manner specified in proposed
§ 190.18(c)(1) would not be an
‘‘unexpected loss’’ to non-defaulting
clearing members, given that the
regulation would be transparently
available to all. To the extent that the
consequences of the application of the
regulation (re-allocation of their default
fund contributions to cover a shortfall in
customer property for members’ public
customers) would be unexpected by
clearing members, and unpredicted by
their risk management systems, it is
equally the case that the public
customers of clearing members would
be surprised by a shortfall in customer
property, which their risk management
systems would also see as
unexpected.196 Thus, the choice is not
simply whether to impose an
unexpected loss to clearing members or
not, but rather a choice of who should
bear that unexpected loss, clearing
members (as a group) or their customers
(as a group). To that point, in addition
to the statutory authority that is
provided in the CEA, the Commission
agrees with the comment from ICI that
§ 190.18(c)(1) would further the policy
goal—stated in section 766(h) of the
Bankruptcy Code, but also running
throughout the Commission’s approach
to part 190—of prioritizing the claims of
public customers over the claims of
non-public customers.
However, despite the foregoing
analysis supporting adoption of
§ 190.18(c)(1), the Commission is
concerned about bank regulators’
195 And, thus, does not require the Commission
to invoke or follow the procedures of CEA section
8(a)(7).
196 Indeed, the risk would be even more
unexpected by public customers: Clearing members
are entirely aware that their default fund
contributions are at risk of use to cover a
mutualized default. Their customers, on the other
hand, expect that their customer funds are fully
protected by the CEA’s and the Commission’s
segregation requirements.
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potential analysis of § 190.08(c)(1). In
particular, the Commission has
considered that bank regulators may
conclude that, because § 190.08(c)(1)
directs the use of DCO default funds for
reasons other than addressing
mutualized member defaults, member
contributions to DCO default funds do
not fit within the definition (in bank
capital regulations) of ‘‘default fund
contribution,’’ see, e.g., 12 CFR 217.2.
Specifically, such member contributions
may not constitute ‘‘funds contributed
or commitments made by a clearing
member to a CCP’s mutualized loss
sharing arrangement,’’ see, e.g., id. If
this were the case, members’ default
fund contributions would be subject to
more onerous capital treatment than
they would receive if such contributions
did fit within the definition of ‘‘default
fund contributions.’’ 197 That more
onerous capital treatment would have a
direct, negative impact on normal dayto-day activities for bank-affiliated
clearing members, and not merely in the
uncertain future event of a DCO
bankruptcy. In other words, as
discussed further below in section
III.D.8, while the benefits to public
customers of § 190.18(c)(1) in case of
bankruptcy would be balanced by the
costs to clearing members, the presentday costs to (bank-affiliated) clearing
members of more onerous capital
treatment would not be offset by
significant benefits to public customers.
The Commission acknowledges that
the decision not to adopt proposed
§ 190.18(c)(1) differs from the
Commission’s approach to
§ 190.17(b)(1). In § 190.17(b)(1),
uncalled or unmet assessments would
be applied to address default losses,
with the only difference being the
timing of the bankruptcy relative to the
timing of the calls for, or payment of,
the assessments. In short, the
Commission concludes in that context
that the default fund contributions
would be treated as such for bank
197 That treatment could be significantly more
onerous: For example, under the FDIC’s regulations,
the capital requirement for a clearing member’s
prefunded default fund contribution to a qualifying
CCP can be as low as 0.16% of that default fund
contribution. See 12 CFR 324.133(d)(4). By contrast,
the capital requirement for a clearing member’s
prefunded default fund contribution to a nonqualifying CCP is 100% of that default fund
contribution. See 12 CFR 324.10(a)(1)(iii), (b)(3)
(requiring capital of 8% of risk-weighted asset
amount, 324.133(d)(2) (setting risk-weighted asset
amount for default fund contributions to nonqualifying CCP at 1,250% of the contribution).
(1,250% * 8% = 100%). The Federal Reserve and
Office of the Comptroller of the Currency have
similar regulations.
Default fund contributions to DCOs total many
billions of dollars. While not all default fund
contributions to DCOs come from bank-affiliated
clearing members, the majority of them do.
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19381
capital purposes, and thus would not be
subject to more onerous capital
treatment. In contrast, proposed
§ 190.18(c)(1) would apply guarantee
funds to cases that are distinct from a
member default. As discussed above, it
seems entirely plausible that doing so
would take such contributions outside
of the definition (in bank capital
regulations) of ‘‘default fund
contribution,’’ and thus subject them to
more onerous capital treatment. The
Commission believes that this
distinction is significant and forms the
basis for the difference in the
Commission’s respective approaches to
§ 190.17(b)(1) and proposed
§ 190.18(c)(1).
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is
adopting § 190.18 as proposed, with the
following modifications, as set forth
above: (1) Adding new paragraph
(b)(1)(iv), as described above; and (2) by
removing paragraph (c)(1) and
renumbering the remaining paragraphs
of paragraph (c).
9. Regulation § 190.19: Support of Daily
Settlement
The Commission is adopting § 190.19
as proposed, with a modification to
paragraph (b)(1), as discussed below.
As the Commission noted in
proposing § 39.14(b), ‘‘[t]he daily
settlement of financial obligations
arising from the addition of new
positions and price changes with
respect to all open positions is an
essential element of the clearing process
at a DCO.’’ 198 Indeed, Congress
confirmed this by requiring that each
DCO complete money settlements not
less frequently than once each business
day.199
In the ordinary course of business,
variation settlement payments are, at a
set time or times each day,200 sent to the
DCO from the customer and proprietary
accounts of each clearing member with
net losses in such accounts (since the
last point of computation of settlement
obligations for that member), and then
sent from the DCO to the customer and
proprietary accounts of each clearing
member with net gains in such accounts
over that time period.
There is no necessary relationship
between the aggregate amount of
payments to the DCO from all clearing
198 76
FR 3608, 3708 (Jan. 11, 2011).
Core Principle E(i), 7 U.S.C. 7a–
1(c)(2)(E)(i).
200 DCOs are required to effect settlement with
each clearing member at least once each business
day. They are additionally required to have the
capability to effect a settlement with each clearing
member on an intraday basis. See § 39.14(b).
199 See
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member customer accounts with net
losses and the aggregate amount of
payments from the DCO to clearing
members’ customer accounts with net
gains. On the other hand, it is the case
that, for each business day, the sum of
variation settlement payments to the
clearinghouse from clearing members’
customer and house accounts with net
losses will equal the sum of variation
settlement payments from the
clearinghouse to clearing members’
customer and house accounts with net
gains.201 Those variation settlement
payments will be received into the
DCO’s accounts at one or more
settlement banks from the accounts of
the clearing members with net losses
and subsequently be disbursed from the
DCO’s accounts at settlement banks to
the accounts of the clearing members
with net gains.202 Depending on the
settlement bank and operational
arrangements of the particular DCO, the
variation settlement funds will remain
in the DCO’s accounts between receipt
and disbursement for a time period of
between several minutes and several
hours.
The Commission believes that it is
crucial to the settlement process that the
variation settlement payments that flow
into the DCO from accounts with net
losses are available promptly to flow out
of the DCO as variation settlement to
accounts with net gains.
The Commission is adopting
§ 190.19(a), pursuant to section 20(a)(1)
of the CEA,203 to provide that, upon and
after an order for relief, variation
settlement funds shall be included in
the customer property of the DCO, and
that they shall be considered traceable
to—and shall promptly be distributed
to—member and customer accounts
entitled to payment with respect to the
same daily settlement.204 This customer
201 Thus, while (for each settlement cycle),
customer account losses (x) plus house account
losses (y) will equal customer account gains (p) plus
house account gains (q) (that is, x + y = p + q), x
would only equal p by random chance.
202 In some cases, the DCO will use one
settlement bank, and all settlement funds will flow
into and out of that bank. In other cases, the DCO
may use a system of settlement banks, and the DCO
may, after receiving payments from members with
payment obligations, move funds between and
among the settlement banks (possibly through a
‘‘concentration bank’’) to match the settlement
funds at each bank to the DCO’s settlement
obligations to members who are entitled to
settlement payments.
203 7 U.S.C. 24(a)(1) (‘‘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 . . . that certain
cash, securities, other property, or commodity
contracts are to be included in or excluded from
customer property or member property.’’).
204 Because deposits of initial margin described in
§ 39.14(a)(1)(iii) are separate from the variation
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property would be allocated to (i)
member property and (ii) customer
property other than member property, in
proportion to the ratio of total gains in
member accounts with net gains, and
total gains in customer accounts with
net gains, respectively.
The Commission is adopting
§ 190.19(b) to address cases where there
is a shortfall in funds received pursuant
to paragraph (a) (i.e., settlement
payments received by the DCO), such as
in the case of a member default.
Paragraph (b)(1) sets forth how such a
shortfall shall be supplemented, to the
extent necessary, and further states that
such funds shall be allocated in the
same proportion as referred to in
paragraph (a). Paragraph (b)(1) provides
that four types of property shall be
included as customer property: (i) Initial
margin held for the account of a member
that has defaulted on a daily settlement,
including initial margin segregated for
the customers of such member; 205 (ii)
Assets of the debtor to the extent
dedicated to such use as part of the
debtor’s default rules and procedures, or
as part of any recovery and wind-down
plans described in the paragraph (a)
(i.e., the debtor DCO’s ‘‘skin in the
game’’); (iii) Prefunded guarantee or
default funds maintained pursuant to
the DCO debtor’s default rules and
procedures; and (iv) Payments made by
members pursuant to assessment
powers maintained pursuant to the
debtor DCO’s default rules and
procedures. Paragraph (b)(2) provides
that, to the extent that the funds that are
included as customer property pursuant
to paragraph (a), supplemented as
described in paragraph (b)(1), such
funds would be allocated between (i)
member property; and (ii) customer
property other than member property, in
proportion to the ratio of total gains in
member accounts with net gains, and
total gains in customer accounts with
net gains, respectively.
The Commission requested comment
with respect to all aspects of proposed
§ 190.19.
CME expressed support for proposed
§ 190.19, commenting that the
provisions in the proposal ‘‘are
appropriate to support the daily
settlement cycle when the trustee
settlement process, they are treated separately in
§ 190.19(a). Such funds would be member property
to the extent that they are deposited on behalf of
members’ house accounts, and customer property
other than member property to the extent that they
are deposited on behalf of members’ customer
accounts.
205 This is restricted to the extent that such
margin may only be used to the extent that such use
is permitted pursuant to parts 1, 22, and 30 of the
Commission’s regulations, which include
provisions restricting the use of customer margin.
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obtains the Commission’s approval to
continue operating the DCO.’’ FIA
commented that it did not support
proposed § 190.19(b), stating that the
provision’s reliance on a debtor DCO’s
recovery and wind-down plans postbankruptcy would be inappropriate.206
SIFMA AMG/MFA requested that the
Commission modify proposed
§ 190.19(b)(1) to clarify the
Commission’s presumed intent that ‘‘the
debtor’s recovery and wind-down plans
shall only apply with respect to
proposed § 190.19(b)(1)(ii)—the debtor’s
‘‘skin in the game’’ [(i.e., its own capital
contributions)]—and not with respect to
the other’’ categories of customer
property that are enumerated in
§ 190.19(b)(1). The Commission agrees
that its intent should be clarified to
reflect the comment from SIFMA AMG/
MFA,207 and is modifying the language
of § 190.19 to reflect that clarification.
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is
adopting § 190.19 as proposed, with a
modification to clarify that the reference
to the debtor’s recovery and wind-down
plans in paragraph (b)(1) applies only to
paragraph (b)(1)(ii), as set forth above.
D. Appendix A Forms
The Commission is deleting forms 1
through 3 contained in appendix A and
is replacing form 4 with a streamlined
proof of claim form. Current forms 1
through 3 contain outdated provisions
that require unnecessary information to
be collected. The Commission believes
these changes will provide a trustee
with flexibility to act based on the
specific circumstances of the case, while
still acting consistently with the rules.
As noted in § 190.03(f), the trustee
will be permitted, but not required, to
use the revised template proof of claim
form included as new appendix A. That
206 FIA’s concerns with the language in
§ 190.19(b) are the same as its concerns with
§ 190.15(b) and (c), discussed in greater detail
above. See supra section II.C.5. However, for the
reasons noted in section II.C.5, the Commission
believes that providing a ‘‘menu of options’’ among
which a trustee may select (and adapt) in a manner
that is ‘‘reasonable and practicable’’ would provide
the trustee with a helpful roadmap to determine
strategy and tactics, given that the trustee will likely
face a complex and difficult situation with little
preparation.
207 As SIFMA AMG/MFA correctly suggested, the
Commission intends for the debtor DCO’s recovery
and wind-down plans to apply to the property
described in § 190.19(b)(1)(ii), and not to the
property described in paragraph (b)(1)(i), (iii) or
(iv), in the manner and to the extent described in
paragraph (b)(1). As noted in the preamble to the
proposal, and as found in the regulation itself,
§ 190.19(b)(1)(ii) contains an explicit reference to
‘‘recovery and wind-down plans,’’ whereas
§ 190.19(b)(1)(i), (iii) and (iv) do not contain such
references.
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template is intended to implement
§ 190.03(e), and includes crossreferences to the detailed paragraphs of
that section. Similarly, the instructions
for this template form that are included
in appendix A are also designed to aid
customers in providing information and
documentation to the trustee that will
enable the trustee to decide whether,
and in what amount, to allow each
customer’s claim consistent with part
190.
The Commission received one
comment with respect to appendix A,
from CME, which opined that ‘‘the
proposed template proof of claim form
included as Appendix A [is a] major
improvement[ ] over the current . . .
proof of claim template. CME also
support[ed] giving the trustee the
flexibility to tailor the proof of claim
form to request information of
customers as appropriate under the
circumstances.’’
Accordingly, after consideration of
this comment, and for the reasons stated
above, appendix A to part 190 will be
adopted as proposed.
E. Appendix B Forms
Appendix B to part 190 contains
special bankruptcy distribution rules.
These rules are broken into two
frameworks. Framework 1 provides
special rules for distributing customer
funds when the debtor FCM
participated in a futures-securities
cross-margining program that refers to
that framework. Framework 2 provides
special rules for allocating as shortfall in
customer funds to customers when the
shortfall is incurred with respect to
funds held in a depository outside the
U.S. or in a foreign currency.
The Commission proposed clarifying
changes to framework 1. No comments
were received with respect to
framework 1. Accordingly, and for the
reasons stated above, the Commission is
adopting appendix B, framework 1 as
proposed.
The Commission proposed to retain
framework 2 with some clarifying
changes to the opening paragraph, but
without proposing any substantive
change. It proposed to retain the current
instructions and examples following the
first paragraph in appendix B,
framework 2 entirely unchanged. It
requested comment with respect to
framework 2. The Commission received
two comments on framework 2: From
the ABA Subcommittee, and from a
number of individual members of that
subcommittee writing on their own
behalf.
The ABA Subcommittee expressed
the concern that ‘‘[f]ramework 2 creates
some ambiguity on when and how the
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special distribution framework it
prescribes should apply.’’ First, the
ABA Subcommittee stated that
‘‘framework 2 could be read to apply
whenever there is a loss resulting from
a sovereign action, even if there is
sufficient customer property to
otherwise pay all customer net equity
claims in full.’’ The ABA Subcommittee
suggested that an additional sentence be
added to the opening paragraph of
framework 2 clarifying that it applies
only when there is a loss due to
sovereign action and there is
insufficient customer property to pay all
customer net equity claims in full.
Second, the ABA Subcommittee (in
conjunction with a clarifying comment
from the Subcommittee Members) noted
that framework 2 uses the term
‘‘reduction in claims’’ in a potentially
confusing manner—framework 2 is
intended to reduce distributions
allocated to those customers who are
allocated losses due to sovereign risk;
those customers claims are not reduced.
If the sovereign action is later reversed
or modified, those customers whose
distributions were reduced will receive
increased distributions on their claims.
Third, the existing instructions to
framework 2 ‘‘establish the ‘Final Net
Equity Determination Date’ as the date
for both converting customer claims to
U.S. dollars and determining the
amount of the Sovereign Loss.’’
However, in prior bankruptcies of FCM/
commodity brokers, ‘‘claims stated in
foreign currencies were either valued on
the date of transfer (where porting was
available), or converted to U.S. dollars
as of either as of the petition date or the
date on which the foreign currency
reflected in the customer’s account was
liquidated (and thus the customer bore
the risk of interim currency
fluctuations).’’ Furthermore, ‘‘a
sovereign action could take place at any
time after the petition date, and the
trustee is required to make funded
balance calculations throughout the
course of the bankruptcy case for
purposes of porting and/or making
interim distributions.’’
The Commission finds the comments
on framework 2 of the ABA
Subcommittee, as clarified by the
comment of the Subcommittee
Members, persuasive. First, framework 2
is indeed only intended to address cases
where there is insufficient customer
property to pay all customer net equity
claims in the relevant account class in
full (if there is no shortfall, then there
is no need to allocate losses), and that
point should be made clear. Second, it
is correct that framework 2 is intended
to reduce distributions, it is not
intended to reduce claims, and it is
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19383
indeed appropriate to change the
language used in framework 2 to clarify
this fact.208 Third, the relevant date is
the date of the calculation, not the
‘‘Final Net Equity Determination Date,’’
and this should be clarified as well.
Accordingly, the Commission is:
(1) Modifying the first paragraph of
framework 2 to include the statement
that: ‘‘If a futures commission merchant
enters into bankruptcy and maintains
futures customer funds or Cleared
Swaps Customer Collateral in a
depository outside the U.S. or in a
depository located in the U.S. in a
currency other than U.S. dollars, and a
sovereign action of a foreign government
or court has occurred that contributes to
shortfalls in the amounts of futures
customer funds or Cleared Swaps
Customer Collateral, the trustee shall
use the following allocation
procedures’’ (emphasis added solely for
illustration).
(2) Amending the instructions and
examples within the whole of
framework 2 to replace references to
‘‘reduction in claims’’ with references to
‘‘reduction in distributions,’’ and with
conforming changes to other text.
(3) Deleting the phrase ‘‘Final Net
Equity Determination Date’’ from
current section II.B.2.b of framework 2,
and replacing it with the phrase ‘‘date
of the calculation.’’
Accordingly, after consideration of
the comments, and for the reasons
stated above, the Commission is
adopting appendix B, framework 2 as
proposed, with the modifications
described above.
F. Technical Corrections to Other Parts
1. Part 1
The Commission is making as
proposed several technical corrections
and updates to part 1 in order to update
cross-references. These are as follows:
• In § 1.25(a)(2)(ii)(B) the Commission
will revise the cross-reference to
specifically identifiable property, since
the definition will be updated in
§ 190.01.
• In § 1.55(d) introductory text and
(d)(1) and (2), references to current
§ 190.06 will be removed consistent
208 The fact that sovereign action reduces
distributions rather than claims means that, if the
sovereign action is later reversed or modified (e.g.,
by appeal in the foreign courts, or due to recovery
of assets in the foreign insolvency proceeding)
resulting in reduced losses due to sovereign action
in a particular jurisdiction, those customers whose
distributions have been reduced due to sovereign
action in that jurisdiction will receive increased
distributions on their claims (with those
distributions adjusted to reflect the revised amount
of losses due to sovereign action). Thus, in this
case, the claims remain constant, while the
distributions increase.
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with the revisions to new § 1.41 (which
was proposed as § 190.10(b) and
renumbered).
• In §§ 1.55(f) and 1.65(a)(3)
introductory text and (a)(3)(iii) the
Commission will update references to
the customer acknowledgment in
§ 1.55(p) (which was proposed as
§ 190.10(e) and renumbered).
2. Part 4
In part 4, the Commission is making
as proposed minor technical
corrections: In §§ 4.5(c)(2)(iii)(A),
4.12(b)(1)(i)(C), and 4.13(a)(3)(ii)(A), the
Commission will change the crossreferences to the defined term for ‘‘inthe-money-amount.’’
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3. Part 41
In part 41, the Commission is making
as proposed one technical correction. In
§ 41.41(d), the Commission will delete
the cross-reference to the recordkeeping
obligations in current § 190.06, pursuant
to the revisions to § 1.41 (which was
proposed as § 190.10(b) and
renumbered).
No comments were received with any
of these technical corrections and
accordingly, for the reasons stated
above, they are being adopted as
proposed.
G. Additional Comments
In addition to the comments
discussed above, the Commission
received several general comments that
addressed matters outside the scope of
the Proposal. The Commission
appreciates the additional feedback.
Because these comments do not address
proposed changes and are therefore
outside the scope of this rulemaking, the
Commission may take the comments
under advisement for future
rulemakings.
ISDA encouraged the Commission to
continue working on DCO recovery and
resolution issues alongside the Federal
Deposit Insurance Corporation (FDIC) in
the United States, and with global
standard setters such as CPMI–IOSCO
and the Financial Stability Board and
other CCP supervisors and resolution
authorities internationally. The
Commission notes that staff are actively
doing each of those things.
ISDA also noted that it would be
advisable to engage in workshops with
both market participants (including
DCOs, FCMs and other clearing
members and customers) and the FDIC
prior to finalizing the Proposal to
develop examples that illustrate both
how net equity claims would be
calculated in a hypothetical DCO
insolvency under various loss scenarios
and how the claims of creditors and
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equity would be treated in a resolution
of the DCO under Title II of the DoddFrank Act. ISDA observed that the
Proposal’s treatment of a DCO’s
insolvency contains significant
subtleties and nuances that could have
implications for the counterfactual in a
DCO resolution. ISDA suggested that
further engagement could help ensure
that these subtleties and nuances would
not result in any unintended
consequences, and that they are broadly
understood by all entities that could be
impacted by a DCO’s insolvency or
resolution.
While the Commission is finalizing
the Proposal, it agrees that workshops
and similar interactions between staff
and other agencies, as well as with
industry participants, are an excellent
way to expose subtleties and nuances,
build common understanding, and
enhance planning.
CME and CMC commented on various
issues relating to delivery, and
requested that ‘‘the Commission
consider, in a separate rulemaking, the
merits of imposing custody
requirements or other customer
protection requirements with respect to
delivery accounts, along with the
possibility of further subdividing
delivery accounts and delivery account
classes by underlying asset class or
delivery mechanism, e.g., electronic
transfer versus physical load-out.’’ 209
CME recommended that the separate
rulemaking consider requirements such
as whether FCMs should hold such
property in custody accounts or
limitations on how long cash or cash
equivalents should be held in delivery
accounts that are not subject to custody
requirements.210 CME believed that any
such rules would fit best in the
Commission’s part 1 regulations and not
in part 190 as parties with delivery
obligations may not necessarily be
aware of requirements in the bankruptcy
regulations. CME recommended that the
part 190 provisions relating to the
delivery account class should be
consistent with any such rules the
Commission may ultimately adopt.
Thus, CME believed that the
Commission may have to revisit the
delivery account class definition, and
any appropriate subdivisions within the
account class, along with the definitions
of cash delivery property and physical
delivery property definitions, based on
the outcome of such a rulemaking.
209 See
CMC, CME.
CME. CME believed that the Commission
has authority to adopt such a rule pursuant to its
anti-fraud authority under CEA section 4b and its
plenary authority to regulate commodity options
under CEA section 4c(b).
210 See
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As noted above, the Commission
recognizes the importance of addressing
deliveries and delivery accounts, in
order to protect customer funds in
delivery accounts, to avoid disruptions
to cash markets for delivered
commodities, and to avoid adverse
consequences to parties that may be
relying on delivery taking place in
connection with their business
operations. The Commission notes that
there potentially would be benefits to
requiring segregation for delivery
accounts, but there would be
corresponding costs as well. The
Commission expects to continue its
consideration of such delivery and
delivery account issues in the future.
SIMFA AMG/MFA understood the
Commission’s decision, due to limited
resources, not to amend certain key
definitions and concepts outside part
190, as proposed by the ABA
Subcommittee in its model set of part
190 rules, within this rulemaking. These
amendments include, e.g., the
definitions of foreign option and
variation margin, as well as regulations
concerning non-swap and non-futures
over-the-counter transactions cleared by
a DCO and concerning leverage
transaction merchants. However, SIFMA
AMG/MFA recommended that the
Commission make these amendments as
soon as possible, given the beneficial
impact such changes will have on the
administration of an FCM or DCO
insolvency. The Commission may
consider these proposed changes in the
future.
ICI and Vanguard encouraged the
Commission to work with other
regulators to minimize existing barriers
to porting, particularly for FCMs dually
registered as broker-dealers, FCMs
within consolidated groups that are
subject to certain due diligence
requirements, and FCMs that are subject
to the FDIC’s Orderly Liquidation
Authority proceedings. The commenters
encouraged the Commission to work
with regulators to permit similar sixmonth grace periods and remove the
requirement to port ‘‘all or none’’ of the
positions instead of allowing partial
transfers of customer positions,
including those of separately managed
accounts.
ICI also recommended that the
Commission engage with SIPC or the
relevant bankruptcy court to ensure that
any selected trustee has the experience
and knowledge to act in accordance
with the duties contained in part 190
and Subchapter IV of the Bankruptcy
Code.
Commission staff have and will
continue to work with staff of other
regulators to minimize barriers to
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porting, and have worked and will, if
and when necessary in future, work
with SIPC and the office of the U.S.
Trustee, to promote the appointment of
the most knowledgeable trustees
available in the context of SIPA or
Chapter 7 proceedings, respectively,
involving a commodity broker.
ICI recommended that the
Commission continue its portfolio
margining harmonization efforts with
the SEC to further facilitate portfolio
margining, including with respect to
security-based swaps and swaps. The
Commission notes that the two
Commissions are actively engaging in
such efforts, and, on October 22, 2020,
held a joint meeting during which they
jointly approved a ‘‘Request for
Comment: Portfolio Margining of
Uncleared Swaps and Non-Cleared
Security-Based Swaps.’’ 211
ICI and Vanguard recommended that
the Commission extend the ‘‘legally
segregated operationally commingled’’
(‘‘LSOC’’) model applied to cleared
swaps contracts (and associated
collateral) within part 22 to also apply
to futures, foreign futures, and options
thereon (and associated collateral) to
limit non-defaulting customer exposure
to defaulting customers.
ICI also requested that the
Commission or Commission staff
provide guidance, such as an
interpretive letter, that interprets part 22
to require that OTC transactions cleared
by DCOs and carried in a cleared swaps
account be treated as cleared swaps
subject to part 22.212
ICI and Vanguard recommended that
the Commission prohibit non-defaulting
customer gains haircutting, or any other
margin haircutting, and if such gains
haircutting is allowed at all, it should be
limited in scope and duration, overseen
by the DCO’s resolution authority and/
or the systemic risk authority, and the
211 85
FR 70536 (November 5, 2020).
an interpretation may be superfluous.
Previously, the Commission issued an
‘‘Interpretative Statement Regarding Funds Related
to Cleared-Only Contracts Determined To Be
Included in a Customer’s Net Equity.’’ 73 FR 57235
(October 2, 2008). At the time, prior to Dodd-Frank,
there were questions as to whether cleared-only
transactions were commodity contracts. The
Commission noted that, in cases where such
contracts are held in a futures account at an FCM
and margined as a portfolio with exchange-traded
futures, assets margining that portfolio are likely to
be includable within ‘‘net equity’’ even if such
contracts were found not to be commodity
contracts: Where the assets in an entity’s account
collateralize a portfolio containing both commodity
contracts and other contracts, the entirety of those
serves as performance bond for each type of
contracts. See id. at 57236. See also 17 CFR 22.1
(defining ‘‘Cleared Swaps Customer Collateral,’’ in
relevant part, as all property that ‘‘[i]s intended to
or does margin, guarantee, or secure a Cleared Swap
. . . .’’).
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212 Such
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customer must receive full
compensation in the form of a credit or
equity claim against the DCO, superior
to that of other creditors.
ICI and Vanguard also requested that
the Commission require DCOs to
increase their ‘‘skin-in-the-game’’ as a
foundational incentive for the DCO to
set appropriate margin levels and avoid
clearing illiquid or highly volatile
products. Vanguard also recommended
that a DCO’s capital should be required
to backstop clearing risk, should the
assets available for DCO recovery prove
inadequate.
FIA requested that the Commission
confirm that amendments to part 190,
including to appendix B, framework 2,
would not prohibit the Commission
from amending § 1.49 at a later date to
expand the definition of ‘‘money center
currency.’’
The Commission confirms that the
amendments to part 190 that are being
made herein will not prohibit the
Commission from amending any other
regulation, including § 1.49, in the
future. If future amendments to other
parts of the Commission’s regulations
lead to a situation where it would be
advisable to make conforming changes
to part 190, the Commission will
consider such conforming changes along
with those amendments.
H. Supplemental Proposal
In the Supplemental Proposal, the
Commission noted a problem to be
solved: There is a possibility that a
SIDCO could file for bankruptcy before
the process for placing that SIDCO into
Title II resolution is complete. Due to
closeout netting rules adopted by many
DCOs, including the SIDCOs, that filing
could have the consequence of
terminating all of the SIDCO’s cleared
contracts. Terminating those contracts
could undermine the success of any
subsequent Title II resolution.
The Supplemental Proposal suggested
one approach to solve the problem, and
requested comment, inter alia, on better
ways to do so. In light of concerns
raised in the comments received in
response to the Supplemental Proposal,
and for reasons discussed below, the
Commission has determined not to
finalize the alternative that was
proposed in the Supplemental Proposal.
The process for placing a financial
company into Title II Resolution is
deliberate and intricate.213 By contrast,
213 In the case of a SIDCO, this would include a
written recommendation by each of the FDIC and
the Federal Reserve covering eight statutory factors.
Following that recommendation, the Secretary of
the Treasury would then need to make a
determination, in consultation with the President,
that each of seven statutory factors is met. (The
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19385
a voluntary petition in bankruptcy
commences the case, which in turn
constitutes an order for relief.
Accordingly, there exists a possibility
that, in the highly unlikely event that a
SIDCO would consider bankruptcy, the
SIDCO could file for bankruptcy before
a process to place that SIDCO into a
Title II Resolution would have
completed. While the appointment of
the FDIC as receiver under Title II
would automatically result in the
dismissal of the prior bankruptcy, if the
bankruptcy filing were to necessarily
result in the termination of the SIDCO’s
derivatives contracts with its members,
that would undermine the potential
success of any subsequent Title II
Resolution.
To address the problem, the
Commission proposed, in the
Supplemental Proposal, to adopt a
provision that would stay the
termination of SIDCO contracts for a
brief time after bankruptcy in order to
provide advance notice to the
Commission (and, thus, to enable the
Commission to notify the key turners) of
the point at which the SIDCO’s
contracts could be terminated, in order
to foster the success of a Title II
resolution by avoiding that termination,
if the FDIC is appointed receiver in such
a Resolution within that time. During
this stay, variation margin would
neither be collected nor paid. Due to
concerns raised by commenters to the
original Proposal regarding the effect of
any restriction on termination of DCO
contracts on treatment, under the capital
regulations of Prudential Regulators of
the banks that many clearing members
are affiliated with, of SIDCO rules, the
proposal provided that this provision
would become effective only if the
Commission were to find that the
Prudential Regulators (i.e., the Federal
Reserve, the FDIC, and the Office of the
Comptroller of the Currency) have taken
steps to make such a stay consistent
with SIDCO rules retaining status as
QMNAs.214
FDIC, Federal Reserve, and Secretary of the
Treasury are often referred to as the ‘‘key turners’’
for Title II resolution). Following such a
determination, the board of directors of the
financial company may acquiesce or consent to the
appointment of the FDIC as receiver, or there may
be a period of judicial review which may extend to
24 hours.
214 Any stay (in bankruptcy) on the termination
of the SIDCO’s derivatives contracts would—under
the regulations of the Prudential Regulators of the
banks and bank holding companies that SIDCO
clearing members may be affiliated with or part of—
be inconsistent with the status of a DCO’s rules as
a qualifying master netting agreement (‘‘QMNA’’).
Qualification of DCO rules as a QMNA is necessary
in order for the banks and bank holding companies
that clearing members are affiliated with or part of
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The Commission requested comment
on all aspects of the Supplemental
Proposal, including as to whether the
approach proposed ‘‘is the best design
for such a solution.’’
The Commission received five
comments on the Supplemental
Proposal, each of which was from an
entity that commented on the
Proposal.215
Many of the commenters argued that
the proposed stay is unnecessary,
because the Commission would
inevitably have received notice of the
impending bankruptcy. For instance, ICI
(2) commented that:
Although it may indeed take some time for
the relevant agencies to ‘‘turn the three
keys,’’ a DCO’s recovery tools should give the
agencies more than enough time. DCOs have
clearing fund provisions, operational default
provisions, and a variety of other risk
management tools at their disposal. In
practice, these tools may not be completely
effective to preclude an insolvency. However,
it seems extraordinarily unlikely that they
would be so ineffective as to fail to give the
FDIC, Federal Reserve Board, and Secretary
of the Treasury enough time to decide
whether to trigger OLA proceedings.
Similarly, SIFMA AMG/MFA (2)
stated that ‘‘the possibility of a surprise
bankruptcy filing [is] implausible given
the regulatory oversight framework.’’
FIA (2) agreed, stating that:
A determination with regard to invoking
Title II will almost certainly be made before
a SIDCO is subject to an order for relief. . . .
[W]e fully anticipate that the Commission,
the FRB, the FDIC, and the Department of the
Treasury will be making an assessment
regarding the necessity and feasibility of
recommending that the President invoke
Title II and taking appropriate action before
the SIDCO concludes that it must file a
petition for bankruptcy.
CME (2) argued that:
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under the CEA oversight framework,
including a SIDCO’s reporting obligations,
surely it is reasonable to expect that the
Commission, FDIC, FRB and Treasury will be
well aware of any circumstances that could
portend a SIDCO’s failure, whatever the
cause, and will be closely monitoring the
situation. If the relevant parties are
to net the exposures of their contracts cleared with
the DCO in calculating bank capital requirements.
If they cannot net such exposures, there would be
significantly increased bank capital requirements
associated with such contracts. Such an increase in
bank capital requirements would disrupt both
proprietary and customer clearing. See generally
Supplemental Proposal, 85 FR 60110, 60112 (Sept.
24, 2020).
215 Comments on the Supplemental Proposal were
submitted by: CME Group Inc. (‘‘CME (2)’’); Futures
Industry Association (‘‘FIA (2)’’); Intercontinental
Exchange Inc. (‘‘ICE (2)’’); Investment Company
Institute (‘‘ICI (2)’’), and Securities Industry and
Financial Markets Asset Management Group and
Managed Funds Association (‘‘SIFMA AMG/MFA
(2)’’).
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contemplating placing the SIDCO into a Title
II resolution proceeding, and doing so is
feasible, it is hard to imagine that a SIDCO
could file a voluntary petition for relief under
subchapter IV of Chapter 7 of the Bankruptcy
Code without their prior knowledge.
* * *
In the highly unlike event a SIDCO were
to face a decision whether to file for
bankruptcy, it would be one of last resort,
taken only after careful deliberation. The
decision to file a voluntary petition for relief
is certainly not one that CME, or any DCO,
would take lightly.
The Commission agrees that, pursuant
to the DCO oversight framework,
including a SIDCO’s reporting
obligations under § 39.19, the
Commission would promptly be
notified of a DCO’s financial distress.
Upon learning of such distress—
whether through notification by the
DCO or by risk surveillance by
Commission staff—the Commission and
staff would monitor the situation
closely, and, in appropriate cases,
promptly contact and act in
coordination with fellow regulators,
including the Federal Reserve and FDIC
(and, as appropriate, the Department of
the Treasury). Moreover, DCOs have
strong and effective ‘‘clearing fund
provisions, operational default
provisions, and other risk management
tools at their disposal,’’ as noted in the
comment letter from ICI (2). The
Commission believes it to be
‘‘extraordinarily unlikely’’ that these
tools would fail, let alone fail before the
‘‘key turners’’ have time to act.
It is also true that, given prior
experience with discussions with DCOs
concerning defaults of clearing members
(none of which resulted in financial
distress to the DCOs), the Commission
fully expects that any DCO that is in
financial distress would be in close
contact with Commission staff. The
Commission also appreciates the
sentiment expressed by CME and
quoted above, implying that ‘‘it is hard
to imagine’’ that a SIDCO would not
provide the Commission with prior
knowledge of a voluntary bankruptcy
filing. Finally, the Commission is
confident that the decision to file a
voluntary petition for relief in
bankruptcy is ‘‘not one that . . . any
DCO would take lightly.’’
Nevertheless, given the destructive
impact that termination of the
derivatives contracts of a SIDCO would
cause, the Commission remains
concerned about the effects that a
bankruptcy filing would have on the
ability to resolve the SIDCO pursuant to
Title II successfully. In this context, it
is not enough that such an event is
‘‘implausible,’’ ‘‘hard to imagine,’’ or
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‘‘extraordinarily unlikely.’’ Knowledge
of the SIDCO’s financial distress is
distinct from knowledge of the timing of
a potential bankruptcy filing. While the
Commission would most likely be aware
of the SIDCO’s distress, it is at this point
not certain that there would be clear
communication of the SIDCO’s
intention to file for bankruptcy
sufficiently in advance that the key
turners would have time to act.
As noted in the Supplemental
Proposal, the destructive impact of a full
tear-up of a SIDCO’s contracts would be
significant. The FSOC has found that a
significant disruption or failure of either
SIDCO could have a major adverse
impact on the U.S. financial markets,
the impact of which would be
exacerbated by the limited number of
clearing alternatives currently available
for the products cleared by each SIDCO.
A failure or disruption of either SIDCO
would likely have a significant
detrimental effect on the liquidity of the
futures and options markets (for CME)
or swaps markets (for ICC), and on
clearing members, which include large
financial institutions, and other market
participants. These significant effects
would, in turn, likely threaten the
stability of the broader U.S. financial
system.216 For those reasons, inter alia,
the Commission continues to be
concerned about avoiding a
circumstance where the derivatives
contracts of a SIDCO are irrevocably
terminated because the SIDCO files for
bankruptcy before a process to place
that SIDCO into a Title II Resolution.
However, the comments expressed
strong concerns about achieving those
goals through the use of a bankruptcy
stay, especially in light of the fact that
variation margin would neither be
collected nor paid during that period.
The Supplemental Proposal
acknowledged that risk levels would
increase during the stay period.
Commenters argued that such increase
in risk exposures during the stay period
would pose unacceptable risks. For
example, CME (2) stated that
‘‘permitting the accumulation of
uncovered risk for 48 hours during an
extremely volatile time would pose a
risk to financial stability.’’ Similarly,
SIFMA AMG/MFA (2) warned that the
proposed part 190 stay, in conjunction
with the Title II stay, ‘‘would result in
extraordinary market exposures to
market participants during highly
volatile market conditions. The nonpayment of margin could also result in
a multiple day liquidity problem for
216 See 2012 FSOC Annual Report, Appendix A,
at 163, 178.
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market participants clearing at the
SIDCO.’’
The Supplemental Proposal also
acknowledged that there is a significant
cost to the proposed stay, in that ‘‘[f]or
the duration of the stay period, clearing
members and clients will be uncertain
whether their contracts will continue (as
part of a Resolution) or be terminated
(and thus would need to be replaced).
That uncertainty would mean that
clearing members and clients would be
disadvantaged in determining how best
to protect their positions.’’ Again,
commenters agreed that this cost would
ensue, and argued that it would be
unacceptable. For example, ICI (2)
observed that during the stay:
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the price of the relevant underlying assets
could (and if a SIDCO is insolvent, likely
would) move dramatically. However,
customers would be precluded from entering
into risk-reducing or replacement
transactions to stem potential losses, since
they will not know whether their contracts
will be terminated or reinstated. Such a
freeze not only threatens to cause public
customers significant losses that they cannot
mitigate; it would also create a liquidity
event because customers will need to
preserve as much liquidity as possible during
the pendency of the stay in order to meet
potential margin calls.
Commenters also raised issues
relating to legal uncertainty. For
instance, FIA (2) acknowledged that
section 20 ‘‘authorizes the Commission
to adopt rules ‘[n]otwithstanding title 11
of the United States Code’ ’’ (i.e., the
Bankruptcy Code). However, FIA
observed that ‘‘[w]hether a stay
contemplated under the Supplemental
Proposal would conflict with section
404(a) of FDICIA . . . is unclear.’’
In light of the persuasive arguments of
the commenters, the Commission
concludes that a bankruptcy stay is not
an appropriate means of achieving the
goal of fostering the success of a Title
II Resolution by avoiding the possibility
that the SIDCO could file for bankruptcy
before a process to place that SIDCO
into a Title II Resolution would have
completed with the result that all of the
SIDCO’s contracts were terminated. This
would be true even if action was taken
by the Prudential Regulators to avoid
having such a stay undermine the
QMNA status of SIDCO rules. Thus,
while the goal remains important, the
Commission will not adopt such a stay.
A number of the comments answered
the Commission’s call for a better way
of achieving that goal. SIFMA AMG/
MFA(II) stated that ‘‘[a]s an alternative
to the proposed stay, the Commission
could require, as part of its Part 39 or
Part 190 rules, that a SIDCO provide a
1 or 2 day notice to the Commission of
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any bankruptcy petition by a SIDCO. We
believe this notice requirement would
achieve the same goal in a materially
less detrimental manner.’’
CME (2) suggested the same
alternative approach to achieve the
same regulatory goal, in somewhat more
detail. CME (2) urged that the
Commission should address the
problem:
in a more direct manner, consistent with its
rulemaking authority. For example, the
Commission could require a DCO to notify
the CFTC in advance of its plan to file a
voluntary petition for relief under subchapter
IV of Chapter 7 of the Code, to allow
Treasury time to determine whether to
appoint the FDIC as receiver before the
SIDCO files its petition. We note that before
a commodity broker may file a voluntary
petition for relief under subchapter IV, its
board of directors must approve a resolution
authorizing the debtor to take that step.
The Commission agrees that the
alternative suggested by the commenters
in response to the Commission’s
request—providing the advance notice
sought by the Commission, but before a
bankruptcy filing rather than
thereafter—is one that, as FIA (2)
observed, ‘‘deserves the Commission’s
strong consideration.’’ It appears that it
may achieve the regulatory goals
specified in the Supplemental Proposal
while avoiding the concerns raised by
the commenters: By providing advance
notice to the Commission, it appears
that it may allow the Commission,
which will be coordinating with the
‘‘key-turners,’’ to advise those agencies
of the imminence of a bankruptcy filing,
and to provide them with warning at a
time that may be sufficient to enable
them to act with dispatch to complete
the process.
Because the alternative approach
would not involve a post-bankruptcy
stay, it would appear to avoid affecting
the QMNA status of SIDCO rules (and,
thus, would appear not to require any
action by the Prudential Regulators).217
Moreover, because this notice would
occur in advance of a bankruptcy filing,
the suspension of payments and
collections of variation margin would
not occur, and there would appear to be
no ambiguity concerning the status of
the cleared contracts of market
participants. By avoiding the
mechanism of a bankruptcy stay, the
Commission would also appear to avoid
the legal uncertainty issues raised by the
commenters with respect to that
mechanism. Instead, this notice
217 This also avoids the issue, raised by ICE (2),
that action by the Prudential Regulators with
respect to QMNA status may not be sufficient to
address netting issues for non-U.S. clearing
members.
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19387
approach would appear to be, as noted
by CME, well within the Commission’s
rulemaking authority.218
However, in light of the concerns
raised with the previous approaches to
addressing this problem, both the one
advanced in the Supplemental Proposal
as well as one advanced in the Proposal,
the Commission concludes that, at this
point, it should engage in further
analysis and development before
proposing this, or any other, alternative
approach. Such further analysis and
development might better enable the
Commission to propose, in detail, a
solution that is effective, and that
mitigates any attendant costs. Thus, the
Commission will, at present, keep this
issue under advisement.
III. Cost-Benefit Considerations
A. Introduction
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders.219
Section 15(a) further specifies that the
costs and benefits shall be evaluated in
light of the following five broad areas of
market and public concern: (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. The Commission
considers the costs and benefits
resulting from its discretionary
determinations with respect to the
section 15(a) factors (collectively
referred to herein as ‘‘Section 15(a)
Factors’’) below.
In the Proposal, the Commission
endeavored to assess the expected costs
and benefits of the proposed rulemaking
in quantitative terms, including costs
related to matters addressed in the
Paperwork Reduction Act 220 (‘‘PRArelated costs’’), where possible. In
situations where the Commission was
unable to quantify the costs and
benefits, the Commission identified and
considered the costs and benefits of the
applicable proposed rules in qualitative
terms. The lack of data and information
to estimate those costs was attributable
in part to the nature of the proposed
218 See, e.g., CEA section 5b(c)(2)(J), 7 U.S.C. 7a–
1(c)(2)(J) (reporting core principle); CEA section
3(b), 7 U.S.C. 5(b) (purpose of the CEA is to ensure
the financial integrity of transactions subject to the
CEA and the avoidance of systemic risk); CEA
section 8a(5), 7 U.S.C. 12a(5) (general rule-making
authority).
219 CEA section 15(a), 7 U.S.C. 19(a).
220 44 U.S.C. 3501 et seq.
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rules. None of the comments identified
quantifiable costs or benefits.
In a number of cases, commenters
suggested alternative approaches or
modifications to the proposed
provisions. The Commission has
carefully considered these alternatives
and modifications and in a number of
instances, for reasons discussed in
detail above, has adopted such
alternative approaches or modifications
where, in the Commission’s judgment,
the alternative or modified approach is
more appropriate to accomplish the
regulatory objectives. The rationale in
these cases was discussed in detail
above.
1. Baseline
The baselines for the Commission’s
consideration of the costs and benefits
of this rulemaking are: (1) The
Commission’s current regulations in
part 190, which establish bankruptcy
rules in the event of an FCM
bankruptcy; (2) current appendix A to
part 190, which contains four
bankruptcy forms (form 1—Operation of
the Debtor’s Estate—Schedule of
Trustee’s Duties; form 2—Request for
Instructions Concerning Non-Cash
property Deposited with (Commodity
Broker); form 3—Request for
Instructions Concerning Transfer of
Your Hedging Contracts Held by
(Commodity Broker); and form 4—Proof
of Claim); and (3) current appendix B to
part 190, which contains two
frameworks setting forth rules
concerning distribution of customer
funds or allocation of shortfall to
customer claims in specific
circumstances.
2. Overarching Concepts
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a. Changes to Structure of Industry
The Commission is making several
revisions to part 190 in order to reflect
the changes to the structure of the
industry since part 190 was originally
published in 1983. In particular, FCMs
and DCOs now operate in a different
world, where matters such as market
moves, transactions, and movements of
funds tend to happen much more
quickly, in part due to the advances in
technology and the global nature of
underlying markets.
These changes include major
structural changes in the financial
markets, including regulatory reforms
following the 2008 financial crisis and
consequent changes to the structure of
the derivatives markets, changes in the
governance of the market utilities, such
as DCOs, from non-profit organizations
to public companies, and major reforms
in the banking sector, followed by the
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creation of large, publicly held financial
holding companies with different
attitudes towards risk.
As a result, several of the changes to
part 190 will address these changed
circumstances. The Commission
believes that the revisions in proposed
part 190 that address the computerized
and fast-paced nature of the industry
will benefit all parties involved in a
bankruptcy proceeding, since the rules
would reflect how the industry actually
works today and will avoid unnecessary
delay to the administration of a
bankruptcy proceeding.
b. Trustee Discretion
In several places in revised part 190,
the Commission provides additional
flexibility and discretion to the
bankruptcy trustee in taking certain
actions.221 This principles-based
approach is in contrast to the customer
notice procedures in current part 190,
which are more prescribed and depend
on the type of notice being given.
The Commission has concluded that,
in general, affording more discretion to
the bankruptcy trustee in appropriate
circumstances is beneficial, and indeed
necessary, where matters are unique and
fast-paced, as they often are in
commodity broker bankruptcy
proceedings. In many areas, it is
unlikely that a prescriptive approach
can be designed that will reliably be ‘‘fit
for purpose’’ in all plausible future
circumstances.
Granting the trustee discretion is
expected to decrease, though it certainly
does not eliminate, the number and
extent of cases in which the trustee will
petition the bankruptcy court for formal
approval of an action. Each formal
approval the trustee is required to
obtain—i.e., each time the trustee moves
for an order from the bankruptcy court
authorizing the trustee to take a
particular action in a particular way—
takes significant time and involves
significant administrative costs—in
particular, the time of professionals
such as attorneys and financial experts
to draft legal pleadings and analyses.
These professionals charge significant
hourly fees, and thus their time leads to
significant administrative costs. As
discussed further below, administrative
costs can be charged against customer
property, leading to reduced recoveries
by public customers.
Therefore, increased discretion of the
trustee will benefit the estate by
allowing the trustee to make principlesbased decisions that are uniquely
221 The alternative, to forego providing such
flexibility or discretion, would invert the benefits
and costs discussed below.
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tailored to the facts and circumstances
of the particular case, rather than
compelling the trustee to follow a
procrustean framework, or requiring the
trustee to request formal approval from
the bankruptcy court or the Commission
before implementing those decisions.
This approach leads to approaches that
are better tailored to the specifics of the
circumstances, reductions in
administrative costs (leaving more funds
available for distribution to public
customers and/or other creditors) and
faster distributions of customer property
(to the benefit of public customers). It is
also intended to mitigate the negative
externalities arising from the distressed
circumstances that tend to result in
further reduction in the value of
customer assets.222
The Commission recognizes, however,
that with increased discretion comes a
risk of trustee mistake or misfeasance; in
other words, a trustee making decisions
that turn out not to be in the best
interests of public customers as a class,
or other creditors.223 While this is
certainly a potential cost in situations
where the trustee is given increased
discretion or flexibility, the Commission
believes that this potential cost will be
mitigated by (1) the high degree of
informal (and, where necessary, formal)
involvement of Commission staff in
FCM and DCO bankruptcy matters,224
and (2) the fact that such discretion
would not be unbounded and would
apply only in particular circumstances,
as discussed below.
Moreover, in response to a comment
by ICI, and as discussed further below,
the Commission is adding a clarification
in § 190.00 that where a provision in
part 190 affords the trustee discretion,
that discretion should be exercised in a
manner that the trustee determines will
best achieve the overarching goal of
protecting public customers as a class
by enhancing recoveries for, and
mitigating disruptions to, public
customers as a class. The Commission is
of the view that adding this principlesbased provision will further clarify the
duty of trustees in commodity broker
bankruptcy proceedings to act in a
222 As discussed above, see section II.B.2, while
the trustee has discretion as to how they administer
the affairs of the bankruptcy estate, a DCO of which
that FCM is a member retains its rights to act under
its rules.
223 Certain discretionary decisions a trustee may
take, for example, the frequency with which the
trustee provides information.
224 As a formal matter, the Commission has the
right to appear and be heard on any issue in any
such case. See 11 U.S.C. 762(b). As a practical
matter, trustees and their counsel have, in previous
commodity broker bankruptcies, consulted with
Commission staff frequently and on an ongoing
basis, particularly in making and implementing
important decisions.
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manner that adds benefits, and reduces
costs, to public customers as a class by,
respectively, enhancing their recoveries
and mitigating disruptions to them.
However, channeling the trustee’s
discretion towards protecting public
customers as a class may well work to
the detriment of (and thus impose costs
upon) individual public customers, or
classes of public customers, whose
interests differ from that of the class in
general. For example, certain customers
may have a particular need for current
and precise information about their
account balances and positions.225 It is
possible (though unlikely) that the
trustee might determine that it is
inordinately costly to do so for a
particular time, looking at the interests
of public customers as a class. Such a
decision would not be a mistake or
malfeasance, though one would expect
the trustee to endeavor to avoid the
necessity for doing so.
An additional risk related to increased
discretion is the possibility that parties
that are dissatisfied with the trustee’s
exercise of discretion may challenge it
in court, potentially leading to increased
litigation costs. The Commission
believes that this risk is mitigated by (1)
the fact that certain of these decisions
would be made in contexts where the
trustee would be seeking an order of the
bankruptcy court approving the trustee’s
approach (and thus the trustee’s
discretion would be subject to judicial
review within a proceeding in which
interested parties already have an
opportunity to object) and (2) the
likelihood that bankruptcy courts would
respect the Commission’s rules granting
the trustee discretion, rendering such
litigation less likely to succeed, and
quicker to resolve. Litigation that is less
likely to succeed is less likely to be
brought, and litigation that is quicker to
resolve is likely to cost less. Thus, by
granting the trustee discretion, the
Commission mitigates the cost of such
litigation.
Instances where the revisions to
proposed part 190 will afford more
flexibility or discretion to the
bankruptcy trustee are discussed in
further detail where they appear in each
provision below.
c. Cost Effectiveness and Promptness
Versus Precision
In revising part 190, the Commission
has endeavored to effect a proper
balance between cost effectiveness and
promptness, on the one hand, and
225 See ICI at 22 (failure of trustee to provide
account statements or information about funded
balances could ‘‘hinder the ability of a regulated
fund to confirm the existence and value of its
transactions and associated margin.’’)
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precision, on the other hand. Current
part 190 favors cost effectiveness and
promptness over precision in certain
respects, particularly with respect to the
concept of pro rata treatment. As a
result of the policy choice made by
Congress in section 766(h) of the
Bankruptcy Code, part 190 proceeds
from the principle that it is more
important to be cost effective and
prompt in the distribution of customer
property (i.e., in terms of being able to
treat public customers as part of a class)
than it is to value each customer’s
entitlements on an individual basis. The
revisions to part 190 take this concept
further, recognizing that there are
additional circumstances where cost
effectiveness and promptness in the
administration of a bankruptcy
proceeding should have higher priority
than precision. However, in response to
ICI’s comment, the Commission has
clarified that where the trustee is
directed to exercise ‘‘reasonable efforts’’
to meet a standard, those efforts should
only be less than ‘‘best efforts’’ to the
extent that the trustee determines that
such an approach would support the
goal of protecting public customers by
enhancing recoveries for, and mitigating
disruptions to, public customers as a
class.226 Thus, the Commission
recognizes that there are limits to the
extent to which cost effectiveness and
promptness will be favored over
precision as discretion must be
exercised in furtherance of the
overarching goal of protecting the
interests of public customers as a class.
The Commission believes that these
revisions favoring cost effectiveness and
promptness over precision further the
policy embodied in section 766(h) of the
Bankruptcy Code and benefit parties
involved in a bankruptcy proceeding
overall, in that they will in general lead
to: (1) A faster administration of the
proceeding; (2) public customers
receiving their share of the debtor’s
customer property more quickly; and (3)
a decrease in administrative costs.
There could, however, be
corresponding costs to this approach for
some public customers in that they may
lose out on being treated precisely in
terms of their individual circumstances
(and, for example, may receive a smaller
distribution of customer property than
otherwise).
d. Unique Nature of Bankruptcy Events
The Commission recognizes in
revised part 190 that there is no onesize-fits-all approach to the
administration of the bankruptcy of an
226 See comparison of best efforts to reasonable
efforts in section II.A.1 above.
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19389
FCM or a DCO, and that it is important
that the rules allow the trustee, in
conducting that administration, to take
into account the unique nature of each
of these events. The revisions to
proposed part 190, therefore, address
the uniqueness of these bankruptcy
events and allow for the bankruptcy
trustee to tailor their approach in the
way that most makes sense given the
individual circumstances of the case at
hand.227 History has shown that FCM
bankruptcies play out in very different
ways, and several of the Commission’s
revisions to part 190 address that
reality. These new provisions reflect the
fact that each FCM and DCO bankruptcy
presents individual circumstances, and
that the proof of claim form will likely
have to be modified to fit the unique
facts and circumstances of each case.
The Commission believes that the
revisions of this type will benefit all
parties involved in a bankruptcy
proceeding by better tailoring such a
proceeding to the unique needs of the
particular case.
However, by providing for a bespoke
tailoring of the approach to commodity
broker bankruptcy, the Commission
inherently provides less transparency,
and thus less certainty, of the
particulars of the approach that will be
followed.
e. Administrative Costs are Costs to the
Estate, and Often to the Customers
In many instances in this adopting
release, the Commission is noting that a
certain provision will impose or reduce
administrative costs, that is, the actual
and necessary costs of preserving the
bankruptcy estate and administering the
case. In each of these cases,
administrative costs will be a cost to the
estate of the debtor, since administrative
expenses that the bankruptcy trustee
incurs in administering the estate
(including for the time of the trustee,
accountants, counsel, consultants,
etc.) 228 will be passed onto the estate
227 Circumstances that may vary include: The
accuracy of the commodity broker’s records at the
time of bankruptcy; whether the bulk of an FCM’s
customer accounts were transferred in the days after
the filing date (or otherwise migrated in the days
before); the number of customer accounts; the
existence and extent of a shortfall in customer
funds; and the complexity of the positions carried
by the commodity broker.
228 Pursuant to section 503(b)(1) of the Code,
administrative costs include the actual, necessary
costs and expenses of preserving the estate; and
pursuant to section 330(a)(1)(A) of the Code, the
Court may award ‘‘reasonable compensation for
actual, necessary services rendered by the trustee
. . . professional person, or attorney . . . .’’ Factors
that are considered in determining ‘‘reasonable
compensation’’ include the time spent on the
services, the rates charged, the customary
compensation charged by comparably skilled
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itself. This means that, in the event of
a shortfall, such costs will ultimately be
borne by the public customers of the
debtor, who will receive smaller
dividends on their claims as the value
of the debtor’s estate decreases.229 By a
parity of reasoning, reducing such
administrative costs will reduce the
shortfall, and increase recoveries by
public customers.
To be sure, the actions taken to
achieve these cost efficiencies that
enhance the value of the estate for
public customers as a whole may
impose costs on individual public
customers.
f. Preference for Public Customers Over
Non-Public Customers and for Both
Over General Creditors
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As noted repeatedly above, and
consistent with the requirements of
section 766(h) of the Bankruptcy Code
and longstanding Commission policy,
many provisions in part 190 favor
public customers over non-public
customers, and both over general
creditors, whenever there is a shortfall
in customer property in any account
class for public customers (or, with
reference to general creditors, for nonpublic customers).
The preference for public customers
benefits them, and provides them with
incentives to participate in transactions
protected by part 190, and to post
collateral willingly. However, this
preference correspondingly disfavors
non-public customers. Accordingly, it
arguably provides them with incentives
to participate less in transactions
protected by part 190—or, perhaps, to
clear through unaffiliated FCMs (and
thus, to do so as public customers of
those FCMs).
Similarly, the preference for both
public and non-public customers over
general creditors may incentivize
general creditors to be less willing to
extend credit to commodity brokers.
However, in light of the fact that
commodity brokers are highly regulated
entities subject to stringent capital or
resource requirements, this incentive
effect with respect to general creditors is
not likely to be strong.
practitioners, and whether the services were
necessary to the administration of the case. See
generally 11 U.S.C. 330(a)(3).
229 While such costs may in certain cases be borne
instead by general creditors, section 766(h) permits
customer property to be used to meet ‘‘claims of a
kind specified in section 507(a)(2)’’ of the
Bankruptcy Code (which in turn include claims for
the expenses of administering the estate) ‘‘that are
attributable to the administration of customer
property.’’
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B. Subpart A—General Provisions
1. Regulation § 190.00: Statutory
Authority, Organization, Core Concepts,
Scope, and Construction: Consideration
of Costs and Benefits
Section 190.00 contains general
provisions applicable to all of part 190.
These provisions set forth the concepts
that guide the Commission’s bankruptcy
regulations. All of § 190.00 is new, in
that current part 190 does not contain
an analogous regulation. However, only
certain provisions within § 190.00 have
cost-benefit implications, since the bulk
of § 190.00 is designed to explain
concepts that are either (1) not different
from those contained in current part
190, but are simply stated more
explicitly in the revised rules, or (2)
new, in that they are not contained in
current part 190, but are concepts that
are meant to clarify how revised
substantive provisions operate. In the
latter case, cost and benefit
considerations are addressed with
respect to the substantive provisions.
The Commission requested comment
on all aspects of its cost and benefit
considerations with respect to proposed
§ 190.00.
There are potential costs associated
with § 190.00(c)(4) which promotes the
transfer or porting of the open
commodity contract positions of a
bankrupt FCM’s public customers rather
than the liquidation of these positions.
For example, OCC commented that
while liquidating customer positions
may introduce market risk associated
with closing out and reopening
positions for certain customers, those
risks should be weighed against the
potential drawbacks of porting,
especially if an FCM to accept the
transfer is not immediately identified.
Specifically, OCC identified three
potential drawbacks with the proposed
§ 190.00(c)(4). First, that it could be
difficult for a trustee (or DCO) to
identify a transferee to accept the open
positions and collateral, which
depending on the market conditions
could be a difficult and time-consuming
process. Second, a customer could face
uncertainty as to how its position and
associated collateral will be resolved
until a transfer is complete and also may
be unable to exit a position in a timely
and efficient manner. Third, a customer
might need to post additional collateral
at a new FCM prior to or immediately
after a transfer.
In considering the costs and benefits
of the preference for transfer versus
liquidation, the Commission notes first
that, as OCC forthrightly acknowledged,
liquidating customer positions may
introduce market risk associated with
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closing out and reopening positions for
certain customers. Additionally,
liquidating a mass of customer positions
may roil the markets, if any, where
those positions are concentrated.
Furthermore, § 190.00(c)(4)
establishes a preference for transfer
rather than a mandate. Thus, if after
exerting their best efforts, the trustee
finds that the process of transfer is
indeed too ‘‘difficult and timeconsuming,’’ the trustee is not obligated
to implement a transfer. Moreover, as a
practical matter, there are narrow limits
to how long a trustee will have to
endeavor to transfer before being
compelled to liquidate positions by the
DCO at which they are held, or, if
applicable, an FCM through which they
are held. (Either the DCO or the FCM,
whichever is applicable, will have the
discretion to liquidate positions that are
being cleared/carried for an FCM that is
in bankruptcy).230 Pursuant to
§ 190.04(d), if the trustee is not
successful in transferring an open
contract by the seventh calendar day
after the order for relief consistent with
§ 190.04(a), the trustee is directed to
liquidate such contract promptly and in
an orderly manner. Thus, while a
customer could face uncertainty as to
how its position and associated
collateral will be resolved until a
transfer is complete (or until the
customer’s positions are otherwise
liquidated), the time of that uncertainty
is both practically and legally limited.
Finally, a customer who does not wish
to post additional collateral at a new
FCM would be entitled to have the new
FCM liquidate their positions, and
promptly receive any remaining
transferred collateral. In this light, the
Commission believes that the benefits of
continuing the preference for transfer
remain significant, while the costs of
this preference are mitigated.
There are potential benefits arising
from reduced uncertainty as a result of
clarifications provided in several
provisions. For example,
§ 190.00(d)(1)(ii), clearly expresses that
part 190 applies to a proceeding
commenced under SIPA with respect to
a debtor that is registered as a broker or
dealer under the CEA when the debtor
also is an FCM. Similarly, § 190.00(e)
clarifies how transactions and collateral
that are portfolio margined are treated as
an important prerequisite to an effective
portfolio margining program. Cboe’s
comment letter expressed the view that
the clarity provided in § 190.00(d)(1)(ii)
will be beneficial to the entire
230 For example, as noted above in section II.A.1,
OCC’s own rules would appear to permit it to
liquidate such positions.
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ecosystem, including customers of
FCMs and broker-dealers, as it furthers
the ability of market participants to
utilize portfolio margining and the
associated efficiencies. CME also saw
benefits to ‘‘remov[ing] any doubt’’ that
part 190 applies to a SIPA proceeding
involving an FCM that is also registered
with the SEC as a broker-dealer.
Similarly, ICI’s comment letter
considered that the ‘‘home field’’ rule in
§ 190.00(e) is highly beneficial.
With respect to the remaining
provisions within proposed § 190.00,
the Commission has not received
comment letters that identify costs or
benefits explicitly attributed to these
provisions, and does not believe that
there are material cost-benefit
implications with respect to them:
• Proposed § 190.00(a), which sets
forth the statutory authority pursuant to
which the Commission is proposing to
adopt proposed part 190.
• Proposed § 190.00(b), which
describes how the proposed rules are
organized into three subparts. While the
addition of DCO-specific rules in this
proposal is new, the cost-benefit
implications of the DCO-specific
provisions (§§ 190.11 through 190.18)
are discussed separately below.
• Section 190.00(c)(2), which
provides that part 190 establishes four
separate account classes, each of which
is treated differently under the
regulations. In the Commission’s view,
this provision is a mere clarification, as
current part 190 also establishes
different account classes for different
types of cleared commodity contracts,
and treats each account class differently.
• Section 190.00(c)(5), which
explains that part 190 applies the
concept of pro rata distribution when it
comes to shortfalls of property in a
particular account class. This provision
is merely explanatory.
• Section 190.00(d)(1)(i)(A), which
provides that the definition of
‘‘commodity broker’’ in proposed part
190 covers both ‘‘futures commission
merchants’’ and ‘‘foreign futures
commission merchants’’ because both
are required to register as FCMs under
the CEA and Commission regulations.
• Section 190.00(d)(2)(i), which states
that the bankruptcy trustee may not
recognize any account class that is not
one of the account classes enumerated
in proposed § 190.01.
• Section 190.00(d)(3), which sets
forth the transactions that are excluded
from the definition of ‘‘commodity
contract.’’ This provision explains and
carries over concepts that are already
embedded in current part 190.
While the Commission has not
received comment letters that identify
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costs or benefits explicitly attributed to
the following provisions in § 190.00, it
believes that there will be cost-benefit
implications to these provisions:
• Section 190.00(c)(1) states that part
190 is limited to a commodity broker
that is (1) an FCM as defined by the CEA
and Commission regulations, or (2) a
DCO under the CEA and Commission
regulations. Current part 190 applies to
a broader set of ‘‘commodity brokers,’’
including FCMs, clearing organizations,
commodity options dealers, and
leverage transaction merchants. This
narrowing of the application of part 190
(by excluding the empty categories of
commodity options dealers and leverage
transaction merchants) benefits the
bankruptcy estate, and the customers,
by allowing the Commission to
promulgate regulations that are less
complex and better tailored to the
narrower, set of commodity brokers that
are covered by the revised
regulations.231
• Section 190.00(c)(3) explains the
distinction between ‘‘public customers’’
and ‘‘non-public customers,’’ and the
priority that public customers (and, after
them, non-public customers) enjoy over
all other claimants with respect to
distributions of customer property. Both
of these concepts exist in current part
190 and are clarified and explained
further in § 190.00(c)(3). In its comment,
ICI urged the Commission to take steps
‘‘to help ensure that the trustee
prioritizes the protection of [public]
customers.’’ In response, Commission
has added a provision,
§ 190.00(c)(3)(i)(C), directing the trustee
to exercise its discretion (where it has
such discretion) in a manner that will
best achieve the overarching goal of
protecting public customers by
enhancing recoveries for, and mitigating
disruptions to, public customers as a
class.232 This approach has the benefit
of guiding the trustee’s discretion in a
manner consistent with the
Commission’s regulatory and statutory
goals. However, it has the limitation of
still leaving the trustee with discretion.
As noted above in section III.A.2 above,
with discretion comes a risk of trustee
mistake or misfeasance.
• Section 190.00(c)(6) addresses the
treatment of commodity contracts that
require delivery performance. The
revised regulations, in allowing the
231 Moreover, prescribing regulations that are
intended to be applicable to entities that, at some
unknown point in the future, enter these empty
categories risks poor tailoring due to lack of data
concerning the characteristics of those unknown
future entrants.
232 As noted above in section III.A.2.vi, the
preference for public customers over non-public
customers creates incentives for both groups.
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19391
trustee more flexibility in how a
customer could effect delivery outside
of the debtor’s estate, will benefit
customers by allowing for a more
bespoke approach to effecting delivery
when customers incur delivery
obligations under their open commodity
contracts. There will, however, be costs
in acting in such a bespoke fashion in
contrast to following standards
established during business as usual.
• Section 190.00(d)(1)(i)(B) notes that
while there are currently no registered
leverage transaction merchants or
commodity options dealers, the
Commission intends to adopt rules with
respect to leverage transaction
merchants or commodity options
dealers at such time as an entity
registers as one of those categories of
commodity brokers. This forwardlooking flexibility will generate benefits
by fostering bankruptcy rules
specifically tailored to leverage
transaction merchants or commodity
options dealers when and if an entity
registers as such.
• Section 190.00(d)(1)(iii), provides
that part 190 shall serve as guidance as
to the distribution of customer property
and member property in a proceeding in
which the FDIC is acting as receiver
pursuant to Title II of Dodd-Frank.233
This provision has the benefits
associated with transparently providing
to FDIC during business-as-usual the
expertise and guidance of the agency
with regulatory and supervisory
responsibility for commodity brokers
(i.e., FCMs and DCOs).234
• Section 190.00(d)(2)(ii) provides
that no property that would otherwise
be included in customer property shall
be excluded from customer property
because it is considered to be held in a
constructive, resulting, or other trust
that is implied in equity. It prevents
public customers from evading pro rata
exposure to shortfalls in customer
property by keeping their collateral in a
trust structure. This provision has the
233 Section 210(m)(1)(B) of title II,12 U.S.C.
5390(m)(1)(B), requires the FDIC, where the covered
financial company or bridge financial company is
a commodity broker, to apply the provisions of
subchapter IV as if the financial company were a
debtor for purposes of such subchapter.
234 DCOs operate nearly 24-hours a day, between
Sunday afternoon and Friday evening. Moreover,
the risks that a DCO is required to manage are based
on market movements and events (including in
OTC markets) that may occur whether or not the
DCO is able to operate. Accordingly, Commission
staff (in cooperation with FDIC staff) have engaged,
and will continue to engage, in significant efforts
to plan for the unlikely event that resolution under
Title II would be necessary for a DCO.
Thus, there is a public benefit to facilitating
FDIC’s efforts in resolution planning for DCOs by
setting forth clear guidance as to the distribution of
customer property and member property in a DCO
resolution proceeding.
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benefit of supporting the statutory
policy of pro rata distribution for the
pool of customers, by ensuring that all
property that properly belongs in the
category of ‘‘customer property’’ would
be considered such customer property.
It should mitigate costs in cases where
particular customers might structure
their relationships with their FCMs in
order to establish such a trust for the
purpose of thwarting their exposure to
pro rata distribution, rather than
structuring those relationships in ways
that otherwise make sense for their
business. It would also reduce those
customers’ incentives to do so, and
would mitigate the costs of litigation
within the bankruptcy proceeding over
the effectiveness of such structures in
achieving that goal. It also benefits the
remaining customers, since if such
litigation were successful, it would
spread the pro rata shortfall over a
smaller volume of customer claims.
• However, this approach will impose
costs on those customers, if any there
be, who would otherwise endeavor to
rely on the trust concept to shield
certain of their property from entering
the pool of customer property. Such
customers might (despite opposition
from the Commission and the trustee)
otherwise be successful in litigation
over the effectiveness of such
arrangements, or may obtain settlements
that would benefit their individual
claims (albeit to the detriment of other
customers, and to the policy of pro rata
distribution). Such customers may view
the inability to protect their collateral
under a trust concept as an incentive to
reduce their use of transactions subject
to part 190.
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2. Regulation § 190.01: Definitions:
Consideration of Costs and Benefits
Section 190.01 sets forth definitions
as they are used for purposes of part
190. In the Commission’s view, only
certain of the definitions in proposed
§ 190.01 will have cost-benefit
implications, and these are discussed in
more detail below, as are any definitions
concerning which there were comments.
The remainder of the definitions set
forth in revised § 190.01 do not, in the
Commission’s view, impose any costs or
benefits, as the changes to the
definitions are minor (in the vein of, for
example, updating cross-references or
updating language to reflect the changes
in the rest of revised part 190) or merely
clarify the current definition.
Where, in the Commission’s view, a
definition in revised § 190.01 has costbenefit implications, and/or where
comments have identified costs or
benefits concerning such a definition,
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those implications are discussed in
more detail below:
• ‘‘Account class,’’ ‘‘cash delivery
property,’’ and ‘‘physical delivery
property’’: The definition of the term
‘‘account class’’ is expanded to include
definitions of each type of account class
set forth in proposed part 190: Futures
account, foreign futures account, cleared
swaps account, and delivery account.
The ABA Subcommittee recommended
that the Commission clarify that these
types of account classes apply to nonpublic customers in addition to public
customers. The Commission agrees that
it is appropriate to clarify this point,
and to include a specific definition for
each type of account class. Doing so will
benefit all parties involved in a
bankruptcy proceeding by ensuring that
all have a common understanding of
how these various types of accounts are
defined for purposes of part 190.
Accordingly, the Commission is
adopting the ABA Subcommittee’s
recommendation.
• The definition of ‘‘account class’’
also removes the category in current
part 190 of ‘‘leverage account’’ because,
as noted above, there are currently no
registered leverage transaction
merchants. Rather, the Commission
intends to adopt rules with respect to
leverage transaction merchants (and,
accordingly, with respect to leverage
accounts) at such time as an entity
registers as such. Removal of the
category of ‘‘leverage account’’ from the
‘‘account class’’ definition benefits
market participants by allowing the
Commission to promulgate bankruptcy
rules specifically tailored to leverage
transaction merchants (and,
accordingly, to leverage accounts) in the
event an entity registers as such.
• The definition of ‘‘account class’’
also splits ‘‘delivery accounts’’ into
separate physical and cash delivery
account classes. Because cash delivery
property is, in some cases, more
difficult to trace to specific customers
and more vulnerable to loss,235 this
separate treatment of physical delivery
property and cash delivery property
should benefit customers with physical
delivery property by allowing for more
prompt distribution of such physical
delivery property. This separation
should also benefit the estate, because
the trustee will not have to wait to
distribute physical delivery property to
customers while attempting to trace
cash delivery property, which could
result in a more prompt resolution of
235 These
reasons for this difficulty and
vulnerability are discussed above in section II.B.4
in the explanation of the changes to proposed
§ 190.06(b).
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the bankruptcy as a whole. However,
there may be costs as a result of
complications, since the trustee will
have to deal with two delivery account
subclasses rather than one delivery
account class. Moreover, in the event of
a shortfall, some customers could
ultimately obtain larger recoveries than
they would have if the delivery account
had not been split into two subclasses,
while others could obtain smaller
recoveries.
The ABA Subcommittee and CME
suggested changes to the definition of
‘‘cash delivery property.’’ Under the
current definition, cash falls within the
delivery class if, inter alia, it is received
on or after three calendar days before
the first notice date or exercise date. The
definition of cash delivery property in
the Proposal continued that limitation.
CME suggested that the three-day
limitation should be removed to address
cases where
‘‘a customer will legitimately post cash to its
delivery account sooner than the definition
would allow, for example, out of caution to
assure that the necessary funds are available
to pay for a delivery when the first notice
date or exercise date immediately follows a
weekend or holiday, or to meet payment
deadlines imposed by the FCM, or based on
market convention.’’
The comments acknowledged that the
Commission’s policy objective is to
‘‘encourage FCMs and their delivery
customers to hold cash intended to pay
for delivery in a segregated account
until bilateral delivery obligations are
near at hand’’ (the segregation
obligations that apply to futures, foreign
futures, and cleared swaps accounts do
not apply to delivery accounts), but
express some doubt that the limitation
is effective in encouraging the desired
behavior, because parties with delivery
obligations may not be aware of it.
Thus, the benefit of retaining the
three-calendar day limitation is
mitigating the time during which cash
delivery property is held in an account
that is not subject to the protection of
segregation requirements, and in
encouraging business models that take
that approach. The cost of doing so is
the risk that funds may nonetheless be
transferred earlier into a delivery
account, and would then be denied
protection as delivery property in an
FCM bankruptcy.236
As discussed above,237 the
Commission has determined to take a
middle-ground approach by expanding
the three-calendar day limitation to a
236 The Commission also notes CME’s suggestion
that it ‘‘consider adopting more formal
requirements with respect to delivery accounts
through separate rulemaking.’’
237 See section II.A.2 above.
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seven-calendar day limitation. This
approach has the benefit of addressing
fully the possibility that delivery
property is transferred slightly early
because of, e.g., a holiday weekend (and
especially cases where FCMs and their
customers or contracts span across
jurisdictions with different holidays).
By expanding the period by four days,
it should address most of the cases
where there are legitimate reasons to
transfer the funds in advance of when
they are needed, to account for the
possibility of a failure in the transfer
process.238 Significantly, it avoids the
cost of encouraging the use of the
delivery account (that is not subject to
segregation requirements) as a long-term
place to hold cash.
Commenters also suggested technical
additions to the definitions of cash
delivery property (to address cash
provided post-petition to facilitate
taking deliveries in cases where
necessary) to physical delivery property
(to address the possibility of a negative
final settlement price), and (in the case
of both cash delivery property and
physical delivery property) to provide
that, for contracts exchanging one fiat
currency for another, both ends of the
transaction would be considered cash
delivery property. The Commission
incorporated these suggestions in the
definitions as adopted. The benefit of
these approaches is to deal properly
with these scenarios; there are no
discernable material costs.
• Pursuant to section 4d of the CEA,
certain contracts and associated
collateral that would be associated with
one account class may instead (pursuant
to Commission regulation 239 or order)
be commingled with a different account
class.240 The purpose of these
arrangements, referred to as portfoliomargining, is to associate such contracts
with an account class in which they are
risk-reducing related to other contracts
in that latter account class.
Paragraph (2) of the definition of
account class confirms that these
portfolio-margining arrangements will
be respected in bankruptcy, that is, such
contracts and associated collateral will
be treated as being part of the account
238 The commenters have not identified any
legitimate reason for an FCM to impose a payment
deadline of more than seven days before first notice
or exercise date, or any relevant market convention
that would require earlier payment, which in either
case would require that the funds be held in a
delivery account.
239 See § 39.15(b)(2), which provides a
mechanism for these arrangements to be
implemented pursuant to clearing organization
rules.
240 Securities positions may also be commingled
in an account class subject to section 4d of the CEA.
7 U.S.C. 6d.
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class into which they are commingled.
The benefit of this treatment in
bankruptcy is to foster and incentivize
such risk-reducing (and capitalefficient) arrangements during business
as usual; there should be no associated
costs in bankruptcy.
Finally, paragraph (3) of the definition
of account class addresses cases where
a commodity broker’s account for a
customer is non-current, or otherwise
inaccurate. These are situations over
which public customers have, at best,
limited control, and thus it is ineffective
to endeavor to create incentives for
public customers to police the behavior
of their FCM. Paragraph (3) confirms
that a commodity broker is considered
to maintain an account for a customer
where it establishes internal books and
records for the customer’s contracts and
collateral and related activity, regardless
of whether the commodity broker has
kept those internal books or records
current or accurate. The benefit of this
treatment will be to treat customers in
accordance with their entitlements,
regardless of whether the commodity
broker has maintained its books and
records current or accurate.
• ‘‘Customer,’’ ‘‘Customer class,’’
‘‘public customer,’’ and ‘‘non-public
customer:’’ The definitions of the terms
‘‘public customer’’ and ‘‘non-public
customer’’ are being revised to include
separate definitions of those terms for
FCMs and DCOs. This change reflects
the new organization of part 190, which
includes separate provisions for when
the debtor is (1) an FCM (subpart B) and
(2) a DCO (subpart C). The ‘‘public
customer’’ definition for FCMs is also
being revised to define that term with
respect to each of the relevant account
classes.241
These changes will generate benefits
as they bring clarity to the question of
who qualifies as a ‘‘public’’ versus a
‘‘non-public’’ customer, and
transparency to the distribution of
property to which each customer is
entitled. Furthermore, this clarity and
transparency is likely to reduce the
administrative costs to the estate, and
the costs to claimants, associated with
the claims allowance process, as well as
the likelihood of litigation by
dissatisfied claimants (and associated
costs). These changes could, however,
impose costs on customers for whom,
241 CME suggested that the Commission should
include non-U.S. customers of foreign broker
clearing members of a DCO within the public
customer definition. As discussed above, the
Commission has determined to consider this
suggestion as part of a comprehensive review of the
issues, to be conducted at such time as the model
of admitting foreign brokers as clearing members for
U.S. DCOs becomes empirical.
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under current part 190, it will not be
clear which category they fall into. The
pool of customer property would be
different for public and non-public
customers under the new policy regime.
Thus, a hypothetical customer who
could have been considered ‘‘public’’
under current part 190 but will be
categorized as ‘‘non-public’’ under
revised part 190 could receive less in
the distribution of customer property
(with other customers receiving more).
• ‘‘Futures, futures contract:’’ The
Commission is adding a definition for
the terms ‘‘futures’’ and ‘‘futures
contract’’ to clarify what those terms
mean for purposes of part 190. This
clarification will lower administrative
costs by providing clarity and
transparency to the types of transactions
that are considered ‘‘futures’’ for
purposes of proposed part 190 and
therefore form part of the futures
account or foreign futures account.
• ‘‘House account:’’ The definition of
the term ‘‘house account’’ will be
revised to include a definition of that
term solely for DCOs. This change will
reflect the new organization of part 190,
which is revised to include separate
provisions for when the debtor is (1) an
FCM (subpart B) or (2) a DCO (subpart
C). CME and the ABA Subcommittee
urged that the term ‘‘house account’’ be
deleted in the few cases where it was
proposed to be used in subpart B in
order to avoid the implication that the
accounts of non-public customers could
not be ported. This change would
enhance clarity and transparency (and,
thus, would reduce administrative
costs) by (1) avoiding that incorrect
implication, while (2) clarifying what
precisely constitutes a house account for
a DCO bankruptcy proceeding.
• ‘‘Primary liquidation date:’’ The
definition of the term ‘‘primary
liquidation date’’ is being revised to
delete references to holding accounts
open for later transfer. This is consistent
with the policy of transferring as many
open commodity contracts as possible
within seven calendar days after entry
of an order for relief or, if that is not
possible, liquidating such commodity
contracts. 242 This change in policy
should benefit some customers, who
will more quickly have clarity as to how
their positions and associated collaterals
will be resolved.243 There may,
however, be costs to customers who
might have preferred having their open
commodity contracts held open for
transfer after the primary liquidation
242 See
§ 190.04(a)(1).
discussion of § 190.00(c)(4) in section
II.B.1 above for concerns about customers lacking
such clarity for an extended time.
243 See
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date. 244 In the event that a larger
number of contracts is liquidated rather
than transferred, there will be costs
resulting from additional downward
pressure on prices.
• ‘‘Specifically identifiable property:’’
The Commission is revising the
definition of the term ‘‘specifically
identifiable property’’ to clarify and
streamline the current definition of that
term. The use of definitions that are
clearer should reduce administrative
costs. Of course, increasing clarity may
be to the detriment of those customers
for whom such clarity results in
assignment to a category that they view
as less favorable.
• ‘‘Substitute customer property:’’
The definition of the term ‘‘substitute
customer property’’ is being added to
refer to cash or cash equivalents
delivered to the trustee by or on behalf
of a customer in order to redeem
specifically identifiable property or a
letter of credit. This provision will
benefit customers who, in a bankruptcy
event, seek to redeem their specifically
identifiable property or letters of
credit.245 Introducing the concept of
substitute customer property may
impose administrative costs, however,
because the trustee may have to expend
time and resources on tracking the
substitute customer property and
ensuring that such property ends up in
the proper pool of customer property
once received.
• ‘‘Swap:’’ The Commission is
amending the definition of ‘‘cleared
swap’’ that appears in the current rules
in order to clarify what this term means
for purposes of proposed part 190. This
clarification should serve the goals of
clarity and transparency (and,
consequently, reducing administrative
costs).
3. Regulation § 190.02: General:
Consideration of Costs and Benefits
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Section 190.02(a)(1) is revised to
provide that the bankruptcy trustee
may, for good cause shown, request
from the Commission an exemption
from the requirements of any procedural
provision in proposed part 190. This is
in contrast to current § 190.10(b)(1),
which provides only that a bankruptcy
trustee may request an exemption from,
or extension of, any time limit
prescribed in current part 190. This
244 Given that the clearing organization for such
contracts may not be willing to permit such
contracts to be held open for an extended period
of time, the existence of such customers is quite
hypothetical.
245 Benefits and costs associated with the use of
substitute customer property are addressed further
below in connection with § 190.04(d)(3) in section
III.C.2.
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expanded mechanism for a trustee to
request exemptions should benefit the
estate and customers by allowing the
trustee to request an exemption that
lowers administrative costs and
increases timeliness. This change,
however, may impose administrative
costs if the trustee’s request is illfounded and the Commission were
nonetheless to grant the request.
The Commission does not believe that
there will be any cost-benefit
implications to § 190.02(a)(2) and (3),
(b), (c), (d), and (e), as those provisions
largely align with the provisions in
current part 190 from which they are
derived.
Regulation § 190.02(f) is a new
provision which addresses the context
of a receiver for an FCM appointed due
to a violation or imminent violation of
the customer property protection
requirements of section 4d of the CEA
or of the regulations thereunder, or of
the FCM’s minimum capital
requirements in § 1.17. In this context,
the FCM has been found to be in
precarious financial condition. This
provision will permit the receiver to file
a petition for bankruptcy of such an
FCM in appropriate cases. This
provision may benefit public customers,
in that a bankruptcy proceeding may be
necessary to protect those customers’
interests in customer property from
losses in value. However, this provision
may have distributional effects as there
may be some customers who do not
receive as much in bankruptcy as they
otherwise would have under the
receivership. In addition, there could be
additional administrative costs that
result from this provision, as the
bankruptcy trustee would have to spend
time and resources overseeing a
bankruptcy proceeding that might not
be entered into absent the power
granted to the receiver under this
regulation. These costs could possibly
be greater than the costs of continuing
to administer the FCM under
receivership.
Indeed, FIA suggested that the
Commission should require that the
receiver must receive permission from
the Commission before filing a
voluntary petition, given that this action
‘‘would effectively close the FCM.’’
Closing the FCM would impose
significant costs on the FCM and, in a
case where the Commission would have
denied permission, those costs could be
unnecessary.
In considering the costs (discussed
above) of what could be an unnecessary
voluntary filing for bankruptcy in
contrast to the benefits of avoiding delay
in filing a necessary filing for
bankruptcy, the Commission determines
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that the context where this rule would
be applicable—only cases where a
receiver has been appointed due to
violation or imminent violation of
customer property protection
requirements, or of the FCM’s minimum
capital requirements—minimizes the
likelihood that a filing would turn out
to be unnecessary, and counsels in favor
of avoiding delay.
4. Section 15(a) Factors—Subpart A
No comments were received on the
application of the section 15(a) factors
to subpart A.
i. Protection of Market Participants and
the Public
Subpart A of the proposed rules
should increase the protection of market
participants and the public by clearly
setting forth how customers of FCMs
and DCOs will be classified and treated,
and how their accounts will be
categorized and treated, in the event of
an FCM or DCO insolvency. The goal of
subpart A of the proposed rules is to
promote an orderly and cost-effective
resolution of the insolvency of an FCM
or DCO, and to increase transparency to
the customers of FCMs and DCOs as to
how their property would be treated in
the event of such an insolvency.
However, as noted above, some of the
provisions of subpart A provide
discretion to the trustee. While
enhanced discretion for the trustee has
the benefit of permitting a more tailored
approach, it also has the cost of
increasing the possibility of trustee
mistake or misfeasance.
ii. Efficiency, Competitiveness, and
Financial Integrity
Subpart A of the proposed rules
should promote efficiency (in the sense
of both cost effectiveness and
timeliness) in the administration of
insolvency proceedings of FCMs and
DCOs and the financial integrity of
derivatives transactions carried by
FCMs and/or cleared by DCOs by clearly
communicating the goals and core
concepts involved in such insolvencies,
and by setting forth clear definitions
that have been updated to account for
current market practices. These effects
should, in turn, enhance the
competitiveness and financial integrity
of U.S. FCMs and DCOs, by enhancing
market confidence in the protection of
public customer funds and positions
entrusted to U.S. FCMs and DCOs, even
if such an entity were to become
insolvent.
iii. Price Discovery
Price discovery is the process of
determining the price level for an asset
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through the interaction of buyers and
sellers and based on supply and
demand conditions. To the extent that
the revised regulations should mitigate
the need for liquidations in conditions
of distress, they will help avoid negative
impacts on price discovery.
iv. Sound Risk Management Practices
Subpart A of the proposed rules
should generally promote sound risk
management practices by setting forth
the core concepts to which the
bankruptcy trustee must adhere in
administering an FCM or DCO
bankruptcy.
v. Other Public Interest Considerations
Some of the FCMs or DCOs that might
enter bankruptcy are very large financial
institutions, and some are (or are part of
larger groups that are) considered to be
systematically important. A bankruptcy
process that effectively facilitates the
proceedings is likely to help to attenuate
the detrimental effects of the bankruptcy
on the financial marketplace and thus
benefit the financial system and thus the
public interest.
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C. Subpart B—Futures Commission
Merchant as Debtor
1. Regulation § 190.03: Notices and
Proofs of Claims: Consideration of Costs
and Benefits
Section 190.03(a)(1) replaces the
requirement in current § 190.10(a) that
all mandatory or discretionary notices
be sent to the Commission via overnight
mail with the requirement of sending
the notices by electronic mail.246 This
change is expected to result in a benefit
to all parties required to provide notices
to the Commission because they will be
able to avoid the costs of sending such
notice in hardcopy form via overnight
mail. These revisions will also allow the
Commission to receive such notices—
and thus, to act—much more
expeditiously.
Section 190.03(a)(2) is a new,
principles-based provision that replaces
the more specific procedures for
providing notice to customers that
appear in current § 190.02(b) by
allowing the trustee to establish and
follow procedures ‘‘reasonably
designed’’ for giving adequate notice to
customers. Paragraph (a)(2) also
provides that the trustee’s procedures
for providing notice to customers
should include ‘‘the use of a prominent
website as well as communication to
customers’ electronic addresses that are
available in the debtor’s books and
246 See
also § 190.03(d), which is adopting this
new method of providing notice to the Commission
for any court filings filed in a bankruptcy.
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records.’’ A generalized and more
modernized approach to notifying
customers will benefit the debtor’s
estate, as the process allows the trustee
to choose cost effective means of
providing notice to customers within
the more flexible bounds of the
proposed regulation, resulting in
savings of administrative costs.
Similarly, it will benefit parties
interested in the proceedings, by
permitting the trustee flexibly to choose
methods of notification that are more
prompt and effective. On the other
hand, affording the trustee increased
discretion in how to provide notice to
customers will carry the potential cost
of trustee misfeasance and abuse of such
discretion, as discussed above in section
III.A.2.ii.
Section 190.03(b)(1) will revise the
time in which a commodity broker must
notify the Commission of a bankruptcy
filing. These revisions codify
procedures whereby (1) in a voluntary
bankruptcy proceeding, the commodity
broker will provide advance notice to
the Commission ahead of the filing to
the extent practicable, and (2) in an
involuntary bankruptcy proceeding, the
commodity broker will notify the
Commission immediately upon the
filing. These revisions will foster the
ability of the Commission and its staff
to perform their duties to protect
customers by providing the Commission
with notice of any bankruptcy
proceeding as soon as possible.
Section 190.03(b)(2) removes the
current deadline of three days after the
order for relief by which the trustee, the
relevant DSRO or a clearing
organization must notify the
Commission of an intent to transfer or
to apply to transfer open commodity
contracts in accordance with section
764(b) of the Bankruptcy Code. It
instead instructs such parties to give
such notice of an intent to transfer ‘‘[a]s
soon as possible.’’ To the extent that the
three-day deadline was limiting transfer
arrangements, this revision will benefit
the estate and some customers by
removing time constraints that could be
construed to prohibit notification after
expiration of the deadline (and thus,
allow the trustee to form the intent to
transfer after such time).
The revision will also enhance the
orderly functioning of the marketplace
at a time of severe market disruption by
facilitating prompt notice of intent to
transfer. On the other hand, by giving
the trustee, DSRO, or clearing
organization more latitude for providing
notice of an intent to transfer, there will
be the potential cost of misfeasance in
waiting an unreasonable amount of time
to provide such notice (or to form such
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intent), which could ultimately impose
additional costs on customers who
would have benefited from an earlier
transfer.247
Section 190.03(c)(1) removes the
requirement that the trustee must
publish notice to customers with
specifically identifiable property in a
newspaper of general circulation serving
the location of each branch office of the
debtor prior to liquidating such property
and instead establishes a requirement to
notify the customers with specifically
identifiable property in accordance with
§ 190.03(a)(2). The Commission believes
that this change will result in lower
administrative costs, as the trustee will
be relieved of the cost of identifying,
and publishing notice in, such
newspapers. Moreover, the trustee will
no longer be required to wait seven days
after the second publication date to
commence liquidation of specifically
identifiable property. Rather, the trustee
will be free to commence liquidation of
specifically identifiable property
starting on the seventh day after entry
of the order for relief. This will benefit
the estate, and potentially the affected
customers, by allowing the trustee more
freedom (from the time constraints set
forth in the current regulations) in
liquidating the specifically identifiable
property, which, in turn, is expected
ultimately to result in a better price.
Moreover, the provisions in
§ 190.03(a)(2) that describe the
notification of customers with
specifically identifiable property will
benefit public customers by allowing
them to receive notice on a ‘‘prominent
website’’ and, more specifically, at their
electronic addresses (to the extent such
addresses are in the debtor’s books and
records), thereby enhancing their ability
to request the return of their specifically
identifiable property within the
specified timeframe.
Section 190.03(c)(2) provides the
bankruptcy trustee with authority to
treat open commodity contracts of
public customers held in hedging
accounts designated as such in the
debtor’s records as specifically
identifiable property.248 This is a
change from the current framework,
under which the trustee treats
customers with specifically identifiable
property on a bespoke basis.
Specifically, to the extent the trustee
does not receive transfer instructions
regarding a customer’s specifically
identifiable open commodity contracts,
the trustee will be required to liquidate
247 See discussion of § 190.00(c)(4) in section
III.b.1 above.
248 See proposed § 190.10(b)(2) for the process of
designating an account as a ‘‘hedging account.’’
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such contracts within a certain time
period. To the extent the trustee
exercises the authority derived from
revised § 190.03(c)(2), they will (subject
to the revision discussed in the next
paragraph) be required to notify each
relevant customer and request
instructions whether to transfer or
liquidate the open commodity contracts.
To the extent the trustee would not
exercise such authority, the trustee will
treat these open commodity contracts
the same as other customer property and
effect a transfer of such contracts. This
new framework should reduce
administrative costs and benefit the
bankruptcy estate by allowing the
trustee to rely on hedging designations
made during business as usual, thereby
allowing the trustee to make swift and
cost effective decisions regarding the
treatment of open commodity contracts
during a bankruptcy situation.
ACLI suggested that § 190.03(c)(2)
should express a preference for transfer
over liquidation with respect to
specifically identifiable property in the
form of positions that are identified as
hedging positions, and consult (on an
individual basis) each customer’s
expressed preferences. However,
§ 190.00(c)(4) sets forth a preference for
porting (transfer) of all open commodity
contract positions of public customers.
Thus, while treating customers with
hedging positions on a bespoke basis
may benefit some of them, it may be at
the cost of effectively transferring a
larger group of customer positions.
Some of those may be customers with
hedging positions whose positions are
not transferred due to limited time and
resources available to be devoted to
bespoke treatment. Indeed, SIFMA
AMG/MFA noted that ‘‘permitting the
trustee this flexibility (subject to the
additional customer protections [of
consulting existing instructions, as
described immediately below]) serves
the interest of customers as a whole by
facilitating a more rapid transfer of
customer positions and property.’’
SIFMA AMG/MFA suggested that it
would ‘‘further the goal of expediency’’
if the regulation would require the
trustee to ‘‘first consult the instructions
(regarding preferences with respect to
transfer or liquidation of open
commodity contracts) provided by a
public customer to the debtor at the
time of opening the relevant hedging
account, and only if such instructions
are missing or unclear, to then require
such customer to provide the trustee
with written instructions as
contemplated by proposed
§ 190.03(c)(2).’’ The Commission agrees,
and has made corresponding changes to
the regulation. While there is a cost
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involved in scanning to determine if
there are instructions, there is a
significant benefit in avoiding
duplication, and in avoiding cases
where the customer, having already
provided instructions, does not reply to
a duplicative request in time for that
reply to be acted upon.
The Commission does not believe that
there are any cost-benefit implications
to § 190.03(c)(3) or (4) (other than those
discussed above with respect to the new
notice provision referenced in each) or
to § 190.03(d).
Section 190.03(e), sets forth the
information required from customers
regarding their claims against the
debtor. As revised, § 190.03(e),
reorganizes and adds certain
information items to those listed in the
current regulation. The Commission
anticipates that, while customers are
likely to have this information at their
disposal, there could be costs associated
with gathering it all in one place.
However, this additional and more
detailed information should benefit the
estate, the bankruptcy court and
customers alike by allowing all parties
to have a fuller, more detailed and more
transparent picture of the customer
claims against the debtor. It should
foster the reduction of administrative
costs and the prompt administration of
the estate. Moreover, the Commission is
of the view that clarifying several of the
information items listed in proposed
§ 190.03(e) and revising the proof of
claim form to match more closely the
text of the regulation should result in
benefits to all parties involved in an
FCM bankruptcy—the estate, the
bankruptcy court, and the customers—
by making the bankruptcy claims
process more prompt and cost effective.
CME sees § 190.03(e) and (f), and the
revised proof of claim form, as ‘‘major
improvements over the current rules
and proof of claim template.’’
This regulation also provides that the
specific items referred to are to be
included ‘‘in the discretion of the
trustee.’’ This discretion will permit the
trustee to tailor the information
requested to the specifics of the debtor’s
prior business, as well as the alreadyavailable records. This will permit the
trustee to limit or to increase the
information requested, in appropriate
cases, with a corresponding increase in
cost effectiveness. To be sure, there may
be corresponding costs (both in
administrative expense and time) if the
set of information requested by the
trustee in the exercise of their discretion
turns out, in retrospect, to be overly
narrow (or broad).
Proposed § 190.03(f) is new and
provides the trustee with flexibility to
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modify the customer proof of claim form
set forth in appendix A to part 190.
Specifically, § 190.03(f) allows the
trustee to modify the proof of claim
form to take into account the particular
facts and circumstances of the case. This
provision should benefit the estate
because the trustee will be able to
modify the proof of claim form in a way
that gathers the information necessary
in a manner that is both effective and
cost effective based on the specific facts
of the case, and the trustee no longer
will be required to get an order from the
bankruptcy court to make such
modifications, thereby saving time and
resources. This new provision should
also benefit customers, who will be able
to take advantage of the more
streamlined and tailored proof of claim
forms developed by the trustee, and
should, therefore, spend less time filling
out such forms. It should also benefit
the estate, which should bear less
administrative cost in evaluating such
forms. Again, there may be
corresponding administrative costs if
the set of information in a modified
proof of claim form turns out, in
retrospect, to be overly narrow (or
broad).
2. Regulation § 190.04: Operation of the
Debtor’s Estate—Customer Property:
Consideration of Costs and Benefits
Regulation § 190.04(a) explicitly
provides a policy and a direction by
which the trustee should use best efforts
to transfer open commodity contracts
and property held by the failed FCM for
or on behalf of its public customers.
This policy and direction is
substantially similar to the policy and
direction under current regulations.249
The changes set forth a clear policy for
trustees to follow, which should benefit
customers of the failed FCM in a
streamlined description of the transfer
process that is consistent with the core
concepts set forth in this part. The costs
and benefits of the preference for
transfer are discussed in section III.B.1
above, in the context of § 190.00(c)(4).
In § 190.04(a)(1), the Commission is
clarifying language; these clarifications
should benefit customers of the failed
FCM by minimizing the likelihood of
future disputes concerning qualification
of property for transfer. The
Commission is also changing the
direction in current § 190.02(e) that the
trustee ‘‘must immediately use its best
efforts to effect a transfer’’ to a direction
that the trustee ‘‘shall promptly use its
best efforts to effect a transfer.’’ This
modest change in focus will benefit
public customers by recognizing that,
249 See
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while effecting transfer is an
extraordinarily high priority, it is
possible that there may be higher
priorities at the inception of the
bankruptcy proceeding, e.g., it may be
necessary to preserve some portion of
customer property from an immediate
threat.250 Once again, by enhancing the
trustee’s discretion as to how to manage
the liquidation, there is the cost that the
trustee will make a mistake.
Section 190.04(a)(2) directs the FCM
(or a trustee, if one has been appointed)
in a case where an involuntary petition
for bankruptcy is filed against the FCM
to use best efforts to effect a transfer
within seven calendar days. The current
regulation limits the commodity broker
to trading for liquidation unless
otherwise directed by the Commission,
by any applicable self-regulatory
organization or by the court. Revised
§ 190.04(a)(2) removes this limitation.
Rather, revised § 190.04(e)(4) more
generally covers limitations on the
business of an FCM in bankruptcy.
Similarly, any requirement to transfer
customer positions would more
properly be addressed by § 1.17(a)(4).
The Commission believes that these
changes will benefit the estate and the
public customers by mitigating the
administrative costs by removing a
redundant regulation. The Commission
does not anticipate any resulting
increase in cost.
In § 190.04(b)(1), the Commission is
clarifying and updating conditions
under which the trustee may make
payments of variation settlement and
initial margin. In sum, the revisions
clarify that payments can be made prior
to pending transfers or liquidation, not
just pending liquidation. The revision
should benefit the customers of the FCM
debtor in clarifying that the trustee has
two paths in treating open commodity
contracts—transfer, and if transfer is not
possible, liquidation. The changes
describe more accurately the types of
payments that the trustee will be
permitted to make and account
specifically for the types of entities to
which the trustee is permitted to make
the types of payments referred to in this
section. The revisions clarify the current
regulatory text, which should benefit
stakeholders. The Commission does not
anticipate any increased cost from these
changes.
Section 190.04(b)(1)(i) prevents the
trustee from making any payments of
behalf of any commodity contract
account that is in deficit, to the extent
250 The Commission is implementing the same
change—the addition of the word ‘‘public’’ before
‘‘customers’’—to § 190.04(a)(2). The anticipated cost
and benefit analysis of the change is the same as
in § 190.04(a)(1).
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within the trustee’s control. The revised
provision recognizes that certain
accounts may be held on an omnibus
basis on behalf of many customers. To
the extent the trustee is making a margin
payment with respect to such an
omnibus account, it may be out of the
trustee’s control to only make payment
with respect to those customer accounts
that are not in deficit. The proviso
similarly will clarify that this
prohibition on making margin payments
on behalf of accounts in deficit is not
intended to prohibit ‘‘upstream’’ entities
(e.g., a CCP or an intermediary through
which the debtor clears) from exercising
legal rights to margin under applicable
law. Due to the structure of omnibus
accounts and the explicit requirement of
lack of trustee control, any payments
that are made under the revised
provision would have been made
pursuant to Commission authorization
under the current regulation. Thus,
neither provision should add any new
regulatory burden and the Commission
does not estimate that there will be any
additional cost associated with the
proposed changes.
Section 190.04(b)(1)(ii) is a new
regulation that adds an explicit
restriction, that the trustee cannot make
a margin payment with respect to a
specific customer account that would
exceed the funded balance of that
account. ICI agrees that this restriction
supports the pro rata distribution
principle, and should benefit the other
customers of the FCM debtor—any
payment of customer property in excess
of a particular customer’s funded
balance is to the detriment of other
customers.251
Section 190.04(b)(1)(iii) is a minor,
non-substantive clarification of current
§ 190.02(g)(1)(ii), that should not create
any changes from the status quo with
regards to costs and benefits.
In § 190.04(b)(1)(iv)–(v), the
Commission is clarifying that margin
must only be used (i.e., paid to a
clearing organization or upstream
intermediary) consistent with section 4d
of the CEA. Section 190.04(b)(1)(vi)
states explicitly the conditions under
which the trustee may make payments
to meet margin obligations.
Together, these changes protect
customers who make payments after the
order for relief by ensuring that they
251 While there will be a corresponding detriment
to the customers who may have benefited from such
excess payments, those customers would only be
losing something that runs counter to the statutory
goal of pro rata distribution. Moreover, there are no
likely incentive effects because, on this issue,
customers stand behind the ‘‘veil of ignorance’’—
it is difficult to identify, ex ante, which customers
would be in the group of gaining customers (or in
the group of losing customers).
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fully benefit from those payments (and
thus incentivize customers to make such
payments in appropriate
circumstances). Moreover, more clearly
permitting the trustee, for the purpose of
curing customer margin deficiencies, to
use funds in an account class that
exceed the sum of all of the net equity
claims for that account class, should
facilitate the orderly transfer of
positions and contracts following the
default, lessening the potential for
further roiling markets. Finally, these
changes taken together also benefit the
broader group of customers of the FCM
debtor by clarifying the treatment of
funds in segregated accounts, and thus
mitigating administrative costs.
These changes are designed to clarify
the statutory requirements applicable to
funds in the customer account. While
there may be accounting requirements
associated with funds in segregated
accounts, substantially all of the costs of
such accounting are already incurred
pursuant to the segregation rules. Thus,
the Commission does not anticipate that
there should be any material additional
costs associated with this change.
Section 190.04(b)(2) allows the trustee
discretion as to whether to issue margin
calls to customers who are
undermargined, deleting highly
prescriptive conditions from the current
rule. The revision should benefit public
customers of the FCM debtor by giving
the trustee the flexibility to recognize
that there may be situations in which
issuing a margin call is impracticable
because the trustee is operating the FCM
in ‘‘crisis mode’’ and may be pending
wholesale transfer of liquidation of open
positions.
It is, however, possible that the
trustee would exercise their discretion
poorly, or in a manner that, in
retrospect, would be seen to be to the
detriment of the estate, and that the
trustee would have failed to issue a
margin call in a situation in which a
public customer would have paid the
call (and in which the balance of
administrative cost and amount
recovered would mean that, in
retrospect, it would have profited the
estate if the call was made). Such failure
could result in a cost to the estate of the
FCM debtor to the extent that such
funds are not available.
The balance of the revisions to
§ 190.04(b) should cause no change to
the related costs and benefits.
Section 190.04(b)(3) retains the
concept in current § 190.02(g)(3), with
updated cross-references. The
Commission does not anticipate that
there will be any costs or benefits to the
proposed minor revisions.
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Section 190.04(b)(4) addresses the
trustee’s obligation to liquidate accounts
in deficit, or where a mark-to-market
calculation would result in a deficit, or
where the customer fails to meet a
margin call within a reasonable time.
The revision will clarify the
applicability of current authority to a
situation that is already implicit in the
current rule. The regulation does not
require the trustee to make additional
calculations but, if a calculation made
by the trustee reveals that the mark-tomarket value of the account is a deficit,
the trustee is instructed to liquidate the
account as soon as practicable rather
than to wait for the time that payment
would be due. The benefit of this
change should be to liquidate accounts
in deficit more promptly (thus
mitigating potential further losses); the
cost will be the cost of engaging in such
liquidation, as well as the possibility
that, absent prompt liquidation, the
deficit would have been mitigated due
to favorable intervening changes in
market value (or, potentially, an
intervening deposit of additional
collateral by the customer).252
Second, the Commission is adding the
concept of ‘‘exigent circumstances’’ as a
new exception to the general and longestablished rule that a minimum of one
hour is sufficient notice for a trustee to
liquidate an undermargined account.
SIFMA AMG/MFA urged the
Commission to curtail the trustee’s
discretion in § 190.04(b)(4) in a number
of ways: By requiring the trustee to defer
to the margin call timings present in
applicable underlying agreements
between the customer and the (prebankruptcy) debtor, and by providing
customers with the opportunity to
demonstrate that a margin payment was
made even if the FCM’s books and
records do not yet reflect its receipt. By
contrast, ICI noted that it is vital that the
trustee be required to swiftly crystallize,
and therefore cap the losses resulting
from, such deficits by promptly
liquidating accounts in deficit or for
which a customer has failed to meet a
margin call. ICI further stated that if the
accounts were allowed to remain open,
additional losses on the delinquent
customers’ transactions would be borne
by the FCM’s non-defaulting customers.
The Commission has determined not
to make the requested changes. While
making those changes would benefit
those customers who are treated on a
more bespoke it would be to the
detriment of the FCM’s other customers.
252 This change may also provide incentives for
a customer whose account is in, or is approaching,
deficit to make such payments promptly to avoid
liquidation of their positions.
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Enhancing the trustee’s discretion to
determine how long a customer has to
meet a margin call, and to rely on the
FCM’s books and records in doing—and
refusing to curtail that discretion (by
forcing the trustee to defer to margin
call timings in pre-bankruptcy
agreements, or to give the customer an
opportunity to demonstrate that the a
margin payment was made) as requested
by the comment—will benefit other
customers of the debtor FCM by giving
the trustee flexibility to respond to
market conditions following an FCM
default. It is important to recognize that
in stressed markets or in situations
where communication protocols cannot
practicably be followed, permitting a
customer time to post margin in
accordance with a pre-bankruptcy
agreement—or, in some cases, even
notice of one hour—may be
insufficiently prompt to mitigate
appropriately (1) the risk that such
customers would default, (2) the risk
that delaying liquidation of such a
customer’s positions increases the
potential for and likelihood that they
would do so with a debit balance, and
(3) the risk that the size of that debit
balance would increase as a result of
that delay, thereby reducing the funded
balances of those other customers.
However, customers who are required to
make payments more promptly would
bear associated costs, from making such
payments in a reduced time frame, from
having to make duplicate payments
(while these would ultimately be
returned in full, this would be without
interest) or from having contracts
liquidated that would otherwise not
have been liquidated if the customer
had more time to make payment.253
The Commission is adding
§ 190.04(b)(5) to guide the trustee in
assigning liquidating positions to the
FCM debtor’s customers when only a
portion of the open contracts are
liquidated. The benefit of this new
provision is that it presents a clear and
transparent mechanism by which the
trustee is to allocate the positions. This
mechanism will protect the customer
account as a whole, by establishing a
preference for assigning liquidating
transactions to individual customer
accounts in a risk-reducing manner. The
allocation mechanism will, however, be
253 SIFMA AMG and MFA also suggested that the
regulation should be amended to give customers
credit for any gains that were haircut due to gainsbased haircutting by a DCO. Any such haircutting
of a customer’s gains is due to application of the
customer’s agreement with the FCM. Moreover,
giving some customers credit despite such
agreements would increase their recovery, but at the
expense of other customers, as discussed in detail
in section II.C.7 above.
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subject to the trustee’s exercise of
reasonable business judgement. It is
possible that such judgment could be
exercised in a poor manner (or in a
manner that, in retrospect, turns out to
be regrettable), with resultant cost to the
FCM debtor estate.
Section 190.04(c) requires the trustee
to use its best efforts to liquidate open
commodity contracts that are not settled
in cash (i.e., those that settle via
physical delivery of a commodity)
where the contract would move into
delivery position. These clarifications
are likely to reduce administrative costs,
to the benefit of the estate (and,
ultimately, customers). CME believed
that this provision would have the
benefit of avoiding unnecessary
disruptions to the delivery process by
customers that did not intend to
participate in making or taking delivery.
There should be no cost associated with
the revision because, while there may be
some customers who would prefer to
hold their contracts through delivery,
the current regulations, just as the
revised regulations, direct the trustee to
liquidate contracts coming into delivery
position.254
Section 190.04(d) will clarify
requirements concerning the liquidation
and valuation of open positions. Section
190.04(d)(1) and (2) clarify requirements
for liquidating open commodity
contracts and specifically identifiable
property other than commodity
contracts.
Section 190.04(d)(3) codifies the
Commission’s longstanding policies of
pro rata distribution and equitable
treatment of customers in bankruptcy,
as described in § 190.00(c)(5) above, as
applied to letters of credit posted as
margin. Under the new provision, the
trustee may request that a customer
deliver substitute customer property
with respect to any letter of credit
received, acquired or held to margin,
guarantee, secure, purchase, or sell a
commodity contract. The amount of the
substitute customer property to be
posted may, in the trustee’s discretion,
be less than the full-face amount of the
letter of the credit, if such lesser amount
is sufficient to ensure pro rata treatment
consistent with §§ 190.08 and 190.09. If
necessary, the trustee may require the
customer to post property equal to the
full-face amount of the letter of credit to
ensure pro rata treatment. Pursuant to
paragraph (d)(3)(i), if such a customer
fails to provide substitute customer
property within a reasonable time
specified by the trustee, the trustee may
draw upon the full amount of the letter
of credit or any portion thereof (if the
254 See,
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letter of credit has not expired). Under
paragraph (d)(3)(ii), the trustee is
instructed to treat any portion of the
letter of credit that is not fully drawn
upon as having been distributed to the
customer. However, the amount treated
as having been distributed will be
reduced by the value of any substitute
customer property delivered by the
customer to the trustee. Any expiration
of the letter of credit after the date of the
order for relief would not affect this
calculation. Pursuant to paragraph
(d)(3)(iii), letters of credit drawn by the
trustee, or substitute customer property
posted by a customer, are to be
considered customer property in the
account class applicable to the original
letter of credit.
ICI, SIFMA AMG/MFA, and Vanguard
supported § 190.04(d)(3) on the grounds
that it has the benefit of treating
customers equitably by avoiding a more
favorable treatment of customers who
post letters of credit than those who
post cash and securities.
These proposed new provisions could
impose costs on customers who use
letters of credit as collateral for their
positions. Such customers could be
considered to have received
distributions up to the full amount of
the letter of credit, or the trustee may
draw upon a portion or possibly the full
amount of the letter of credit.
Moreover, a number of
commenters,255 expressed the concern
that requests for substitute customer
property in the special context of
delivery letters of credit could cause
sudden liquidity needs, and substantial
hardship to customers. For example,
CME noted that, while they support
§ 190.04(d)(3) outside the context of
delivery letters of credit, they see
difficulties in that context, specifically
in the case of deliveries for certain
energy contracts, often which take place
over 30 days. The delivery letters of
credit for these contracts can involve
hundreds of millions of dollars in face
amounts, and CME is of the view that
it would cause substantial liquidity
hardship for buyers to have to substitute
cash in such amounts.
While the discussion above represents
potentially important costs, the
Commission is noting factors that can
alleviate these costs, and is
implementing provisions that it believes
substantially mitigate these costs: First,
the Commission is adding a new
§ 190.04(d)(3)(iv), which provides that
the trustee shall, in exercising their
discretion with regard to addressing
letters of credit, including as to the
timing and amount of a request for
255 CMC,
CME, FIA.
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substitute customer property, endeavor
to mitigate, to the extent practicable, the
adverse effects upon customers that
have posted letters of credit, in a
manner that achieves pro rata treatment
among customer claims. Second, the
Commission notes the likelihood that
requests for substitute customer
property may not apply to the particular
delivery letters of credit the commenters
have expressed concerns about: As
requested by CME, the Commission
confirms that (1) a delivery letter of
credit that is posted directly with the
DCO or with the delivery counterparty,
rather than with or through the FCM,
and for which the FCM is not a named
beneficiary, is outside the delivery
account class, i.e., it does not constitute
cash delivery property (or property of
the debtor’s estate), and (2) the
provisions in other parts of the part 190
regulations regarding treatment of letters
of credit posted with or through the
debtor FCM do not apply such a letter
of credit.
The Commission’s priority in this
context is to ensure the customers using
letters of credit to meet margin
obligations are treated in an
economically equivalent manner to
those who have posted other types of
collateral, so that there is no incentive
to use such letters of credit to
circumvent the pro rata distribution of
margin funds as set forth in section
766(h) of the Bankruptcy Code.256
Moreover, if there are shortfalls in
customer property in a particular
account class, and public customers
posting letters of credit are protected
from sharing in those shortfalls, those
public customers would benefit.
However, the shortfalls would,
inevitably, instead be allocated to other
public customers, who would suffer
corresponding losses. Regulation
§ 190.04(d)(3) supports the policy of pro
rata treatment of public customers
embodied in section 766(h) of the
Bankruptcy Code by clarifying that
letters of credit cannot be used to avoid
pro rata distribution of margin funds. It
therefore avoids concentrating losses on
those public customers (who are likely
to be smaller customers) that cannot
qualify for, or cannot afford the cost of,
letters of credit, or otherwise do not use
letters of credit as collateral. Moreover,
by directing the trustee to exercise their
discretion, including with respect to
amounts and timing of requests for
customer property, in a manner that
mitigates adverse effects on those
customers that have posted letters of
256 See,
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credit, it will mitigate the liquidity costs
to such customers.
Section 190.04(e)(1) concerns
liquidation of open commodity
contracts in the market, while paragraph
(e)(2) addresses liquidation by book
entry offset. Both of these revised
regulations delete the requirement in
the current regulations that a clearing
organization must obtain approval for
its rules regarding liquidation of open
commodity contracts, a requirement that
is superfluous in light of the regulatory
framework set forth in part 40 of the
Commission’s regulations, and in light
of the notice-filing regime established
by Congress in section 5c(c) of the
CEA.257 This has the benefit of enabling
clearing organizations to avoid the cost
of filing a request for rule approval,
pursuant to CEA section 5c(c)(4) and
Regulation § 40.5. There are potential
costs, in that an ill-conceived rule could
be more readily identified, and
addressed, in a rule approval process.
However, Commission staff, as a matter
of practice, closely reviews all noticefiled clearing organization rules.
Section 190.04(e)(3) is new, and
confirms that an FCM or foreign futures
intermediary through which a debtor
FCM carries open commodity contracts
may exercise any enforceable
contractual rights that the FCM or
foreign futures intermediary has to
liquidate such commodity contracts. It
provides that the liquidating FCM or
foreign futures intermediary must use
‘‘commercially reasonable efforts’’ in the
liquidation and provides the trustee a
damages remedy if the FCM or foreign
futures intermediary fails to do so.
Damages are the only remedy; under no
circumstance can the liquidation be
voided.
This new provision will benefit
carrying FCMs by confirming explicitly
that carrying FCMs are allowed to
exercise enforceable contractual rights
to liquidate contracts, which reduces
ambiguity and thus will reduce
administrative costs. At the same time,
clarification of the availability of the
damages remedy will help to protect
creditors of the debtor FCM’s estate in
the event that the carrying FCM does
not use commercially reasonable efforts
in liquidating the open contracts (and
thus will incentivize carrying FCMs to
act in a commercially reasonable
manner). Thus, the regulation itself
provides the estate with a potential
mitigant for the costs in the form of a
damages remedy.
The remainder of the revisions to
§ 190.04(e)(4) and (f) are nonsubstantive language changes and
257 7
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clarifications and updated crossreferences and should not have
associated costs or benefits.
3. Regulation § 190.05: Operation of the
Debtor’s Estate—General: Consideration
of Costs and Benefits
In § 190.05, the Commission is
addressing general issues regarding the
operation of the debtor’s estate. In both
§ 190.05(a) and (b), the Commission is
making revisions providing the trustee
with more flexibility to act in a
bankruptcy situation. Section 190.05(a),
for example, provides that the trustee
‘‘shall use reasonable efforts’’ to comply
with the CEA and the Commission’s
regulations. Section 190.05(b) requires
the trustee to ‘‘use reasonable efforts’’ to
compute a funded balance for each
customer account that contains open
commodity contracts or other property
as of the close of business each business
day until such open commodity
contracts and other property in such
account have been transferred or
liquidated, ‘‘which shall be as accurate
as reasonably practicable under the
circumstances, including the reliability
and availability of information.’’ These
two revisions will benefit the estate by
recognizing that a bankruptcy could be
an emergency event, that perfectly
reliable information could be
unavailable or inordinately expensive to
obtain, and that therefore the trustee
should be allowed some measure of
flexibility to act reasonably given the
particular circumstances of the case.
CME noted that § 190.05(b) will have
the benefit of allowing the trustee to
transfer more promptly public
customers’ positions and property than
if the trustee were held to a strict
standard of precision. On the other
hand, affording the trustee increased
discretion in complying with the CEA
and the Commission’s regulations, and
in computing a funded balance for each
customer account, may carry the
potential cost of trustee mistake,
misfeasance, or abuse of such
discretion, as discussed above.
Whereas current § 190.04(b) requires a
trustee to compute a funded balance
only for those customer accounts with
open commodity contracts, revised
§ 190.05(b) expands the scope of
customer accounts for which a trustee is
required to compute a funded balance to
those accounts with open commodity
contracts or other property (including,
but not limited to, specifically
identifiable property). This expansion of
the trustee’s duties represents an
administrative cost, as the trustee will
have to expend time and resources at
the close of business each business day
to compute the funded balance of all
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customer accounts. However, this
revision should also result in a benefit
to those customers whose accounts hold
property but no open commodity
contracts, in the form of enhanced
information about their financial
position (including with regard to
collateral, the value of which may
change on a daily basis, and with regard
to the percentage distribution currently
available). These customers will, under
the revised provision, receive daily
computations of the funded balance of
their accounts with the debtor.
However, revised § 190.05(b) also
narrows the trustee’s duty compared to
current § 190.04(b): While the current
provision states that the trustee ‘‘must
compute a funded balance for each
customer account . . . each day,’’ the
revised provision only requires the
trustee to ‘‘use reasonable efforts’’ to do
so. Regulation § 190.00(c)(3)(i)(C)
provides that ‘‘reasonable efforts’’
should only be less than ‘‘best efforts’’
to the extent that this would benefit
public customers as a class. Exercises of
discretion by a trustee that, on a net
basis, benefit public customers as a class
may, on a net basis, impose costs on
individuals or groups within that class.
For example, there theoretically may be
cases where, because the administrative
cost of computing a funded balance
would outweigh the benefit of doing so
to public customers as a class, the
trustee, in exerting ‘‘reasonable efforts,’’
determines not to do so on a particular
day or for a particular time. As ICI
points out in their comment letter, that
decision would harm certain customers,
i.e., regulated funds, who have a
particular need to confirm the existence
and value of their transactions and
associated margin.
Section 190.05(c) requires the debtor
to maintain ‘‘records required under this
chapter to be maintained by the debtor,
including records of the computations
required by this part’’ ‘‘until such time
as the debtor’s case is closed.’’ This
revision expands the scope of records
that must be maintained, thereby
imposing certain administrative costs,
but should benefit the estate, because it
will limit the amount of time the trustee
will have to maintain the relevant
records.
Section 190.05(d) requires the
bankruptcy trustee to use all reasonable
efforts to continue to issue account
statements for customer accounts that
contain open commodity contracts or
other property, and to issue account
statements reflecting any liquidation or
transfer of open commodity contracts or
other property promptly after such
liquidation or transfer. This provision
will likely result in administrative costs,
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as the trustee will have to expend time
and resources issuing account
statements to customers. It will benefit
customers because it should help them
to keep track of their commodity
contracts (and the continued availability
of hedges) and the property in their
accounts, including in particular when
such contracts and property are
liquidated or transferred, even during a
bankruptcy. ICI noted that this is of
particular benefit to regulated funds,
providing them with a basis to confirm
the existence and value of their
transactions and associated margin.
Section 190.05(e)(1) allows a
bankruptcy trustee to effect transfers of
customer property in accordance with
§ 190.07, but requires the trustee to
obtain court approval prior to making
any other disbursements to customers.
This provision should benefit the estate
and customers by allowing the trustee,
without court approval, to port
customers’ positions and associated
property to a solvent FCM as quickly as
possible in a bankruptcy situation. In
the event that too much customer
property (that is, an amount in excess of
the ultimate pro rata share) is
transferred for those customers whose
positions are being ported, and cannot
be offset or clawed back, it could result
in costs to other customers, for whom
less than their pro rata share would be
available.
Section 190.05(e)(2) allows the
bankruptcy trustee to invest the
proceeds from the liquidation of
commodity contracts or specifically
identifiable property, and any other
customer property, in obligations of or
guaranteed by the United States, so long
as the obligations are maintained in
depositories located in the United States
or its territories or possessions. The
revised regulation expands the scope of
customer property that the trustee is
permitted to invest in such a manner to
include ‘‘any other customer property.’’
This change should benefit customers,
in that additional customer property
could be invested (in this limited
manner).
Section 190.05(f) requires the trustee
to apply the residual interest provisions
contained in § 1.11 ‘‘in a manner
appropriate to the context of their
responsibilities as a bankruptcy trustee
pursuant to’’ the Bankruptcy Code and
‘‘in light of the existence of a surplus or
deficit in customer property available to
pay customer claims.’’ This explicit
requirement to continue to apply the
residual interest requirements set forth
in § 1.11 may result in administrative
costs, since the trustee would require
resources to do so. However, this
provision should benefit customers by
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making it more likely that they would
receive what they are entitled to receive
from the debtor’s estate. Indeed,
Vanguard noted that the residual
interest requirement is a valuable buffer
to protect customers.
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4. Regulation § 190.06: Making and
Taking Delivery Under Commodity
Contracts: Consideration of Costs and
Benefits
Section 190.06 addresses the making
and taking of deliveries under
commodity contracts.
Specifically, § 190.06(a)(2) requires
the trustee to use ‘‘reasonable efforts’’
(in contrast to the current ‘‘best efforts’’)
to allow a customer to deliver physical
delivery property that is held directly by
the customer in settlement of a
commodity contract, and to allow
payment in exchange for such delivery,
and for both of these to occur outside
the debtor’s estate, where the rules of
the exchange or clearing organization
prescribe a process for delivery that
allows this.
Management of contracts in the
delivery positions involves a significant
degree of tailored administration. Under
the best efforts standard, the trustee may
spend more time (and thus incur higher
costs) focusing on the needs of a few
customers, which could detract from the
trustee’s ability to manage the estate
more broadly. Accordingly, the change
from ‘‘best efforts’’ to ‘‘reasonable
efforts’’ should benefit creditors of the
estate (as a whole) as the trustee should
not need to provide a disproportionate
amount of individualized treatment to
such contracts.258 However, particular
customers that would otherwise have
received the trustee’s focused treatment
under the ‘‘best efforts’’ standard could
suffer a cost from the change.
Section 190.06(a)(3) provides
guidance to address situations when the
trustee determines that it is not
practicable to effect delivery outside the
estate and therefore, delivery is made or
taken within the debtor’s estate. The
revisions provide the trustee with the
flexibility to act ‘‘as it deems reasonable
under the circumstances of the case,’’
but set an outer bound to the trustee’s
discretion in requiring them to act
‘‘consistent with the pro rata
distribution of customer property by
258 As discussed above in section II.A.1, the
trustee in exerting best efforts to meet a standard
must diligently exert efforts to meet that standard
‘‘to the extent of its own total capabilities.’’ By
contrast, in exerting ‘‘reasonable efforts’’ to meet a
standard, the Commission expects that the trustee
will work in good faith to meet the standard, but
will also take into account other considerations,
including the impact of the effort necessary to meet
the standard on the overarching goal of protecting
public customers as a class.
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account class.’’ This provision again
will have the benefits and costs of
enhanced discretion discussed above,
but includes an outer bound to that
discretion.
In § 190.06(a)(4), the Commission
adds a new provision to reflect that
delivery may need to be made in a
securities account.259 The new
provision should benefit customers who
require the delivery of securities, and
the trustee, by permitting those
securities to be delivered to the proper
type of account. By setting limits, the
provision should mitigate the risk of
transferring too much value out of the
commodity contract account (and
creating a risk of an undermargin or
deficit balance).
Section 190.06(b) is also new. It
creates an account class for physical
delivery property held in delivery
accounts and the proceeds of such
physical delivery property. This account
class is further be sub-divided into
separate physical delivery and cash
delivery account subclasses. In general,
creating the delivery account class
should help protect customers with
property in delivery accounts following
a default, because delivery accounts are
not subject to the Commission’s
segregation requirements. The further
sub-division into sub-classes recognizes
that cash is more vulnerable to loss, and
more difficult to trace, as compared to
physical delivery property. This will
likely benefit those with physical
delivery claims; customers in the cash
delivery sub-class would be likely get a
pro rata distribution that is less. The
benefits and costs of creating these subclasses were discussed more fully above
in reference to the definition of account
class in proposed § 190.01.
5. Regulation § 190.07: Transfers:
Consideration of Costs and Benefits
Section 190.07(a) works to promote
transfers of commodity contracts from a
debtor FCM. It does so by prohibiting
any clearing organization or selfregulatory organization from adopting,
maintaining in effect, or enforcing rules
that interfere with the acceptance by its
members of transfers of open
commodity contracts and the equity
margining or securing of such contracts
from FCMs with respect to which a
petition in bankruptcy has been filed, if
the transfers have been approved by the
Commission.
The revised regulation includes the
provisos that it (1) does not limit the
exercise of any contractual right of a
clearing organization or other registered
259 This is only relevant for debtor FCMs that are
also broker-dealers.
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entity to liquidate or transfer open
commodity contracts, and (2) should not
be interpreted to limit a DCO’s ability
adequately to manage risk. The revision
modifies, in a balanced fashion, the
standard for clearing organization and
SRO rules that are adopted, maintained,
in effect, and enforced and where
transfers are approved by the
Commission. While clearing
organizations and SROs will need to
comply with the revised standard, the
compliance cost should not be different
than under the prior standard. The
clarification that the regulations do not
limit contractual risk management rights
should provide a benefit to clearing
organizations and their members in
clarifying that the regulation will not
nullify the contracts in this regard, and
will not have an associated cost.
In § 190.07(b)(1), the Commission
clarifies that it is the transferee FCM
itself who has the responsibility to
determine whether it would be in
violation of regulatory minimum
financial requirements upon accepting a
transfer. It is not the trustee’s duty. The
Commission does not anticipate any
material cost from this revision.
Section 190.07(b)(3) permits a
transferee to accept open commodity
contracts and associated property prior
to completing customer diligence
requirements, provided that such
diligence is completed as soon as
practicable thereafter, and no later than
six months after transfer. It is intended
to incentivize potential transferees to
accept transfers by making it more
practicable to do so. It recognizes that
customer diligence processes would
have already been required to have been
completed by the debtor FCM with
respect to each of its customers as part
of opening their accounts. CME, ICI and
Vanguard agree that the proposal would
provide a benefit to customers and
transferee clearing members and
trustees, by facilitating the transfer
process.260 If such flexibility were not
provided, under the current regulations,
transfer might not be accomplished, or
may not be accomplished promptly. The
provision recognizes the importance of
the account opening diligence
260 The customer diligence requirements in
question focus on anti-money-laundering
requirements and ensuring that risk disclosures
have been provided to customers and
acknowledgements of such disclosures have been
received. The corresponding costs would arise from
the possibility that the transferee’s diligence would
have revealed problems that had been missed by the
debtor FCM’s customer diligence process, or arose
subsequent to the time that the original process was
conducted, and that conducting the revised
diligence more promptly would sooner reveal the
concerns, thus permitting them to be addressed
more expeditiously.
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requirements and would mitigate the
risk from delay by requiring the
diligence to be performed as soon as
practicable and setting an outer limit at
six months, unless that time is extended
by the Commission.
FIA has requested that the
Commission provide transferee FCMs
with more specific relief from
applicable law relating to ‘‘customer
diligence’’ and to add specific
references to certain rules, in order to
provide certainty, and to mitigate
regulatory risk, to a transferee. FIA
requested various points of specific
relief under five headings: (i) Rules
relating to anti-money laundering
requirements; (ii) rules relating to risk
and other disclosures; (iii) rules relating
to capital and residual interest
requirements; (iv) rules relating to
account statements; and (v) rules
relating to margin.
As discussed in more detail in Section
II.B.5 above, the Commission has
decided that, with respect to certain
points of the requested relief, providing
the relief is warranted, and there are no
material associated costs from doing so.
Thus, for example, § 190.07(b)(3) is
being amended to refer explicitly to the
risk disclosure requirements in
§ 1.65(a)(3).
With respect to the other points of
requested relief, the comment requests
relief that the Commission has decided
carries unacceptable costs. Thus, the
Commission is not providing a general
exemption from undermargined account
capital charges in accordance with
§ 1.17, nor is the Commission extending
the time to comply with capital or
residual interest requirements. While
such relief might have the advantage of
further incentivizing FCMs to accept
transferred accounts, it would do so at
the cost of potentially causing or
accepting financial weakness at
transferee FCMs.
In a third group of points of requested
relief, the Commission notes that
interpretations of existing regulations
should adequately address the concerns.
Thus, transferred accounts are (based on
the terms of the regulations) excluded
from the Customer Identification
Program requirements of 31 CFR
1026.220, while the provisions of
§ 190.07(b)(3) adequately inform what
constitutes ‘‘appropriate risk-based
procedures for conducting ongoing
customer due diligence’’ (emphasis
supplied) in the context of 31 CFR
1026.210(b)(5)(i). While providing more
specific regulatory provisions might
enhance regulatory certainty (and thus
redound to the benefit of transferee
FCMs, and potentially incentivize FCMs
to accept transferred accounts), it carries
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the risk of being under-inclusive or
over-inclusive, and thus failing to
achieve the regulatory goals.
Moreover, as to both the second and
third categories, there may be a more
tailored approach to achieving the goal:
As the Commission explicitly notes
above, any further relief that might be
appropriate in a particular situation can
be requested by the transferee in light of
the relevant facts and circumstances.
The Commission observed that its staff
have traditionally responded to requests
for relief in emergency situations with
great dispatch, and expects, and has
instructed staff, to continue to do so in
this context in the future.261 While this
approach provides less certainty in
advance, it has the benefit of making
tailored relief available (and mitigating
the possibility that relief leads to
unintended consequences).
Section 190.07(b)(4) clarifies that
account agreements governing a
transferred account are deemed assigned
to the transferee until and unless a new
agreement is reached. At the request of
FIA, the Commission is confirming that
if there is a pre-existing account
agreement between a transferred
customer and the transferee FCM, that
pre-existing agreement will govern the
relationship rather than the agreement
between the customer and the transferor
(debtor) FCM. The provision also
confirms that consequences for breaches
pre-transfer are borne by the transferor
rather than the transferee. Section
190.07(b)(4) provides important
transparency regarding the agreement
between a transferred customer and a
transferee FCM pending the negotiation
of a new agreement between them, or,
if such negotiation is unsuccessful, until
either party decides to terminate the
relationship.
Section 190.07(b)(5) provides that in
the event of transfer, customer
instructions that are received by the
debtor with respect to any open
commodity contracts or specifically
identifiable property should be
transmitted to the transferee, who
should comply with such instructions to
the extent practicable. The slight
revisions to current § 190.02(c) are
merely clarifications, and there should
be no costs or benefits associated with
such revisions.
Section 190.07(c) provides that ‘‘all
commodity contract accounts (including
accounts with no open commodity
contract positions) are eligible for
transfer. . . .’’ This recognizes
explicitly that accounts can be
transferred if the accounts are intended
for trading commodities, but do not
261 See
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include any open commodity contracts
at the time of the order for relief. The
revision clarifies the current language
and will not change the types of
accounts that can be transferred.
Accordingly, the Commission does not
anticipate that there will be material
added cost associated with the revision.
Section 190.07(d) revises special rules
for transfers under section 764(b) of the
Bankruptcy Code. The revision is being
made to promote transfer. Cost and
benefit considerations related to transfer
are as discussed above.262 The revised
regulation permits partial transfers, but
(to the extent practicable) not in cases
where netting sets for spreads or
straddles would be broken or where
customers’ net equity claims would
increase. The revised regulation should
provide a benefit to customers by
codifying this limitation. This
recognizes that there may be
circumstances where partial transfer is
not practicable and implies that the
trustee makes that decision. It is
therefore possible that certain customers
holding spread or straddle positions
could have positions liquidated or not
transferred under the revised provision,
or could have spreads or straddles
broken because of the trustee’s exercise
of discretion.
The Commission has declined to
adopt ICI’s suggestion to provide
guidance to the effect that the trustee
should not effectuate a transfer that will
result in a separately managed account
having a significant deficit following the
porting, in order to avoid a
circumstance where ‘‘the manager of
that account would likely need to
liquidate the bulk of the account’s
portfolio and other positions in order to
eliminate or reduce the deficit.’’ While
adopting such a suggestion might
benefit the beneficial owner by enabling
the account manager to manage the
separate account in accord with the
account manager’s investment program,
it may instead have the opposite effect,
in that it may prevent any transfer of the
customer’s positions before the seventh
calendar day after the order for relief, in
which event the trustee will be required
to liquidate the entirety of the
customer’s account, promptly and in an
orderly manner, causing the very
disruptions that the transfer provisions
(and ICI’s suggestion) are designed to
avoid. Moreover, many FCMs carry
hundreds or even thousands of
separately managed accounts. It may
well not be practical for a trustee, in
addition to their numerous other
responsibilities (and in a context where
they need to learn those responsibilities
262 See
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in a compressed timeframe) to take ‘‘due
account’’ of the particular circumstances
of each of these separately managed
accounts in the hours, or perhaps a
small number of days, that the trustee
may be allowed by the clearing
organizations carrying the FCMs
accounts to negotiate and effectuate a
transfer. Endeavoring to do so might
well have the cost of diverting the
trustee and their assistants from
carrying out more pressing tasks.
Section 190.07(d)(3) permits a letter of
credit associated with a commodity
contract to be transferred with an
eligible commodity contract account. If
the letter of credit cannot be transferred
and the customer does not deliver
substitute property, the provision will
permit the trustee to draw upon all or
a portion of the letter of credit and treat
the proceeds as customer property in
the applicable account class. The
revised regulation ensures that letters of
credit are treated in an economically
similar fashion to other types of
collateral and that customers using
letters of credit will not receive any
differential economic advantages, thus
serving the goal of pro rata distribution.
If the trustee does draw upon the letter
of credit, there may be administrative
costs incurred by the estate, as well as
costs to the customer that posted the
letter of credit as collateral. These costs
may be mitigated if the customer
delivers substitute property, as set forth
in the proposed regulation. Moreover,
consistent with § 190.04(d)(3)(iv), the
trustee is directed to ‘‘endeavor to
achieve pro rata treatment among
customer claims in a manner that
mitigates, to the extent practicable, the
adverse effects upon customers that
have posted letters of credit.’’ 263
Section 190.07(d)(4) will require a
trustee to use reasonable efforts to
prevent physical delivery property from
being separated from commodity
contract positions under which the
property is deliverable. While this
provision will impose an administrative
cost on the estate, it is already a best
practice for trustees; keeping delivery
property with the underlying contract
positions is necessary for (and thus
should benefit) the delivery process.
Therefore, the additional administrative
cost from the revised regulation should
be minimal.
In § 190.07(d)(5), the Commission
prohibits the trustee from making a
transfer that would result in insufficient
remaining customer property to make an
equivalent percentage distribution to all
customers in the applicable account
class (taking into account all previous
transfers and distributions). The
Commission is further clarifying that the
trustee should make determinations in
this context based on customer claims
reflected in the FCM’s records, and, for
customer claims that are not consistent
with those records, should make
estimates using reasonable discretion
based in each case on available
information as of the calendar day
immediately preceding transfer. This
will support achieving the statutory
policy of pro rata distribution and give
the trustee discretion to make decisions
based on the overarching principle set
forth above, valuing cost effectiveness
over precise values of entitlement.
However, this is designed to work to the
detriment of any customer who, absent
the provision, would otherwise benefit
from a larger distribution. Moreover, in
giving the trustee discretion, it carries
the risk of mistake or misfeasance.
Section 190.07(e) will add language to
clarify that certain transfers are
approved by the Commission pursuant
to the procedure set forth in the
Bankruptcy Code (and thus protected
from avoidance) and will prohibit the
trustee from avoiding such transfers,
unless the transfer is disapproved by the
Commission. These include a transfer
made by ‘‘a receiver that has been
appointed for the FCM that is now a
debtor.’’ The new provision is being
added in order to respect the actions of
a receiver that is acting to protect the
property of the FCM that has become
the debtor in bankruptcy. It will provide
certainty to the actions of such a
receiver, whose duties, among others,
include protecting the customer
property of the FCM. However, to the
extent that the receiver takes actions
that are, considered in retrospect,
mistaken or ill-advised, the revised
provision will prevent the correction of
such actions unless the Commission
acts affirmatively to disapprove them.264
Section 190.07(f) will clarify that the
Commission may prohibit the transfer of
a particular set or sets of the commodity
contract accounts, or permit the transfer
of a particular set or sets of commodity
contract accounts that do not comply
with the requirements of the section. In
addition, the Commission is clarifying
that the transfers of the commodity
contract accounts include the associated
customer property. These revisions are
263 The costs and benefits of allowing the trustee
to draw upon the letter of credit have been
discussed above in section III.C.2 with respect to
§ 190.04(d)(3).
264 Regulation § 190.02(b)(1) explicitly excepts
from the delegation to the Director of the Division
of Clearing and Risk the authority to disapprove a
pre-relief transfer pursuant to § 190.07(e)(1).
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clarifications and should not have any
associated costs.
6. Regulation § 190.08: Calculation of
Funded Net Equity: Consideration of
Costs and Benefits
In § 190.08, the Commission
addresses calculation of funded net
equity. Section 190.08(a) simply states
that a customer’s funded net equity
claim is equal to the aggregate of such
customers funded net equity claims for
each account class.
Section 190.08(b) sets forth the steps
for a trustee to follow when calculating
each customer’s net equity. SIFMA
AMG/MFA requested that the
Commission amend proposed
§ 190.08(b)(2)(xii) to treat accounts of
the same principal or beneficial owner
maintained by different agents or
nominees as separate accounts and not
all held in the individual capacity of
such principal or beneficial owner,
suggesting that this would have the
benefit of reducing the administrative
difficulties the trustee would face in
consolidating all accounts of the same
principal or beneficial owner, and it
would have the further benefit of
avoiding any confusion as to treatment
of separate accounts that could arise
with the overlay of the time-limited
relief provided by Letter 19–17.
The Commission declined to make
this change. The change would not
achieve those benefits and would have
associated costs: First, the FCM, to the
extent it does treat such accounts
separately pursuant to the relief set forth
in Letter 19–17, will already be
consolidating (for purposes of certain
calculations) all accounts of the same
principal or beneficial owner, in that the
Letter conditions its relief on the FCM
applying credit limits and stress testing
on a combined account basis.265
Second, given that Letter 19–17 also
conditions relief on the FCM disclosing
that ‘‘under CFTC [p]art 190 rules all
separate accounts of the beneficial
owner will be combined in the event of
an FCM bankruptcy,’’ amending
§ 190.08(b)(2)(xii) to treat them
separately would be inconsistent with
that disclosure, and would cause, rather
than relieve, inconsistency with the
approach taken under the Letter.
While the Commission is making
certain revisions in § 190.08(b)(3), (4),
and (5), the Commission views such
revisions as non-substantive and merely
clarifying the text in the current
analogous provisions. Thus, the
Commission does not expect these
265 See CFTC Letter 19–17, https://www.cftc.gov/
node/217076 at 4.
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changes to result in any costs or
benefits.
Section 190.08(c) sets forth
instructions for calculating each
customer’s funded balance, while in
§ 190.08(d), the Commission is in
general implementing changes to
provide more flexibility to the trustee in
valuing commodity contracts and other
property held by or for a commodity
broker. For instance, in § 190.08(d)(5),
the Commission is deleting the
requirement that the trustee seek
approval of the court prior to enlisting
professional assistance to value
customer property. These changes
should benefit the estate by providing
the trustee with more flexibility to
determine how to value certain
customer property, including whether
or not to enlist professional assistance
in doing so. Likewise, these revisions
should serve the goal of a pro rata
distribution to customers, as the
accurate valuation of customer property
can benefit from the input of a
professional. On the other hand,
affording the trustee increased
discretion in how to value commodity
contracts and other property held by a
debtor carries the potential cost of
mistake, misfeasance, or abuse of
discretion by the trustee, as discussed
above, or possibly by the professional
whose service is retained.
With respect to commodity contracts
that have been transferred,
§ 190.08(d)(1)(i) provides that such
contracts be valued at the end of the last
settlement cycle on the day preceding
such transfer, rather than at the end of
the settlement cycle in which it is
transferred. Again, this revision should
benefit both the estate and customers by
making it practical to calculate the value
of the transferred commodity contracts
prior to the transfer.
The Commission has declined to
accept ICE’s suggestion that it adopt a
‘‘more flexible approach’’ because ‘‘the
market may move significantly on the
date of the transfer.’’ While prices may
move intra-day during the period
between opening and the time of
auction, they may also move between
the time of auction and closing.
Therefore, there is no ex ante reason to
expect that the previous day’s price is
less reflective of the price at the time of
the auction than the closing price on the
auction day. Moreover, an alternative
approach, using the price set in the
auction as the price for individual
contracts, is unlikely to be practicable.
Units auctioned will frequently contain
a heterogenous (though risk-related) set
of products, tenors (e.g., contract
months), and directions (e.g., long or
short). Thus, it will often be
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impracticable to translate an auction
price for a portfolio to prices for
individual contracts within that
portfolio.
7. Regulation § 190.09: Allocation of
Property and Allowance of Claims:
Consideration of Costs and Benefits
In § 190.09, the Commission is
addressing allocation of property and
allowance of claims. Section
190.09(a)(1) defines the scope of
‘‘customer property’’ that is available to
pay the claims of a debtor FCM’s
customers, and § 190.09(a)(1)(i) sets
forth the categories of ‘‘cash, securities,
or other property or the proceeds of
such cash, securities, or other property
received, acquired, or held by or for the
account of the debtor, from or for the
account of a customer’’ that are
included in customer property. In
§ 190.09(a)(1)(i), the Commission is
making certain substantive changes to
the categories listed in current
§ 190.08(a)(1)(i), as discussed below:
• First, § 190.09(a)(1)(i)(D) is new and
provides that customer property
includes any property ‘‘received by the
debtor as payment for a commodity to
be delivered to fulfill a commodity
contract from or for the commodity
customer account of a customer.’’
Clarifying this point explicitly should
benefit both the estate and customers by
avoiding confusion or potential
litigation.
• Second, § 190.09(a)(1)(i)(F)
provides that letters of credit, including
proceeds of letters of credit drawn by
the trustee, or substitute customer
property, constitute ‘‘customer
property.’’ This section is being revised
to be consistent with the other letters of
credit provisions that are being added
throughout part 190. The Commission
does not anticipate that this provision
will result in any material costs or
benefits, as current § 190.08(a)(1)(i)
already includes a provision regarding
letters of credit.266
Section 190.09(a)(1)(ii) sets forth the
categories of ‘‘[a]ll cash, securities, or
other property’’ that would be included
in customer property. In
§ 190.09(a)(1)(ii), the Commission is
making certain substantive changes to
the categories listed in current
§ 190.08(a)(1)(ii), as discussed below:
• First, § 190.09(a)(1)(ii)(D) provides
that any cash, securities, or other
266 The costs and benefits of the underlying
policy decision to take steps to ensure that
customers posting letters of credit are treated (with
respect to pro rata allocation of losses) in a manner
consistent with the manner in which customers
posting other forms of collateral are treated are
discussed in connection with § 190.04(d)(3) in
section III.C.2 above.
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property that was property received,
acquired or held to margin, guarantee,
secure, purchase, or sell a commodity
contract and that is subsequently
recovered by the avoidance powers of
the trustee or is otherwise recovered by
the trustee on any other claim or basis
constitutes customer property. The
current version of this provision refers
only to the trustee’s avoidance powers
(leaving out the possibility for recovery
other than through avoidance powers).
The Commission’s revisions to this
section will benefit the estate, by
assuring that any property they recover
will be included in the pool of customer
property, rather than going to some
other creditor (to be sure, those other
creditors will receive correspondingly
less).
• Second, § 190.09(a)(1)(ii)(G) is new,
and provides that any current assets of
the debtor in the greater of (i) the
amount that the debtor is obligated to be
set aside as its targeted residual interest
amount, pursuant to § 1.11, or (ii) the
debtor’s obligations to cover debit
balances or undermargined amounts,
pursuant to § 1.20, § 1.22, § 22.2, or
§ 30.7, constitute customer property.
This new provision will result in
administrative costs, because the trustee
will need to take the extra step of
determining whether any current assets
of the debtor need to be set aside as
customer property and, if so, how much.
This provision should benefit public
customers (and serve the policy of
protecting customer collateral),
however, because it will mitigate the
risk of a shortfall in customer funds by
ensuring that the trustee fulfills the
Commission’s regulations that require
an FCM to put certain funds into
segregation on behalf of customers. ICI
and Vanguard agreed that this provision
will benefit customers, while CME
considered it a ‘‘substantial
improvement over the current rule.’’
This approach will result in such funds
being included in the pool of customer
property, rather than going to some
other creditor. It will, to the same
extent, operate to the detriment of
general creditors.
• Third, § 190.09(a)(1)(ii)(K) is also
new, and provides that any cash,
securities, or other property that is
payment from an insurer to the trustee
arising from or related to a claim related
to the conversion or misuse of customer
property constitutes customer property.
This provision should benefit customers
(and, again, the policy of protecting
customer collateral), since any
insurance payment as described in this
proposed section will enlarge the pool
of customer property, rather than going
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to general creditors.267 It could result in
administrative costs, however, as the
trustee will need to spend time and
resources in order to determine whether
any such insurance payments exist, and
in prosecuting such insurance claims.
• Fourth, the second sentence of
§ 190.09(a)(1)(ii)(L) is new, and will
provide that customer property for
purposes of these regulations includes
any ‘‘customer property,’’ as that term is
defined in SIPA, that remains after
satisfaction of the provisions in SIPA
regarding allocation of customer
property constitutes customer property.
This provision should benefit
commodity customers (and act to the
detriment of general creditors) because
any securities customer property
remaining after full allocation to
securities customers will enlarge the
pool of commodity customer property. It
could result in administrative costs,
however, since the trustee could need to
spend time and resources determining
the extent to which such property is left
over after allocation to customers in a
SIPA proceeding.268
Section 190.09(a)(2) sets forth the
categories of property that are not
included in customer property. In
§ 190.09(a)(2), the Commission has
made certain substantive changes to the
categories listed in current
§ 190.08(a)(2), as discussed below:
• First, in § 190.09(a)(2)(iii), the
Commission is adding explicit language
to state that only those forward
contracts that are not cleared by a
clearing organization are excluded from
the pool of customer property. This
revision will benefit customers (and act
to the detriment of general creditors),
since the pool of customer property
would increase by explicitly including
any cleared forward contracts.
• Second, § 190.09(a)(2)(v) provides
that any property deposited by a
customer with a commodity broker after
the entry of an order for relief that is not
necessary to meet the margin
requirements of such customer is not
customer property. The deletion of the
word ‘‘maintenance’’ before ‘‘margin’’
will eliminate any distinction between
initial and variation margin; this
deletion will benefit customers by
267 It will, again, to the same extent, act to the
detriment of general creditors.
268 The Commission further notes that the first
sentence of § 190.09(a)(1)(ii)(L), which provides that
customer property includes any cash, securities, or
other property in the debtor’s estate, but only to the
extent that the customer property under the other
definitional elements is insufficient to satisfy in full
all claims of the debtor’s public customers, will
impose no new costs or benefits because such
provision already appears in current § 190.08, and
the only changes to the provision would be nonsubstantive updates to cross-references.
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ensuring that any amount deposited by
a customer after the entry of an order for
relief that is necessary to meet that
customer’s margin requirements will be
included in the pool of customer
property. This provision would
correspondingly act to the detriment of
general creditors.
• Third, § 190.09(a)(2)(viii), which is
new, provides that any money,
securities, or other property held in a
securities account to fulfill delivery,
under a commodity contract that is a
security futures product, from or for the
account of a customer, is excluded from
customer property. This provision
avoids conflict with the resolution,
under SIPA, of claims for securities and
related collateral.
Section 190.09(a)(3), which is new,
gives the trustee the authority to assert
claims against any person to recover the
shortfall of customer property
enumerated in certain paragraphs
elsewhere in § 190.09(a). This provision
could impose administrative costs, since
the trustee could have to expend time
and resources to assert and prosecute
such claims to make up for any shortfall
in customer property. The provision
will, however, benefit customers, since
it will ensure that the trustee is in a
position to recover any such shortfalls
and gives the trustee authority to act to
do so. Moreover, since this provision
makes explicit what is implicit in
current part 190, an additional benefit of
this provision may be reduced litigation
costs over a trustee’s authority to engage
in attempts to recover shortfalls in
customer property.269
Section 190.09(b) adds the phrase ‘‘or
attributable to’’ to the language that is in
current § 190.08(b), when describing
how to treat property segregated on
behalf of or attributable to non-public
customers, namely, as part of the public
customer estate; the addition of this
phrase, as described above, will clarify
that § 190.09(b)(1) applies both to
property that is in the debtor’s estate at
the time of the bankruptcy filing, as well
as property that is later recovered by the
trustee and becomes part of the debtor’s
estate at the time of recovery. This
additional phrase would benefit public
customers and the statutory policy in
favor of them (and correspondingly act
to the detriment of non-public
customers and general creditors), since
it could increase the amount of property
that is treated as part of the public
customer estate. It could impose
administrative costs because it could
269 Of course, these recoveries are derived from
persons against whom such claims are successfully
asserted. The transfer to customers from these
individuals advances the goal of pro-rata
distribution.
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19405
take time and resources to properly
allocate any property that is recovered
after the time the bankruptcy is filed.270
Section 190.09(c)(1)(ii) is a new
provision that instructs the trustee, in
the event there is property remaining
allocated to a particular account class
after payment in full of all allowed
customer claims in that account class, to
allocate the excess in accordance with
proposed § 190.09(c)(2), which in turn
sets forth the order of allocation for any
customer property that cannot be traced
to a specific customer account class.
These provisions will benefit public
customers who would otherwise face
shortfalls (and then, non-public
customers who would otherwise face
shortfalls). Since these provisions make
explicit what is implicit in current part
190, an additional benefit of these
provisions will result from the increased
clarity over what to do with any excess
customer property. However, the
provisions will act to the detriment of
non-public customers (relative to public
customers) and general creditors
(relative to both) who, under the current
regime, could have been more likely to
receive any excess customer property in
the absence of an explicit provision
providing what to do with any such
excess customer property.271
Section 190.09(d) governs the
distribution of customer property. The
only substantive change in § 190.09(d)
from its analog in current § 190.08(d) is
in § 190.09(d)(1)(i) and (ii), which
import the concept of ‘‘substitute
customer property.’’ Whereas current
§ 190.08(d)(1)(i) and (ii) require
customers to deposit cash in order to
obtain the return of specifically
identifiable property, § 190.09(d)(1)(i)
and (ii) allow the posting of ‘‘substitute
customer property.’’ This term, which is
defined in § 190.01, means cash or cash
equivalents. This revision will benefit
customers because it makes it easier for
customers to redeem their specifically
identifiable property by no longer
limiting customers to only using cash to
do so. It could, however, impose
administrative costs in the form of time
and resources of the trustee, who, in the
event a customer chooses to post cash
equivalents to redeem their specifically
identifiable property, will be required to
270 Section 190.09(c)(1) will have a similar change
in the addition of the phrase ‘‘or recovered by the
trustee on behalf of or for the benefit of an account
class,’’ which is meant to clarify that any property
recovered by the trustee on behalf of or for the
benefit of a particular account class after the
bankruptcy filing must be allocated to the customer
estate of that account class. This revision will
present similar costs and benefits to those discussed
above.
271 The incentive effects of such preferences are
discussed in section III.A.2.vi, above.
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value (and potentially to liquidate) such
cash equivalents. Moreover, while ‘‘cash
equivalents’’ are required to be assets
‘‘that are highly liquid such that they
may be converted into United States
dollar cash within one business day
without material discount in value,’’ it
is possible that such assets could
nonetheless decrease in value,
potentially to the detriment of other
customers.
8. Regulation § 190.10: Provisions
Applicable to Futures Commission
Merchants During Business as Usual:
Consideration of Costs and Benefits
As proposed, § 190.10 addresses
provisions applicable to FCMs during
business as usual. The ABA
Subcommittee and CME recommended
that these ordinary course provisions
should be codified in part 1 of the
Commission’s regulations, to be more
transparent to FCM compliance
personnel. As discussed further below,
the Commission has accepted that
suggestion and is adopting in part 1 of
its regulations the provisions that were
proposed as § 190.10 (b), (c), (d), and (e).
In the regulation proposed as
§ 190.10(a), the Commission notes that
an FCM is required to maintain current
records related to its customer accounts,
consistent with current Commission
regulations, and in a manner that will
permit them to be provided to another
FCM in connection with the transfer of
open customer contracts and other
customer property. This regulation does
not impose new obligations, but rather
informs the trustee regarding their
duties by incorporating references to the
Commission’s existing regulations.
Thus, this provision is remaining in part
190, and, as the sole remaining
paragraph, will be codified as § 190.10.
The regulation proposed as
§ 190.10(b) addresses designation of
accounts as intended for the purpose of
hedging. It is being codified as § 1.41.
An FCM will be permitted to rely upon
a customer’s written representation of
hedging intent regarding the designation
of a hedging account, without being
required to look behind that
representation, thus mitigating
administrative costs.
Section 1.41(a) requires an FCM to
provide a customer an opportunity to
designate an account as a hedging
account when the customer first opens
the account, allowing for clear
instruction to FCMs at the outset of the
relationship. Clear instruction at the
outset will facilitate the ability properly
to account for customer property. There
will be some disclosure and accounting
costs associated with this provision. For
those customers that do engage in
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hedging, it will be more cost effective to
designate the account at opening than to
monitor the transactions for the first
qualifying transaction to provide the
opportunity to make the designation, as
applicable under the current regulation.
Thus, the regulation should reduce the
probability that the opportunity to
designate the account as a hedging
account will be missed.
Section 1.41(b) sets forth the
conditions for treating an account as a
hedging account, permitting such
treatment upon the customer’s written
representation that their trading would
constitute hedging as defined under any
relevant Commission rule or the rule of
a DCO, DCM, SEF, or FBOT. There will
be record-keeping costs for FCMs and
customers associated with the
provision.
Section 1.41(c) provides that the
foregoing requirements do not apply to
commodity contract accounts opened
prior to the effective date of this final
rulemaking, and that an FCM can
continue to designate such existing
accounts as hedging accounts based on
written hedging instructions obtained
under current regulations. This
provision should mitigate the impact of
the changes to current requirements in
§ 1.41(a) and (b) by not applying those
provisions to already opened hedging
accounts, instead relying upon the
information collected and maintained
during the current regulatory
framework.
Section 1.41(d) will permit an FCM to
designate an existing customer account
as a hedging account for purposes of
bankruptcy treatment, provided that the
FCM obtains the necessary customer
representation. This provision will give
FCMs and customers flexibility to apply
the proposed regulations to existing
accounts where the impact would not be
overly burdensome.
The regulation proposed as
§ 190.10(c) addresses the establishment
of delivery accounts during business as
usual. It is being codified as § 1.42, and
recognizes that when an FCM facilitates
delivery under a customer’s physical
delivery contract and such delivery is
effected outside of a futures account,
foreign futures account, or cleared
swaps account, it must be effected
through (and the associated property
held in) a delivery account. While there
are costs associated with the opening
and maintenance of delivery accounts,
the Commission views that the use of
such accounts is cost effective in
facilitating delivery.272 The benefit of
using such accounts is twofold: To
protect customer assets during the
delivery process, and to foster the wellfunctioning of the delivery process.
The regulation proposed as
§ 190.10(d) addresses letters of credit,
and will prohibit an FCM from
accepting a letter of credit as collateral
during business as usual unless certain
conditions are met at the time of
acceptance and remain true through the
date of expiration. It is being codified as
§ 1.43.
The first condition is that the trustee
must be able to draw upon the letter of
credit in full or in part in the event of
a bankruptcy proceeding, the entry of a
protective decree under SIPA, or the
appointment of FDIC as receiver
pursuant to Title II of the Dodd-Frank
Act. Second, if the letter of credit is
permitted to be and in fact is passed
through to a clearing organization, the
trustee for such clearing organization (or
the FDIC) must be able to draw upon the
letter of credit in full or in part in the
event of a bankruptcy proceeding for
such clearing organization (or where the
FDIC is appointed as receiver).
Section 1.43 will ensure that an
FCM’s treatment and acceptance of
letters of credit during business as usual
is consistent with and does not preclude
the trustee’s treatment of letters of credit
in accordance with §§ 190.00(c)(5) and
190.04(d)(3). The Commission
understands that under industry
practice, most existing letter of credit
arrangements are consistent with the
Joint Audit Committee Forms of
Irrevocable Standby Letter of Credit,
both Pass-Through and Non PassThrough,273 and that these forms are
consistent with these new requirements.
Nevertheless, FCMs will need to review
the existing letters of credit for
consistency with the regulation, and it
is plausible that some could need to be
re-negotiated to be consistent therewith.
To mitigate the costs of this change,
the Commission has considered the
extent of the use of letters of credit in
the industry and has determined that
upon the effective date of the regulation,
§ 1.43 will apply only to new letters of
credit and customer agreements. The
Commission further is including a
transition period of one year from the
effective date until § 1.43 will apply to
existing letters of credit and customer
agreements. The transition period is
intended to give FCMs an adequate
opportunity to conduct the necessary
review of existing letters of credit and
customer agreements, and to make any
272 The Commission further understands that it is
already industry practice to use such accounts,
therefore, as a practical matter, the cost associated
with mandating the use of such accounts should be
mitigated.
273 See section II.B.8 above.
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necessary changes. SIFMA AMG/MFA
have urged the Commission to shorten
that one-year transition period,
questioning how a (non-conforming)
letter of credit would be treated if an
FCM that is holding such a letter of
credit went into bankruptcy during that
period. Nonetheless, the Commission
has concluded that the one-year time
period appropriately balances the goals
of mitigating burden on FCMs who are
required to conduct such reviews, and
make such changes, with the goal of
mitigating the risk that an FCM that has
accepted one or more letters of credit
that do not conform to the new
requirements becomes a debtor during
that transition period. Even if such a
situation occurs, the risk that the
customer who posted that letter of credit
would obtain treatment that is not
consistent with (i.e., better than) pro
rata treatment (at the expense of other
public customers) is mitigated by the
provision in § 190.04(d)(3)(ii)—which is
not subject to the one-year transition
period—that, for a letter of credit posted
as collateral, ‘‘the trustee shall treat any
portion that is not drawn upon (less the
value of any substitute customer
property delivered by the customer) as
having been distributed to the customer
for purposes of calculating entitlements
to distribution or transfer.’’
It is possible that some letters of
credit could become more expensive for
customers to obtain, as there will be an
increased likelihood that the letter of
credit will be drawn upon. (As
discussed above, this appears to not
apply to the majority of existing
arrangements). As noted in the
discussion of § 190.04(d)(3), the benefit
of the regulation is ensuring that letters
of credit are treated in an economically
consistent manner with other types of
collateral, thus promoting the goal of
pro rata distribution. However, it could
create incentives for customers who
had, or who would prefer to, post letters
of credit that could not be drawn upon
unless the customer defaulted, to reduce
their participation in transactions
cleared through FCMs.
The provision proposed as § 190.10(e)
concerns the disclosure statement for
non-cash margin, and is being codified
as § 1.55(p). It largely aligns with the
provisions in current part 190 from
which it was derived; there will be no
additional cost or benefit implications.
9. Section 15(a) Factors—Subpart B
a. Protection of Market Participants and
the Public
Subpart B of the revised regulations
will increase the protection of market
participants and the public by clarifying
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certain provisions (thereby promoting
transparency for customers, other
claimholders, and the general public),
by providing, in certain other
provisions, discretion to the trustee in
determining how best to achieve the
goal of protecting public customers as a
class, by fostering transfer (and therefore
mitigating the market risk associated
with closing out and reopening
positions for certain customers), by
enhancing the likelihood that customer
net equity claims will be fully funded,
and by promoting fairness to customers
as a class by achieving pro rata
distribution.
b. Efficiency, Competitiveness, and
Financial Integrity
Subpart B of the revised regulations
will promote efficiency (in the sense of
both cost effectiveness and timeliness)
in the administration of insolvency
proceedings of FCMs and the financial
integrity of derivatives transactions
carried by FCMs by setting forth clear
and well-thought-out instructions for a
bankruptcy trustee to follow in the
event of an FCM insolvency, and by
ensuring that these instructions are and
remain consistent with current market
practices. Moreover, subpart B will
provide the bankruptcy trustee with
discretion, in certain circumstances, to
react flexibly to the particulars of the
insolvency proceeding, guided by the
goal of protecting public customers as a
class, thereby promoting cost-effective
administration of the proceeding. These
effects will, in turn, enhance the
competitiveness of U.S. FCMs, by
enhancing market confidence in the
protection of customer funds and
positions entrusted to U.S. FCMs, even
in the case of insolvency.
c. Price Discovery
Price discovery is the process of
determining the price level for an asset
through the interaction of buyers and
sellers and based on supply and
demand conditions. The revised
regulations work to promote the
transfer, rather than liquidation, of
customer positions. To the extent that
they therefore mitigate the likelihood of
the need for liquidations of customer
positions, particularly in conditions of
market distress, they will mitigate the
negative impacts of bankruptcy
proceedings on price discovery.
d. Sound Risk Management Practices
Subpart B of the revised regulations
will promote sound risk management
practices by facilitating the bankruptcy
trustee’ effective management of the risk
of the debtor FCM. Subpart B will
accomplish this by revising the
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bankruptcy regulations for an FCM
insolvency to reflect current market
practices and thereby make it easier for
the trustee to act effectively to protect
customer property in the event of such
an insolvency.
e. Other Public Interest Considerations
Subpart B of the revised regulations
supports the implementation of
statutory policy such as promoting
protection of public customers and
ensuring pro rata distribution of
customer funds. Moreover, some of the
FCMs that might enter bankruptcy are
very large financial institutions, and
some are (or are part of larger groups
that are) considered to be systematically
important. A well-structured and
effective bankruptcy process that
efficiently facilitates the proceedings is
likely to benefit the financial system
(and thus the public interest), as that
process will help to attenuate the
detrimental effects of the bankruptcy on
the financial system and reduce the
likelihood that uncertainty as to the
outcome of the insolvency could cause
disruption to financial markets.
D. Subpart C—Clearing Organization as
Debtor
Subpart C to part 190 is intended to
create a tailored set of regulations to
govern a proceeding under subchapter
IV of chapter 7 of the Bankruptcy Code
in which the debtor is a clearing
organization. As discussed further
below, while these regulations are fitted
to the context of a commodity broker
that is a clearing organization, they are
principles-based rather than
prescriptive, and flexible rather than
rigid.
The overarching benefits of this
approach include the following. First,
uncertainty will be reduced during
business-as-usual (thus enhancing the
ability of both clearing members and
their customers better to understand
their exposures to the possible
insolvency of a clearing organization,
and to tailor their risk management
practices (and use of clearing services)
in light of this enhanced
understanding). This better
understanding may well foster greater
trust in the cleared derivatives
marketplace, and thus greater
participation therein. To be sure, it is
also possible that some market
participants, upon achieving a greater
understanding, may decide not to
participate. There are other limitations
to these benefits, noted below. Second,
by developing a more detailed, yet
flexible, framework and procedures for
the bankruptcy of a DCO, the costs (to
the estate, to clearing members, and to
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public customers) of the case should be
reduced.
Third, the resolution regime
established under Title II of Dodd-Frank
provides that the maximum liability of
FDIC as receiver of a covered financial
company to a claimant is the amount
the claimant would have received if the
FDIC had not been appointed receiver
and the covered financial company had
been liquidated under chapter 7 of the
Bankruptcy Code. By establishing a
clearer counterfactual, subpart C will:
(a) Enhance the ability of FDIC to plan
for and to execute its responsibilities as
receiver; (b) enhance the ability of
market participants to predict in
advance their exposures in the unlikely
event of the resolution as a DCO; and (c)
mitigate the cost of litigation over the
value of such claims. The Commission
notes that there can, to a certain extent,
be costs imposed by proposed subpart
C, in that there may be a corresponding
reduction in flexibility with the
addition of rules specifically tailored to
address a DCO bankruptcy, but the
Commission has drafted these proposed
rules with the intent of maintaining
significant flexibility, where warranted.
It is apposite to note an important
issue that affects incentives: A
significant group of commenters have
expressed strong concerns, both in
comments to this rulemaking 274 and
elsewhere,275 that clearing members and
their customers have no meaningful role
in DCO risk governance, and, most
relevant here, that DCOs’ default rules
and procedures and recovery and winddown plans are developed without
sufficient input from members and their
customers. As discussed in detail in
section II.C above and in this section
II.D, subpart C is based, in large part, on
a debtor DCO’s ex ante default rules and
procedures and recovery and winddown plans, though applied flexibly by
the trustee—that is, only to the extent
they determine is ‘‘reasonable’’ and
‘‘practicable.’’
Most of those concerns transcend the
topic of this rulemaking: As a general
matter, risk governance is intended to
mitigate the possibility of default and,
where default does occur, to foster the
result that it is the defaulter that pays
for all of the losses; skin-in-the-game
provides an additional layer of lossabsorbency that (i) comes before
mutualizing costs to non-defaulters and
(ii) creates incentives for DCOs to
engage in successful risk management.
274 See
ACLI, FIA, ICI, SIFMA AMG/MFA, and
Vanguard.
275 See, e.g., A Path Forward for CCP Resilience,
Recovery, and Resolution (published by a group of
prominent clearing members and money managers).
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Default rules and procedures are
intended to, inter alia, ensure that the
DCO can take timely action to contain
losses and liquidity pressures and to
continue meeting its obligations in the
event of a clearing member default.
Recovery plans address credit losses
that exceed the DCO’s available
resources, as well as the manifestation
of other risks, as necessary to maintain
the derivatives clearing organization’s
viability as a going concern, while
wind-down involves the actions of the
DCO to effect the permanent cessation
or sale or transfer of one or more
services.
Commission regulations require DCOs
to: Take steps to ensure their resilience,
have effective rules and procedures to
manage defaults, address fully any
individual or combined default loss,
and maintain viable plans for recovery
in the event that they suffer a default
loss or any other (non-default) loss.276
DCOs’ rules and arrangements for
default management and their recovery
plans work to allocate losses that are not
covered by the resources of the defaulter
between the DCOs themselves, their
clearing members, and (in some cases
such as gains-based haircutting), will
have the effect (along with clearing
agreements between FCMs and their
public customers) of allocating certain
losses to public customers. These
include default losses that are not
covered by margin posted by the
defaulter (or the defaulter’s own
contribution to mutualized loss
arrangements) or by the DCO’s ‘‘skin-inthe-game,’’ as well as certain investment
or custody losses. All of this would
occur outside of bankruptcy.277
Those rules, plans, and
arrangements—and the extent to which
they are considered helpful or
noxious—thus influence the incentives
of DCOs, their clearing members, and
the customers of those clearing
members. Accordingly, the concerns
that these clearing members and money
managers have raised with respect to
their limited ability to influence these
rules, plans, and arrangements that have
effects outside of bankruptcy are likely
to have important incentive effects on
how, and the extent to which, clearing
members and their public customers
276 See generally part 39 of the Commission’s
regulations. Only SIDCOs, or other DCOs that have
elected to become subject to the provisions of
subpart C of part 39, are required to address fully
any default loss, or to maintain recovery and winddown plans. However, among DCOs based in the
United States, the vast majority of activity is
conducted on DCOs that fall within one of those
two categories.
277 Moreover, among U.S. DCOs (and among all
DCOs registered with the Commission), no loss has
ever been so large that it was mutualized.
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(including money managers) are willing
to and do participate in cleared markets.
To the extent that subpart C of part
190 applies those rules, plans and
arrangements, even if flexibly, then the
incentive effects described above may
be felt more strongly by clearing
members and their public customers,
albeit only marginally so.278 The level of
that enhanced incentive is difficult to
measure, since it depends, in significant
part, on the perception of those entities
as to the effect of referring to those
rules, plans, and procedures in
bankruptcy under part 190, subpart C:
Those rules, plans, and procedures,
which they dislike, are and will be
applicable in cases where the DCO
engages in either default management or
recovery outside of bankruptcy. The
references to these rules, plans, and
procedures in part 190 increases the
likelihood that they will be used
(because bankruptcy represents an
additional circumstance in which they
would be applicable). The incentive
effects also depend on the perception of
clearing members and their public
customers on the effect of such use in
bankruptcy.
A note on terminology: As discussed
above in section II.C, the customers of
a clearing organization are its members,
considered separately in two roles: (1)
Each member may have a proprietary
(also known as ‘‘house’’) account at the
clearing organization, on behalf of itself
and its non-public customers (i.e.,
affiliates). The property that the clearing
organization holds in respect of these
accounts is referred to as ‘‘member
property.’’ (2) Each member may have
an account for that members’ public
customers. The property that the
clearing organization holds in respect of
these accounts is referred to as
‘‘customer property other than member
property.’’ Many clearing members will
have both such accounts, although some
may have only one or the other.
1. Regulation § 190.11: Scope and
Purpose of Subpart C: Consideration of
Costs and Benefits
Section 190.11(a) will simply state
that the new subpart C of part 190 will
apply to a proceeding commenced
under subchapter IV of chapter 7 of the
Bankruptcy Code in which the debtor is
a clearing organization. Therefore, the
costs and benefits of § 190.11(a) are the
overarching costs and benefits stated
above.
278 The effects of those rules on incentives for
DCOs is even more difficult to measure, since a
chapter 7 liquidation (the only bankruptcy available
to a commodity broker, see 11 U.S.C. 109(d)) is
highly likely to reduce severely, if it does not
eliminate, the DCO’s value to its shareholders.
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ICE and SIFMA AMG/MFA noted
that, in the case of the bankruptcy of a
DCO organized outside the United
States, there may be conflicts with a
bankruptcy proceeding in the home
jurisdiction unless the applicability of
part 190 is limited. For example, there
may be differing—and irreconcilable—
rules for distributing property. Such
differing rules could incentivize, e.g. a
customer of a non-FCM clearing
member to bring litigation seeking to
apply part 190’s customer protection
rules to what they might describe as the
customer claims of their non-FCM
clearing member.279
The Commission has determined to
adopt a suggestion by ICE and, in a
newly created § 190.11(b), to limit the
applicability of part 190, in the case of
a foreign DCO subject to a proceeding in
its home jurisdiction, to provisions that
(a) focus on the contracts and property
of public customers of FCM members 280
or (b) general provisions, and those that
provide notice and reports to the
Commission and a U.S. bankruptcy
trustee.281 By limiting the applicability
of part 190 in this manner, the
Commission will foster the goal of
mitigating such conflicts,282 while by
including those provisions (rather than
disapplying part 190 entirely to the
bankruptcy of a foreign-based clearing
organization), the Commission will
foster the goal of protecting customers of
U.S. FCM members of such a foreignbased DCO.
279 As noted immediately below, public
customers of FCM clearing members will benefit
from protection under part 190.
280 I.e., §§ 190.13, 190.17, and 190.18, but only
with respect to: (1) Claims of FCM clearing
members on behalf of their public customers; and
(2) property that is or should have been segregated
for the benefit of FCM clearing members’ public
customers, or that has been recovered for the benefit
of FCM clearing members’ public customers.
281 I.e., subpart A, and § 190.12.
282 The Commission notes that conflicts involving
a DCO based outside the United States with the
insolvency law in that DCO’s home jurisdiction as
applied to claims of FCM clearing members on
behalf of their public customers should be mitigated
by the fact that, pursuant to § 39.27(c)(3) and
Exhibit R to appendix A to part 39, the DCO is
required to submit and to keep current a
memorandum demonstrating, inter alia, the basis
for the conclusion that the DCO’s arrangements to
ring-fence the customer funds of FCM clearing
member are effective under the relevant non-U.S.
law in the event of the insolvency of the DCO, and
the basis for the conclusion that a local court or
insolvency official in the DCO’s jurisdiction of
domicile would respect the choice of U.S. law in
that context, and the basis for the conclusion that
the DCO would be able to comply with relevant
provisions of the Bankruptcy Code and Commission
regulations with respect to pro rata distribution and
relevant orders of a U.S. court regarding the
distribution of customer funds.
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2. Regulation § 190.12: Required Reports
and Records: Consideration of Costs and
Benefits
Section 190.12(a)(1) is analogous to
§ 190.03(a), in that it provides
instructions regarding how to give
notice to the Commission and to a
clearing organization’s members, where
such notice is required under subpart C.
For a discussion of the costs and
benefits of this section, please refer to
the discussion of the cost and benefit
implications of § 190.03(a).
Section 190.12(a)(2) will revise the
time in which a debtor clearing
organization must notify the
Commission of a bankruptcy filing. In
particular: (1) In the event of a voluntary
bankruptcy filing, the debtor will be
required to notify the Commission at or
before the time of filing, and (2) in the
event of an involuntary bankruptcy
filing, the debtor must notify the
Commission as soon as possible, but in
any event no later than three hours after
the receipt of the notice of such filing.
These revisions codify expectations that
(1) in a voluntary bankruptcy
proceeding, the debtor clearing
organization will provide advance
notice to the Commission ahead of the
filing to the extent practicable, and (2)
in an involuntary bankruptcy
proceeding, the debtor clearing
organization will notify the Commission
immediately upon receiving notice of
the filing, or within at the most three
hours thereafter.
With respect to a voluntary
bankruptcy filing, the Commission
expects that the DCO will have reported
its financial distress in the lead-up to a
bankruptcy filing in accordance with
the mandatory reporting requirements
in § 39.19(c)(4); the revision in proposed
§ 190.12(a) merely codifies the
expectation that the clearing
organization will notify the Commission
of an intent to file for bankruptcy
protection as soon as practicable before,
and in no event later than, the time of
the filing. In addition, § 190.12(a) also
will allow a debtor clearing organization
to provide the relevant docket number
of the bankruptcy proceeding to the
Commission ‘‘as soon as available,’’
while not delaying notifying the
Commission of the filing itself, to
account for the potential for a time lag
between the filing of a proceeding and
the assignment by the relevant court of
a docket number. These revisions will
enhance the ability of the Commission
to perform its responsibilities to support
the interests of clearing members,
customers of clearing members, markets,
and the broader financial system, by
providing the Commission with prompt
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notice of any DCO bankruptcy
proceeding.
Section 190.12(b) and (c) involve the
provision of certain reports and records
to the trustee and/or the Commission by
the debtor clearing organization. In
particular: § 190.12(b) sets forth the
reports and records that the clearing
organization will be required to provide
to the Commission and to the trustee
within three hours following the later of
the commencement of the proceeding or
the appointment of the trustee, and
§ 190.12(c) sets forth the records to be
provided to the Commission and to the
trustee no later than the next business
day following commencement of a
bankruptcy proceeding. These
provisions will impose administrative
costs on the debtor clearing organization
and/or the trustee, which will be
obligated to spend time and resources
transmitting copies of the required
reports and records to the trustee and/
or Commission. However, these
provisions should both benefit the
estate, and enhance the Commission’s
ability to fulfil its responsibilities, by
providing them with the most current
information about the clearing
organization, and by allowing the
trustee to begin to understand the
business of the clearing organization as
soon as possible following a bankruptcy
filing, which is critically necessary to
the administration of the debtor clearing
organization’s estate. This would in turn
promote confidence in the clearing
system in particular, and financial
markets more broadly.
OCC indicated that, while they
‘‘maintain[ ] this information in a
readily accessible place and do[ ] not
foresee any challenge in identifying and
providing this information without
delay,’’ they believe that the three hour
time period is ‘‘overly prescriptive’’
because of the possibility of ‘‘unforeseen
delays that could occur on the day in
which a DCO enters bankruptcy.’’ The
Commission has declined to modify the
proposal, because the Commission
believes that setting this specific
deadline will result in significant
benefits: Providing this information to
the trustee and the Commission with
much-needed expediency, and
facilitating DCOs’ contingency planning.
By comparison, the burden of providing
the reports, which as the commenter
notes, are already in existence and are
readily accessible, appears modest.
3. Regulation § 190.13: Prohibitions on
Avoidance of Transfers: Consideration
of Costs and Benefits
Section 190.13 implements section
764(b) of the Bankruptcy Code with
respect to DCOs, and prohibits the
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avoidance of certain transfers made
either before or shortly after entry of the
order for relief. While the prohibition of
avoidance of pre- and post-relief
transfers in the context of FCM debtors
in § 190.07(e) applies so long as the
transfer is not disapproved by
Commission, the same prohibition on
avoidance of pre- and post-relief
transfers in § 190.13(a) and (b) will
require the affirmative approval of the
Commission (though such approval can
be given either before or after the
transfer is made). This distinction will
impose administrative costs on the
clearing organization or the trustee, who
will have to expend time and resources
to seek affirmative approval from the
Commission for such a transfer in the
context of administering a DCO,
respectively, either before or after
bankruptcy. As noted above,283 a
clearing organization is mandated to
maintain a ‘‘balanced book.’’ Thus, a
transferee clearing organization may
only accept transfer of all of the
transferor’s customer positions (or at
least all positions in a given product
set).284 Any such transfer will have
significant effects on the markets
cleared, and on the broader financial
system. There are important benefits
from requiring the Commission’s
approval of such a significant
transaction, and thus permitting the
administrative agency responsible for
oversight of the derivatives markets to
maintain a level of discretion which
will help accomplish the goal of an
orderly functioning of the marketplace.
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4. Regulation § 190.14: Operation of the
Estate of the Debtor Subsequent to the
Filing Date: Consideration of Costs and
Benefits
Section 190.14(a) provides that the
trustee may, in their discretion based
upon the facts and circumstances of the
case, instruct each customer to file a
proof of claim containing such
information as is deemed appropriate by
the trustee. Allowing the bankruptcy
trustee to use their discretion in
tailoring the proof of claim form to the
specific facts and circumstances of the
case should benefit both the trustee and
customers by limiting the information
requested to only that which is
necessary for purposes of administering
the debtor’s estate and thereby
increasing cost effectiveness,
particularly given the bespoke nature of
a clearing organization bankruptcy.
283 See
section II.C.3 above.
the transferor clearing organization does not
have a balanced book, e.g., because of a member
default, it could nonetheless only transfer a
balanced book.
284 If
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Thus, the Commission has not proposed
a prescribed proof of claim form. There
could, however, be corresponding
administrative costs to both the estate
and the customers if the set of
information requested by the trustee in
the exercise of their discretion turns out
in retrospect to be overly narrow or
broad.
ICE believed that the proposal did not
clearly take into account non-CFTCregulated clearing, and that claims of
members with respect to such activity
should be properly accounted for in
bankruptcy and should not be
disadvantaged. As the Commission
noted above,285 to the extent that the
DCO is conducting non-CFTC-regulated
activity, the Commission expects that
the proof of claim form will include the
opportunity to claim for debts of the
DCO related to activity that is not
regulated by the CFTC. Thus, no change
is necessary to address this concern.
Section 190.14(b) provides that a
debtor clearing organization will cease
making calls for variation settlement or
initial margin.286 Under current
regulations, it would not be possible to
continue the operations of a debtor
clearing organization for any amount of
time after entry of the order for relief,
as there is no clear and coherent
mechanism to do so. Thus, § 190.14(b)
affirms current legal requirements and
maintains the status quo. Section
190.14(c)(1) provides that the trustee
shall liquidate all open commodity
contracts that have not been terminated,
liquidated or transferred no later than
seven calendar days after the entry of
the order for relief. This provision will
impose administrative costs in that the
trustee will have a hard deadline for
terminating, liquidating or transferring
any open commodity contracts within a
certain timeframe, whereas under
current part 190 there was no specified
timeframe for such termination,
liquidation or transfer. It could,
however, benefit clearing members and
customers, who will have certainty that
their open commodity contracts would
be liquidated within a particular
285 See
section II.C.4.
originally proposed, § 190.14(b) also
contained provisions that were intended to provide
a brief opportunity, after the order for relief, to
enable paths alternative to liquidation—that is,
resolution under Title II of the Dodd-Frank Act, or
transfer of clearing operations to another DCO—in
cases where a short delay (i.e., less than or equal
to six days) might facilitate such an alternative
path. The Commission subsequently issued the
Supplemental Proposal, which withdrew those
proposed provisions—§ 190.14(b)(2) and (3)—and
proposed a new alternative to facilitate the potential
resolution of a SIDCO pursuant to Title II of the
Dodd-Frank Act. As discussed in section II.C.4
above, the Commission is not adopting the
Supplemental Proposal.
286 As
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timeframe rather than being held open
for an undetermined amount of time. A
deadline for liquidation or transfer of
open contracts may benefit the broader
financial markets by mitigating
uncertainty.
Section 190.14(c)(2), which is derived
from current § 190.08(d)(3), will provide
that the trustee may, at their discretion,
make distributions in the form of
securities that are equivalent to the
securities originally delivered to the
debtor by a clearing member or such
clearing member’s customer, rather than
liquidating the securities and making
distributions in cash. Unlike current
§ 190.08(d)(3), § 190.14(c)(2) will not
allow the customer to request that the
trustee purchase like-kind securities and
distribute those instead of cash, but
instead will leave it to the discretion of
the trustee whether to do so. This
change could impose costs on customers
who would prefer to have a distribution
of equivalent securities rather than cash,
since it will remove their option to
request such a distribution. However, it
could benefit the estate by allowing the
trustee to use their discretion as to
whether to purchase and distribute
equivalent securities, rather than being
obligated to do so at the request of a
customer.
Section 190.14(d) will require the
trustee to use reasonable efforts to
compute the funded balance of each
customer account immediately prior to
the distribution of any property in the
account, ‘‘which shall be as accurate as
reasonably practicable under the
circumstances, including the reliability
and availability of information.’’ This
requirement applies with respect to
accounts of the customers of the
clearing organization: That is, its
members, separately in respect of each
such member’s (1) house account (on
behalf of the member and its non-public
customers and (2) customer account or
accounts (on behalf of the member’s
public customers, one such account for
each account class, to the extent
relevant).
This requirement will impose
administrative costs due to the time and
effort involved in making such
calculations. However, the regulation
gives the trustee a certain amount of
discretion, and this calculation will be
necessary to achieve the goal of making
distributions that are consistent with
each customer’s proportionate share.
5. Regulation § 190.15: Recovery and
Wind-Down Plans; Default Rules and
Procedures: Consideration of Costs and
Benefits
Section 190.15 provides that (1) the
trustee shall not avoid or prohibit any
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action taken by a debtor that was within
the scope of and was provided for in the
debtor’s recovery and wind-down plans;
(2) in administering a DCO bankruptcy,
the trustee shall, subject to the
reasonable discretion of the trustee and
to the extent practicable, implement the
default rules and procedures maintained
by the debtor; and (3) in administering
a DCO bankruptcy, the trustee shall, to
the extent reasonable and practicable,
and consistent with the protection of
customers, take actions in accordance
with the debtor’s recovery and winddown plans.
The Commission considered two
alternatives to directing the trustee to
implement the debtor’s own default
rules and procedures and recovery and
wind-down plans: First, continuing to
allow a bankruptcy trustee to develop,
in the moment, a plan for liquidating
the debtor clearing organization, and
second, prescribing an across-the-board
method for liquidating a debtor clearing
organization.
A number of commenters appeared to
support the first alternative approach.
Some (e.g., ACLI, FIA, ICI, SIFMA
AMG/MFA, Vanguard) expressed
concern that they lack transparency
with regard to the DCO risk
management decisions and DCOs’
default rules and procedures and
recovery and wind-down plans are
developed without sufficient input from
clearing members and their customers.
For example, Vanguard argued that the
existing DCO governance regime
provides them with no meaningful voice
in critical DCO risk management
practices and new cleared product
introductions; and since public
customers have only a very limited
ability to mitigate clearing risks
contractually, they ‘‘rely heavily on the
Commission to protect the interests of
[their] investors in the mandated cleared
market.’’ Commenters also expressed
the concern that there is a risk that, as
a DCO begins to fail, otherwise prudent
DCO rules could be changed without the
appropriate vetting by clearing members
and public customers who, given
mutualized allocation of losses, bear the
risk of poor risk management choices
undertaken by the DCO.287
287 With respect to DCO rules adopted as the DCO
is on the threshold of failure: DCO rules are subject
to review by the Commission. In all cases, they are
subject to review for consistency with the CEA and
Commission regulations (see § 40.6). In the case of
SIDCOs, they are additionally subject to review for
consistency with the purposes of the Dodd-Frank
Act or any applicable rules, orders, or standards
prescribed under section 805(a) thereof. Moreover,
to the extent commenters are concerned that such
late-enacted rules will be unfair to clearing
members or their customers, the Commission
expects that such unfairness would affect the
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The Commission has considered the
potential interplay of the amendments
to part 190 with other Commission
regulations and applicable statutes. As
noted above, these commenters’
concerns predominantly relate to the
economic interests of clearing members
and their customers in contexts outside
of bankruptcy.
A DCO’s operations and rules outside
of bankruptcy are governed by parts 39
and 40 of the Commission’s regulations.
The Commission, in particular through
its Division of Clearing and Risk,
applies these regulations and conducts
a rigorous program of oversight of DCOs
designed to protect the interests of
market participants and of the financial
system, including through careful
reviews of their rules (including default
rules) and their recovery and winddown plans, through detailed daily and
periodic risk surveillance, and through
in-depth remote and on-site
examinations addressing a wide
spectrum of risk management issues.
As noted by a commenter above, they
‘‘rely heavily on the Commission to
protect the interests of our investors in
the mandated cleared market.’’ Over the
years, the Commission has taken
seriously its responsibilities in this
regard, through its regulatory,
surveillance, and examinations
programs.
As discussed above, there are
important costs to addressing, in the
context of part 190, market participants’
concerns regarding DCOs’ rules,
procedures, and plans for allocating
losses that apply outside of a DCO
bankruptcy: Establishing a bankruptcy
regime where some market participants
would be allocated a smaller amount of
losses in bankruptcy than outside of
bankruptcy would risk creating
incentives for those participants to act
in a manner that promotes the
likelihood that the DCO will enter
bankruptcy.
In view of these considerations, the
Commission believes the commenters’
concerns are effectively mitigated by the
existing provisions of parts 39 and 40 of
its regulations and by the Commission’s
supervision of DCOs.288 Therefore, the
adoption of part 190, subpart C, which
is applicable to a DCO’s potential
bankruptcy, appropriately complements
parts 39 and 40 and the Commission’s
trustee’s judgment of the extent to which it is
‘‘reasonable’’ to apply those rules.
288 Nonetheless, the Commission is sensitive to
the concerns raised by commenters with respect to
the development and maintenance of DCO recovery
and wind-down plans and default rules and
procedures, and is actively reviewing these issues,
in particular with respect to governance, as they
relate to parts 39 and 40.
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ongoing supervision, which apply to a
DCO’s operations and rules outside of
bankruptcy.
Other commenters are concerned with
the inclusion in those DCO rules and
plans of ‘‘drastic measures as Variation
Margin Gains Haircutting (VMGH) and
Partial Tear-Up (PTU) of open
positions.’’ Gains haircutting, however,
is part of the ex ante allocation of losses,
and thus is an inherent part of the way
in which losses will be allocated in
bankruptcy. Moreover, there is a limited
amount of customer property available.
Thus, to the extent the application of
VMGH were to be disallowed, and some
customers would realize corresponding
benefits through increases in the
allowed amounts of their claims (and
thus a greater share of customer
property), other customers would suffer
corresponding costs, through a
decreased share of customer property—
indeed, the latter customers may receive
less than the amount of their claims for
initial margin.289 Accordingly, the
Commission concludes that it is
inadvisable to prohibit VMGH, or to
mandate that its effects be reversed, in
cases of DCO bankruptcy.
Partial tear-up, on the other hand, is
inapplicable in a clearing organization
bankruptcy: § 190.14(b) prohibits further
collection of variation margin, while
§ 190.14(c) requires the trustee to
liquidate all open commodity contracts.
Together, they effectively mandate full
tear-up of open positions. Thus, the
question of whether partial tear-up
should be prohibited is moot.
Other commenters were concerned
that these plans do not prescribe a
specific course of action, but rather
‘‘present a menu of options.’’ See, e.g.,
FIA, Vanguard. The Commission is of
the view that, given the complexity of
the operations of a DCO, and the need
for extremely prompt action, having the
trustee develop an entire plan in the
moment would be likely to turn out to
be impracticable. By contrast, being
presented with a ‘‘menu of options’’
among which the trustee may select
(and adapt) in a manner that is
‘‘reasonable and practicable’’ provides
the benefit of a helpful roadmap to
determine strategy and tactics.
The commenters, and potentially
other clearing members and public
customers who share the concerns of the
commenters, appeared to view DCO
default rules and procedures and
recovery and wind-down plans that they
believe have been adopted with
289 Cf. ISDA: Safeguarding Clearing: The Need for
a Comprehensive CCP Recovery and Resolution
Framework (2017) at 2 (‘‘Initial margin haircutting
should never be permitted.’’)
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inadequate input from them as noxious,
and thus they may already be
incentivized to reduce their exposure to
such DCOs. Those incentives may be
(marginally) increased by the fact that
the Commission is establishing in
§ 190.15 a model for the trustee that is
based on those rules, procedures, and
plans.
Other commenters (CME and ICE)
supported the second alternative,
specifically, a requirement that the
trustee cannot override the DCO’s
default rules or deviate from the DCO’s
recovery or wind-down plans. However,
given that these rules and plans are
designed to operate outside of
bankruptcy, a requirement to follow
them in procrustean fashion would have
the cost of compelling the trustee to
adopt an approach that may be poorly
tailored to the situation, and the
Commission will accordingly not adopt
such a requirement.
Finally, given the differences between
DCOs (and potential bankruptcy
situations), a one-size-fits-all approach
prescribed by the Commission is likely
to prove too rigid, and thus will not be
adopted.
The Commission is accordingly of the
view that, relative to these alternatives,
directing a trustee to implement the
DCO’s own default rules and
procedures, and recovery and winddown plans, would benefit the estate by
providing the trustee with a menu of
purpose-built rules, procedures and
plans to liquidate a DCO, which rules,
procedures and plans the DCO has
developed subject to the requirements of
the Commission’s regulations and
supervision of the Commission. Adding
concepts of reasonability and
practicability will give the trustee the
discretion to modify those rules,
procedures, and plans where and to the
extent appropriate. Hence, the
Commission believes that an approach
whereby the trustee would follow the
DCO’s own purpose-built default rules
and procedures and recovery and winddown plans, but have the discretion to
vary them as appropriate, would be the
most cost effective.
6. Regulation § 190.16: Delivery:
Consideration of Costs and Benefits
Regulation § 190.16 addresses
delivery in the context of a clearing
organization bankruptcy. Current part
190 does not contain any regulations
specific to delivery in that context.
Section 190.16(a) provides that a
bankruptcy trustee is required to use
‘‘reasonable efforts’’ to facilitate and
cooperate with the completion of the
delivery on behalf of the clearing
organization’s clearing member or the
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clearing member’s customer. This has
the benefit of mitigating disruption to
the cash market for the commodity and
mitigating adverse consequences to
parties that may be relying on delivery
taking place in connection with their
business operations. While the exertion
of such reasonable efforts will
necessarily involve administrative costs
(predominantly, time of the trustee or
their agents), the Commission is of the
view that this approach has important
benefits relative to the two alternatives.
Given the importance of reliable
delivery to physical markets, it would
be inappropriate to relieve the trustee of
the obligation to endeavor to facilitate
and cooperate with the members’ or
members’ customers’ efforts to
accomplish delivery. On the other hand,
mandating that the trustee go beyond
reasonable efforts would risk
compelling the trustee to expend
unwarranted amounts of resources in
this endeavor.
While proposed § 190.16(a) applied
this approach only to contracts that had
moved into delivery position prior to
the date and time of the order for relief,
the ABA Subcommittee and CME
suggested that this approach should be
extended to contracts that move into
delivery position after that date and
time, with CME noting that ‘‘it is
equally important to protect deliveries
under [such contracts] to avoid
disruption to commercial markets and
operations.’’ The Commission has
accepted this suggestion and notes that,
if any contracts move into delivery
position after the order for relief, but
before being terminated, liquidated, or
transferred, the benefits and costs of this
approach are analogous to those of
contracts that move into delivery
position prior to the order for relief.
Section 190.16(b) clarifies which
property will be part of the physical
delivery account class and which will
be part of the cash delivery account
class. It is analogous to § 190.06(b) in
the FCM context, and carries forward
the concepts in that section, but has
been modified for the context of a DCO
bankruptcy. Clearly delineating between
the physical delivery account class and
the cash delivery account class will
benefit customers because it will
increase transparency in terms of which
account class their property belongs in.
Section 190.16(b) will likely impose
administrative costs, since accounting
separately for physical delivery property
and cash delivery property will take the
trustee’s time and resources. As noted
above,290 the sub-division of the
290 See discussion of § 190.06(b) in section II.B.4
above.
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delivery account class into the physical
and cash delivery account classes will
recognize that cash is more vulnerable
to loss, and more difficult to trace, as
compared to physical delivery property.
Therefore, this sub-division will likely
benefit those with physical delivery
claims. Since cash is more vulnerable to
loss and more difficult to trace, then
under this approach, clearing members
and customers with claims in the cash
delivery sub-class will be more likely to
get a pro rata distribution that would be
less than those with claims in the
physical delivery property sub-class.291
7. Regulation § 190.17: Calculation of
Net Equity: Consideration of Costs and
Benefits
Section 190.17(a) clarifies that a
member of a debtor clearing
organization may have claims against
the clearing organization in separate
capacities: On behalf of its public
customers (customer accounts) and on
behalf of its non-public customers
(house accounts). It further states that
net equity shall be calculated separately
for each customer capacity in which the
clearing member has a claim against the
debtor. In the Commission’s view, the
provisions in § 190.17(a) are
clarifications that reflect customer
classifications set forth in section 766(i)
of the Bankruptcy Code, and account
classifications that have long been used
in other contexts, and will not impose
any costs or benefits on any parties.
Section 190.17(b)(1) provides that the
calculation of a clearing member’s net
equity claim in the bankruptcy of a
clearing organization shall include the
full application of the debtor’s loss
allocation rules and procedures. It also
provides that, with respect to a clearing
member’s house account, this will
include any assessments or similar loss
allocation arrangements provided for
under those rules and procedures that
were not called for before the filing date,
or, if called for, have not been paid.
A number of commenters, including
the ABA Subcommittee, CME, FIA, and
ICE, objected to including assessments
that had not been called for before the
order for relief in the calculation of net
equity claims where the debtor clearing
organization’s rules provide that
assessments cannot be called for after
bankruptcy. Taking these commenters’
preferred approach would benefit the
clearing members in circumstances
where there are both uncalled
291 Costs and benefits of the separation of the
delivery account class into physical delivery and
cash delivery subclasses were also addressed in
respect to the costs and benefits section addressing
the definition of ‘‘account class’’ in § 190.01,
section II.A.2 above.
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assessments, and remaining default
losses. As FIA noted in its comment
letter, the inclusion of uncalled
assessments ‘‘appears to have the effect
of reducing a clearing member’s
potential recovery.’’ However, all losses
will ultimately be allocated, and if
uncalled assessments are not taken into
account, any remaining losses that
haven’t been covered by other default
resources will be allocated through
gains-based haircutting. Thus, the
commenters’ preferred approach would
be at the cost of the customers of
clearing members, who would bear
additional losses even as the clearing
members would benefit.
Relative to the alternative suggested
by these commenters, the direct effect of
§ 190.17(b)(1) is to ensure that the
uncalled assessment will make up more
of the default losses, and conversely that
haircutting of the gains (of both clearing
members and customers) will make up
less of that loss. Hence, the rule could
harm clearing members, and
correspondingly benefit their customers.
In addition, there can be indirect effects.
While the maximum amount of
assessments that clearing members are
exposed to will not increase, there is a
marginally 292 increased likelihood that
those assessments will be used.293
Because clearing members’ potential
assessments are more likely to be used,
they will have a marginally increased
incentive to reduce their level of
exposure to assessments—for example,
by reducing their clearing activity for
themselves or on behalf of their
customers. While it is conceivable that
clearing members could work to
influence DCOs to reduce their own
assessment powers as a result of these
incentives, there are mitigants in the
Commission’s regulations.294
Section 190.17(b)(2) provides that
where the debtor’s loss allocation rules
292 ‘‘Marginal’’ because this happens only if (a)
there is a DCO bankruptcy, (b) there is a default loss
suffered by the DCO in connection with the
bankruptcy, and (c) not all of the assessments
necessary to address that default loss were called
before that bankruptcy.
293 While § 190.17(b)(1) will not result in uncalled
assessments being ‘‘called’’—the clearing members
will not have to pay them to the estate—uncalled
assessments will be ‘‘used’’ to reduce the clearing
member’s net equity claim.
294 For example, § 39.39(b)(1) requires SIDCOs
and Subpart C DCOs to have viable plans for
recovery necessitated by uncovered credit losses,
and the extent of a DCO’s assessment power
contributes to the viability of its recovery plan.
Moreover, the two SIDCOs, CME and ICE Clear
Credit, already have significant assessment powers,
and any proposed rule change to reduce those
powers would need to withstand review under
§ 40.10 for consistency with inter alia, the purposes
of the CEA and the Dodd-Frank Act, which include
the mitigation of systemic risk and the promotion
of financial stability.
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and procedures provide that clearing
members are entitled to payments due
to portions of mutualized default
resources that are either prefunded, or
assessed and collected, but in either
case not used, or to the clearing
organization’s recoveries on claims
against others (including recoveries on
claims against defaulting clearing
members), then ‘‘appropriate
adjustments shall be made to the net
equity claims of clearing members that
are so entitled.’’ These provisions will
benefit the estate by providing the
trustee with tools to act promptly and
efficiently, with lower administration
costs. The trustee will have a clear
roadmap to calculate net equity in the
bankruptcy of a clearing organization
and will not be obligated to come up
with an ad hoc methodology for doing
so. The provisions would also benefit
clearing members (and, therefore, their
customers) by providing transparency as
to how their net equity will be
calculated, as well as facilitating the
efficient administration of the estate.295
In those cases where the debtor has
excess mutualized default funds, or
recovers on claims against defaulters,
application of the debtor’s ‘‘reverse
waterfall’’ rules will benefit clearing
members (and, in certain cases, their
customers) by increasing the net equity
claims of the entitled clearing members.
In addition to the potential for these
transfers between general creditors and
clearing members and their customers,
this rule can create incentives for
clearing members and their customers.
In particular, it makes clearing
members’ contributions to mutualized
resources (and the possibility that gainsbased haircutting will affect clearing
members and their customers) less
onerous, because they enhance the
possibility that if the clearing member’s
contribution to mutualized default
resources (or gains-based haircutting
affecting clearing members or their
customers) is used to meet a default, it
ultimately will come back to the
clearing member or their customers as it
is recovered by the DCO (or the DCO’s
trustee) from the (bankruptcy) estate of
the defaulter.
Section 190.17(c) adopts by reference
the net equity calculations set forth in
proposed § 190.08, to the extent
applicable.296
295 See also 17 CFR 39.16 (requiring each DCO to,
among other things, ‘‘adopt rules and procedures
designed to allow for the efficient, fair, and safe
management of events during which clearing
members become insolvent or default on the
obligations of such clearing members to the’’ DCO).
296 For a discussion of the cost and benefit
considerations for § 190.08, please see section
IV.C.6 above.
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Section 190.17(d) sets forth a
definition of the term ‘‘funded balance’’
that is taken directly from the relevant
Bankruptcy Code provisions. Clarifying
the meaning of the term ‘‘funded
balance’’ in the context of a clearing
organization bankruptcy will benefit
clearing members, in that they will
know ex ante what is and is not
included in their funded balance and
how that amount is calculated. In
addition, § 190.17(d) adopts by
reference the methodology for
calculating funded balance that is set
forth in § 190.08(c).297
8. Regulation § 190.18: Treatment of
Property: Consideration of Costs and
Benefits
Section 190.18(a) is analogous to
§ 190.17(a), in that it will provide that
property of the debtor clearing
organization’s estate will be allocated
between member property and customer
property other than member property in
order to satisfy the proprietary and
customer claims, respectively, of
clearing members. In the Commission’s
view, the provisions in § 190.18(a) are
mere clarifications and do not impose
any costs or benefits on any parties.
Section 190.18(b)(1)(i) and (ii) set out
the scope of customer property for a
clearing organization, and are largely
based on § 190.09(a).298
Section 190.18(b)(1)(iii) provides that
customer property for a clearing
organization includes any guaranty fund
deposit, assessment or similar payment
or deposit made by a clearing member
or recovered by a trustee, to the extent
any remains following administration of
the debtor’s default rules and
procedures, and any other property of a
member available under the debtor’s
rules and procedures to satisfy claims
made by or on behalf of public
customers of a member. This provision
supports the goal of making customers
of the clearing organization whole, since
it clarifies that any property described
in this section will be included in the
scope of customer property, rather than
ultimately going to some other creditor
of the debtor. It would result in
corresponding costs to non-customer
creditors, and could result in
administrative costs, however, since the
trustee could need to spend time and
resources in order to determine whether
any such property exists in order to
properly allocate such property to
customers.
297 For a discussion of the cost and benefit
considerations for § 190.08(c), please see section
III.C.6 above.
298 For a discussion of the cost and benefit
considerations for § 190.09(a), please see section
III.C.7 above.
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A number of commenters (CME,
SIFMA AMG/MFA) have suggested that
the Commission make it explicit that
customer property should include the
amounts of its own funds a debtor DCO
had committed as part of its loss
allocation rules. The Commission has
accepted this suggestion in the final
rule, incorporating this provision in
§ 190.18(b)(1)(iv). This will benefit
customers, who will have additional
funds allocated to their claims, thereby
increasing the payment that they receive
on their claims and/or increasing the
likelihood of full payment of their
claims (due to an increase in customer
property). However, this benefit would
accrue at the possible expense of general
creditors, as there will be an equivalent
reduction in assets in the general estate.
An indirect consequence of this change
might be to marginally incentivize
customers to retain open positions in
contracts that are cleared by a
potentially-failing DCO, which might
marginally contribute to preserving
liquidity in those markets.
Regulation § 190.18(b)(2) adopts by
reference, in the context of a DCO as a
debtor, the exclusions from customer
property applied in the context of
debtor FCMs in § 190.09(a)(2), as if the
term debtor used therein would refer to
a clearing organization as debtor and to
the extent relevant to a clearing
organization.299
Regulation § 190.18(c) sets forth the
allocation of customer property among
customer classes (i.e., allocation
between (1) customer property other
than member property, and (2) member
property). This provision, in general,
applies the principle, consistent with
the Commission’s policy to favor public
customers over non-public customers,
that allocation to customer property
other than member property is favored
over allocation to member property, so
long as the funded balance in any
account class for members’ public
customers is less than one hundred
percent of net equity claims. This
provision would, in the event and at the
time it applied, benefit the public
customers of the debtor’s clearing
members, since it makes clear that
allocation to such customers is preferred
over allocation to the clearing members’
house accounts. It imposes
corresponding costs on the debtor’s
clearing members and affiliates to the
extent that, under the current regime,
there is a possibility that more customer
property would be allocated to their
house accounts. Overall, this provision
299 For
a discussion of the cost and benefit
considerations for proposed § 190.09(a)(2), please
see section III.C.7 above.
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provides the benefit of ex ante
transparency to the estate, the debtor’s
clearing members, and their customers,
who would know during business-asusual how customer property would be
allocated in the event of a bankruptcy.
However, the ABA Subcommittee,
CME, FIA, and ICE objected to proposed
§ 190.18(c)(1), which would apply the
debtor’s mutualized (and, in general,
member-funded) default fund to
customer property other than member
property, that is, to the customer class
for members’ public customers, to the
extent the funded balance is less than
one hundred percent for members’
public customers in any account class.
CME raised a particularly trenchant
point: Devoting member-funded
guarantee funds to purposes other than
mutualizing member defaults may result
in more onerous capital treatment for
the contributions of bank- or bankaffiliated-members to such funds,
increasing the capital charges for such
exposures manifold.300
As noted, the costs and benefits
discussed above will only accrue if
there is both a clearing organization
bankruptcy and a shortfall in customer
funds in one or more of the account
classes for members’ public customers
for that clearing organization in that
bankruptcy. The costs and benefits at
that potential future time would be
balanced, in that the costs to clearing
members (whose guarantee funds were
devoted to claims of the clearing
members’ customers) would be benefits
to those customers. By contrast, less
favorable capital treatment would have
a present-day effect, in the form of
higher capital costs for clearing
members. Moreover, those higher costs
would not create any direct benefit
(present day or otherwise) for, e.g.,
customers. In light of these factors, the
Commission has decided not to adopt
proposed § 190.18(c)(1) and to renumber
the remaining paragraphs of § 190.18(c).
Section 190.18(d) sets forth the
allocation of customer property among
account classes. This provision is
similar in concept to § 190.09(c). This
provision will benefit clearing members
and their customers, who will have
increased transparency, ex ante, into
how customer property will be
allocated. Prescribing this allocation
will, however, impose administrative
costs, because the trustee will lose some
amount of flexibility in terms of how to
allocate customer property between
account classes.
300 As discussed in detail in a footnote in section
II.C.8, those capital charges could increase by
literally hundreds of times, for a total impact of
billions of dollars in increased capital charges.
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Section 190.18(e) provides that, where
the debtor has, prior to the order for
relief, kept initial margin for house
accounts in accounts without separation
by account class, then member property
will be considered to be in a single
account class.301 This provision will
benefit the estate in those cases, because
the trustee will not be put to the
considerable task of separating in
bankruptcy that which was treated as a
single account during business-as-usual.
Paragraph (e) will also benefit the
debtor’s clearing members, who will
have increased transparency as to how
their member property will be treated.
Section 190.18(f) gives the trustee the
authority to assert claims against any
person to recover the shortfall of
customer property enumerated in
certain paragraphs elsewhere in
§ 190.18, analogous to § 190.09(a)(3).
This provision could impose
administrative costs, since the trustee
will need to expend time and resources
to assert claims to make up for any
shortfall in customer property. The
provision will, however, benefit
customers, since it will support the
trustee’s efforts to recover any such
shortfalls by giving the trustee authority
to act to do so. Moreover, since this
provision will make explicit what is
implicit in current part 190, an
additional benefit of this provision is a
reduction in potential litigation costs
over a trustee’s attempts to recover
shortfalls in customer property.302
9. Regulation § 190.19: Support of Daily
Settlement: Consideration of Costs and
Benefits
Section 190.19 deals with the
treatment of variation settlement in a
clearing organization bankruptcy, and
sets forth the approach for the trustee to
follow when there is a shortfall in
variation settlement owed to a debtor
clearing organization’s clearing
members and customers. Specifically,
§ 190.19(a) provides that any variation
settlement payments received by the
clearing organization after entry of an
order for relief shall be included in
customer property, and shall promptly
be distributed to the member and
customer accounts entitled to such
payments. Section 190.19(b) deals with
a situation where there is a shortfall in
301 ‘‘Account class’’ is defined in § 190.01 as
meaning one or more of each of the following types
of accounts, as described in greater detail in that
provision: (1) Futures account; (2) foreign futures
account; (3) cleared swaps account; and (4) delivery
account.
302 As discussed above in section III.C.7, while
the persons against whom claims are successfully
asserted may perceive a subjective cost, the
Commission does not find these costs relevant to
the analysis.
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variation settlement received by the
clearing organization, and provides that
such funds shall be supplemented with
four specified categories of funds
(margin, to the extent permissible under
parts 1, 22, and 30, assets of the debtor,
to the extent dedicated to such purpose,
prefunded guarantee funds, and
assessments) in accordance with the
clearing organization’s default rules and
procedures and (with respect to assets of
the debtor) any recovery and winddown plans maintained by the clearing
organization.
Section 190.19 will benefit clearing
members and their customers because it
will ensure that any variation settlement
received by the clearing organization
will be sent to those member and
customer accounts that would be
entitled to payment of variation
settlement, and that the trustee would
be able to supplement any shortfall in
variation settlement amounts with the
property listed in proposed § 190.19(b).
This approach will also benefit the
financial system more broadly, by
mitigating the effect of the bankruptcy
of the debtor on settlement payments.
There will be corresponding costs to
general creditors of the clearing
organization since, under current part
190, it is conceivable that, contrary to
the Commission’s interpretation of the
current rules, variation settlement
received by the clearing organization
could be diverted to the pool of general
creditors rather than becoming customer
property (even though such diversion
would be contrary to the expectations of
both the Commission and the industry).
In clarifying how variation settlement
received by the clearing organization is
to be treated by the bankruptcy trustee,
§ 190.19 will also benefit clearing
members and their customers by
providing enhanced transparency.
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10. Section 15(a) Factors—Subpart C
i. Protection of Market Participants and
the Public
Subpart C of the part 190 regulations
will increase the protection of market
participants and the public by setting
forth a bespoke framework for how the
bankruptcy trustee is expected to treat
the property of DCO clearing members
and their customers in the event of a
DCO insolvency, thereby promoting ex
ante transparency for such clearing
members and customers, and by
providing, in certain provisions,
discretion to the trustee in determining
how best to address the bankruptcy of
the DCO, and to achieve the goal of
protecting public customers as a class.
Moreover, the addition in part 190 of
bespoke bankruptcy rules for a DCO
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bankruptcy will provide better
protections to market participants by
accounting for the unique position of
clearing members (and the customers of
such clearing member) of a DCO that is
going through an insolvency
proceeding. Finally, provisions such as
§ 190.18(c), which preferentially
allocate excess property in any account
class to the customer class that benefits
public customers, to the extent there is
a shortfall in any account class in that
customer class, will further protect
public customers.
ii. Efficiency, Competitiveness, and
Financial Integrity
Subpart C of the part 190 regulations
will promote efficiency (in the sense of
both cost effectiveness and timeliness)
in the administration of insolvency
proceedings of DCOs, and the financial
integrity of transactions cleared by
DCOs by setting forth clear instructions
for a bankruptcy trustee to follow in the
event of a DCO insolvency. Moreover,
subpart C will provide the bankruptcy
trustee with discretion, in certain
circumstances, to react flexibly to the
particulars of the insolvency
proceeding, guided by the goal of
protecting public customers as a class,
thereby promoting efficiency of the
administration of the proceeding. These
effects will, in turn, enhance the
competitiveness of U.S. DCOs and their
FCM clearing members, by enhancing
market confidence in the protection of
customer funds and positions entrusted
to U.S. DCOs through their clearing
members, even in the case of
insolvency.
iii. Price Discovery
Price discovery is the process of
determining the price level for an asset
through the interaction of buyers and
sellers and based on supply and
demand conditions. Because a DCO
bankruptcy inevitably leads to full
close-out of the positions carried at the
DCO, the part 190 regulations will not
contribute to avoiding the resultant
negative impacts on price discovery.
iv. Sound Risk Management Practices
Subpart C of the part 190 regulations
will promote sound risk management
practices by facilitating the bankruptcy
trustee’s efforts to manage effectively
the risk of the debtor DCO. Subpart C
will accomplish this by adding
bankruptcy regulations to part 190 for a
DCO insolvency that reflect current
market practices and thereby make it
easier for the trustee to act effectively to
protect customer property in the event
of such an insolvency. Moreover,
subpart C will promote sound risk
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19415
management practices by instructing a
bankruptcy trustee to implement the
debtor DCO’s default rules and
procedures and to take actions in
accordance with the debtor DCO’s
recovery and wind-down plans, which
rules, procedures and plans are
developed and overseen by the
Commission, though subject to the
trustee’s discretion. Some portions of
subpart C may make additional
resources available to the trustee. On the
other hand, some commenters expressed
concern about changes (such as
§ 190.15) that they believe might lead to
inappropriate risk management choices
by DCOs.
v. Other Public Interest Considerations
By favoring the implementation of the
clearing organization’s default rules,
recovery plans, and procedures
established ex ante under the
supervision of the Commission, and by
supporting daily settlement, the part
190 regulations will support financial
stability. Moreover, some of the DCOs
that might enter bankruptcy are very
large financial institutions, and some
are considered to be systematically
important. An effective bankruptcy
process that efficiently facilitates the
proceedings is likely to benefit the
financial system (and thus the public
interest), as that process will help to
attenuate the detrimental effects of the
bankruptcy on the financial network.
E. Changes to Appendices A and B
The Commission is deleting forms 1
through 3 contained in appendix A,
which contain outdated provisions that
require the collection of unnecessary
information, and is replacing form 4
with a streamlined template proof of
claim form, which the trustee can use in
a flexible manner. CME considered the
template proof of claim ‘‘a major
improvement’’ over the current version.
These changes have the benefit of
reducing administrative costs, and there
are no obvious increased costs.
Similarly, the Commission is making
clarifying changes to framework 1 of
appendix B, and making, consistent
with the suggestions of the ABA
Subcommittee and the Subcommittee
Members, a significant set of clarifying
changes to framework 2. These changes
have the benefit of having framework 2
work in a more accurate, and less
confusing manner, thus reducing
administrative costs, and there are no
obvious increased costs.
F. Technical Corrections to Parts 1, 4,
and 41
The Commission is making technical
corrections to parts 1, 4, and 41 to
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update cross-references. These
corrections are clarifying and do not
have any impact on the substantive
obligations related to these sections.
Thus, there are no increased costs
associated with these minor technical
updates.
IV. Related Matters
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A. Antitrust Considerations
Section 15(b) of the CEA requires the
Commission to take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving the purposes of the CEA in
issuing any order or adopting any
Commission rule or regulation.303
The Commission believes that the
public interest to be protected by the
antitrust laws is the promotion of
competition. The Commission has
considered this rulemaking to determine
whether it might have anticompetitive
effects, and has not identified any effect
this rulemaking, which would apply
only in the rare instance of an FCM or
DCO bankruptcy, would have on
competition. Accordingly, the
Commission has not identified any less
anticompetitive means of achieving the
purposes of the CEA.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
whether the regulations they propose
will have a significant economic impact
on a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis on the impact.304
The regulations being adopted by the
Commission affect clearing
organizations, FCMs, bankruptcy
trustees, and customers. The
Commission has previously established
certain definitions of ‘‘small entities’’ to
be used in evaluating the impact of its
regulations in accordance with the
RFA.305
The Commission has previously
determined that clearing organizations
and FCMs are not small entities for
purposes of the RFA.306 In the event of
a bankruptcy, a trustee is appointed as
receiver to manage the estate of the
insolvent FCM or clearing organization.
Accordingly, since the trustee is
representing the estate of either an FCM
or clearing organization, the trustee is
not a small entity for purposes of the
RFA. The Commission recognizes that
many customers of an FCM or DCO in
303 Section
15(b) of the CEA, 7 U.S.C. 19(b).
U.S.C. 601 et seq.
305 47 FR 18618 (Apr. 30, 1982).
306 See 66 FR 45604, 45609 (Aug. 29, 2001); 67
FR 53146, 53171 (Aug. 14, 2002).
304 5
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bankruptcy could be considered to be
small entities for purposes of the RFA.
The Commission believes, however, that
the amendments to part 190 are
designed so that they can be
implemented without imposing a
significant economic burden on a
substantial number of small entities.
These regulations take into account
existing trading practices and the
logistical considerations of
implementing the regulations.
Accordingly, the Commission
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b), that the rule adopted herein will
not have a significant economic impact
on a substantial number of small
entities.
in the Commission’s bankruptcy
regulations for commodity broker
liquidations (17 CFR part 190). These
regulations apply to liquidations under
chapter 7, subchapter IV of the
Bankruptcy Code.309 The Commission
promulgated part 190 pursuant to the
authority of 7 U.S.C. 24. The
Commission is amending Information
Collection 3038–0021 as a result of
these final regulations to (1)
accommodate new information
collection requirements for FCMs and
DCOs, and (2) revise the existing
information collection requirements for
FCMs and DCOs. The Commission did
not receive any comments regarding its
PRA burden analysis in the preamble to
the proposal.
C. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) 307 imposes certain requirements
on Federal agencies (including the
Commission) in connection with their
conducting or sponsoring a collection of
information as defined by the PRA. The
regulations adopted herein would result
in such a collection, as discussed below.
A person is not required to respond to
a collection of information unless it
displays a currently valid control
number issued by the Office of
Management and Budget (OMB). The
regulations include a collection of
information for which the Commission
has previously received control
numbers from OMB. The title of this
collection of information is: OMB
Control Number 3038–0021,
‘‘Regulations Governing Bankruptcies of
Commodity Brokers.’’
Information Collection 3038–0021 308
contains the reporting, recordkeeping
and third-party disclosure requirements
1. Reporting Requirements in an FCM
Bankruptcy
Regulation § 190.03(b)(1) requires
FCMs that file a petition in bankruptcy
to notify the Commission and the
relevant DSRO, as soon as practicable
before and in any event no later than the
time of such filing, of the anticipated or
actual filing date, the court in which the
proceeding will be or has been filed
and, as soon as known, the docket
number assigned to that proceeding. It
further requires an FCM against which
an involuntary bankruptcy petition or
application for a protective decree
under SIPA is filed to notify the
Commission and the relevant DSRO
immediately upon the filing of such
petition or application.
Regulation § 190.03(b)(2) requires the
trustee, the relevant DSRO, or an
applicable clearing organization to
notify the Commission if such person
intends to transfer or apply to transfer
open commodity contracts or customer
property on behalf of the public
customers of the debtor.
Based on its experience, the
Commission anticipates that an FCM
bankruptcy would occur once every
three years.310 The Commission has
estimated the burden hours for the
reporting requirements in an FCM
bankruptcy as follows:
Estimated number of respondents: 1.
Estimated annual number of
responses per respondent: 1.311
307 44
U.S.C. 3501 et seq.
are two information collections
associated with OMB Control No. 3038–0021. The
first includes the reporting, recordkeeping, and
third-party disclosure requirements applicable to a
single respondent in a commodity broker
liquidation (e.g., a single FCM, DCO, or trustee)
within the relevant time period. This includes both
(1) requirements on a single FCM or a single trustee
in an FCM bankruptcy which correspond to current
requirements on a single FCM or a single trustee in
an FCM bankruptcy, as provided for in
§§ 190.03(b)(1) and (2) and (c)(1), (2), and (4),
190.05(b) and (d), and 190.07(b)(5); and (2) new
requirements on a single DCO or a single trustee in
a DCO bankruptcy as provided for in
§§ 190.12(a)(2), (b)(1) and (2), and (c)(1) and (2) and
190.14(a) and (d). The second information
collection includes the third-party disclosure
requirements that are applicable during business as
usual to multiple respondents (e.g., multiple FCMs).
These requirements were proposed as § 190.10(b)
and (e) (which are analogs to current §§ 190.06(d)
and 190.10(c)), as well as a new third-party
disclosure requirement provided for in § 190.10(d)
(regarding letters of credit); however, the third-party
disclosure requirements are being adopted as
§§ 1.41, 1.43, and 1.55(p).
308 There
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309 11
U.S.C. 761 et seq.
estimates express the burdens in terms
of those that would be imposed on one respondent
during the three-year period.
311 The Commission estimates that (1) under
§ 190.03(b)(1), an FCM would make two
notifications per bankruptcy (one to the
Commission and one to its DSRO), and (2) under
§ 190.03(b)(2), an FCM would make one notification
per bankruptcy. Dividing those numbers by three
(since the Commission anticipates an FCM
bankruptcy occurring once every three years)
results in 0.67 notifications annually pursuant to
310 These
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Estimated total annual number of
responses for all respondents: 1.
Estimated annual number of burden
hours per respondent: 1.312
Estimated total annual burden hours
for all respondents: 1.
Estimated total annual burden hours
for all respondents: 266.67.
3. Third-Party Disclosure Requirements
Applicable to a Single Respondent in an
FCM Bankruptcy
Regulation § 190.03(c)(1) requires the
trustee to use all reasonable efforts to
promptly notify any customer whose
futures account, foreign futures account,
Regulation § 190.05(b) requires the
or cleared swaps account includes
trustee to use reasonable efforts to
specifically identifiable property, and
compute a funded balance for each
that such specifically identifiable
customer account that contains open
property may be liquidated on and after
commodity contracts or other property
as of the close of business each business the seventh day after the order for relief
if the customer has not instructed the
day subsequent to the order for relief
trustee in writing before the deadline
until the date all open commodity
specified in the notice to return such
contracts and other property in such
property pursuant to the terms for
account has been transferred or
distribution of customer property
liquidated.
contained in part 190.
Regulation § 190.05(d) requires the
Regulation § 190.03(c)(2) allows the
trustee to use reasonable efforts to
trustee to treat open commodity
continue to issue account statements
contracts of public customers identified
with respect to any customer for whose
on the books and records of the debtor
account open commodity contracts or
has held in an account designated as a
other property is held that has not been
hedging account as specifically
liquidated or transferred.
identifiable property of such
Based on its experience, the
customer.316
Commission anticipates that an FCM
bankruptcy would occur once every
Regulation § 190.03(c)(4) requires the
three years.313 The Commission has
trustee to promptly notify each
customer that an order for relief has
estimated the burden hours for the
been entered and instruct each customer
recordkeeping requirements in an FCM
to file a proof of customer claim
bankruptcy as follows:
containing the information specified in
Estimated number of respondents: 1.
§ 190.03(e).
Estimated annual number of
Regulation § 190.07(b)(5) requires the
responses per respondent: 26,666.67.314
trustee, in the event that specifically
Estimated total annual number of
responses for all respondents: 26,666.67. identifiable property has been or will be
transferred, to transmit any customer
Estimated annual number of burden
instructions previously received by the
hours per respondent: 266.67.315
trustee with respect to such specifically
identifiable property to the transferee of
§ 190.03(b)(1), and 0.33 notifications annually
pursuant to § 190.03(b)(2), for a total of one
such property.
notification annually per respondent.
Based on its experience, the
312 The Commission estimates that (1) the
Commission anticipates that an FCM
notifications required under § 190.03(b)(1) would
bankruptcy would occur once every
take 0.5 hours to make, and (2) the notification
required under § 190.03(b)(2) would take 2 hours to
three years.317 The Commission has
make. In terms of burden hours, this amounts to
estimated the burden hours for the
(0.5*0.67 under § 190.03(b)(1)) plus (2*0.33 under
third-party disclosure requirements
§ 190.03(b)(2)), or a total of one burden hour
applicable to a single respondent in an
annually per respondent.
313 These estimates express the burdens in terms
FCM bankruptcy as follows:
of those that would be imposed on one respondent
Estimated number of respondents: 1.
during the three-year period.
Estimated annual number of
314 The Commission estimates that (1) under
responses
per respondent: 10,003.32.318
§ 190.05(b), a trustee would compute a funded
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2. Recordkeeping Requirements in an
FCM Bankruptcy
balance for customer accounts 40,000 times; and (2)
under § 190.05(d), a trustee would issue 40,000
account statements for customer accounts. Dividing
those numbers by three (since the Commission
anticipates an FCM bankruptcy occurring once
every three years) results in 13,333.33 records
annually pursuant to § 190.05(b), and 13,333.33
records annually pursuant to § 190.05(d), for a total
of 26,666.67 records annually per respondent.
315 The Commission estimates that each record
required under § 190.05(b) and 190.05(d) would
take 0.01 hours to prepare. In terms of burden
hours, this amounts to (0.01*13,333.33 under
§ 190.05(b)) plus (0.01*13,333.33 under
§ 190.05(d)), or a total of 266.67 burden hours
annually per respondent.
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316 The Commission no longer assigns burden
hours to the discretionary notice that a trustee may
provide to customers in an involuntary FCM
bankruptcy proceeding pursuant to § 190.03(c)(3).
There have been no involuntary FCM liquidations
and none are anticipated. Accordingly, continuing
to assign burden hours to this voluntary
requirement would inappropriately inflate the
burden hours of this information collection.
317 These estimates express the burdens in terms
of those that would be imposed on one respondent
during the three-year period.
318 The Commission estimates that a trustee
would make the required disclosures under each of
§ 190.03(c)(1), (2), and (4) 10,000 times per
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19417
Estimated total annual number of
responses for all respondents: 10,003.32.
Estimated annual number of burden
hours per respondent: 1,336.67.319
Estimated total annual burden hours
for all respondents: 1,336.67.
4. Reporting Requirements in a
Derivatives Clearing Organization (DCO)
Bankruptcy
Regulation § 190.12(a)(2) requires a
clearing organization that files a petition
in bankruptcy to notify the Commission,
at or before the time of such filing, of
the filing date, the court in which the
proceeding will be or has been filed
and, as soon as known, the docket
number assigned to that proceeding. It
further requires a clearing organization
against which an involuntary
bankruptcy petition is filed to similarly
notify the Commission within three
hours after the receipt of notice of such
filing.
Regulation § 190.12(b)(1) requires the
debtor clearing organization to provide
to the trustee, no later than three hours
following the later of the
commencement of a bankruptcy
proceeding or the appointment of the
trustee, copies of each of the most recent
reports that the debtor was required to
file with the Commission under
§ 39.19(c).
Regulation § 190.12(b)(2) requires the
debtor clearing organization to provide
to the trustee and the Commission, no
later than three hours following the
commencement of a bankruptcy
proceeding, copies of (1) the most recent
recovery or wind-down plans of the
debtor maintained pursuant to
§ 39.39(b), and (2) the most recent
version of the debtor’s default
management plan and default rules and
procedures maintained pursuant to
§ 39.16 and, as applicable, § 39.35.
Regulations § 190.12(c)(1) and (2)
require the debtor clearing organization
bankruptcy. Dividing those numbers by three (since
the Commission anticipates an FCM bankruptcy
occurring once every three years) results in 3,333.33
disclosures annually pursuant to each of
§ 190.03(c)(1), (2), and (4). The Commission further
estimates that a trustee would make the required
disclosure under § 190.07(b)(5) 10 times per
bankruptcy. Dividing this number by three results
in 3.33 disclosures annually pursuant to
§ 190.07(b)(5). This amounts to a total of 10,003.32
disclosures annually per respondent.
319 The Commission estimates that (1) each
disclosure required under § 190.03(c)(1) and (2) and
(b) would take 0.1 hours to prepare; (2) each
disclosure required under § 190.03(c)(4) would take
0.2 hours to prepare; and (3) each disclosure
required under § 190.07(b)(5) would take 1 hour to
prepare. In terms of burden hours, this amounts to
(0.1*3,333.33 under § 190.03(c)(1)) plus
(0.1*3,333.33 under § 190.03(c)(2)) plus
(0.2*3,333.33 under § 190.03(c)(4)) plus (1*3.33
under § 190.07(b)(5)), or a total of 1336.66 burden
hours annually per respondent.
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to make available to the trustee and the
Commission, no later than the next
business day following commencement
of a bankruptcy proceeding, copies of
(1) all records maintained by the debtor
pursuant to § 39.20(a), and (2) any
opinions of counsel or other legal
memoranda provided to the debtor in
the five years preceding the bankruptcy
proceeding relating to the enforceability
of the rules and procedures of the debtor
in the event of an insolvency proceeding
involving the debtor.
Based on its experience, the
Commission anticipates that a clearing
organization bankruptcy would occur
once every fifty years.320 The
Commission has estimated the burden
hours for the reporting requirements in
a DCO bankruptcy as follows:
Estimated number of respondents: 1.
Estimated annual number of
responses per respondent: 2.98.321
Estimated total annual number of
responses for all respondents: 2.98.
Estimated annual number of burden
hours per respondent: 0.61.322
320 No U.S. clearing organization has ever been
the subject of a bankruptcy proceeding, and none
has come anywhere near insolvency. While there
have been less than a handful of central
counterparties worldwide that became functionally
insolvent during the twentieth century, none of
those were subject to modern resiliency
requirements. Accordingly, the Commission
believes that an estimate of one DCO bankruptcy
every fifty years is an appropriate estimate. These
burden estimates express the burdens in terms of
those that would be imposed on one respondent
during the fifty-year period.
321 The Commission estimates that (1) under
§ 190.12(a)(2), a clearing organization would make
two notifications per bankruptcy; (2) under
§ 190.12(b)(1), a clearing organization would
provide 40 reports to the trustee; (3) under
§ 190.12(b)(2), a clearing organization would
provide 5 reports to the trustee and the
Commission; (4) under § 190.12(c)(1), a clearing
organization would provide 100 records to the
trustee and the Commission; and (5) under
§ 190.12(c)(2), a clearing organization would
provide 2 records to the trustee and the
Commission. Dividing those numbers by 50 (since
the Commission anticipates a clearing organization
bankruptcy occurring once every 50 years) results
in (1) 0.04 reports annually pursuant to
§ 190.12(a)(2); (2) 0.8 reports annually pursuant to
§ 190.12(b)(1); (3) 0.1 reports annually pursuant to
§ 190.12(b)(2); (4) 2 reports annually pursuant to
§ 190.12(c)(1); and (5) 0.04 reports annually
pursuant to § 190.12(c)(2), for a total of 2.98 reports
annually per respondent.
322 The Commission estimates that (1) each
notification required under § 190.12(a)(2) and (d)(2)
would take 0.5 hours to make; (2) gathering the
reports required under § 190.12(b)(1) would take 0.2
hours; (3) gathering the reports required under
§ 190.12(b)(2) would take 0.2 hours; (4) gathering
the reports required under § 190.12(c)(1) would take
0.2 hours; and (5) gathering the reports required
under § 190.12(c)(2) would take 0.2 hours. In terms
of burden hours, this amounts to (0.5*0.04 under
§ 190.12(a)(2)) plus (0.2*0.8 under § 190.12(b)(1))
plus (0.2*0.1 under § 190.12(b)(2)) plus (0.2*2
under § 190.12(c)(1)) plus (0.2*0.04 under
§ 190.12(c)(2)), or a total of 0.61 burden hours
annually per respondent.
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Estimated total annual burden hours
for all respondents: 0.61.
5. Recordkeeping Requirements in a
DCO Bankruptcy
Regulation § 190.14(d) requires the
trustee to use reasonable efforts to
compute a funded balance for each
customer account that contains open
commodity contracts or other property
as of the close of business each business
day subsequent to the order for relief on
which liquidation of property within
the account has been completed or
immediately prior to any distribution of
property within the account.
Based on its experience, the
Commission anticipates that a clearing
organization bankruptcy would occur
once every fifty years.323 The
Commission has estimated the burden
hours for the recordkeeping
requirements in a DCO bankruptcy as
follows:
Estimated number of respondents: 1.
Estimated annual number of
responses per respondent: 9.324
Estimated total annual number of
responses for all respondents: 9.
Estimated annual number of burden
hours per respondent: 0.9.325
Estimated total annual burden hours
for all respondents: 0.9.
6. Third-Party Disclosure Requirements
Applicable to a Single Respondent in a
DCO Bankruptcy
Regulation § 190.14(a) allows the
trustee, in their discretion based upon
the facts and circumstances of the case,
to instruct each customer to file a proof
of claim containing such information as
is deemed appropriate by the trustee,
and seek a court order establishing a bar
date for the filing of such proofs of
claim.
Based on its experience, the
Commission anticipates that a clearing
organization bankruptcy would occur
once every fifty years.326 The
Commission has estimated the burden
323 These estimates express the burdens in terms
of those that would be imposed on one respondent
during the fifty-year period.
324 The Commission estimates that, under
§ 190.14(d), a clearing organization would compute
a funded balance for customer accounts 450 times
during a bankruptcy. This number is based on an
average of 45 clearing members, each with two
accounts (house and customer). Dividing that
number by 50 (since the Commission anticipates a
clearing organization bankruptcy occurring once
every 50 years) results in 9 records annually per
respondent.
325 The Commission estimates that computing the
funded balance of customer accounts pursuant to
§ 190.14(d) would take 0.1 hours per computation.
In terms of burden hours, this amounts to (0.1*9),
or 0.9 burden hours annually per respondent.
326 These estimates express the burdens in terms
of those that would be imposed on one respondent
during the fifty-year period.
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hours for the third-party disclosure
requirements applicable to a single
respondent in a DCO bankruptcy as
follows:
Estimated number of respondents: 1.
Estimated annual number of
responses per respondent: 0.9.327
Estimated total annual number of
responses for all respondents: 0.9.
Estimated annual number of burden
hours per respondent: 0.18.328
Estimated total annual burden hours
for all respondents: 0.18.
7. Third-Party Disclosure Requirements
Applicable to Multiple Respondents
During Business as Usual
As discussed in Section II.B.8 above,
the Commission is codifying the
provisions proposed as § 190.10(b), (d),
and (e) in part 1, along with other
regulations that pertain to an FCM’s
business as usual. Regulation § 1.41,
which was proposed as § 190.10(b),
requires an FCM to provide an
opportunity to each of its customers,
upon first opening a futures account or
cleared swaps account with such FCM,
to designate such account as a hedging
account.
Regulation § 1.43, which was
proposed as § 190.10(d), prohibits an
FCM from accepting a letter of credit as
collateral unless such letter of credit
may be exercised under certain
conditions specified in the regulation.
Regulation § 1.55(p), which was
proposed as § 190.10(e), requires an
FCM to provide any customer with the
disclosure statement set forth in
§ 1.55(p) prior to accepting property
other than cash from or for the account
of a customer to margin, guarantee, or
secure a commodity contract.
The requirements described above are
applicable on a regular basis (i.e., during
business as usual) to multiple
respondents. The Commission has
estimated the burden hours for the
third-party disclosure requirements
applicable to multiple respondents
during business as usual as follows:
Estimated number of respondents:
125.
Estimated annual number of
responses per respondent: 3,000.329
327 The Commission estimates that, under
§ 190.14(a), a trustee would make the disclosure 45
times during a bankruptcy. This number is based
on an average of 45 clearing members. Dividing that
number by 50 (since the Commission anticipates a
clearing organization bankruptcy occurring once
every 50 years) results in 0.9 records annually per
respondent.
328 The Commission estimates that instructing
customers to file a proof of claim pursuant to
§ 190.14(a) would take 0.2 hours. In terms of burden
hours, this amounts to (0.2*0.9), or 0.18 burden
hours annually per respondent.
329 The Commission estimates that under §§ 1.41,
1.43, and 1.55(p), an FCM would make the required
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Estimated total annual number of
responses for all respondents: 375,000.
Estimated annual number of burden
hours per respondent: 60.330
Estimated total annual burden hours
for all respondents: 7,500.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures,
Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 4
Brokers, Commodity futures,
Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 41
Brokers, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 190
Bankruptcy, Brokers, Reporting and
recordkeeping requirements.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission amends 17 CFR
chapter I as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p,
6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12,
12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and
24 (2012).
2. In § 1.25, revise paragraph
(a)(2)(ii)(B) to read as follows:
■
§ 1.25
Investment of customer funds.
(a) * * *
(2) * * *
(ii) * * *
(B) Securities subject to such
repurchase agreements must not be
‘‘specifically identifiable property’’ as
defined in § 190.01 of this chapter.
*
*
*
*
*
■ 3. Add § 1.41 to read as follows:
§ 1.41
§ 1.42
Designation of hedging accounts.
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(a) A futures commission merchant
must provide an opportunity to each
customer, when it first opens a futures
account, foreign futures account or
disclosures 1,000 times per year. This amounts to
a total of 3,000 responses annually per respondent.
330 The Commission estimates that each
disclosure required under §§ 1.41, 1.43, and 1.55(p)
would take 0.02 hours to make. In terms of burden
hours, this amounts to (0.02*1,000 under § 1.41)
plus (0.02*1,000 under § 1.43 plus (0.02*1,000
under § 1.55(p)), or 60 burden hours annually per
respondent.
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cleared swaps account with such futures
commission merchant, to designate such
account as a hedging account. The
futures commission merchant must
indicate prominently in the accounting
records in which it maintains open
trade balances whether, for each
customer account, the account is
designated as a hedging account.
(b) A futures commission merchant
may permit the customer to open an
account as a hedging account only if it
obtains the customer’s written
representation that the customer’s
trading of futures or options on futures,
foreign futures or options on foreign
futures, or cleared swaps (as applicable)
in the account constitutes hedging as
such term may be defined under any
relevant Commission regulation or rule
of any clearing organization, designated
contract market, swap execution facility
or foreign board of trade.
(c) The requirements set forth in
paragraphs (a) and (b) of this section do
not apply to a futures commission
merchant with respect to any
commodity contract account that the
futures commission merchant opened
prior to May 13, 2021. The futures
commission merchant may continue to
designate as a hedging account any
account with respect to which the
futures commission merchant received
written hedging instructions from the
customer in accordance with former
§ 190.06(d) of this chapter.
(d) A futures commission merchant
may designate an existing futures
account, foreign futures account or
cleared swaps account of a particular
customer as a hedging account,
provided that it has obtained the
representation set out in paragraph (b)
of this section from such customer.
■ 4. Add § 1.42 to read as follows:
Delivery accounts.
In connection with the making or
taking of delivery of a commodity under
a commodity contract whose terms
require settlement via physical delivery,
if a futures commission merchant
facilitates or effects the transfer of the
physical delivery property and payment
therefor on behalf of the customer, and
does so outside the futures account,
foreign futures account or cleared swaps
account in which the commodity
contract was held, the futures
commission merchant must do so in a
delivery account, provided, however,
that when the commodity subject to
delivery is a security, a futures
commission merchant may, consistent
with any applicable regulatory
requirements, do so in a securities
account.
■ 5. Add § 1.43 to read as follows:
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§ 1.43
19419
Letters of credit as collateral.
A futures commission merchant shall
not accept a letter of credit as collateral
unless such letter of credit may be
exercised, through its stated date of
expiry, under the following conditions,
regardless of whether the customer
posting that letter of credit is in default
in any obligation:
(a) In the event that an order for relief
under chapter 7 of the Bankruptcy Code
or a protective decree pursuant to
section 5(b)(1) of SIPA is entered with
respect to the futures commission
merchant, or if the FDIC is appointed as
receiver for the futures commission
merchant pursuant to 12 U.S.C. 5382(a),
the trustee for that futures commission
merchant (or, as applicable, FDIC) may
draw upon such letter of credit, in full
or in part, in accordance with
§ 190.04(d)(3) of this chapter.
(b) If the letter of credit is passed
through to a clearing organization, then
in the event that an order for relief
under chapter 7 of the Bankruptcy Code
is entered with respect to the clearing
organization, or if the FDIC is appointed
as receiver for the clearing organization
pursuant to 12 U.S.C. 5382(a), the
trustee for that clearing organization (or,
as applicable, FDIC) may draw upon
such letter of credit, in full or in part,
in accordance with § 190.04(d)(3) of this
chapter.
(c) A futures commission merchant
shall not accept a letter of credit from
a customer as collateral if it has any
agreement with the customer that is
inconsistent with this section.
■ 6. In § 1.55:
■ a. Revise paragraphs (d) and (f);
■ b. Remove the parenthetical control
number sentence and parenthetical
authority citation following paragraph
(h);
■ c. Remove the paragraph (k) heading;
and
■ d. Add paragraph (p).
The revision and addition read as
follows:
§ 1.55 Public disclosures by futures
commission merchants.
*
*
*
*
*
(d) Any futures commission
merchant, or (in the case of an
introduced account) any introducing
broker, may open a commodity futures
account for a customer without
obtaining the separate acknowledgments
of disclosure and elections required by
this section and by §§ 1.33(g) and 33.7
of this chapter, provided that:
(1) Prior to the opening of such
account, the futures commission
merchant or introducing broker obtains
an acknowledgement from the customer,
which may consist of a single signature
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at the end of the futures commission
merchant’s or introducing broker’s
customer account agreement, or on a
separate page, of the disclosure
statements, consents, and elections
specified in this section and § 1.33(g),
and in §§ 33.7, 155.3(b)(2), and
155.4(b)(2) of this chapter, and which
may include authorization for the
transfer of funds from a segregated
customer account to another account of
such customer, as listed directly above
the signature line, provided the
customer has acknowledged by check or
other indication next to a description of
each specified disclosure statement,
consent, or election that the customer
has received and understood such
disclosure statement or made such
consent or election; and
(2) The acknowledgment referred to in
paragraph (d)(1) of this section is
accompanied by and executed
contemporaneously with delivery of the
disclosures and elective provisions
required by this section and § 1.33(g),
and by § 33.7 of this chapter.
*
*
*
*
*
(f) A futures commission merchant or,
in the case of an introduced account, an
introducing broker, may open a
commodity futures account for an
‘‘institutional customer’’ as defined in
§ 1.3 without furnishing such
institutional customer the disclosure
statements or obtaining the
acknowledgments required under
paragraph (a) of this section, or
§§ 1.33(g), 1.55(p), and 1.65(a)(3), and
§§ 30.6(a), 33.7(a), 155.3(b)(2), and
155.4(b)(2) of this chapter.
*
*
*
*
*
(p)(1) Except as provided in § 1.65, no
commodity broker (other than a clearing
organization) may accept property other
than cash from or for the account of a
customer, other than a customer
specified in paragraph (f) of this section,
to margin, guarantee, or secure a
commodity contract unless the
commodity broker first furnishes the
customer with the disclosure statement
set forth in paragraph (p)(2) of this
section in boldface print in at least 10
point type which may be provided as
either a separate, written document or
incorporated into the customer
agreement, or with another statement
approved under paragraph (c) of this
section and set forth in appendix A to
this section which the Commission
finds satisfies the requirement of this
paragraph (p)(1).
(2) The disclosure statement required
by paragraph (p)(1) of this section is as
follows:
THIS STATEMENT IS FURNISHED
TO YOU BECAUSE REGULATION
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1.55(p) OF THE COMMODITY
FUTURES TRADING COMMISSION
REQUIRES IT FOR REASONS OF FAIR
NOTICE UNRELATED TO THIS
COMPANY’S CURRENT FINANCIAL
CONDITION.
1. YOU SHOULD KNOW THAT IN
THE UNLIKELY EVENT OF THIS
COMPANY’S BANKRUPTCY,
PROPERTY, INCLUDING PROPERTY
SPECIFICALLY TRACEABLE TO YOU,
WILL BE RETURNED, TRANSFERRED
OR DISTRIBUTED TO YOU, OR ON
YOUR BEHALF, ONLY TO THE
EXTENT OF YOUR PRO RATA SHARE
OF ALL PROPERTY AVAILABLE FOR
DISTRIBUTION TO CUSTOMERS.
2. THE COMMISSION’S
REGULATIONS CONCERNING
BANKRUPTCIES OF COMMODITY
BROKERS CAN BE FOUND AT 17
CODE OF FEDERAL REGULATIONS
PART 190.
(3) The statement contained in
paragraph (p)(2) of this section need be
furnished only once to each customer to
whom it is required to be furnished by
this section.
7. In § 1.65, revise paragraphs (a)(3)
introductory text and (a)(3)(iii) to read
as follows:
■
§ 1.65 Notice of bulk transfers and
disclosure obligations to customers.
(a) * * *
(3) Where customer accounts are
transferred to a futures commission
merchant or introducing broker, other
than at the customer’s request, the
transferee introducing broker or futures
commission merchant must provide
each customer whose account is
transferred with the risk disclosure
statements and acknowledgments
required by § 1.55 (domestic futures and
foreign futures and options trading) and
§ 33.7 of this chapter (domestic
exchange-traded commodity options)
and receive the required
acknowledgments within sixty days of
the transfer of accounts. This paragraph
(a)(3) shall not apply:
*
*
*
*
*
(iii) If the transfer of accounts is made
from one introducing broker to another
introducing broker guaranteed by the
same futures commission merchant
pursuant to a guarantee agreement in
accordance with the requirements of
§ 1.10(j) and such futures commission
merchant maintains the relevant
acknowledgments required by
§§ 1.55(a)(1)(ii) and 33.7(a)(1)(ii) of this
chapter and can establish compliance
with § 1.55(p).
*
*
*
*
*
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PART 4—COMMODITY POOL
OPERATORS AND COMMODITY
TRADING ADVISORS
8. The authority citation for part 4
continues to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l,
6m, 6n, 6o, 12a, and 23.
9. In § 4.5, revise paragraph
(c)(2)(iii)(A) to read as follows:
■
§ 4.5 Exclusion for certain otherwise
regulated persons from the definition of the
term ‘‘commodity pool operator.’’
*
*
*
*
*
(c) * * *
(2) * * *
(iii) * * *
(A) Will use commodity futures or
commodity options contracts, or swaps
solely for bona fide hedging purposes
within the meaning and intent of the
definition of bona fide hedging
transactions and positions for excluded
commodities in §§ 1.3 and 151.5 of this
chapter; Provided however, That, in
addition, with respect to positions in
commodity futures or commodity
options contracts, or swaps which do
not come within the meaning and intent
of the definition of bona fide hedging
transactions and positions for excluded
commodities in §§ 1.3 and 151.5 of this
chapter, a qualifying entity may
represent that the aggregate initial
margin and premiums required to
establish such positions will not exceed
five percent of the liquidation value of
the qualifying entity’s portfolio, after
taking into account unrealized profits
and unrealized losses on any such
contracts it has entered into; and,
Provided further, That in the case of an
option that is in-the-money at the time
of the purchase, the in-the-money
amount as defined in § 190.01of this
chapter may be excluded in computing
such five percent; or
*
*
*
*
*
■ 10. In § 4.12, revise the section
heading and paragraph (b)(1)(i)(C) to
read as follows:
§ 4.12
part.
Exemption from provisions of this
*
*
*
*
*
(b) * * *
(1) * * *
(i) * * *
(C) Will not enter into commodity
interest transactions for which the
aggregate initial margin and premiums,
and required minimum security deposit
for retail forex transactions (as defined
in § 5.1(m) of this chapter) exceed 10
percent of the fair market value of the
pool’s assets, after taking into account
unrealized profits and unrealized losses
on any such contracts it has entered
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into; Provided, however, That in the
case of an option that is in-the-money at
the time of purchase, the in-the-money
amount as defined in § 190.01 of this
chapter may be excluded in computing
such 10 percent; and
*
*
*
*
*
■ 11. In § 4.13, revise paragraph
(a)(3)(ii)(A) to read as follows:
§ 4.13 Exemption from registration as a
commodity pool operator.
*
*
*
*
*
(a) * * *
(3) * * *
(ii) * * *
(A) The aggregate initial margin,
premiums, and required minimum
security deposit for retail forex
transactions (as defined in § 5.1(m) of
this chapter) required to establish such
positions, determined at the time the
most recent position was established,
will not exceed 5 percent of the
liquidation value of the pool’s portfolio,
after taking into account unrealized
profits and unrealized losses on any
such positions it has entered into;
Provided, That in the case of an option
that is in-the-money at the time of
purchase, the in-the-money amount as
defined in § 190.01 of this chapter may
be excluded in computing such 5
percent; or
*
*
*
*
*
12. The authority citation for part 41
continues to read as follows:
Authority: Sections 206, 251 and 252, Pub.
L. 106–554, 114 Stat. 2763, 7 U.S.C. 1a, 2, 6f,
6j, 7a–2, 12a; 15 U.S.C. 78g(c)(2).
13. In § 41.41, revise paragraph (d) to
read as follows:
■
§ 41.41 Security futures products
accounts.
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*
*
*
*
(d) Recordkeeping requirements. The
Commission’s recordkeeping rules set
forth in §§ 1.31, 1.32, 1.35, 1.36, 1.37,
4.23, 4.33, and 18.05 of this chapter
shall apply to security futures product
transactions and positions in a futures
account (as that term is defined in § 1.3
of this chapter). The rules in the
preceding sentence shall not apply to
security futures product transactions
and positions in a securities account (as
that term is defined in § 1.3 of this
chapter); provided, that the SEC’s
recordkeeping rules apply to those
transactions and positions.
*
*
*
*
*
■ 14. Revise part 190 to read as follows:
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Subpart B—Futures Commission Merchant
as Debtor
190.03 Notices and proofs of claims.
190.04 Operation of the debtor’s estate—
customer property.
190.05 Operation of the debtor’s estate—
general.
190.06 Making and taking delivery under
commodity contracts.
190.07 Transfers.
190.08 Calculation of funded net equity.
190.09 Allocation of property and
allowance of claims.
190.10 Current records during business as
usual.
Subpart C—Clearing Organization as
Debtor
190.11 Scope and purpose of this subpart.
190.12 Required reports and records.
190.13 Prohibition on avoidance of
transfers.
190.14 Operation of the estate of the debtor
subsequent to the filing date.
190.15 Recovery and wind-down plans;
default rules and procedures.
190.16 Delivery.
190.17 Calculation of net equity.
190.18 Treatment of property.
190.19 Support of daily settlement.
Appendix B to Part 190—Special
Bankruptcy Distributions
■
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Subpart A—General Provisions
Sec.
190.00 Statutory authority, organization,
core concepts, scope, and construction.
190.01 Definitions.
190.02 General.
Appendix A to Part 190—Customer Proof of
Claim Form
PART 41—SECURITY FUTURES
PRODUCTS
*
PART 190—BANKRUPTCY RULES
Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a–
1, 12, 12a, 19, and 24; 11 U.S.C. 362, 546,
548, 556, and 761–767, unless otherwise
noted.
Subpart A—General Provisions
§ 190.00 Statutory authority, organization,
core concepts, scope, and construction.
(a) Statutory authority. The
Commission has adopted the regulations
in this part pursuant to its authority
under sections 8a(5) and 20 of the Act.
Section 8a(5) provides general
rulemaking authority to effectuate the
provisions and accomplish the purposes
of the Act. Section 20 provides that the
Commission may, notwithstanding title
11 of the United States Code, adopt
certain rules or regulations governing a
proceeding involving a commodity
broker that is a debtor under subchapter
IV of chapter 7 of the Bankruptcy Code.
Specifically, the Commission is
authorized to adopt rules or regulations
specifying:
(1) That certain cash, securities, or
other property, or commodity contracts,
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are to be included in or excluded from
customer property or member property;
(2) That certain cash, securities, or
other property, or commodity contracts,
are to be specifically identifiable to a
particular customer in a particular
capacity;
(3) The method by which the business
of the commodity broker is to be
conducted or liquidated after the date of
the filing of the petition under chapter
7 of the Bankruptcy Code, including the
payment and allocation of margin with
respect to commodity contracts not
specifically identifiable to a particular
customer pending their orderly
liquidation;
(4) Any persons to which customer
property and commodity contracts may
be transferred under section 766 of the
Bankruptcy Code; and
(5) How a customer’s net equity is to
be determined.
(b) Organization. This part is
organized into three subparts. This
subpart contains general provisions
applicable in all cases. Subpart B of this
part contains provisions that apply
when the debtor is a futures commission
merchant (as that term is defined in the
Act or Commission regulations). This
includes acting as a foreign futures
commission merchant, as defined in
section 761(12) of the Bankruptcy Code,
but excludes a person that is ‘‘noticeregistered’’ as a futures commission
merchant pursuant to section 4f(a)(2) of
the Act. Subpart C contains provisions
that apply when the debtor is registered
as a derivatives clearing organization
under the Act.
(c) Core concepts. The regulations in
this part reflect several core concepts.
The descriptions of core concepts in
paragraphs (c)(1) through (6) of this
section are subject to the further specific
requirements set forth in this part, and
the specific requirements in this part
should be interpreted and applied
consistently with these core concepts.
(1) Commodity brokers. Subchapter IV
of chapter 7 of the Bankruptcy Code
applies to a debtor that is a commodity
broker, against which a customer holds
a ‘‘net equity’’ claim relating to a
commodity contract. This part is limited
to a commodity broker that is:
(i) A futures commission merchant; or
(ii) A derivatives clearing organization
registered under the Act and § 39.3 of
this chapter.
(2) Account classes. The Act and
Commission regulations in parts 1, 22,
and 30 of this chapter provide differing
treatment and protections for different
types of cleared commodity contracts.
This part establishes three account
classes that correspond to the different
types of accounts that futures
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commission merchants and clearing
organizations are required to maintain
under the regulations in the preceding
sentence, specifically, the futures
account class (including options on
futures), the foreign futures account
class (including options on foreign
futures), and the cleared swaps account
class (including cleared options other
than options on futures or foreign
futures). This part also establishes a
fourth account class, the delivery
account class (which may be further
subdivided as provided in this part), for
property held in an account designated
within the books and records of the
debtor as a delivery account, for
effecting delivery under commodity
contracts whose terms require
settlement via delivery when the
commodity contract is held to
expiration or, in the case of a cleared
option, is exercised.
(3) Public customers and non-public
customers; Commission segregation
requirements; member property—(i)
Public customers and non-public
customers. This part prescribes separate
treatment of ‘‘public customers’’ and
‘‘non-public customers’’ (as these terms
are defined in § 190.01) within each
account class in the event of a
proceeding under this part in which the
debtor is a futures commission
merchant. Public customers of a debtor
futures commission merchant are
entitled to a priority in the distribution
of cash, securities, or other customer
property over non-public customers,
and both have priority over all other
claimants (except for claims relating to
the administration of customer
property) pursuant to section 766(h) of
the Bankruptcy Code.
(A) The cash, securities, or other
property held on behalf of the public
customers of a futures commission
merchant in the futures, foreign futures,
or cleared swaps account classes are
subject to special segregation
requirements imposed under parts 1, 22,
and 30 of this chapter for each account
class. Although such segregation
requirements generally are not
applicable to cash, securities, or other
property received from or reflected in
the futures, foreign futures, or cleared
swaps accounts of non-public customers
of a futures commission merchant, such
transactions and property are customer
property within the scope of this part.
(B) While parts 1, 22, and 30 of this
chapter do not impose special
segregation requirements with respect to
treatment of cash, securities, or other
property of public customers carried in
a delivery account, such property does
constitute customer property. Thus, the
distinction between public and non-
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public customers is, given the priority
for public customers in section 766(h) of
the Bankruptcy Code, relevant for the
purpose of making distributions to
delivery account class customers
pursuant to this part.
(C) Where a provision in this part
affords the trustee discretion, that
discretion should be exercised in a
manner that the trustee determines will
best achieve the overarching goal of
protecting public customers as a class
by enhancing recoveries for, and
mitigating disruptions to, public
customers as a class. In seeking to
achieve that overarching goal, the
trustee has discretion to balance those
two sub-goals when they are in tension.
Where the trustee is directed to exercise
‘‘reasonable efforts’’ to meet a standard,
those efforts should only be less than
‘‘best efforts’’ to the extent that the
trustee determines that such an
approach would support the foregoing
goals.
(ii) Clearing organization
bankruptcies: Member property and
customer property other than member
property. For a clearing organization,
‘‘customer property’’ is divided into
‘‘member property’’ and ‘‘customer
property other than member property.’’
The term member property is used to
identify the cash, securities, or property
available to pay the net equity claims of
clearing members based on their house
account at the clearing organization.
Thus, in the event of a proceeding under
this part in which the debtor is a
clearing organization, the classification
of customers as public customers or
non-public customers also is relevant, in
that each member of the clearing
organization will have separate claims
against the clearing organization (by
account class) with respect to:
(A) Commodity contract transactions
cleared for its own account or on behalf
of any of its non-public customers
(which are cleared in a ‘‘house account’’
at the clearing organization); and
(B) Commodity contract transactions
cleared on behalf of any public
customers of the clearing member
(which are cleared in accounts at the
clearing organization that is separate
and distinct from house accounts).
(iii) Preferential assignment among
customer classes and account classes
for clearing organization bankruptcies.
Section 190.18 is designed to support
the interests of public customers of
members of a debtor that is a clearing
organization.
(A) Certain customer property is
preferentially assigned to ‘‘customer
property other than member property’’
instead of ‘‘member property’’ to the
extent that there is a shortfall in funded
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balances for members’ public customer
claims. Moreover, to the extent that
there are excess funded balances for
members’ claims in any customer class/
account class combination, that excess
is also preferentially assigned to
‘‘customer property other than member
property’’ to the extent of any shortfall
in funded balances for members’ public
customer claims.
(B) Where property is assigned to a
particular customer class with more
than one account class, it is assigned to
the account class for which the funded
balance percentage is the lowest until
there are two account classes with equal
funded balance percentages, then to
both such account classes, keeping the
funded balance percentage the same,
and so forth following the analogous
approach if the debtor has more than
two account classes within the relevant
customer class.
(4) Porting of public customer
commodity contract positions. In a
proceeding in which the debtor is a
futures commission merchant, this part
sets out a policy preference for
transferring to another futures
commission merchant, or ‘‘porting,’’
open commodity contract positions of
the debtor’s public customers along
with all or a portion of such customers’
account equity. Porting mitigates risks
to both the customers of the debtor
futures commission merchant and to the
markets. To facilitate porting, this part
addresses the manner in which the
debtor’s business is to be conducted on
and after the filing date, with specific
provisions addressing the collection and
payment of margin for open commodity
contract positions prior to porting.
(5) Pro rata distribution. (i) The
commodity broker provisions of the
Bankruptcy Code, subchapter IV of
chapter 7, in particular section 766(h),
have long revolved around the principle
of pro rata distribution. If there is a
shortfall in the cash, securities or other
property in a particular account class
needed to satisfy the net equity claims
of public customers in that account
class, the customer property in that
account class will be distributed pro
rata to those public customers (subject
to appendix B of this part). Any
customer property not attributable to a
specific account class, or that exceeds
the amount needed to pay allowed
customer net equity claims in a
particular account class, will be
distributed to public customers in other
account classes so long as there is a
shortfall in those other classes. Nonpublic customers will not receive any
distribution of customer property so
long as there is any shortfall, in any
account class, of customer property
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needed to satisfy public customer net
equity claims.
(ii) The pro rata distribution principle
means that, if there is a shortfall of
customer property in an account class,
all customers within that account class
will suffer the same proportional loss
relative to their allowed net equity
claims. The principle in this paragraph
(c)(5)(ii) applies to all customers,
including those who post as collateral
specifically identifiable property or
letters of credit. The pro rata
distribution principle is subject to the
special distribution provisions set forth
in framework 1 in appendix B of this
part for cross-margin accounts and
framework 2 in appendix B of this part
for funds held outside of the U.S. or
held in non-U.S. currency.
(6) Deliveries. (i) Commodity contracts
may have terms that require a customer
owning the contract:
(A) To make or take delivery of the
underlying commodity if the customer
holds the contract to a delivery position;
or
(B) In the case of an option on a
commodity:
(1) To make delivery upon exercise
(as the buyer of a put option or seller of
a call option); or
(2) To take delivery upon exercise (as
seller of a put option or buyer of a call
option).
(ii) Depending upon the
circumstances and relevant market,
delivery may be effected via a delivery
account, a futures account, a foreign
futures account or a cleared swaps
account, or, when the commodity
subject to delivery is a security, in a
securities account (in which case
property associated with the delivery
held in a securities account is not part
of any customer account class for
purposes of this part).
(iii) Although commodity contracts
with delivery obligations are typically
offset before reaching the delivery stage
(i.e., prior to triggering bilateral delivery
obligations), when delivery obligations
do arise, a delivery default could have
a disruptive effect on the cash market
for the commodity and adversely impact
the parties to the transaction. This part
therefore sets out special provisions to
address open commodity contracts that
are settled by delivery, when those
positions are nearing or have entered
into a delivery position at the time of or
after the filing date. The delivery
provisions in this part are intended to
allow deliveries to be completed in
accordance with the rules and
established practices for the relevant
commodity contract market or clearing
organization, as applicable and to the
extent permitted under this part.
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(iv) In a proceeding in which the
debtor is a futures commission
merchant, the delivery provisions in
this part reflect policy preferences to:
(A) Liquidate commodity contracts
that settle via delivery before they move
into a delivery position; and
(B) When such contracts are in a
delivery position, to allow delivery to
occur, where practicable, outside
administration of the debtor’s estate.
(v) The delivery provisions in this
part apply to any commodity that is
subject to delivery under a commodity
contract, as the term commodity is
defined in section of 1a(9) of the Act,
whether the commodity itself is tangible
or intangible, including agricultural
commodities as defined in § 1.3 of this
chapter, other non-financial
commodities (such as metals or energy
commodities) covered by the definition
of exempt commodity in section 1a(20)
of the Act, and commodities that are
financial in nature (such as foreign
currencies) covered by the definition of
excluded commodity in section 1a(19)
of the Act. The delivery provisions also
apply to virtual currencies that are
subject to delivery under a commodity
contract.
(d) Scope—(1) Proceedings—(i)
Certain commodity broker proceedings
under subchapter IV of chapter 7 of the
Bankruptcy Code. (A) Section 101(6) of
the Bankruptcy Code recognizes
‘‘futures commission merchants’’ and
‘‘foreign futures commission
merchants,’’ as those terms are defined
in section 761(12) of the Bankruptcy
Code, as separate categories of
commodity broker. The definition of
commodity broker in § 190.01, as it
applies to a commodity broker that is a
futures commission merchant under the
Act, also covers foreign futures
commission merchants because a
foreign futures commission merchant is
required to register as a futures
commission merchant under the Act.
(B) Section 101(6) of the Bankruptcy
Code recognizes ‘‘commodity options
dealers,’’ and ‘‘leverage transaction
merchants’’ as defined in sections
761(6) and (13) of the Bankruptcy Code,
as separate categories of commodity
brokers. There are no commodity
options dealers or leverage transaction
merchants as of December 8, 2020.
Note 1 to paragraph (b)(1)(i)(B). The
Commission intends to adopt rules with
respect to commodity options dealers or
leverage transaction merchants,
respectively, at such time as an entity
registers as such.
(ii) Futures commission merchants
subject to a SIPA proceeding. Pursuant
to section 7(b) of SIPA, 15 U.S.C. 78fff–
1(b), the trustee in a SIPA proceeding,
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where the debtor also is a commodity
broker, has the same duties as a trustee
in a proceeding under subchapter IV of
chapter 7 of the Bankruptcy Code, to the
extent consistent with the provisions of
SIPA or as otherwise ordered by the
court. This part therefore also applies to
a proceeding commenced under SIPA
with respect to a debtor that is
registered as a broker or dealer under
section 15 of the Securities Exchange
Act of 1934 when the debtor also is a
futures commission merchant.
(iii) Commodity brokers subject to an
FDIC proceeding. Section 5390(m)(1)(B)
of title 12 of the United States Code
provides that the FDIC must apply the
provisions of subchapter IV of chapter 7
of the Bankruptcy Code in respect of the
distribution of customer property and
member property in connection with the
liquidation of a covered financial
company or a bridge financial company
(as those terms are defined in section
5381(a) of title 12) that is a commodity
broker as if such person were a debtor
for purposes of subchapter IV, except as
specifically provided in section 5390 of
title 12. This part therefore shall serve
as guidance as to such distribution of
property in a proceeding in which the
FDIC is acting as a receiver pursuant to
title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
with respect to a covered financial
company or bridge financial company
that is a commodity broker whose
liquidation otherwise would be
administered by a trustee under
subchapter IV of chapter 7 of the
Bankruptcy Code.
(2) Account class and implied trust
limitations. (i) The trustee may not
recognize any account class that is not
one of the account classes enumerated
in § 190.01.
(ii) No property that would otherwise
be included in customer property, as
defined in § 190.01, shall be excluded
from customer property because such
property is considered to be held in a
constructive, resulting, or other trust
that is implied in equity.
(3) Commodity contract exclusions.
For purposes of this part, the following
are excluded from the term ‘‘commodity
contract’’:
(i) Options on commodities (including
swaps subject to regulation under part
32 of this chapter) that are not centrally
cleared by a clearing organization or
foreign clearing organization.
(ii) Transactions, contracts or
agreements that are classified as
‘‘forward contracts’’ under the Act
pursuant to the exclusion from the term
‘‘future delivery’’ set out in section
1a(27) of the Act or the exclusion from
the definition of a ‘‘swap’’ under section
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1a(47)(B)(ii) of the Act, in each case that
are not centrally cleared by a clearing
organization or foreign clearing
organization.
(iii) Security futures products as
defined in section 1a(45) of the Act
when such products are held in a
securities account.
(iv) Any off-exchange retail foreign
currency transaction, contract or
agreement described in sections
2(c)(2)(B) or (C) of the Act.
(v) Any security-based swap or other
security (as defined in section 3 of the
Exchange Act), but a security futures
product or a mixed swap (as defined in
1a(47)(D) of the Act) that is, in either
case, carried in an account for which
there is a corresponding account class
under this part is not so excluded.
(vi) Any off-exchange retail
commodity transaction, contract or
agreement described in section
2(c)(2)(D) of the Act, unless such
transaction, contract or agreement is
traded on or subject to the rules of a
designated contract market or foreign
board of trade as, or as if, such
transaction, contract, or agreement is a
futures contract.
(e) Construction. (1) A reference in
this part to a specific section of a
Federal statute or specific regulation
refers to such section or regulation as
the same may be amended or
superseded.
(2) Where they differ, the definitions
set forth in § 190.01 shall be used
instead of defined terms set forth in
section 761 of the Bankruptcy Code. In
many cases, these definitions are based
on definitions in parts 1, 22, and 30 of
this chapter. Notwithstanding the use of
different defined terms, the regulations
in this part are intended to be consistent
with the provisions and objectives of
subchapter IV of chapter 7 of the
Bankruptcy Code.
(3) In the context of portfolio
margining and cross margining
programs, commodity contracts and
associated collateral will be treated as
part of the account class in which,
consistent with part 1, 22, 30, or 39 of
this chapter, or Commission Order, they
are held.
(i) Thus, as noted in paragraph (2) of
the definition of account class in
§ 190.01, where open commodity
contracts (and associated collateral) that
would be attributable to one account
class are, instead, commingled with the
commodity contracts (and associated
collateral) in a second account class (the
‘‘home field’’), then the trustee must
treat all such commodity contracts and
collateral as part of, and consistent with
the regulations applicable to, the second
account class.
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(ii) The concept in paragraph (e)(3)(i)
of this section, that the rules of the
‘‘home field’’ will apply, also pertains to
securities positions that are, pursuant to
an approved cross margining program,
held in a commodities account class (in
which case the rules of that
commodities account class will apply)
and to commodities positions that are,
pursuant to an approved crossmargining program, held in a securities
account (in which case, the rules of the
securities account will apply, consistent
with section 16(2)(b)(ii) of SIPA, 15
U.S.C. 78lll(2)(b)(ii)).
§ 190.01
Definitions.
For purposes of this part:
Account class:
(1) Means one or more of each of the
following types of accounts maintained
by a futures commission merchant or
clearing organization (as applicable),
each type of which must be recognized
as a separate account class by the
trustee:
(i) Futures account means:
(A) With respect to public customers,
the same definition as set forth in § 1.3
of this chapter.
(B) With respect to non-public
customers:
(1) With respect to a futures
commission merchant, an account
maintained on the books and records of
the futures commission merchant for the
purpose of accounting for a person’s
transactions in futures or options on
futures contracts executed on or subject
to the rules of a designated contract
market registered under the Act (and
related cash, securities, or other
property); and
(2) With respect to a clearing
organization, an account maintained on
the books and records of the clearing
organization for the purpose of
accounting for transactions in futures or
options on futures contracts cleared or
settled by the clearing organization for
a member or a member’s non-public
customers (and related cash, securities,
or other property).
(ii) Foreign futures account means:
(A) With respect to public customers:
(1) With respect to a futures
commission merchant, a 30.7 account,
as such term is defined in § 30.1(g) of
this chapter; and
(2) With respect to a clearing
organization, an account maintained on
the books and records of the clearing
organization for the purpose of
accounting for transactions in futures or
options on futures contracts executed on
or subject to the rules of a foreign board
of trade, cleared or settled by the
clearing organization for a member that
is a futures commission merchant (and
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related cash, securities or other
property), on behalf of that member’s
30.7 customers (as that latter term is
defined in § 30.1(f) of this chapter).
(B) With respect to non-public
customers:
(1) With respect to a futures
commission merchant, an account
maintained on the books and records of
the futures commission merchant for the
purpose of accounting for a person’s
transactions in futures or options on
futures contracts executed on or subject
to the rules of a foreign board of trade
(and related cash, securities, or other
property); and
(2) With respect to a clearing
organization, an account maintained on
the books and records of the clearing
organization for the purpose of
accounting for transactions in futures or
options on futures contracts executed on
or subject to the rules of a foreign board
of trade, cleared or settled by the
clearing organization for a member or a
member’s non-public customers (and
related cash, securities, or other
property).
(iii) Cleared swaps account means:
(A) With respect to public customers,
a cleared swaps customer account, as
such term is defined in § 22.1 of this
chapter.
(B) With respect to non-public
customers:
(1) With respect to a futures
commission merchant, an account
maintained on the books and records of
the futures commission merchant for the
purpose of accounting for a person’s
transactions in cleared swaps (as
defined in § 22.1 of this chapter) (and
related cash, securities, or other
property); and
(2) With respect to a clearing
organization, an account maintained on
the books and records of the clearing
organization for the purpose of
accounting for transactions in cleared
swaps (as defined in § 22.1 of this
chapter) (or in other contracts permitted
to be cleared in the account) cleared or
settled by the clearing organization for
a member or a member’s non-public
customers (including any property
related thereto).
(iv)(A) Delivery account means (for
both public and non-public customers,
considered separately):
(1) An account maintained on the
books and records of a futures
commission merchant for the purpose of
accounting for the making or taking of
delivery under commodity contracts
whose terms require settlement by
delivery of a commodity, and which is
designated as a delivery account on the
books and records of the futures
commission merchant; and
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(2) An account maintained on the
books and records of a clearing
organization for a clearing member (or a
customer of a clearing member) for the
purpose of accounting for the making or
taking of delivery under commodity
contracts whose terms require
settlement by delivery of a commodity,
as well as any account in which the
clearing organization holds physical
delivery property represented by
electronic title documents or otherwise
existing in an electronic
(dematerialized) form in its capacity as
a central depository, in each case where
the account is designated as a delivery
account on the books and the records of
the clearing organization.
(B) The delivery account class is
further divided into a ‘‘physical delivery
account class’’ and a ‘‘cash delivery
account class,’’ as provided in
§ 190.06(b), each of which shall be
recognized as a separate class of account
by the trustee.
(2)(i) If open commodity contracts
that would otherwise be attributable to
one account class (and any property
margining, guaranteeing, securing or
accruing in respect of such commodity
contracts) are, pursuant to a
Commission rule, regulation, or order,
or a clearing organization rule approved
in accordance with § 39.15(b)(2) of this
chapter, held separately from other
commodity contracts and property in
that account class and are commingled
with the commodity contracts and
property of another account class, then
the trustee must treat the former
commodity contracts (and any property
margining, guaranteeing, securing, or
accruing in respect of such commodity
contracts), for purposes of this part, as
being held in an account of the latter
account class.
(ii) The principle in paragraph (2)(i) of
this definition will be applied to
securities positions and associated
collateral held in a commodity account
class pursuant to a cross margining
program approved by the Commission
(and thus treated as part of that
commodity account class) and to
commodity positions and associated
collateral held in a securities account
pursuant to a cross margining program
approved by the Commission (and thus
treated as part of the securities account).
(3) For the purpose of this definition,
a commodity broker is considered to
maintain an account for another person
by establishing internal books and
records in which it records the person’s
commodity contracts and cash,
securities or other property received
from or on behalf of such person or
accruing to the credit of such person’s
account, and related activity (such as
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liquidation of commodity contract
positions or adjustments to reflect markto-market gains or losses on commodity
contract positions), regardless whether
the commodity broker has kept such
books and records current or accurate.
Act means the Commodity Exchange
Act.
Bankruptcy Code means, except as the
context of the regulations in this part
otherwise requires, those provisions of
title 11 of the United States Code
relating to ordinary bankruptcies
(chapters 1 through 5) and liquidations
(chapter 7 with the exception of
subchapters III and V), together with the
Federal Rules of Bankruptcy Procedure
relating thereto.
Business day means weekdays, not
including Federal holidays as
established annually by 5 U.S.C. 6103.
A business day begins at 8:00 a.m. in
Washington, DC, and ends at 7:59:59
a.m. on the next day that is a business
day.
Calendar day means the time from
midnight to midnight in Washington,
DC.
Cash delivery account class has the
meaning set forth under account class in
this section.
Cash delivery property means any
cash or cash equivalents recorded in a
delivery account that is, as of the filing
date:
(1) Credited to such account to pay for
receipt of delivery of a commodity
under a commodity contract;
(2) Credited to such account to
collateralize or guarantee an obligation
to make or take delivery of a commodity
under a commodity contract; or
(3) Has been credited to such account
as payment received in exchange for
making delivery of a commodity under
a commodity contract. It also includes
property in the form of commodities
that have been delivered after the filing
date in exchange for cash or cash
equivalents held in a delivery account
as of the filing date. The cash or cash
equivalents must be identified on the
books and the records of the debtor as
having been received, from or for the
account of a particular customer, on or
after seven calendar days before the
relevant:
(i) First notice date in the case of a
futures contract; or
(ii) Exercise date in the case of a
(cleared) option.
(4) Cash delivery property also
includes any cash transferred by a
customer to the trustee on or after the
filing date for the purpose of paying for
delivery, consistent with
§ 190.06(a)(3)(ii)(B)(1).
(5) In the case of a contract where one
fiat currency is exchanged for another
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fiat currency, each such currency, to the
extent that it is recorded in a delivery
account, will be considered cash
delivery property.
Cash equivalents means assets, other
than United States dollar cash, that are
highly liquid such that they may be
converted into United States dollar cash
within one business day without
material discount in value.
Cleared swaps account has the
meaning set forth under account class in
this section.
Clearing organization means a
derivatives clearing organization that is
registered with the Commission as such
under the Act.
Commodity broker means any person
that is:
(1) A futures commission merchant
under the Act, but excludes a person
that is ‘‘notice-registered’’ as a futures
commission merchant under section
4f(a)(2) of the Act; or
(2) A clearing organization, in each
case with respect to which there is a
‘‘customer’’ as that term is defined in
this section.
Commodity contract means:
(1) A futures or options on futures
contract executed on or subject to the
rules of a designated contract market;
(2) A futures or option on futures
contract executed on or subject to the
rules of a foreign board of trade;
(3) A swap as defined in section
1a(47) of the Act and § 1.3 of this
chapter, that is directly or indirectly
submitted to and cleared by a clearing
organization and which is thus a cleared
swap as that term is defined in section
1a(7) of the Act and § 22.1 of this
chapter; or
(4) Any other contract that is a swap
for purposes of this part under the
definition in this section and is
submitted to and cleared by a clearing
organization.
(5) Notwithstanding paragraphs (1)
through (4) of this definition, a security
futures product as defined in section
1a(45) of the Act is not a commodity
contract for purposes of this part when
such contract is held in a securities
account. Moreover, a contract,
agreement, or transaction described in
§ 190.00(d)(3) as excluded from the term
‘‘commodity contract’’ is excluded from
this definition.
Commodity contract account means:
(1) A futures account, foreign futures
account, cleared swaps account, or
delivery account; or
(2) If the debtor is a futures
commission merchant, for purposes of
identifying customer property for the
foreign futures account class (subject to
§ 190.09(a)(1)), an account maintained
for the debtor by a foreign clearing
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organization or a foreign futures
intermediary reflecting futures or
options on futures executed on or
subject to the rules of a foreign board of
trade, including any account maintained
on behalf of the debtor’s public
customers.
Court means the court having
jurisdiction over the debtor’s estate.
Cover has the meaning set forth in
§ 1.17(j) of this chapter.
Customer means:
(1)(i) With respect to a futures
commission merchant as debtor
(including a foreign futures commission
merchant as that term is defined in
section 761(12) of the Bankruptcy
Code), the meaning set forth in sections
761(9)(A) and (B) of the Bankruptcy
Code.
(ii) With respect to a clearing
organization as debtor, the meaning set
forth in section 761(9)(D) of the
Bankruptcy Code.
(2) The term customer includes the
owner of a portfolio cross-margining
account covering commodity contracts
and related positions in securities (as
defined in section 3 of the Exchange
Act) that is carried as a futures account
or cleared swaps customer account
pursuant to an appropriate rule,
regulation, or order of the Commission.
Customer claim of record means a
customer claim that is determinable
solely by reference to the records of the
debtor.
Customer class means each of the
following two classes of customers,
which must be recognized as separate
classes by the trustee: Public customers
and non-public customers; provided,
however, that when the debtor is a
clearing organization the references to
public customers and non-public
customers are based on the
classification of customers of, and in
relation to, the members of the clearing
organization.
Customer property and customer
estate are used interchangeably to mean
the property subject to pro rata
distribution in a commodity broker
bankruptcy in the priority set forth in
sections 766(h) or (i), as applicable, of
the Bankruptcy Code, and includes
cash, securities, and other property as
set forth in § 190.09(a).
Debtor means a person with respect to
which a proceeding is commenced
under subchapter IV of chapter 7 of the
Bankruptcy Code or under SIPA, or for
which the Federal Deposit Insurance
Corporation is appointed as a receiver
pursuant to 12 U.S.C. 5382, provided,
however, that this part applies only to
such a proceeding if the debtor is a
commodity broker as defined in this
section.
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Delivery account has the meaning set
forth under account class in this
section.
Distribution of property to a customer
includes transfer of property on the
customer’s behalf, return of property to
a customer, as well as distributions to a
customer of valuable property that is
different than the property posted by
that customer.
Equity means the amount calculated
as equity in accordance with
§ 190.08(b)(1).
Exchange Act means the Securities
Exchange Act of 1934, as amended, 15
U.S.C. 78a et seq.
FDIC means the Federal Deposit
Insurance Corporation.
Filing date means the date a petition
under the Bankruptcy Code or
application under SIPA commencing a
proceeding is filed or on which the
FDIC is appointed as a receiver pursuant
to 12 U.S.C. 5382(a).
Final net equity determination date
means the latest of:
(1) The day immediately following the
day on which all commodity contracts
held by or for the account of customers
of the debtor have been transferred,
liquidated, or satisfied by exercise or
delivery;
(2) The day immediately following the
day on which all property other than
commodity contracts held for the
account of customers has been
transferred, returned or liquidated;
(3) The bar date for filing customer
proofs of claim as determined by rule
3002(c) of the Federal Rules of
Bankruptcy Procedure, the expiration of
the six-month period imposed pursuant
to section 8(a)(3) of SIPA, or such other
date (whether earlier or later) set by the
court (or, in the case of the FDIC acting
as a receiver pursuant to 12 U.S.C.
5382(a), the deadline set by the FDIC
pursuant to 12 U.S.C. 5390(a)(2)(B); or
(4) The day following the allowance
(by the trustee or by the bankruptcy
court) or disallowance (by the
bankruptcy court) of all disputed
customer net equity claims.
Foreign board of trade has the same
meaning as set forth in § 1.3 of this
chapter.
Foreign clearing organization means a
clearing house, clearing association,
clearing corporation or similar entity,
facility, or organization clears and
settles transactions in futures or options
on futures executed on or subject to the
rules of a foreign board of trade.
Foreign future shall have the same
meaning as that set forth in section
761(11) of the Bankruptcy Code.
Foreign futures account has the
meaning set forth under account class in
this section.
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Foreign futures commission merchant
shall have the same meaning as that set
forth in section 761(12) of the
Bankruptcy Code.
Foreign futures intermediary refers to
a foreign futures and options broker, as
such term is defined in § 30.1(e) of this
chapter, acting as an intermediary for
foreign futures contracts between a
foreign futures commission merchant
and a foreign clearing organization.
Funded balance means the amount
calculated as funded balance in
accordance with § 190.08(c) and, as
applicable, § 190.17(d).
Funded net equity means, for
purposes of subpart B of this part, the
amount calculated as funded net equity
in accordance with § 190.08(a), and for
purposes of subpart C of this part, the
amount calculated as funded net equity
in accordance with § 190.17(c).
Futures and futures contract are used
interchangeably to mean any contract
for the purchase or sale of a commodity
(as defined in section 1a(9) of the Act)
for future delivery that is executed on or
subject to the rules of a designated
contract market or on or subject to the
rules of a foreign board of trade. The
term also covers, for purposes of this
part:
(1) Any transaction, contract or
agreement described in section
2(c)(2)(D) of the Act and traded on or
subject to the rules of a designated
contract market or foreign board of
trade, to the extent not covered by the
foregoing definition; and
(2) Any transaction, contract, or
agreement that is classified as a
‘‘forward contract’’ under the Act
pursuant to the exclusion from the term
‘‘future delivery’’ set out in section
1a(27) of the Act or the exclusion from
the definition of a ‘‘swap’’ under section
1a(47)(B)(ii) of the Act, provided that
such transaction, contract, or agreement
is traded on or subject to the rules of a
designated contract market or foreign
board of trade and is cleared by,
respectively, a clearing organization or
foreign clearing organization the same
as if it were a futures contract.
Futures account has the meaning set
forth under account class in this
section.
House account means, in the case of
a clearing organization, any commodity
contract account of a member at such
clearing organization maintained to
reflect trades for the member’s own
account or for any non-public customer
of such member.
In-the-money means:
(1) With respect to a call option, when
the value of the underlying interest
(such as a commodity or futures
contract) which is the subject of the
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option exceeds the strike price of the
option; and
(2) With respect to a put option, when
the value of the underlying interest
(such as a commodity or futures
contract) which is the subject of the
option is exceeded by the strike price of
the option.
Joint account means any commodity
contract account held by more than one
person.
Member property means, in
connection with a clearing organization
bankruptcy, the property which may be
used to pay that portion of the net
equity claim of a member which is
based on the member’s house account at
the clearing organization, including any
claims on behalf of non-public
customers of the member.
Net equity means, for purposes of
subpart B of this part, the amount
calculated as net equity in accordance
with § 190.08(b), and for purposes of
subpart C of this part, the amount
calculated as net equity in accordance
with § 190.17(b).
Non-public customer means:
(1) With respect to a futures
commission merchant, any customer
that is not a public customer; and
(2) With respect to a clearing
organization, any person whose account
carried on the books and records of:
(i) A member of the clearing
organization that is a futures
commission merchant, is classified as a
proprietary account under § 1.3 of this
chapter (in the case of the futures or
foreign futures account class) or as a
cleared swaps proprietary account
under § 22.1 of this chapter (in the case
of the cleared swaps account class); or
(ii) A member of the clearing
organization that is a foreign broker, is
classified or treated as proprietary under
and for purposes of:
(A) The rules of the clearing
organization; or
(B) The jurisdiction of incorporation
of such member.
Open commodity contract means a
commodity contract which has been
established in fact and which has not
expired, been redeemed, been fulfilled
by delivery or exercise, or been offset
(i.e., liquidated) by another commodity
contract.
Order for relief has the same meaning
set forth in section 301 of the
Bankruptcy Code, in the case of the
filing of a voluntary bankruptcy
petition, and means the entry of an
order granting relief under section 303
of the Bankruptcy Code in an
involuntary case. It also means, where
applicable, the issuance of a protective
decree under section 5(b)(1) of SIPA or
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the appointment of the FDIC as receiver
pursuant to 12 U.S.C. 5382(a)(1)(A).
Person means any individual,
association, partnership, corporation,
trust, or other form of legal entity.
Physical delivery account class has
the meaning set forth under account
class in this section.
Physical delivery property means:
(1) In general. A commodity, whether
tangible or intangible, held in a form
that can be delivered to meet and fulfill
delivery obligations under a commodity
contract that settles via delivery if held
to a delivery position (as described in
§ 190.06(a)(1)), including warehouse
receipts, other documents of title, or
shipping certificates (including
electronic versions of any of the
foregoing) for the commodity, or the
commodity itself:
(i) That the debtor holds for the
account of a customer for the purpose of
making delivery of such commodity on
the customer’s behalf, which as of the
filing date or thereafter, can be
identified on the books and records of
the debtor as held in a delivery account
for the benefit of such customer. Cash or
cash equivalents received after the filing
date in exchange for delivery of such
physical delivery property shall also
constitute physical delivery property;
(ii) That the debtor holds for the
account of a customer and that the
customer received or acquired by taking
delivery under an expired or exercised
commodity contract and which, as of
the filing date or thereafter, can be
identified on the books and records of
the debtor as held in a delivery account
for the benefit of such customer,
regardless how long such property has
been held in such account; or
(iii) Where property that the debtor
holds in a futures account, foreign
futures account, or cleared swaps
account, or, if the commodity is a
security, in a securities account, would
meet the criteria listed in paragraph (1)
or (2) of this definition, but for the fact
of being held in such account rather
than a delivery account, such property
will be considered physical delivery
property solely for purposes of the
obligations to make or take delivery of
physical delivery property pursuant to
§ 190.06.
(iv) Commodities or documents of
title that are not held by the debtor and
are delivered or received by a customer
in accordance with § 190.06(a)(2) (or in
accordance with § 190.06(a)(2) in
conjunction with § 190.16(a) if the
debtor is a clearing organization) to
fulfill a customer’s delivery obligation
under a commodity contract will be
considered physical delivery property
solely for purposes of the obligations to
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19427
make or take delivery of physical
delivery property pursuant to § 190.06.
As this property is held outside of the
debtor’s estate, it is not subject to pro
rata distribution.
(2) Special cases. (i) In the case of a
contract where one fiat currency is
exchanged for another fiat currency,
neither such currency, to the extent that
it is recorded in a delivery account, will
be considered physical delivery
property.
(ii) In a case where the final
settlement price is negative, i.e., where
the party obliged to deliver physical
delivery property under an expiring
futures contract or an expired options
contract is also obliged to make a cash
payment to the buyer, such cash or cash
equivalents constitute physical delivery
property.
Primary liquidation date means the
first business day immediately
following the day on which all
commodity contracts (including any
commodity contracts that are
specifically identifiable property) have
been liquidated or transferred.
Public customer means:
(1) With respect to a futures
commission merchant and in relation to:
(i) The futures account class, a futures
customer as defined in § 1.3 of this
chapter whose futures account is subject
to the segregation requirements of
section 4d(a) of the Act and the
regulations in this chapter that
implement section 4d(a), including as
applicable §§ 1.20 through 1.30 of this
chapter;
(ii) The foreign futures account class,
a 30.7 customer as defined in § 30.1 of
this chapter whose foreign futures
accounts is subject to the segregation
requirements of § 30.7 of this chapter;
(iii) The cleared swaps account class,
a Cleared Swaps Customer as defined in
§ 22.1 of this chapter whose cleared
swaps account is subject to the
segregation requirements of part 22 of
this chapter; and
(iv) The delivery account class, a
customer that is or would be classified
as a public customer if the property
reflected in the customer’s delivery
account had been held in an account
described in paragraph (1)(i), (ii), or (iii)
of this definition.
(2) With respect to a clearing
organization, any customer of that
clearing organization that is not a nonpublic customer.
Securities account means, in relation
to a futures commission merchant that
is registered as a broker or dealer under
the Exchange Act, an account
maintained by such futures commission
merchant in accordance with the
requirements of section 15(c)(3) of the
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Exchange Act and § 240.15c3–3 of this
title.
Security has the meaning set forth in
section 101(49) of the Bankruptcy Code.
SIPA means the Securities Investor
Protection Act of 1970, 15 U.S.C 78aaa
et seq.
Specifically identifiable property
means:
(1)(i) The following property received,
acquired, or held by or for the account
of the debtor from or for the futures
account, foreign futures account, or
cleared swaps account of a customer:
(A) Any security which as of the filing
date is:
(1)(i) Held for the account of a
customer;
(ii) Registered in such customer’s
name;
(iii) Not transferable by delivery; and
(iv) Has a duration or maturity date of
more than 180 days; or
(2)(i) Fully paid;
(ii) Non-exempt; and
(iii) Identified on the books and
records of the debtor as held by the
debtor for or on behalf of the commodity
contract account of a particular
customer for which, according to such
books and records as of the filing date,
no open commodity contracts were held
in the same capacity.
(B) Any warehouse receipt, bill of
lading, or other document of title which
as of the filing date:
(1) Can be identified on the books and
records of the debtor as held for the
account of a particular customer; and
(2) Is not in bearer form and is not
otherwise transferable by delivery;
(ii) Any open commodity contracts
treated as specifically identifiable
property in accordance with
§ 190.03(c)(2); and
(iii) Any physical delivery property
described in paragraphs (1) through (3)
of the definition of physical delivery
property in this section.
(2) Notwithstanding paragraphs (1)
and (3) of this definition, security
futures products, and any money,
securities, or property held to margin,
guarantee, or secure such products, or
accruing as a result of such products,
shall not be considered specifically
identifiable property for the purposes of
subchapter IV of the Bankruptcy Code
or this part, if held in a securities
account.
(3) No property that is not explicitly
included in this definition may be
treated as specifically identifiable
property.
Strike price means the price per unit
multiplied by the total number of units
at which a person may purchase or sell
a futures contract or a commodity or
other interest underlying an option that
is a commodity contract.
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Substitute customer property means
cash or cash equivalents delivered to the
trustee by or on behalf of a customer in
connection with:
(1) The return of specifically
identifiable property by the trustee; or
(2) The return of, or an agreement not
to draw upon, a letter of credit received,
acquired or held to margin, guarantee,
secure, purchase, or sell a commodity
contract.
Swap has the meaning set forth in
section 1a(47) of the Act and § 1.3 of
this chapter, and, in addition, also
means any other contract, agreement, or
transaction that is carried in a cleared
swaps account pursuant to a rule,
regulation, or order of the Commission,
provided, in each case, that it is cleared
by a clearing organization as, or the
same as if it were, a swap.
Trustee means, as appropriate, the
trustee in bankruptcy or in a SIPA
proceeding, appointed to administer the
debtor’s estate and any interim or
successor trustee, or the FDIC, where it
has been appointed as a receiver
pursuant to 12 U.S.C. 5382.
Undermargined means, with respect
to a futures account, foreign futures
account, or cleared swaps account
carried by the debtor, the funded
balance for such account is below the
minimum amount that the debtor is
required to collect and maintain for the
open commodity contracts in such
account under the rules of the relevant
clearing organization, foreign clearing
organization, designated contract
market, swap execution facility or
foreign board of trade. If any such rules
establish both an initial margin
requirement and a lower maintenance
margin requirement applicable to any
commodity contracts (or to the entire
portfolio of commodity contracts or any
subset thereof) in a particular
commodity contract account of the
customer, the trustee will use the lower
maintenance margin level to determine
the customer’s minimum margin
requirement for such account.
Variation settlement means variation
margin as defined in § 1.3 of this
chapter plus all other daily settlement
amounts (such as price alignment
payments) that may be owed or owing
on the commodity contract.
§ 190.02
General.
(a) Request for exemption. (1) The
trustee (or, in the case of an involuntary
petition pursuant to section 303 of the
Bankruptcy Code, any other person
charged with the management of a
commodity broker) may, for good cause
shown, request from the Commission an
exemption from the requirements of any
procedural provision in this part,
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including an extension of any time limit
prescribed by this part or an exemption
subject to conditions, provided that the
Commission shall not grant an
extension for any time period
established by the Bankruptcy Code.
(2) A request pursuant to paragraph
(a)(1) of this section—
(i) May be made ex parte and by any
means of communication, written or
oral, provided that the trustee must
confirm an oral request in writing
within one business day and such
confirmation must contain all the
information required by paragraph (b)(3)
of this section. The request or
confirmation of an oral request must be
given to the Commission as provided in
paragraph (a) of this section.
(ii) Must state the particular provision
of this part with respect to which the
exemption or extension is sought, the
reason for the requested exemption or
extension, the amount of time sought if
the request is for an extension, and the
reason why such exemption or
extension would not be contrary to the
purposes of the Bankruptcy Code and
this part.
(3) The Director of the Division of
Clearing and Risk, or members of the
Commission staff designated by the
Director, shall grant, deny, or otherwise
respond to a request, on the basis of the
information provided in any such
request and after consultation with the
Director of the Market Participants
Division or members of the Commission
staff designated by the Director, unless
exigent circumstances require
immediate action precluding such prior
consultation, and shall communicate
that determination by the most
appropriate means to the person making
the request.
(b) Delegation of authority to the
Director of the Division of Clearing and
Risk. (1) Until such time as the
Commission orders otherwise, the
Commission hereby delegates to the
Director of the Division of Clearing and
Risk, and to such members of the
Commission’s staff acting under the
Director’s direction as they may
designate, after consultation with the
Director of the Market Participants
Division, or such members of the
Commission’s staff under the Director’s
direction as they may designate, unless
exigent circumstances require
immediate action, all the functions of
the Commission set forth in this part,
except the authority to disapprove a prerelief transfer of a public customer
commodity contract account or
customer property pursuant to
§ 190.07(e)(1).
(2) The Director of the Division of
Clearing and Risk may submit to the
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Commission for its consideration any
matter which has been delegated to the
Director pursuant to paragraph (b)(1) of
this section.
(3) Nothing in this section shall
prohibit the Commission, at its election,
from exercising its authority delegated
to the Director of the Division of
Clearing and Risk under paragraph
(b)(1) of this section.
(c) Forward contracts. For purposes of
this part, an entity for or with whom the
debtor deals who holds a claim against
the debtor solely on account of a
forward contract, that is not cleared by
a clearing organization, will not be
deemed to be a customer.
(d) Other. The Bankruptcy Code will
not be construed by the Commission to
prohibit a commodity broker from doing
business as any combination of the
following: Futures commission
merchant, commodity options dealer,
foreign futures commission merchant, or
leverage transaction merchant, nor will
the Commission construe the
Bankruptcy Code to permit any
operation, trade, or business, or any
combination of the foregoing, otherwise
prohibited by the Act or by any of the
Commission’s regulations in this
chapter, or by any order of the
Commission.
(e) Rule of construction. Contracts in
security futures products held in a
securities account shall not be
considered to be ‘‘from or for the
commodity futures account’’ or ‘‘from or
for the commodity options account’’ of
such customers, as such terms are used
in section 761(9) of the Bankruptcy
Code.
(f) Receivers. In the event that a
receiver for a futures commission
merchant is appointed due to the
violation or imminent violation of the
customer property protection
requirements of section 4d of the Act, or
of the regulations in part 1, 22, or 30 of
this chapter that implement section 4d
or 4(b)(2) of the Act, or of the futures
commission merchant’s minimum
capital requirements in § 1.17 of this
chapter, such receiver may, in an
appropriate case, file a petition for
bankruptcy of such futures commission
merchant pursuant to section 301 of the
Bankruptcy Code.
(g) Definition of ‘‘allowed.’’ The term
‘‘allowed’’ in this part shall have the
meaning ascribed to it in the
Bankruptcy Code.
Subpart B—Futures Commission
Merchant as Debtor
§ 190.03
Notices and proofs of claims.
(a) Notices-means of providing—(1)
To the Commission. Unless instructed
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otherwise by the Commission, all
mandatory or discretionary notices to be
given to the Commission under this
subpart shall be directed by electronic
mail to bankruptcyfilings@cftc.gov. For
purposes of this subpart, notice to the
Commission shall be deemed to be
given only upon actual receipt.
(2) To Customers. The trustee, after
consultation with the Commission, and
unless otherwise instructed by the
Commission, will establish and follow
procedures reasonably designed for
giving adequate notice to customers
under this subpart and for receiving
claims or other notices from customers.
Such procedures should include, absent
good cause otherwise, the use of a
prominent website as well as
communication to customers’ electronic
addresses that are available in the
debtor’s books and records.
(b) Notices to the Commission and
designated self-regulatory
organizations—(1) Of commencement of
a proceeding. Each commodity broker
that is a futures commission merchant
and files a petition in bankruptcy shall
as soon as practicable before, and in any
event no later than, the time of such
filing, notify the Commission and such
commodity broker’s designated selfregulatory organization of the
anticipated or actual filing date, the
court in which the proceeding will be or
has been filed and, as soon as known,
the docket number assigned to that
proceeding. Each commodity broker that
is a futures commission merchant and
against which a bankruptcy petition is
filed or with respect to which an
application for a protective decree
under SIPA is filed shall immediately
upon the filing of such petition or
application notify the Commission and
such commodity broker’s designated
self-regulatory organization of the filing
date, the court in which the proceeding
has been filed, and, as soon as known,
the docket number assigned to that
proceeding.
(2) Of transfers under section 764(b)
of the Bankruptcy Code. As soon as
possible, the trustee of a commodity
broker that is a futures commissions
merchant, the relevant designated selfregulatory organization, or the
applicable clearing organization must
notify the Commission, and in the case
of a futures commission merchant, the
trustee shall also notify its designated
self-regulatory organization and clearing
organization(s), if such person intends
to transfer or to apply to transfer open
commodity contracts or customer
property on behalf of the public
customers of the debtor in accordance
with section 764(b) of the Bankruptcy
Code and § 190.07(c) or (d).
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(c) Notices to customers—(1)
Specifically identifiable property other
than open commodity contracts. In any
case in which an order for relief has
been entered, the trustee must use all
reasonable efforts to promptly notify, in
accordance with paragraph (a)(2) of this
section, any customer whose futures
account, foreign futures account, or
cleared swaps account includes
specifically identifiable property, other
than open commodity contracts, which
has not been liquidated, that such
specifically identifiable property may be
liquidated commencing on and after the
seventh day after the order for relief (or
such other date as is specified by the
trustee in the notice with the approval
of the Commission or court) if the
customer has not instructed the trustee
in writing before the deadline specified
in the notice to return such property
pursuant to the terms for distribution of
specifically identifiable property
contained in § 190.09(d)(1). Such notice
must describe the specifically
identifiable property and specify the
terms upon which that property may be
returned, including if applicable and to
the extent practicable any substitute
customer property that must be
provided by the customer.
(2) Open commodity contracts carried
in hedging accounts. To the extent
reasonably practicable under the
circumstances of the case, and following
consultation with the Commission, the
trustee may treat open commodity
contracts of public customers identified
on the books and records of the debtor
as held in a futures account, foreign
futures account, or cleared swaps
account designated as a hedging account
in the debtor’s records, as specifically
identifiable property of such customer.
(i) If the trustee does not exercise such
authority, such open commodity
contracts do not constitute specifically
identifiable property.
(ii) If the trustee exercises such
authority:
(A) The trustee shall use reasonable
efforts to promptly notify, in accordance
with paragraph (a)(2) of this section,
each relevant public customer of such
determination.
(B)(1) Where, in the judgment of the
trustee, the books and records of the
debtor reveal a clear preference by a
relevant public customer with respect to
transfer or liquidation of open
commodity contracts, the trustee shall
endeavor, to the extent reasonably
practicable, to comply with that
preference.
(2) Where, in the judgment of the
trustee, the books and records of the
debtor do not reveal a clear preference
by a relevant public customer with
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respect to transfer or liquidation of open
commodity contracts, the trustee will
request the customer to provide written
instructions whether to transfer or
liquidate such open commodity
contracts. Such notice must specify the
manner for providing such instructions
and the deadline by which the customer
must provide instructions.
(C) Such notice must also inform the
customer that:
(1) (Where instructions have been
requested pursuant to paragraph
(c)(2)(ii)(B)(2) of this section), if the
customer does not provide instructions
in the prescribed manner and by the
prescribed deadline, the customer’s
open commodity contracts will not be
treated as specifically identifiable
property under this part;
(2) Any transfer of the open
commodity contracts is subject to the
terms for distribution contained in
§ 190.09(d)(2);
(3) Absent compliance with any terms
imposed by the trustee or the court, the
trustee may liquidate the open
commodity contracts; and
(4) Providing (or having provided)
instructions may not prevent the open
commodity contracts from being
liquidated.
(3) Involuntary cases. Prior to entry of
an order for relief, and upon leave of the
court, a trustee appointed in an
involuntary proceeding pursuant to
section 303 of the Bankruptcy Code may
notify customers, in accordance with
paragraph (a)(2) of this section, of the
commencement of such proceeding and
may request customer instructions with
respect to the return, liquidation, or
transfer of specifically identifiable
property.
(4) Notice of bankruptcy and request
for proof of customer claim. The trustee
shall promptly notify, in accordance
with paragraph (a)(2) of this section,
each customer that an order for relief
has been entered and instruct each
customer to file a proof of customer
claim containing the information
specified in paragraph (e) of this
section. Such notice may be given
separately from any notice provided in
accordance with paragraph (c) of this
section. The trustee shall cause the
proof of customer claim form referred to
in paragraph (e) of this section to set
forth the bar date for its filing.
(d) Notice of court filings. The trustee
shall promptly provide the Commission
with copies of any complaint, motion,
or petition filed in a commodity broker
bankruptcy which concerns the
disposition of customer property. Court
filings shall be directed to the
Commission addressed as provided in
paragraph (a)(1) of this section.
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(e) Proof of customer claim. The
trustee shall request that customers
provide, to the extent reasonably
practicable, information sufficient to
determine a customer’s claim in
accordance with the regulations
contained in this part, including in the
discretion of the trustee:
(1) The class of commodity contract
account upon which each claim is based
(i.e., futures account, foreign futures
account, cleared swaps account, or
delivery account (and, in the case of a
delivery account, how much is based on
cash delivery property and how much is
based on the value of physical delivery
property);
(2) Whether the claimant is a public
customer or a non-public customer;
(3) The number of commodity
contract accounts held by each
claimant, and, for each such account:
(i) The account number;
(ii) The name in which the account is
held;
(iii) The balance as of the last account
statement for the account, and
information regarding any activity in the
account from the date of the last account
statement up to and including the filing
date that affected the balance of the
account;
(iv) The capacity in which the
account is held;
(v) Whether the account is a joint
account and, if so, the amount of the
claimant’s percentage interest in that
account and whether participants in the
joint account are claiming jointly or
separately;
(vi) Whether the account is a
discretionary account;
(vii) Whether the account is an
individual retirement account for which
there is a custodian; and
(viii) Whether the account is a crossmargining account for futures and
securities;
(4) A description of any accounts held
by the claimant with the debtor that are
not commodity contract accounts;
(5) A description of all claims against
the debtor not based upon a commodity
contract account of the claimant or an
account listed in response to paragraph
(e)(4) of this section;
(6) A description of all claims of the
debtor against the claimant not included
in the balance of a commodity contract
account of the claimant;
(7) A description of and the value of
any open positions, unliquidated
securities, or other unliquidated
property held by the debtor on behalf of
the claimant, indicating the portion of
such property, if any, which was
included in the information provided in
paragraph (e)(3) of this section, and
identifying any such property which
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would be specifically identifiable
property as defined in § 190.01;
(8) Whether the claimant holds
positions in security futures products,
and, if so, whether those positions are
held in a futures account, a foreign
futures account, or a securities account;
(9) Whether the claimant wishes to
receive payment in kind, to the extent
practicable, for any claim for
unliquidated securities or other
unliquidated property; and
(10) Copies of any documents which
support the information contained in
the proof of customer claim, including
without limitation, customer
confirmations, account statements, and
statements of purchase or sale.
(f) Proof of claim form. A template
customer proof of claim form which
may (but is not required to) be used by
the trustee is set forth in appendix A to
this part.
(1) If there are no open commodity
contracts that are being treated as
specifically identifiable property (e.g., if
the customer proof of claim form was
distributed after the primary liquidation
date), the trustee should modify the
customer proof of claim form to delete
references to open commodity contracts
as specifically identifiable property.
(2) In the event the trustee determines
that the debtor’s books and records
reflecting customer transactions are not
reasonably reliable, or account
statements are not available from which
account balances as of the date of
transfer or liquidation of customer
property may be determined, the proof
of claim form used by the trustee should
be modified to take into account the
particular facts and circumstances of the
case.
§ 190.04 Operation of the debtor’s estate—
customer property.
(a) Transfers—(1) All cases. The
trustee for a commodity broker shall
promptly use its best efforts to effect a
transfer in accordance with § 190.07(c)
and (d) no later than the seventh
calendar day after the order for relief of
the open commodity contracts and
property held by the commodity broker
for or on behalf of its public customers.
(2) Involuntary cases. A commodity
broker against which an involuntary
petition in bankruptcy is filed, or the
trustee if a trustee has been appointed
in such case, shall use its best efforts to
effect a transfer in accordance with
§ 190.07(c) and (d) of all open
commodity contracts and property held
by the commodity broker for or on
behalf of its public customers and such
other property as the Commission in its
discretion may authorize, on or before
the seventh calendar day after the filing
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date, and immediately cease doing
business; provided, however, that if the
commodity broker demonstrates to the
Commission within such period that it
was in compliance with the segregation
and financial requirements of this
chapter on the filing date, and the
Commission determines, in its sole
discretion, that such transfer is neither
appropriate nor in the public interest,
the commodity broker may continue in
business subject to applicable
provisions of the Bankruptcy Code and
of this chapter.
(b) Treatment of open commodity
contracts—(1) Payments by the trustee.
Prior to the primary liquidation date,
the trustee may make payments of
initial margin and variation settlement
to a clearing organization, commodity
broker, foreign clearing organization, or
foreign futures intermediary, carrying
the account of the debtor, pending the
transfer, or liquidation of any open
commodity contracts, whether or not
such contracts are specifically
identifiable property of a particular
customer, provided, that:
(i) To the extent within the trustee’s
control, the trustee shall not make any
payments on behalf of any commodity
contract account on the books and
records of the debtor that is in deficit;
provided, however, that the provision in
this paragraph (b)(1) shall not be
construed to prevent a clearing
organization, foreign clearing
organization, futures commission
merchant, or foreign futures
intermediary carrying an account of the
debtor from exercising its rights to the
extent permitted under applicable law;
(ii) Any margin payments made by the
trustee with respect to a specific
customer account shall not exceed the
funded balance for that account;
(iii) The trustee shall not make any
payments on behalf of non-public
customers of the debtor from funds that
are segregated for the benefit of public
customers;
(iv) If the trustee receives payments
from a customer in response to a margin
call, then to the extent within the
trustee’s control, the trustee must use
such payments to make margin
payments for the open commodity
contract positions of such customer;
(v) The trustee may not use payments
received from one public customer to
meet the margin (or any other)
obligations of any other customer; and
(vi) If funds segregated for the benefit
of public customers in a particular
account class exceed the aggregate net
equity claims for all public customers in
such account class, the trustee may use
such excess funds to meet the margin
obligations for any public customer in
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such account class whose account is
under-margined (as described in
paragraph (b)(4) of this section) but not
in deficit, provided that the trustee
issues a margin call to such customer
and provided further that the trustee
shall liquidate such customer’s open
commodity contracts if the customer
fails to make the margin payment within
a reasonable time as provided in
paragraph (b)(4) of this section.
(2) Margin calls. The trustee (or, prior
to appointment of the trustee, the debtor
against which an involuntary petition
was filed) may issue a margin call to any
public customer whose commodity
contract account contains open
commodity contracts if such account is
under-margined.
(3) Margin payments by the customer.
The full amount of any margin payment
by a customer in response to a margin
call under paragraph (b)(2) of this
section must be credited to the funded
balance of the particular account for
which it was made.
(4) Trustee obligation to liquidate
certain open commodity contracts. The
trustee shall, as soon as practicable
under the circumstances, liquidate all
open commodity contracts in any
commodity contract account that is in
deficit, or for which any mark-to-market
calculation would result in a deficit, or
for which the customer fails to meet a
margin call made by the trustee within
a reasonable time. Except as otherwise
provided in this part, absent exigent
circumstances, a reasonable time for
meeting margin calls made by the
trustee shall be deemed to be one hour,
or such greater period not to exceed one
business day, as the trustee may
determine in its sole discretion.
(5) Partial liquidation of open
commodity contracts by others. In the
event that a clearing organization,
foreign clearing organization, futures
commission merchant, foreign futures
intermediary, or other person carrying a
commodity customer account for the
debtor in the nature of an omnibus
account has liquidated only a portion of
open commodity contracts in such
account, the trustee will exercise
reasonable business judgment in
assigning the liquidating transactions to
the underlying commodity customer
accounts carried by the debtor.
Specifically, the trustee should
endeavor to assign the contracts as
follows: First, to liquidate open
commodity contracts in a risk-reducing
manner in any accounts that are in
deficit; second, to liquidate open
commodity contracts in a risk-reducing
manner in any accounts that are
undermargined; third, to liquidate open
commodity contracts in a risk-reducing
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19431
manner in any other accounts, and
finally to liquidate any remaining open
commodity contracts in any accounts. If
more than one commodity contract
account reflects open commodity
contracts in a particular account class
for which liquidating transactions have
been executed, the trustee shall to the
extent practicable allocate the
liquidating transactions to such
commodity contract accounts pro rata
based on the number of open
commodity contracts of such
commodity contract accounts. For
purposes of this section, the term ‘‘a
risk-reducing manner’’ is measured by
margin requirements set using the
margin methodology and parameters
followed by the derivatives clearing
organization at which such contracts are
cleared.
(c) Contracts moving into delivery
position. After entry of the order for
relief and subject to paragraph (a) of this
section, which requires the trustee to
attempt to make transfers to other
commodity brokers permitted by
§ 190.07 and section 764(b) of the
Bankruptcy Code, the trustee shall use
its best efforts to liquidate any open
commodity contract that settles upon
expiration or exercise via the making or
taking of delivery of a commodity:
(1) If such contract is a futures
contract or a cleared swaps contract,
before the earlier of the last trading day
or the first day on which notice of intent
to deliver may be tendered with respect
thereto, or otherwise before the debtor
or its customer incurs an obligation to
make or take delivery of the commodity
under such contract;
(2) If such contract is a long option on
a commodity and has value, before the
first date on which the contract could be
automatically exercised or the last date
on which the contract could be
exercised if not subject to automatic
exercise; or
(3) If such contract is a short option
on a commodity that is in-the-money in
favor of the long position holder, before
the first date on which the long option
position could be exercised.
(d) Liquidation or offset. After entry of
the order for relief and subject to
paragraph (a) of this section, which
requires the trustee to attempt to make
transfers to other commodity brokers
permitted by § 190.07 and section 764(b)
of the Bankruptcy Code, and except as
otherwise set forth in this paragraph (d),
the following commodity contracts and
other property held by or for the
account of a debtor must be liquidated
in the market in accordance with
paragraph (e)(1) of this section or
liquidated via book entry in accordance
with paragraph (e)(2) of this section by
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the trustee promptly and in an orderly
manner:
(1) Open commodity contracts. All
open commodity contracts, except for:
(i) Commodity contracts that are
specifically identifiable property (if
applicable) and are subject to customer
instructions to transfer (in lieu of
liquidating) as provided in
§ 190.03(c)(2), provided that the
customer is in compliance with the
terms of § 190.09(d)(2); and
(ii) Open commodity contract
positions that are in a delivery position,
which shall be treated in accordance
with the provisions of § 190.06.
(2) Specifically identifiable property,
other than open commodity contracts or
physical delivery property. Specifically
identifiable property, other than open
commodity contracts or physical
delivery property, to the extent that:
(i) The fair market value of such
property is less than 75% of its fair
market value on the date of entry of the
order for relief;
(ii) Failure to liquidate the
specifically identifiable property may
result in a deficit balance in the
applicable customer account; or
(iii) The trustee has not received
instructions to return pursuant to
§ 190.03(c)(1), or has not returned such
property upon the terms contained in
§ 190.09(d)(1).
(3) Letters of credit. The trustee may
request that a customer deliver
substitute customer property with
respect to any letter of credit received,
acquired, or held to margin, guarantee,
secure, purchase, or sell a commodity
contract, whether the letter of credit is
held by the trustee on behalf of the
debtor’s estate or a derivatives clearing
organization or a foreign intermediary or
foreign clearing organization on a passthrough or other basis, including in
cases where the letter of credit has
expired since the date of the order for
relief. The amount of the request may
equal the full face amount of the letter
of the credit or any portion thereof, to
the extent required or may be required
in the trustee’s discretion to ensure pro
rata treatment among customer claims
within each account class, consistent
with §§ 190.08 and 190.09.
(i) If a customer fails to provide
substitute customer property within a
reasonable time specified by the trustee,
the trustee may, if the letter of credit has
not expired, draw upon the full amount
of the letter of credit or any portion
thereof.
(ii) For any letter of credit referred to
in this paragraph (d)(3), the trustee shall
treat any portion that is not drawn upon
(less the value of any substitute
customer property delivered by the
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customer) as having been distributed to
the customer for purposes of calculating
entitlements to distribution or transfer.
The expiration of the letter of credit on
or at any time after the date of the order
for relief shall not affect such
calculation.
(iii) Any proceeds of a letter of credit
drawn by the trustee, or substitute
customer property posted by a
customer, shall be considered customer
property in the account class applicable
to the original letter of credit.
(iv) The trustee shall, in exercising
their discretion with regard to
addressing letters of credit, including as
to the timing and amount of a request
for substitute customer property,
endeavor to mitigate, to the extent
practicable, the adverse effects upon
customers that have posted letters of
credit, in a manner that achieves pro
rata treatment among customer claims.
(4) All other property. All other
property, other than physical delivery
property held for delivery in accordance
with the provisions of § 190.06, which
is not required to be transferred or
returned pursuant to customer
instructions and which has not been
liquidated in accordance with
paragraphs (d)(1) through (3) of this
section.
(e) Liquidation of open commodity
contracts—(1) By the trustee or a
clearing organization in the market—(i)
Debtor as a clearing member. For open
commodity contracts cleared by the
debtor as a member of a clearing
organization, the trustee or clearing
organization, as applicable, shall
liquidate such open commodity
contracts pursuant to the rules of the
clearing organization, a designated
contract market, or a swap execution
facility, if and as applicable. Any such
rules providing for liquidation other
than on the open market shall be
designed to achieve, to the extent
feasible under market conditions at the
time of liquidation, a process for
liquidating open commodity contracts
that results in competitive pricing. For
open commodity contracts that are
futures or options on futures that were
established on or subject to the rules of
a foreign board of trade and cleared by
the debtor as a member of a foreign
clearing organization, the trustee shall
liquidate such open commodity
contracts pursuant to the rules of the
foreign clearing organization or foreign
board of trade or, in the absence of such
rules, in the manner the trustee
determines appropriate.
(ii) Debtor not a clearing member. For
open commodity contracts submitted by
the debtor for clearing through one or
more accounts established with a
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futures commission merchant (as
defined in § 1.3 of this chapter) or
foreign futures intermediary, the trustee
shall use commercially reasonable
efforts to liquidate the open commodity
contracts to achieve competitive pricing,
to the extent feasible under market
conditions at the time of liquidation and
subject to any rules or orders of the
relevant clearing organization, foreign
clearing organization, designated
contract market, swap execution facility,
or foreign board of trade governing the
liquidation of open commodity
contracts.
(2) By the trustee or a clearing
organization via book entry offset. Upon
application by the trustee or clearing
organization, the Commission may
permit open commodity contracts to be
liquidated, or settlement on such
contracts to be made, by book entry.
Such book entry shall offset open
commodity contracts, whether matched
or not matched on the books of the
commodity broker, using the settlement
price for such commodity contracts as
determined by the clearing organization
in accordance with its rules. Such rules
shall be designed to establish, to the
extent feasible under market conditions
at the time of liquidation, such
settlement prices in a competitive
manner.
(3) By a futures commission merchant
or foreign futures intermediary. For
open commodity contracts cleared by
the debtor through one or more accounts
established with a futures commission
merchant or a foreign futures
intermediary, such futures commission
merchant or foreign futures
intermediary may exercise any
enforceable contractual rights it has to
liquidate such commodity contracts,
provided, that it shall use commercially
reasonable efforts to liquidate the open
commodity contracts to achieve
competitive pricing, to the extent
feasible under market conditions at the
time of liquidation and subject to any
rules or orders of the relevant clearing
organization, foreign clearing
organization, designated contract
market, swap execution facility, or
foreign board of trade governing its
liquidation of such open commodity
contracts. If a futures commission
merchant or foreign futures
intermediary fails to use commercially
reasonable efforts to liquidate open
commodity contracts to achieve
competitive pricing in accordance with
this paragraph (e)(3), the trustee may
seek damages reflecting the difference
between the price (or prices) at which
the relevant commodity contracts would
have been liquidated using
commercially reasonable efforts to
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achieve competitive pricing and the
price (or prices) at which the
commodity contracts were liquidated,
which shall be the sole remedy available
to the trustee. In no event shall any such
liquidation be voided.
(4) Liquidation only. (i) Nothing in
this part shall be interpreted to permit
the trustee to purchase or sell new
commodity contracts for the debtor or
its customers except to offset open
commodity contracts or to transfer any
transferable notice received by the
debtor or the trustee under any
commodity contract; provided, however,
that the trustee may, in its discretion
and with approval of the Commission,
cover uncovered inventory or
commodity contracts of the debtor
which cannot be liquidated immediately
because of price limits or other market
conditions, or may take an offsetting
position in a new month or at a strike
price for which limits have not been
reached.
(ii) Notwithstanding paragraph
(e)(4)(i) of this section, the trustee may,
with the written permission of the
Commission, operate the business of the
debtor in the ordinary course, including
the purchase or sale of new commodity
contracts on behalf of the customers of
the debtor under appropriate
circumstances, as determined by the
Commission.
(f) Long option contracts. Subject to
paragraphs (d) and (e) of this section,
the trustee shall use its best efforts to
assure that a commodity contract that is
a long option contract with value does
not expire worthless.
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§ 190.05 Operation of the debtor’s estate—
general.
(a) Compliance with the Act and
regulations in this chapter. Except as
specifically provided otherwise in this
part, the trustee shall use reasonable
efforts to comply with all of the
provisions of the Act and of the
regulations in this chapter as if it were
the debtor.
(b) Computation of funded balance.
The trustee shall use reasonable efforts
to compute a funded balance for each
customer account that contains open
commodity contracts or other property
as of the close of business each business
day subsequent to the order for relief
until the date all open commodity
contracts and other property in such
account have been transferred or
liquidated, which shall be as accurate as
reasonably practicable under the
circumstances, including the reliability
and availability of information.
(c) Records—(1) Maintenance. Except
as otherwise ordered by the court or as
permitted by the Commission, records
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required under this chapter to be
maintained by the debtor, including
records of the computations required by
this part, shall be maintained by the
trustee until such time as the debtor’s
case is closed.
(2) Accessibility. The records required
to be maintained by paragraph (c)(1) of
this section shall be available during
business hours to the Commission and
the U.S. Department of Justice. The
trustee shall give the Commission and
the U.S. Department of Justice access to
all records of the debtor, including
records required to be retained in
accordance with § 1.31 of this chapter
and all other records of the commodity
broker, whether or not the Act or this
chapter would require such records to
be maintained by the commodity broker.
(d) Customer statements. The trustee
shall use all reasonable efforts to
continue to issue account statements
with respect to any customer for whose
account open commodity contracts or
other property is held that has not been
liquidated or transferred. With respect
to such accounts, the trustee must also
issue an account statement reflecting
any liquidation or transfer of open
commodity contracts or other property
promptly after such liquidation or
transfer.
(e) Other matters—(1) Disbursements.
With the exception of transfers of
customer property made in accordance
with § 190.07, the trustee shall make no
disbursements to customers except with
approval of the court.
(2) Investment. The trustee shall
promptly invest the proceeds from the
liquidation of commodity contracts or
specifically identifiable property, and
may invest any other customer property,
in obligations of the United States and
obligations fully guaranteed as to
principal and interest by the United
States, provided that such obligations
are maintained in a depository located
in the United States, its territories or
possessions.
(f) Residual interest. The trustee shall
apply the residual interest provisions of
§ 1.11 of this chapter in a manner
appropriate to the context of their
responsibilities as a bankruptcy trustee
pursuant subchapter IV of chapter 7 of
the Bankruptcy Code and this part, and
in light of the existence of a surplus or
deficit in customer property available to
pay customer claims.
§ 190.06 Making and taking delivery under
commodity contracts.
(a) Deliveries—(1) General. The
provisions of this paragraph (a) apply to
commodity contracts that settle upon
expiration or exercise by making or
taking delivery of physical delivery
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property, if such commodity contracts
are in a delivery position on the filing
date, or the trustee is unable to liquidate
such commodity contracts in
accordance with § 190.04(c) to prevent
them from moving into a delivery
position, i.e., before the debtor or its
customer incurs bilateral contractual
obligations to make or take delivery
under such commodity contracts.
(2) Delivery made or taken on behalf
of a customer outside of the
administration of the debtor’s estate. (i)
The trustee shall use reasonable efforts
to allow a customer to deliver physical
delivery property that is held directly by
the customer and not by the debtor (and
thus not recorded in any commodity
contract account of the customer) in
settlement of a commodity contract, and
to allow payment in exchange for such
delivery, to occur outside the
administration of the debtor’s estate,
when the rules of the exchange or other
market listing the commodity contract,
or the clearing organization or the
foreign clearing organization clearing
the commodity contract, as applicable,
prescribe a process for delivery that
allows the delivery to be fulfilled:
(A) In the normal course directly by
the customer;
(B) By substitution of the customer for
the commodity broker; or
(C) Through agreement of the buyer
and seller to alternative delivery
procedures.
(ii) Where a customer delivers
physical delivery property in settlement
of a commodity contract outside of the
administration of the debtors’ estate in
accordance with paragraph (a)(2)(i) of
this section, any property of such
customer held at the debtor in
connection with such contract must
nonetheless be included in the net
equity claim of that customer, and, as
such, can only be distributed pro rata at
the time of, and as part of, any
distributions to customers made by the
trustee.
(3) Delivery as part of administration
of the debtor’s estate. When the trustee
determines that it is not practicable to
effect delivery as provided in paragraph
(a)(2) of this section:
(i) To facilitate the making or taking
of delivery directly by a customer, the
trustee may, as it determines reasonable
under the circumstances of the case and
consistent with the pro rata distribution
of customer property by account class:
(A) When a customer is obligated to
make delivery, return any physical
delivery property to the customer that is
held by the debtor for or on behalf of the
customer under the terms set forth in
§ 190.09(d)(1)(ii), to allow the customer
to deliver such property to fulfill its
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delivery obligation under the
commodity contract; or
(B) When a customer is obligated to
take delivery:
(1) Return any cash delivery property
to the customer that is reflected in the
customer’s delivery account, provided
that cash delivery property returned
under this paragraph (a)(3)(i)(B)(1) shall
not exceed the lesser of:
(i) The amount the customer is
required to pay for delivery of the
commodity; or
(ii) The customer’s net funded balance
for all of the customer’s commodity
contract accounts;
(2) Return cash, securities, or other
property held in the customer’s nondelivery commodity contract accounts,
provided that property returned under
this section shall not exceed the lesser
of:
(i) The amount the customer is
required to pay for delivery of the
commodity; or
(ii) The net funded balance for all of
the customer’s commodity contract
accounts reduced by any amount
returned to the customer pursuant to
paragraph (a)(3)(i)(B)(1) of this section,
and provided further, however, that the
trustee may distribute such property
only to the extent that the customer’s
funded balance for each such account
exceeds the minimum margin
obligations for such account (as
described in § 190.04(b)(2)); and
(C) Impose such conditions on the
customer as it considers appropriate to
assure that property returned to the
customer is used to fulfill the
customer’s delivery obligations.
(ii) If the trustee does not return
physical delivery property, cash
delivery property, or other property in
the form of cash or cash equivalents to
the customer as provided in paragraph
(a)(3)(i) of this section, subject to
paragraph (a)(4) of this section:
(A) To the extent practical, the trustee
shall make or take delivery of physical
delivery property in the same manner as
if no bankruptcy had occurred, and
when making delivery, the party to
which delivery is made must pay the
full price required for taking such
delivery; or
(B) When taking delivery of physical
delivery property:
(1) The trustee shall pay for the
delivery first using the customer’s cash
delivery property or other property,
limited to the amounts set forth in
paragraph (a)(3)(i)(B) of this section,
along with any cash transferred by the
customer to the trustee on or after the
filing date for the purpose of paying for
delivery.
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(2) If the value of the cash or cash
equivalents that may be used to pay for
deliveries as described in paragraph
(a)(3)(i)(B) of this section is less than the
amount required to be paid for taking
delivery, the trustee shall issue a
payment call to the customer. The full
amount of any payment made by the
customer in response to a payment call
must be credited to the funded balance
of the particular account for which such
payment is made.
(3) If the customer fails to meet a call
for payment under paragraph
(a)(3)(ii)(B)(2) of this section before
payment is made for delivery, the
trustee must convert any physical
delivery property received on behalf of
the customer to cash as promptly as
possible.
(4) Deliveries in a securities account.
If an open commodity contract held in
a futures account, foreign futures
account, or cleared swaps account
requires delivery of a security upon
expiration or exercise of such
commodity contract, and delivery is not
completed pursuant to paragraph (a)(2)
or (a)(3)(i) of this section, the trustee
may make or take delivery in a
securities account in a manner
consistent with paragraph (a)(3)(ii) of
this section, provided, however, that the
trustee may transfer property from the
customer’s commodity contract
accounts to the securities account to
fulfill the delivery obligation only to the
extent that the customer’s funded
balance for such commodity contract
account exceeds the customer’s
minimum margin obligations for such
accounts (as described in § 190.04(b)(2))
and provided further that the customer
is not under-margined or does not have
a deficit balance in any other
commodity contract accounts.
(5) Delivery made or taken on behalf
of proprietary account. If delivery of
physical delivery property is to be made
or taken on behalf of the debtor’s own
account or the account of any nonpublic customer of the debtor, the
trustee shall make or take delivery, as
the case may be, on behalf of the
debtor’s estate, provided that if the
trustee takes delivery of physical
delivery property it must convert such
property to cash as promptly as
possible.
(b) Special account class provisions
for delivery accounts. (1) Within the
delivery account class, the trustee shall
treat—
(i) Physical delivery property held in
delivery accounts as of the filing date,
and the proceeds of any such physical
delivery property subsequently
received, as part of the physical delivery
account class; and
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(ii) Cash delivery property in delivery
accounts as of the filing date, along with
any physical delivery property for
which delivery is subsequently taken on
behalf of a customer in accordance with
paragraph (a)(3) of this section, as part
of a separate cash delivery account
class.
(2)(i) If the debtor holds any cash or
cash equivalents in an account
maintained at a bank, clearing
organization, foreign clearing
organization, or other person, under a
name or in a manner that clearly
indicates that the account holds
property for the purpose of making
payment for taking delivery, or
receiving payment for making delivery,
of a commodity under commodity
contracts, such property shall (subject to
§ 190.09) be considered customer
property—
(A) In the cash delivery account class
if held for making payment for taking
delivery; and
(B) In the physical delivery account
class, if held as a result of receiving
such payment for a making delivery
after the filing date.
(ii) Any other property (excluding
property segregated for the benefit of
customer in the futures, foreign futures
or cleared swaps account class) that is
traceable as having been held or
received for the purpose of making
delivery, or as having been held or
received as a result of taking delivery,
of a commodity under commodity
contracts, shall (subject to § 190.09) be
considered customer property—
(A) In the cash delivery account class
if received after the filing date in
exchange for taking delivery; and
(B) Otherwise shall be considered
customer property in the physical
delivery account class.
§ 190.07
Transfers.
(a) Transfer rules. No clearing
organization or self-regulatory
organization may adopt, maintain in
effect, or enforce rules that:
(1) Are inconsistent with the
provisions of this part;
(2) Interfere with the acceptance by its
members of transfers of commodity
contracts, and the property margining or
securing such contracts, from futures
commission merchants that are required
to transfer accounts pursuant to
§ 1.17(a)(4) of this chapter; or
(3) Interfere with the acceptance by its
members of transfers of commodity
contracts, and the property margining or
securing such contracts, from a futures
commission merchant that is a debtor as
defined in § 190.01, if such transfers
have been approved by the Commission,
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provided, however, that this paragraph
(a)(3) shall not—
(i) Limit the exercise of any
contractual right of a clearing
organization or other registered entity to
liquidate or transfer open commodity
contracts; or
(ii) Be interpreted to limit a clearing
organization’s ability adequately to
manage risk.
(b) Requirements for transferees. (1) It
is the duty of each transferee to assure
that it will not accept a transfer that
would cause the transferee to be in
violation of the minimum financial
requirements set forth in this chapter.
(2) Any transferee that accepts a
transfer of open commodity contracts
from the estate of the debtor—
(i) Accepts the transfer subject to any
loss that may arise in the event the
transferee cannot recover from the
customer any deficit balance that may
arise related to the transferred open
commodity contracts.
(ii) If the commodity contracts were
held for the account of a customer:
(A) Must keep such commodity
contracts open at least one business day
after their receipt, unless the customer
for whom the transfer is made fails to
respond within a reasonable time to a
margin call for the difference between
the margin transferred with such
commodity contracts and the margin
which such transferee would require
with respect to a similar set of
commodity contracts held for the
account of a customer in the ordinary
course of business; and
(B) May not collect commissions with
respect to the transfer of such
commodity contracts.
(3) A transferee may accept open
commodity contracts and property, and
open accounts on its records, for
customers whose commodity contracts
and property are transferred pursuant to
this part prior to completing customer
diligence, provided that account
opening diligence as required by law
(including the risk disclosures referred
to in § 1.65(a)(3) of this chapter) is
performed, and records and information
required by law are obtained, as soon as
practicable, but in any event within six
months of the transfer, unless this time
is extended for a particular account,
transferee, or debtor by the Commission.
(4)(i) Any account agreements
governing a transferred account
(including an account that has been
partially transferred) shall be deemed
assigned to the transferee by operation
of law and shall govern the transferee
and customer’s relationship until such
time as the transferee and customer
enter into a new agreement; provided,
however, that any breach of such
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agreement by the debtor existing at or
before the time of the transfer
(including, but not limited to, any
failure to segregate sufficient customer
property) shall not constitute a default
or breach of the agreement on the part
of the transferee, or constitute a defense
to the enforcement of the agreement by
the transferee.
(ii) Paragraph (b)(4)(i) of this section
shall not apply where the customer has
a pre-existing account agreement with
the transferee futures commission
merchant. In such a case, the transferred
account will be governed by that preexisting account agreement.
(5) If open commodity contracts or
any specifically identifiable property
has been, or is to be, transferred in
accordance with section 764(b) of the
Bankruptcy Code and this section,
customer instructions previously
received by the trustee with respect to
open commodity contracts or with
respect to specifically identifiable
property, shall be transmitted to the
transferee of property, which shall
comply therewith to the extent
practicable.
(c) Eligibility for transfer under
section 764(b) of the Bankruptcy Code—
accounts eligible for transfer. All
commodity contract accounts (including
accounts with no open commodity
contract positions) are eligible for
transfer after the order for relief
pursuant to section 764(b) of the
Bankruptcy Code, except:
(1) The debtor’s own account or the
accounts of general partners of the
debtor if the debtor is a partnership; and
(2) Accounts that are in deficit.
(d) Special rules for transfers under
section 764(b) of the Bankruptcy Code—
(1) Effecting transfer. The trustee for a
commodity broker shall use its best
efforts to effect a transfer to one or more
other commodity brokers of all eligible
commodity contract accounts, open
commodity contracts and property held
by the debtor for or on behalf of its
customers, based on customer claims or
record, no later than the seventh
calendar day after the order for relief.
(2) Partial transfers; multiple
transferees—(i) Of the customer estate.
If all eligible commodity contract
accounts held by a debtor cannot be
transferred under this section, a partial
transfer may nonetheless be made. The
Commission will not disapprove such a
transfer for the sole reason that it was
a partial transfer. Commodity contract
accounts may be transferred to one or
more transferees, and, subject to
paragraph (d)(4) of this section, may be
transferred to different transferees by
account class.
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(ii) Of a customer’s commodity
contract account. If all of a customer’s
open commodity contracts and property
cannot be transferred under this section,
a partial transfer of contracts and
property may be made so long as such
transfer would not result in an increase
in the amount of any customer’s net
equity claim. One, but not the only,
means to effectuate a partial transfer is
by liquidating a portion of the open
commodity contracts held by a customer
such that sufficient value is realized, or
margin requirements are reduced to an
extent sufficient, to permit the transfer
of some or all of the remaining open
commodity contracts and property. If
any open commodity contract to be
transferred in a partial transfer is part of
a spread or straddle, to the extent
practicable under the circumstances,
each side of such spread or straddle
must be transferred or none of the open
commodity contracts comprising the
spread or straddle may be transferred.
(3) Letters of credit. A letter of credit
received, acquired, or held to margin,
guarantee, secure, purchase, or sell a
commodity contract may be transferred
with an eligible commodity contract
account if it is held by a derivatives
clearing organization on a pass-through
or other basis or is transferable by its
terms, so long as the transfer will not
result in a recovery which exceeds the
amount to which the customer would be
entitled under §§ 190.08 and 190.09. If
the letter of credit cannot be transferred
as provided for in the foregoing
sentence, and the customer does not
deliver substitute customer property to
the trustee in accordance with
§ 190.04(d)(3), the trustee may draw
upon a portion or all of the letter of
credit, the proceeds of which shall be
treated as customer property in the
applicable account class.
(4) Physical delivery property. The
trustee shall use reasonable efforts to
prevent physical delivery property held
for the purpose of making delivery on a
commodity contract from being
transferred separate and apart from the
related commodity contract, or to a
different transferee.
(5) No prejudice to other customers.
No transfer shall be made under this
part by the trustee if, after taking into
account all customer property available
for distribution to customers in the
applicable account class at the time of
the transfer, such transfer would result
in insufficient remaining customer
property to make an equivalent
percentage distribution (including all
previous transfers and distributions) to
all customers in the applicable account
class, based on—
(i) Customer claims of record; and
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(ii) Estimates of other customer claims
made in the trustee’s reasonable
discretion based on available
information, in each case as of the
calendar day immediately preceding
transfer.
(e) Prohibition on avoidance of
transfers under section 764(b) of the
Bankruptcy Code—(1) Pre-relief
transfers. Notwithstanding the
provisions of paragraphs (c) and (d) of
this section, the following transfers are
approved and may not be avoided under
sections 544, 546, 547, 548, 549, or
724(a) of the Bankruptcy Code:
(i) The transfer of commodity contract
accounts or customer property prior to
the entry of the order for relief in
compliance with § 1.17(a)(4) of this
chapter unless such transfer is
disapproved by the Commission;
(ii) The transfer, withdrawal, or
settlement, prior to the order for relief
at the request of a public customer,
including a transfer, withdrawal, or
settlement at the request of a public
customer that is a commodity broker, of
commodity contract accounts or
customer property held from or for the
account of such customer by or on
behalf of the debtor unless:
(A) The customer acted in collusion
with the debtor or its principals to
obtain a greater share of customer
property or the bankruptcy estate than
that to which it would be entitled under
this part; or
(B) The transfer is disapproved by the
Commission;
(iii) The transfer prior to the order for
relief by a clearing organization, or by
a receiver that has been appointed for
the futures commission merchant (FCM)
that is now a debtor, of one or more
accounts held for or on behalf of
customers of the debtor, or of
commodity contracts and other
customer property held for or on behalf
of customers of the debtor, provided
that the transfer is not disapproved by
the Commission.
(2) Post-relief transfers.
Notwithstanding the provisions of
paragraphs (c) and (d) of this section,
the following transfers are approved and
may not be avoided under sections 544,
546, 547, 548, 549, or 724(a) of the
Bankruptcy Code:
(i) The transfer of a commodity
contract account or customer property
eligible to be transferred under
paragraphs (c) and (d) of this section
made by the trustee or by any clearing
organization on or before the seventh
calendar day after the entry of the order
for relief, as to which the Commission
has not disapproved the transfer; or
(ii) The transfer of a commodity
contract account or customer property at
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the direction of the Commission on or
before the seventh calendar day after the
order for relief, upon such terms and
conditions as the Commission may
deem appropriate and in the public
interest.
(f) Commission action.
Notwithstanding any other provision of
this section (other than paragraphs
(d)(2)(ii) and (d)(5) of this section), in
appropriate cases and to protect the
public interest, the Commission may:
(1) Prohibit the transfer of a particular
set or sets of commodity contract
accounts and customer property; or
(2) Permit transfers of a particular set
or sets of commodity contract accounts
and customer property that do not
comply with the requirements of this
section.
§ 190.08
Calculation of funded net equity.
For purposes of this subpart, funded
net equity shall be computed as follows:
(a) Funded claim. The funded net
equity claim of a customer shall be
equal to the aggregate of the funded
balances of such customer’s net equity
claim for each account class.
(b) Net equity. Net equity means a
customer’s total customer claim of
record against the estate of the debtor
based on the customer property,
including any commodity contracts,
held by the debtor for or on behalf of
such customer less any indebtedness of
the customer to the debtor. Net equity
shall be calculated as follows:
(1) Step 1-equity determination. (i)
Determine the equity balance of each
commodity contract account of a
customer by computing, with respect to
such account, the sum of:
(A) The ledger balance;
(B) The open trade balance; and
(C) The realizable market value,
determined as of the close of the market
on the last preceding market day, of any
securities or other property held by or
for the debtor from or for such account,
plus accrued interest, if any.
(ii) For the purposes of this paragraph
(b)(1), the ledger balance of a customer
account shall be calculated by:
(A) Adding:
(1) Cash deposited to purchase,
margin, guarantee, secure, or settle a
commodity contract;
(2) Cash proceeds of liquidations of
any securities or other property referred
to in paragraph (b)(1)(i)(C) of this
section;
(3) Gains realized on trades; and
(4) The face amount of any letter of
credit received, acquired or held to
margin, guarantee, secure, purchase or
sell a commodity contract; and
(B) Subtracting from the result:
(1) Losses realized on trades;
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(2) Disbursements to or on behalf of
the customer (including, for these
purposes, transfers made pursuant to
§§ 190.04(a) and 190.07); and
(3) The normal costs attributable to
the payment of commissions, brokerage,
interest, taxes, storage, transaction fees,
insurance, and other costs and charges
lawfully incurred in connection with
the purchase, sale, exercise, or
liquidation of any commodity contract
in such account.
(iii) For purposes of this paragraph
(b)(1), the open trade balance of a
customer’s account shall be computed
by subtracting the unrealized loss in
value of the open commodity contracts
held by or for such account from the
unrealized gain in value of the open
commodity contracts held by or for such
account.
(iv) For purposes of this paragraph
(b)(1), in calculating the ledger balance
or open trade balance of any customer,
exclude any security futures products,
any gains or losses realized on trades in
such products, any property received to
margin, guarantee, or secure such
products (including interest thereon or
the proceeds thereof), to the extent any
of the foregoing are held in a securities
account, and any disbursements to or on
behalf of such customer in connection
with such products or such property
held in a securities account.
(2) Step 2-customer determination
(aggregation). Aggregate the credit and
debit equity balances of all accounts of
the same class held by a customer in the
same capacity. Paragraphs (b)(2)(i)
through (xii) of this section prescribe
which accounts must be treated as being
held in the same capacity and which
accounts must be treated as being held
in a separate capacity.
(i) Except as otherwise provided in
this paragraph (b)(2), all accounts that
are maintained with a debtor in a
person’s name and that, under this
paragraph (b)(2), are deemed to be held
by that person in its individual capacity
shall be deemed to be held in the same
capacity.
(ii) An account maintained with a
debtor by a guardian, custodian, or
conservator for the benefit of a ward, or
for the benefit of a minor under the
Uniform Gift to Minors Act, shall be
deemed to be held in a separate capacity
from accounts held by such guardian,
custodian or conservator in its
individual capacity.
(iii) An account maintained with a
debtor in the name of an executor or
administrator of an estate in its capacity
as such shall be deemed to be held in
a separate capacity from accounts held
by such executor or administrator in its
individual capacity.
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(iv) An account maintained with a
debtor in the name of a decedent, in the
name of the decedent’s estate, or in the
name of the executor or administrator of
such estate in its capacity as such shall
be deemed to be accounts held in the
same capacity.
(v) An account maintained with a
debtor by a trustee shall be deemed to
be held in the individual capacity of the
grantor of the trust unless the trust is
created by a valid written instrument for
a purpose other than avoidance of an
offset under the regulations contained in
this part. A trust account which is not
deemed to be held in the individual
capacity of its grantor under this
paragraph (b)(2)(v) shall be deemed to
be held in a separate capacity from
accounts held in an individual capacity
by the trustee, by the grantor or any
successor in interest of the grantor, or by
any trust beneficiary, and from accounts
held by any other trust.
(vi) An account maintained with a
debtor by a corporation, partnership, or
unincorporated association shall be
deemed to be held in a separate capacity
from accounts held by the shareholders,
partners or members of such
corporation, partnership, or
unincorporated association, if such
entity was created for purposes other
than avoidance of an offset under the
regulations contained in this part.
(vii) A hedging account of a person
shall be deemed to be held in the same
capacity as a speculative account of
such person.
(viii) Subject to paragraphs (b)(2)(ix)
and (xiv) of this section, the futures
accounts, foreign futures accounts,
delivery accounts, and cleared swaps
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.
(ix) An omnibus customer account for
public customers of a futures
commission merchant maintained with
a debtor shall be deemed to be held in
a separate capacity from any omnibus
customer account for non-public
customers of such futures commission
merchant and from any account
maintained with the debtor on its own
behalf or on behalf of any non-public
customer.
(x) A joint account maintained with
the debtor shall be deemed to be held
in a separate capacity from any account
held in an individual capacity by the
participants in such account, from any
account held in an individual capacity
by a commodity pool operator or
commodity trading advisor for such
account, and from any other joint
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account; provided, however, that if such
account is not transferred in accordance
with §§ 190.04(a) and 190.07, it shall be
deemed to be held in the same capacity
as any other joint account held by
identical participants and a participant’s
percentage interest therein shall be
deemed to be held in the same capacity
as any account held in an individual
capacity by such participant.
(xi) An account maintained with a
debtor in the name of a plan that is
subject to the terms of the Employee
Retirement Income Security Act of 1974
and the regulations in 29 CFR chapter
XXV, or similar state, Federal, or foreign
laws or regulations applicable to
retirement or pension plans, shall be
deemed to be held in a separate capacity
from an account held in an individual
capacity by the plan administrator, any
employer, employee, participant, or
beneficiary with respect to such plan.
(xii) Except as otherwise provided in
this section, an account maintained
with a debtor by an agent or nominee for
a principal or a beneficial owner shall
be deemed to be an account held in the
individual capacity of such principal or
beneficial owner.
(xiii) With respect to the cleared
swaps account class, each individual
cleared swaps customer account within
each cleared swap omnibus customer
account referred to in paragraph
(b)(2)(viii) of this section shall be
deemed to be held in a separate capacity
from each other such individual cleared
swaps customer account, subject to the
provisions of paragraphs (b)(2)(i)
through (xi) of this section.
(xiv) Accounts held by a customer in
separate capacities shall be deemed to
be accounts of different customers. The
burden of proving that an account is
held in a separate capacity shall be
upon the customer.
(3) Step 3-setoffs. (i) The net equity of
one customer account may not be offset
against the net equity of any other
customer account.
(ii) Any obligation to the debtor owed
by a customer which is not required to
be included in computing the equity of
that customer under paragraph (b)(1) of
this section (defined as x), must be
deducted from any obligation to the
customer owed by the debtor which is
not required to be included in
computing the equity of that customer
(defined as y). If the former amount (x)
exceeds the latter (y), the excess (x-y)
must be deducted from the equity
balance of the customer obtained after
performing the preceding calculations
required by paragraph (b) of this section,
provided, that if the customer owns
more than one class of accounts with a
positive equity balance, the excess
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(again, x-y) must be allocated and offset
against each positive equity balance in
the same proportion as that positive
equity balance bears to the total of all
positive equity balances of accounts of
different classes held by such customer.
(iii) A negative equity balance
obtained with respect to one customer
account class must be set off against a
positive equity balance in any other
account class of such customer held in
the same capacity, provided, that if a
customer owns more than one class of
accounts with a positive equity balance,
such negative equity balance must be
offset against each positive equity
balance in the same proportion as that
positive equity balance bears to the total
of all positive equity balances in
accounts of different classes held by
such customer.
(iv) To the extent any indebtedness of
the debtor to the customer which is not
required to be included in computing
the equity of such customer under
paragraph (b)(1) of this section exceeds
such indebtedness of the customer to
the debtor, the customer claim therefor
will constitute a general creditor claim
rather than a customer property claim,
and the net equity therefor shall be
separately calculated.
(v) The rules pertaining to separate
capacities and permitted setoffs
contained in this section shall only be
applied subsequent to the entry of an
order for relief; prior to that date, the
provisions of § 1.22 of this chapter and
of sections 4d(a)(2) and 4d(f) of the Act
(and, in each case, the regulations in
part 1, 22, or 30 of this chapter that
implement sections 4d(a)(2) and 4d(f))
shall govern what setoffs are permitted.
(4) Step 4-correction for distributions.
The value on the date of transfer or
distribution of any property transferred
or distributed subsequent to the filing
date and prior to the primary
liquidation date with respect to each
class of account held by a customer
must be added to the equity obtained for
that customer for accounts of that class
after performing the steps contained in
paragraphs (b)(1) through (3) of this
section: Provided, however, that if all
accounts for which there are customer
claims of record and 100% of the equity
pertaining thereto is transferred in
accordance with § 190.07 and section
764(b) of the Bankruptcy Code, net
equity shall be computed based solely
upon those allowed customer claims, if
any, filed subsequent to the order for
relief which are not claims of record on
the filing date.
(5) Step 5-correction for ongoing
events. Compute any adjustments to the
steps in paragraphs (b)(1) through (4) of
this section required to correct
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misestimates or errors including,
without limitation, corrections for
ongoing events such as the liquidation
of unliquidated claims or specifically
identifiable property at a value different
from the estimated value previously
used in computing net equity.
(c) Calculation of funded balance.
Funded balance means a customer’s pro
rata share of the customer estate with
respect to each account class available
for distribution to customers of the same
customer class.
(1) Funded balance computation. The
funded balance of any customer claim
shall be computed (separately by
account class and customer class) by:
(i) Multiplying the ratio of the amount
of the net equity claim of such customer
(defined as x) less the amounts referred
to in paragraph (c)(1)(ii) of this section
of such customer for any account class
(defined as y) divided by the sum of the
net equity claims of all customers for
accounts of that class (defined as p) less
the amounts referred to in paragraph
(c)(1)(ii) of this section of all customers
for accounts of that class (defined as q)
(thus, ((x-y)/(p-q)) by the sum of:
(A) The value of letters of credit
received, acquired, or held to margin,
guarantee, secure, purchase, or sell a
commodity contract relating to all
customer accounts of the same class;
(B) The value of the money, securities,
or other property segregated on behalf of
all customer accounts of the same class
less the amounts referred to in
paragraph (c)(1)(ii) of this section;
(C) The value of any money,
securities, or other property which must
be allocated under § 190.09 to all
customer accounts of the same class;
and
(D) The amount of any add-back
required under paragraph (b)(4) of this
section; and
(ii) Then adding 100% of—
(A) Any margin payment made
between the entry of the order for relief
(or, in an involuntary case, the date on
which the petition for bankruptcy is
filed) and the primary liquidation date;
provided, however, that if margin is
posted to substitute for a letter of credit,
such margin does not increase the
funded balance; and
(B) For cash delivery property, any
cash transferred to the trustee on or after
the filing date for the purpose of paying
for delivery.
(2) Corrections to funded balance. The
funded balance must be adjusted to
correct for ongoing events including,
without limitation:
(i) Added claimants;
(ii) Disallowed claims;
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(iii) Liquidation of unliquidated
claims at a value other than their
estimated value; and
(iv) Recovery of property.
(d) Valuation. In computing net
equity, commodity contracts and other
property held by or for a commodity
broker must be valued as provided in
this paragraph (d).
(1) Commodity contracts—(i) Open
contracts. Unless otherwise specified in
this paragraph (d), the value of an open
commodity contract shall be equal to
the settlement price as calculated by the
clearing organization pursuant to its
rules; provided, however, that if an open
commodity contract is transferred to
another commodity broker, its value on
the debtor’s books and records shall be
determined as of the end of the last
settlement cycle on the day preceding
such transfer.
(ii) Liquidated contracts. Except as
specified in paragraphs (d)(1)(ii)(A) and
(B) of this section, the value of a
commodity contract liquidated on the
open market shall equal the actual value
realized on liquidation of the
commodity contract.
(A) Weighted average. If identical
commodity contracts are liquidated
within a 24-hour period or business day
(or such other period as the bankruptcy
court may determine is appropriate) as
part of a general liquidation of
commodity contracts, but cannot be
liquidated at the same price, the trustee
may use the weighted average of the
liquidation prices in computing the net
equity of each customer for which the
debtor held such commodity contracts.
(B) Bulk liquidation. The value of a
commodity contract liquidated as part
of a bulk auction, taken into inventory
or under management by a clearing
organization, or similarly liquidated
outside of the open market shall be
equal to the settlement price calculated
by the clearing organization as of the
end of the settlement cycle during
which the commodity contract was
liquidated.
(2) Securities. The value of a listed
security shall be equal to the closing
price for such security on the exchange
upon which it is traded. The value of all
securities not traded on an exchange
shall be equal in the case of a long
position, to the average of the bid prices
for long positions, and in the case of a
short position, to the average of the
asking prices for the short positions. If
liquidated, the value of such security
shall be equal to the actual value
realized on liquidation of the security;
provided, however, that if identical
securities are liquidated within a 24hour period or business day (or such
other period as the bankruptcy court
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may determine is appropriate) as part of
a general liquidation of securities, but
cannot be liquidated at the same price,
the trustee may use the weighted
average of the liquidation prices in
computing the net equity of each
customer for which the debtor held such
securities. Securities which are not
publicly traded shall be valued by the
trustee pursuant to paragraph (d)(5) of
this section.
(3) Commodities held in inventory.
Commodities held in inventory, as
collateral or otherwise, shall be valued
at their fair market value. If such fair
market value is not readily ascertainable
based upon public sources of prices, the
trustee shall value such commodities
pursuant to paragraph (d)(5) of this
section.
(4) Letters of credit. The value of any
letter of credit received, acquired or
held to margin, guarantee, secure,
purchase, or sell a commodity contract
shall be its face amount, less the
amount, if any, drawn and outstanding,
provided that, if the trustee makes a
determination in good faith that a draw
on a letter of credit is unlikely to be
honored on either a temporary or a
permanent basis, the trustee shall value
the letter of credit pursuant to paragraph
(d)(5) of this section.
(5) All other property. Subject to the
other provisions of this paragraph (d),
all other property shall be valued by the
trustee using such professional
assistance as the trustee deems
necessary in its sole discretion under
the circumstances; provided, however,
that if such property is sold, its value for
purposes of the calculations required by
this part shall be equal to the actual
value realized on the sale of such
property; and, provided further, that the
sale shall be made in compliance with
all applicable statutes, rules, and orders
of any court or governmental entity with
jurisdiction there over.
§ 190.09 Allocation of property and
allowance of claims.
The property of the debtor’s estate
must be allocated among account
classes and between customer classes as
provided in this section. (Property
connected with certain cross-margining
arrangements is subject to the
provisions of framework 1 in appendix
B to this part.) The property so allocated
will constitute a separate estate of the
customer class and the account class to
which it is allocated, and will be
designated by reference to such
customer class and account class.
(a) Scope of customer property. (1)
Customer property includes the
following:
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(i) All cash, securities, or other
property or the proceeds of such cash,
securities, or other property received,
acquired, or held by or for the account
of the debtor, from or for the account of
a customer, including a non-public
customer, which is:
(A) Property received, acquired, or
held to margin, guarantee, secure,
purchase or sell a commodity contract;
(B) Open commodity contracts;
(C) Physical delivery property as that
term is defined in paragraphs (1)
through (3) in the definition of that term
in § 190.01;
(D) Cash delivery property, or other
cash, securities, or other property
received by the debtor as payment for a
commodity to be delivered to fulfill a
commodity contract from or for the
commodity customer account of a
customer;
(E) Profits or contractual rights
accruing to a customer as the result of
a commodity contract;
(F) Letters of credit, including any
proceeds of a letter of credit drawn by
the trustee, or substitute customer
property posted by the customer,
pursuant to § 190.04(d)(3);
(G) Securities held in a portfolio
margining account carried as a futures
account or a cleared swaps customer
account; or
(H) Property hypothecated under
§ 1.30 of this chapter to the extent that
the value of such property exceeds the
proceeds of any loan of margin made
with respect thereto; and
(ii) All cash, securities, or other
property which:
(A) Is segregated for customers on the
filing date;
(B) Is a security owned by the debtor
to the extent there are customer claims
for securities of the same class and
series of an issuer;
(C) Is specifically identifiable to a
customer;
(D) Was property of a type described
in paragraph (a)(1)(i)(A) of this section
that is subsequently recovered by the
avoidance powers of the trustee or is
otherwise recovered by the trustee on
any other claim or basis;
(E) Represents recovery of any debit
balance, margin deficit, or other claim of
the debtor against a customer;
(F) Was unlawfully converted but is
part of the debtor’s estate;
(G) Constitutes current assets of the
debtor (as of the date of the order for
relief) within the meaning of § 1.17(c)(2)
of this chapter, including the debtor’s
trading or operating accounts and
commodities of the debtor held in
inventory, in the greater of—
(1) The amount that the debtor is
obligated to set aside as its targeted
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residual interest amount pursuant to
§ 1.11 of this chapter and the debtor’s
residual interest policies adopted
thereunder, with respect to each of the
futures account class, the foreign futures
account class, and the cleared swaps
account class; or
(2) The debtor’s obligations to cover
debit balances or under-margined
amounts as provided in §§ 1.20, 1.22,
22.2, and 30.7 of this chapter;
(H) Is other property of the debtor that
any applicable law, rule, regulation, or
order requires to be set aside for the
benefit of customers;
(I) Is property of the debtor’s estate
recovered by the Commission in any
proceeding brought against the
principals, agents, or employees of the
debtor;
(J) Is proceeds from the investment of
customer property by the trustee
pending final distribution;
(K) Is a payment from an insurer to
the trustee arising from or related to a
claim related to the conversion or
misuse of customer property; or
(L) Is cash, securities, or other
property of the debtor’s estate, including
the debtor’s trading or operating
accounts and commodities of the debtor
held in inventory, but only to the extent
that the property enumerated in
paragraphs (a)(1)(i)(F) and (a)(1)(ii)(A)
through (K) of this section is insufficient
to satisfy in full all claims of public
customers. Such property includes
‘‘customer property,’’ as defined in
section 16(4) of SIPA, 15 U.S.C. 78lll(4),
that remains after allocation in
accordance with section 8(c)(1)(A)–(D)
of SIPA, 15 U.S.C. 78fff–2(c)(1)(A)–(D)
and that is allocated to the debtor’s
general estate in accordance with
section 8(c)(1) of SIPA, 15 U.S.C. 78fff–
2(c)(1).
(2) Customer property will not
include:
(i) Claims against the debtor for
damages for any wrongdoing of the
debtor, including claims for
misrepresentation or fraud, or for any
violation of the Act or of the regulations
in this chapter;
(ii) Other claims for property which
are not based upon property received,
acquired, or held by or for the account
of the debtor, from or for the account of
the customer;
(iii) Forward contracts (unless such
contracts are cleared by a clearing
organization or, in the case of forward
contracts treated as foreign futures, a
foreign clearing organization);
(iv) Physical delivery property that is
not held by the debtor, and is delivered
or received by a customer in accordance
with § 190.06(a)(2) or § 190.16(a) to
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19439
fulfill the customer’s delivery obligation
under a commodity contract;
(v) Property deposited by a customer
with a commodity broker after the entry
of an order for relief which is not
necessary to meet the margin
requirements applicable to the accounts
of such customer;
(vi) Property hypothecated pursuant
to § 1.30 of this chapter to the extent of
the loan of margin with respect thereto;
(vii) Money, securities, or property
held to margin, guarantee or secure
security futures products, or accruing as
a result of such products, if held in a
securities account; and
(viii) Money, securities, or property
held in a securities account to fulfill
delivery, under a commodity contract
from or for the account of a customer,
as described in § 190.06(b)(2).
(3) Nothing contained in this section,
including, but not limited to, the
satisfaction of customer claims by
operation of this section, shall prevent
a trustee from asserting claims against
any person to recover the shortfall of
property enumerated in paragraphs
(a)(1)(i)(F) and (a)(1)(ii)(A) through (L)
of this section.
(b) Allocation of customer property
between customer classes. No customer
property may be allocated to pay nonpublic customer claims until all public
customer claims have been satisfied in
full. Any property segregated on behalf
of or attributable to non-public
customers must be treated initially as
part of the public customer estate and
allocated in accordance with paragraph
(c)(2) of this section.
(c) Allocation of customer property
among account classes—(1) Property
identified to an account class—(i)
Segregated property. Subject to
paragraph (b) of this section, property
held by or for the account of a customer,
which is segregated on behalf of a
specific account class, or readily
traceable on the filing date to customers
of such account class, or recovered by
the trustee on behalf of or for the benefit
of an account class, must be allocated to
the customer estate of the account class
for which it is segregated, to which it is
readily traceable, or for which it is
recovered.
(ii) Excess property. If, after payment
in full of all allowed customer claims in
a particular account class, any property
remains allocated to that account class,
such excess shall be allocated in
accordance with paragraph (c)(2) of this
section.
(2) All other property. Money,
securities, and property received from
or for the account of customers which
cannot be allocated in accordance with
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paragraph (c)(1)(i) of this section, must
be allocated in the following order:
(i) To the estate of the account class
for which, after the allocation required
in paragraph (c)(1) of this section, the
percentage of each public customer net
equity claim which is funded is the
lowest, until the funded percentage of
net equity claims of such class equals
the percentage of each public customer’s
net equity claim which is funded for the
account class with the next lowest
percentage of the funded claims; and
then
(ii) To the estate of the two account
classes referred to in paragraph (c)(2)(i)
of this section so that the percentage of
the net equity claims which are funded
for each class remains equal until the
percentage of each public customer net
equity claim which is funded equals the
percentage of each public customer net
equity claim which is funded for the
account class with the next lowest
percentage of funded claims, and so
forth, until the percentage of each
public customer net equity claim which
is funded is equal for all classes of
accounts; and then,
(iii) Among account classes in the
same proportion as the public customer
net equity claims for each such account
class bears to the total of public
customer net equity claims of all
account classes until the public
customer claims of each account class
are paid in full; and, thereafter,
(iv) To the non-public customer estate
for each account class in the same order
as is prescribed in paragraphs (c)(2)(i)
through (iii) of this section for the
allocation of the customer estate among
account classes.
(d) Distribution of customer
property—(1) Return or transfer of
specifically identifiable property.
Specifically identifiable property not
required to be liquidated under
§ 190.04(d)(2) may be returned or
transferred on behalf of the customer to
which it is identified:
(i) If it is margining an open
commodity contract, only if substitute
customer property is first deposited
with the trustee with a value equal to
the greater of the full fair market value
of such property on the return date or
the balance due on the return date on
any loan by the debtor to the customer
for which such property constitutes
security; or
(ii) If it is not margining an open
commodity contract, at the option of the
customer, either pursuant to the terms
of paragraph (d)(1)(i) of this section, or
pursuant to the following terms: Such
customer first deposits substitute
customer property with the trustee with
a value equal to the amount by which
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the greater of the value of the
specifically identifiable property to be
transferred or returned on the date of
such transfer or return or the balance
due on the return date on any loan by
the debtor to the customer for which
such property constitutes security,
together with any other disbursements
made, or to be made, to such customer,
plus a reasonable reserve in the trustee’s
sole discretion, exceeds the estimated
aggregate of the funded balances for
each class of account of such customer
less the value on the date of its transfer
or return of any property transferred or
returned prior to the primary
liquidation date with respect to the
customer’s net equity claim for such
account; provided, however, that
adequate security to assure the recovery
of any overpayments by the trustee is
provided to the debtor’s estate by the
customer.
(2) Transfers of specifically
identifiable commodity contracts under
section 766 of the Bankruptcy Code.
Any open commodity contract that is
specifically identifiable property and
which is not required to be liquidated
under § 190.04(d), and which is not
otherwise liquidated, may be transferred
on behalf of a public customer,
provided, however, that such customer
must first deposit substitute customer
property with the trustee with a value
equal to the amount by which the equity
to be transferred to margin such contract
together with any other transfers or
returns of specifically identifiable
property or disbursements made, or to
be made, to such customer, plus a
reasonable reserve in the trustee’s sole
discretion, exceeds the estimated
aggregate of the funded balances for
each class of account of such customer
less the value on the date of its transfer
or return of any property transferred or
returned prior to the primary
liquidation date with respect to the
customer’s net equity claim for such
account; and, provided further, that
adequate security to assure the recovery
of any overpayments by the trustee is
provided to the debtor’s estate by the
customer.
(3) Distribution in kind of specifically
identifiable securities. If any securities
of a customer are specifically
identifiable property as defined in
paragraph (1)(i)(A) of the definition of
that term in § 190.01 of this chapter, but
the customer has no open commodity
contracts, the customer may request that
the trustee purchase or otherwise obtain
the largest whole number of like-kind
securities (i.e., securities of the same
class and series of an issuer), with a fair
market value (inclusive of transaction
costs) which does not exceed that
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portion of the funded balance of such
customer’s allowed net equity claim that
constitutes a claim for securities, if likekind securities can be purchased in a
fair and orderly manner.
(4) Proof of customer claim. No
distribution shall be made pursuant to
paragraphs (d)(1) and (3) of this section
prior to receipt of a completed proof of
customer claim as described in
§ 190.03(e) or (f).
(5) No differential distributions. No
further disbursements may be made to
customers with respect to a particular
account class for whom transfers have
been made pursuant to § 190.07 and
paragraph (d)(2) of this section, until a
percentage of each net equity claim
equivalent to the percentage distributed
to such customers is distributed to all
public customers in such account class.
Partial distributions, other than the
transfers referred to in § 190.07 and
paragraph (d)(2) of this section, with
respect to a particular account class
made prior to the final net equity
determination date must be made
pursuant to a preliminary plan of
distribution approved by the court,
upon notice to the parties and to all
customers, which plan requires
adequate security to the debtor’s estate
to assure the recovery of any
overpayments by the trustee and
distributes an equal percentage of net
equity to all public customers in such
account class.
§ 190.10 Current records during business
as usual.
A person that is a futures commission
merchant is required to maintain
current records relating to its customers’
accounts, including copies of all
account agreements and related account
documentation, and ‘‘know your
customer’’ materials, pursuant to
§§ 1.31, 1.35, 1.36, and 1.37 of this
chapter, which may be provided to
another futures commission merchant to
facilitate the transfer of open
commodity contracts or other customer
property held by such person for or on
behalf of its customers to the other
futures commission merchant, in the
event an order for relief is entered with
respect to such person.
Subpart C—Clearing Organization as
Debtor
§ 190.11 Scope and purpose of this
subpart.
(a) This subpart applies to a
proceeding commenced under
subchapter IV of chapter 7 of the
Bankruptcy Code in which the debtor is
a clearing organization.
(b) If the debtor clearing organization
is organized outside the United States,
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and is subject to a foreign proceeding,
as defined in 11 U.S.C. 101(23), in the
jurisdiction in which it is organized,
then only the following provisions of
this part shall apply:
(1) Subpart A.
(2) Section 190.12.
(3) Section 190.13, but only with
respect to futures contracts and cleared
swaps contracts cleared by FCM
clearing members on behalf of their
public customers and the property
margining or securing such contracts.
(4) Sections 190.17 and 190.18, but
only with respect to claims of FCM
clearing members on behalf of their
public customers, as well as to property
that is or should have been segregated
for the benefit of FCM clearing
members’ public customers, or that has
been recovered for the benefit of FCM
clearing members’ public customers.
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§ 190.12
Required reports and records.
(a) Notices—(1) Means of providing—
(i) To the Commission. Unless
instructed otherwise by the
Commission, all mandatory or
discretionary notices to be given to the
Commission under this subpart shall be
directed by electronic mail to
bankruptcyfilings@cftc.gov. For
purposes of this subpart, notice to the
Commission shall be deemed to be
given only upon actual receipt.
(ii) To members. The trustee, after
consultation with the Commission, and
unless otherwise instructed by the
Commission, will establish and follow
procedures reasonably designed for
giving adequate notice to members
under this subpart and for receiving
claims or other notices from members.
Such procedures should include, absent
good cause otherwise, the use of a
prominent website as well as
communication to members’ electronic
addresses that are available in the
debtor’s books and records.
(2) Of commencement of a
proceeding. A debtor that files a petition
in bankruptcy that is subject to this
subpart shall, at or before the time of
such filing, and a debtor against which
such a petition is filed shall, as soon as
possible, but in any event no later than
three hours after the receipt of notice of
such filing, notify the Commission of
the filing date, the court in which the
proceeding has been or will be filed,
and, as soon as available, the docket
number assigned to that proceeding by
the court.
(b) Reports and records to be provided
to the trustee and the Commission
within three hours. (1) As soon as
practicable following the
commencement of a proceeding that is
subject to this subpart and in any event
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no later than three hours following the
later of the commencement of such
proceeding or the appointment of the
trustee, the debtor shall provide to the
trustee copies of each of the most recent
reports that the debtor was required to
file with the Commission under
§ 39.19(c) of this chapter, including
copies of any reports required under
§ 39.19(c)(2), (3), and (4) of this chapter
(including the most up-to-date version
of any recovery and wind-down plans of
the debtor maintained pursuant to
§ 39.39(b) of this chapter) that the debtor
filed with the Commission during the
preceding 12 months.
(2) As soon as practicable following
the commencement of a proceeding that
is subject to this subpart and in any
event no later than three hours
following the commencement of such
proceeding (or, with respect to the
trustee, the appointment of the trustee),
the debtor shall provide to the trustee
and the Commission copies of the most
up-to-date versions of the default
management plan and default rules and
procedures maintained by the debtor
pursuant to § 39.16 and, as applicable,
§ 39.35 of this chapter.
(c) Records to be provided to the
trustee and the Commission by the next
business day. As soon as practicable
following commencement of a
proceeding that is subject to this subpart
and in any event no later than the next
business day, the debtor shall make
available to the trustee and the
Commission copies of the following
records:
(1) All records maintained by the
debtor described in § 39.20(a) of this
chapter; and
(2) Any opinions of counsel or other
legal memoranda provided to the debtor
(whether by external or internal
counsel) in the five years preceding the
commencement of such proceeding
relating to the enforceability of the rules
and procedures of the debtor in the
event of an insolvency proceeding
involving the debtor.
§ 190.13 Prohibition on avoidance of
transfers.
The following transfers are approved
and may not be avoided under sections
544, 546, 547, 548, 549, or 724(a) of the
Bankruptcy Code:
(a) Pre-relief transfers. Any transfer of
open commodity contracts and the
property margining or securing such
contracts made to another clearing
organization that was approved by the
Commission, either before or after such
transfer, and was made prior to entry of
the order for relief; and
(b) Post-relief transfers. Any transfers
of open commodity contracts and the
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19441
property margining or securing such
contracts made to another clearing
organization on or before the seventh
calendar day after the entry of the order
for relief, that was made with the
approval of the Commission, either
before or after such transfer.
§ 190.14 Operation of the estate of the
debtor subsequent to the filing date.
(a) Proofs of claim. The trustee may,
in its discretion based upon the facts
and circumstances of the case, instruct
each customer to file a proof of claim
containing such information as is
deemed appropriate by the trustee, and
seek a court order establishing a bar date
for the filing of such proofs of claim.
(b) Operation of the derivatives
clearing organization. Subsequent to the
order for relief, the derivatives clearing
organization shall cease making calls for
variation settlement or initial margin.
(c) Liquidation. (1) The trustee shall
liquidate all open commodity contracts
that have not been terminated,
liquidated, or transferred no later than
seven calendar days after entry of the
order for relief. Such liquidation of open
commodity contracts shall be conducted
in accordance with the rules and
procedures of the debtor, to the extent
applicable and practicable.
(2) In lieu of liquidating securities
held by the debtor and making
distributions in the form of cash, the
trustee may, in its reasonable discretion,
make distributions in the form of
securities that are equivalent (i.e.,
securities of the same class and series of
an issuer) to the securities originally
delivered to the debtor by a clearing
member or such clearing member’s
customer.
(d) Computation of funded balance.
The trustee shall use reasonable efforts
to compute a funded balance for each
customer account immediately prior to
any distribution of property within the
account, which shall be as accurate as
reasonably practicable under the
circumstances, including the reliability
and availability of information.
§ 190.15 Recovery and wind-down plans;
default rules and procedures.
(a) Prohibition on avoidance of
actions taken pursuant to recovery and
wind-down plans. Subject to the
provisions of section 766 of the
Bankruptcy Code and §§ 190.13 and
190.18, the trustee shall not avoid or
prohibit any action taken by a debtor
subject to this subpart that was
reasonably within the scope of and was
provided for in any recovery and winddown plans maintained by the debtor
and filed with the Commission pursuant
to § 39.39 of this chapter.
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(b) Implementation of debtor’s default
rules and procedures. In administering
a proceeding under this subpart, the
trustee shall implement, in consultation
with the Commission, the default rules
and procedures maintained by the
debtor under § 39.16 and, as applicable,
§ 39.35 of this chapter and any
termination, close-out and liquidation
provisions included in the rules of the
debtor, subject to the reasonable
discretion of the trustee and to the
extent that implementation of such
default rules and procedures is
practicable.
(c) Implementation of recovery and
wind-down plans. In administering a
proceeding under this subpart, the
trustee shall, in consultation with the
Commission, take actions in accordance
with any recovery and wind-down plans
maintained by the debtor and filed with
the Commission pursuant to § 39.39 of
this chapter, to the extent reasonable
and practicable, and consistent with the
protection of customers.
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§ 190.16
Delivery.
(a) General. In the event that a
commodity contract, cleared by the
derivatives clearing organization, that
settles upon expiration or exercise by
making or taking delivery of physical
delivery property, has moved into
delivery position prior to the date and
time of the order for relief, or moves
into delivery position after that date and
time, but before being terminated,
liquidated, or transferred, then, in either
such event, the trustee must use
reasonable efforts to facilitate and
cooperate with the completion of
delivery on behalf of the clearing
member or the clearing member’s
customer in a manner consistent with
§ 190.06(a) and the pro rata distribution
principle addressed in § 190.00(c)(5).
(b) Special provisions for delivery
accounts. (1) Consistent with the
separation of the physical delivery
property account class and the cash
delivery account class set forth in
§ 190.06(b), the trustee shall treat—
(i) Physical delivery property held in
delivery accounts as of the filing date,
along with the proceeds from any
subsequent sale of such physical
delivery property in accordance with
§ 190.06(a)(3) to fulfill a clearing
member’s or its customer’s delivery
obligation or any other subsequent sale
of such property, as part of the physical
delivery account class; and
(ii) Cash delivery property in delivery
accounts as of the filing date, along with
any physical delivery property for
which delivery is subsequently taken on
behalf of a clearing member or its
customer in accordance with
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§ 190.06(a)(3), as part of the separate
cash delivery account class.
(2) If the debtor holds any cash or
property in the form of cash equivalents
in an account with a bank or other
person under a name or in a manner
that clearly indicates that the account
holds property for the purpose of
making payment for taking physical
delivery, or receiving payment for
making physical delivery, of a
commodity under any commodity
contracts, such property shall (subject to
§ 190.19) be considered customer
property in the cash delivery account
class if held for making payment for
taking delivery, or in the physical
delivery account class, if held for the
purpose of receiving such payment.
§ 190.17
Calculation of net equity.
(a) Net equity–separate capacities and
calculations. (1) If a member of the
clearing organization clears trades in
commodity contracts through a
commodity contract account carried by
the debtor as a customer account for the
benefit of the clearing member’s public
customers and separately through a
house account, the clearing member
shall be treated as having customer
claims against the debtor in separate
capacities with respect to the customer
account and house account at the
clearing organization, and by account
class. A member shall be treated as part
of the public customer class with
respect to claims based on any
commodity customer accounts carried
as ‘‘customer accounts’’ by the clearing
organization for the benefit of the
member’s public customers, and as part
of the non-public customer class with
respect to claims based on its house
account.
(2) Net equity shall be calculated
separately for each separate customer
capacity in which the clearing member
has a claim against the debtor, i.e.,
separately by the member’s customer
account and house account and by
account class.
(b) Net equity—application of debtor’s
loss allocation rules and procedures.
(1)(i) The calculation of a clearing
member’s net equity claim shall include
the full application of the debtor’s loss
allocation rules and procedures,
including the default rules and
procedures referred to in § 39.16 and, if
applicable, § 39.35 of this chapter.
(ii) The calculation in paragraph
(b)(1)(i) of this section will include,
with respect to the clearing member’s
house account, any assessments or
similar loss allocation arrangements
provided for under those rules and
procedures that were not called for
before the filing date, or, if called for,
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have not been paid. Such loss allocation
arrangements shall be applied to the
extent necessary to address losses
arising from default by clearing
members.
(2) Appropriate adjustments shall be
made to the net equity claims of the
clearing members that are so entitled
under the following circumstances:
Where the debtor’s loss allocation rules
and procedures would entitle clearing
members to additional payments of cash
or other property due to—
(i) Portions of mutualized default
resources that are prefunded, or
assessed and collected, but in either
event not used; or
(ii) The debtor’s recoveries on claims
against others (including, but not
limited to, recoveries on claims against
clearing members who have defaulted
on their obligations to the debtor).
(c) Net equity—general. Subject to
paragraph (b) of this section, net equity
shall be calculated in the manner
provided in § 190.08, to the extent
applicable.
(d) Calculation of funded balance.
Funded balance means a clearing
member’s pro rata share of customer
property other than member property
(for accounts for a clearing member’s
customer accounts) or member property
(for a clearing member’s house
accounts) with respect to each account
class available for distribution to
customers of the same customer class,
calculated in the manner provided in
§ 190.08(c) to the extent applicable.
§ 190.18
Treatment of property.
(a) General. The property of the
debtor’s estate must be allocated
between member property and customer
property other than member property as
provided in this section to satisfy claims
of clearing members, as customers of the
debtor. The property so allocated will
constitute a separate estate of the
customer class (i.e., member property,
and customer property other than
member property) and the account class
to which it is allocated, and will be
designated by reference to such
customer class and account class.
(b) Scope of customer property.
Customer property is the property
available for distribution within the
relevant account class in respect of
claims by clearing members, as
customers of the clearing organization,
based on customer accounts carried by
the debtor for the benefit of such
members’ public customers or,
considered separately, such members’
house accounts.
(1) Customer property includes the
following:
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(i) All cash, securities, or other
property, or the proceeds of such cash,
securities, or other property, that is
received, acquired, or held by or for the
account of the debtor, from or for any
commodity contract account of a
clearing member carried by the debtor,
which is:
(A) Property received, acquired, or
held, in order to margin, guarantee,
secure, purchase, or sell a commodity
contract;
(B) Open commodity contracts;
(C) Physical delivery property as that
term is defined in paragraphs (1)
through (3) of the definition of that term
in § 190.01;
(D) Cash, securities or other property
received by the debtor as payment for a
commodity to be delivered to fulfill a
commodity contract from or for the
commodity customer account of a
clearing member or a customer of a
clearing member;
(E) Profits or contractual rights
accruing as a result of a commodity
contract;
(F) Letters of credit, including any
proceeds of a letter of credit drawn
upon by the trustee, or substitute
customer property posted by a clearing
member or a customer of a clearing
member, pursuant to § 190.04(d)(3); or
(G) Securities held in a portfolio
margining account carried as a futures
account or a cleared swaps customer
account;
(ii) All cash, securities, or other
property which:
(A) Is segregated by the debtor on the
filing date for the benefit of clearing
members’ house accounts or clearing
members’ public customer accounts;
(B) Was of a type described in
paragraph (b)(1)(i)(A) of this section that
is subsequently recovered by the
avoidance powers of the trustee or is
otherwise recovered by the trustee on
any other claim or basis;
(C) Represents a recovery of any debit
balance, margin deficit or other claim of
the debtor against any commodity
contract account carried for the benefit
of a member’s house accounts or a
member’s public customer accounts;
(D) Was unlawfully converted but is
part of the debtor’s estate; or
(E) Was of a type described in
paragraphs (a)(1)(ii)(H) through (K) of
§ 190.09 (as if the term debtor used
therein refers to a clearing organization
as debtor);
(iii) Any guaranty fund deposit,
assessment, or similar payment or
deposit made by a clearing member, or
recovered by the trustee, to the extent
any remains following administration of
the debtor’s default rules and
procedures, and any other property of a
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member available under the debtor’s
rules and procedures to satisfy claims
made by or on behalf of public
customers of a member; and
(iv) Amounts of its own funds that the
debtor had committed as part of its loss
allocation rules, to the extent that such
amounts have not already been applied
under such rules.
(2) Customer property will not
include property of the type described
in § 190.09(a)(2), as if the term debtor
used therein refers to a clearing
organization and to the extent relevant
to a clearing organization.
(c) Allocation of customer property
between customer classes. (1) Where the
funded balance for members’ house
accounts is greater than one hundred
percent with respect to any account
class:
(i) Any excess should be allocated to
customer property other than member
property to the extent that the funded
balance is less than one hundred
percent of net equity claims for
members’ public customers in any
account class; and
(ii) Any remaining excess after the
application of paragraph (c)(1)(i) of this
section should be allocated to member
property to the extent that the funded
balance is less than one hundred
percent of net equity claims for
members’ house accounts in any other
account class.
(2) Where the funded balance for
members’ public customers in any
account class is greater than one
hundred percent:
(i) Any excess should be allocated to
customer property other than member
property to the extent that the funded
balance is less than one hundred
percent of net equity claims for
members’ public customers in any other
account class; and
(ii) Any remaining excess after the
application of paragraph (c)(2)(i) of this
section should be allocated to member
property to the extent that the funded
balance is less than one hundred
percent of net equity claims for
members’ house accounts in any
account class.
(d) Allocation of customer property
among account classes—(1) Segregated
property. Subject to paragraph (b) of this
section, property held by or for the
account of a customer, which is
segregated on behalf of a specific
account class within a customer class,
or readily traceable on the filing date to
customers of such account class within
a customer class, or recovered by the
trustee on behalf of or for the benefit of
an account class within a customer
class, must be allocated to the customer
estate of the account class for which it
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19443
is segregated, to which it is readily
traceable, or for which it is recovered.
(2) All other property. Customer
property which cannot be allocated in
accordance with paragraph (d)(1) of this
section, shall be allocated within
customer classes, but between account
classes, in the following order:
(i) To the estate of the account class
for which the percentage of each
members’ net equity claim which is
funded is the lowest, until the funded
percentage of net equity claims of such
account class equals the percentage of
each members’ net equity claim which
is funded for the account class with the
next lowest percentage of the funded
claims; and then
(ii) To the estate of the two account
classes so that the percentage of the net
equity claims which are funded for each
such account class remains equal until
the percentage of each net equity claim
which is funded equals the percentage
of each net equity claim which is
funded for the account class with the
next lowest percentage of funded
claims, and so forth, until all account
classes within the customer class are
fully funded.
(e) Accounts without separation by
account class. Where the debtor has,
prior to the order for relief, kept initial
margin for house accounts in accounts
without separation by account class,
then member property will be
considered to be in a single account
class.
(f) Assertion of claims by trustee.
Nothing in this section, including, but
not limited to, the satisfaction of
customer claims by operation of this
section, shall prevent a trustee from
asserting claims against any person to
recover the shortfall of property
enumerated in paragraphs (b)(1)(i)(E)
and (b)(1)(ii) and (iii) of this section.
§ 190.19
Support of daily settlement.
(a) Notwithstanding any other
provision of this part, funds received
(whether from clearing members’ house
or customer accounts) by a debtor
clearing organization as part of the daily
settlement required pursuant to § 39.14
of this chapter shall, upon and after an
order for relief, be included as customer
property that is reserved for and
traceable to, and promptly shall be
distributed to, members entitled to
payments of such funds with respect to
such members’ house and customer
accounts as part of that same daily
settlement. Such funds when received,
other than deposits of initial margin
described in § 39.14(a)(1)(iii) of this
chapter, shall be considered member
property and, separately, customer
property other than member property, in
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proportion to the ratio of total gains in
member accounts with net gains, and
total gains in clearing members’
customer accounts with net gains,
respectively. Deposits of initial margin
described in § 39.14(a)(1)(iii) of this
chapter shall be considered member
property and, separately, customer
property other than member property, to
the extent deposited on behalf of,
respectively, clearing members’ house
accounts and customer accounts.
(b) To the extent there is a shortfall in
funds received pursuant to paragraph (a)
of this section:
(1) Such funds shall be supplemented
with the property described in
paragraphs (b)(1)(i) through (iv) of this
section, as applicable, to the extent
necessary to meet the shortfall, in
accordance with the derivatives clearing
organization’s default rules and
procedures adopted pursuant to § 39.16
and, as applicable, § 39.35 of this
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chapter, and (with respect to paragraph
(b)(1)(ii) of this section) any recovery
and wind-down plans maintained
pursuant to § 39.39 of this chapter and
submitted pursuant to § 39.19 of this
chapter. Such funds shall be included as
member property and customer property
other than member property in the
proportion described in paragraph (a) of
this section, and shall be distributed
promptly to members’ house accounts
and members’ customer accounts which
accounts are entitled to payment of such
funds as part of that daily settlement.
(i) Initial margin held for the account
of a member, including initial margin
segregated for the customers of such
member, that has defaulted on payments
required pursuant to a daily settlement,
but only to the extent that such margin
is permitted to be used pursuant to parts
1, 22, and 30 of this chapter.
(ii) Assets of the debtor, to the extent
dedicated to such use as part of the
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debtor’s default rules and procedures,
and any recovery and wind-down plans,
described in this paragraph (b)(1).
(iii) Prefunded guarantee or default
funds maintained pursuant to the
debtor’s default rules and procedures.
(iv) Payments made by members
pursuant to assessment powers
maintained pursuant to the debtor’s
default rules and procedures.
(2) If the funds that are included as
customer property pursuant to
paragraph (a) of this section,
supplemented as described in paragraph
(b)(1) of this section, are insufficient to
pay in full members entitled to payment
of such funds as part of daily settlement,
then such funds shall be distributed pro
rata to such members’ house accounts
and customer accounts in proportion to
the ratio of total gains in member
accounts with net gains, and total gains
in customer accounts with net gains,
respectively.
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19445
Appendix A to Part 190-Customer Proof of Claim Form
[CASE CAPTION]
CLAIM FORM FOR COMMODITY BROKER CUSTOMERS OF [DEBTOR)
Debtor: [INSERT]
Customer Name:
COURT USE ONLY
Account Number(s):
D Check this box if this claim
amends a previously filed claim.
Court Claim
Number:
(If known)
Daytime Telephone number:
Email:
Filed on:
Name and address where payment should be sent (if
different from above):
D Check this box if you are aware
that anyone else has filed a proof
of claim relating to this claim.
Attach copy of statement giving
particulars.
Telephone number:
Email:
THIS CLAIM FORM SHOULD BE USED ONLY IF YOU ARE A CUSTOMER HOLDING
A CLAIM BASED ON A COMMODITY CONTRACT ACCOUNT (A FUTURES,
FOREIGN FUTURES, CLEARED SWAPS OR DELIVERY ACCOUNT) AT THE
DEBTOR. A DIFFERENT CLAIM FORM MUST BE USED TO ASSERT OTHER TYPES
OF CLAIMS AGAINST THE DEBTOR.
THE DEADLINE FOR FILING ALL CUSTOMER CLAIMS BASED ON COMMODITY
CONTRACT ACCOUNTS IS [BAR DATE]. NO CUSTOMER CLAIM WILL BE
ALLOWED IF IT IS RECEIVED AFTER THIS DATE. CLAIMS MUST BE RECEIVED
BY 11:59 P.M. ([TIME ZONE]) ON _ _ _ _ _ _ TO BE CONSIDERED TIMELY.
If you require additional space to answer any question, please attach separate pieces of paper and
label the answers to the corresponding questions.
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[Include case-specific instructions for how to file a claim]
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I.
CLAIM AMOUNT
For each type of commodity contract account that is applicable, state the amount of your claim
against the Debtor.
(1) Futures account claim:$ _ _ _ _ [§ 190.03(e)(1)] 331
(2) Foreign futures account claim:$ _ _ _ _ [§ 190.03(e)(l)]
(3) Cleared swaps account claim:$ _ _ _ _ [§ 190.03(e)(l)]
(4) Delivery account claim:$_ _ _ _ [§ 190.03(e)(l)]
Of the amount in (4), please note how much is in the form of cash or cash equivalents($
)
and how much is the value of commodities that have been or were/are to be delivered ($ _ _ _~
(5) Total claim: $_ _ _ _ _ _ _ _ _ __
(6) Date on which your claim is valued (see instructions): _ _ _ _ _ _ _ __
II.
ACCOUNT INFORMATION
For each commodity contract account with the Debtor, please provide the following information.
To the extent you have multiple commodity contract accounts with the Debtor, please provide
the following information for each account separately in an attachment.
(1) Account number: _ _ _ _ _ _ _ [§ 190.03(e)(3)(i)]
(2) Name in which the account is held: _ _ _ _ _ _ _ _ _ [§ 190.03(e)(3)(ii)]
(3) Please specify all capacities in which you hold the account (check all that are applicable)
[§ 190.03(e)(3)(iv)]:
D a. Individual capacity
D b. Guardian, custodian, or conservator for the benefit of a ward or a minor
under
the Uniform Gift to Minors Act
Bracketed references are to the corresponding provision in § 190.03(e) where the relevant information item is
listed.
331
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D c. Executor or administrator of an estate
D d. Trustee for a trust beneficiary
D e. Corporation, partnership, or unincorporated association
D f. Omnibus customer account of a futures commission merchant
D g. Part owner of a joint account
D h. Individual retirement account
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
D
19447
i. Agent or nominee for a principal or beneficial owner (and not described in
Items (a)-(h))
D j.
In any other capacity not described above in Items (a)-(i) (please specify the
capacity): _ _ _ _ _ _ _ _ _ _ _ _ _ __
Ifyou selected more than one box, please attach an explanation.
(4) Please specify whether the account is a joint account[§ 190.03(e)(3)(v)]:
Check one:
0
YES ONO
Ifyou selected "YES," please specify your percentage interest in the account,
and
whether all participants in the joint account are claiming jointly. In addition, please see
the instructions for additional information required for joint accounts.
a. My percentage interest in the joint account is: _ _ _%
b.
Participants in the joint account are claiming:
Check one:
0
SEPARATEL Y
□ JOINTLY
(5) Please specify whether the account is a discretionary account (i.e., does another person have
trading authority over the account)[§ 190.03(e)(3)(vi)]:
Check one:
0
YES ONO
Ifyou selected "YES," please see the instructions for additional information required for
discretionary accounts.
(6) Please specify whether the account is an individual retirement account for which there is a
custodian[§ 190.03(e)(3)(vii)]:
Check one:
0
YES ONO
1. Ifyou selected "YES," please see the instructions for additional information required
for individual retirement accounts for which there is a custodian.
(7) Please specify whether the account is a cross-margining account for futures and securities
[§ 190.03(e)(3)(viii)]:
Check one:
0
YES ONO
Ifyou selected "YES, "please see the instructions for additional information required for
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cross-margining accounts for futures and securities.
19448
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
III.
ACCOUNT STATEMENT: OPEN POSITIONS, UNLIOUIDATED SECURITIES
AND OTHER UNLIOUIDATED PROPERTY
(1) Account balance per most recent account statement: $_ _ _ [§ 190.03(e)(3)(iii)]
a. Date of the most recent account statement: - - - - - - - - - - - -
PLEASE ATTACH A COPY OF THIS STATEMENT (NOT THE ORIGINAL)
b. Do you agree with the account balance(s) on your most recent account statement(s), as
set forth above?
Check one:
0
YES
O NO
Ifyou selected "NO, "please explain in an attachment the reasons why you disagree with
the account balance reflected on your most recent statement.
c. Has there been activity in the account since the date of the last account statement up to
and including the filing date that has affected the balance of the account
("subsequent activity")?
Check one:
0
YES
O NO
Ifyou selected "YES, "please provide full information regarding any such subsequent
activity in an attachment.
(2) On the date on which your claim is valued, did you have any open positions, unliquidated
securities and/or other unliquidated property in or associated with any of your commodity
contract accounts?[§ 190.03(e)(7)]
2.
Check one:
0
YES
O NO
Ifyou selected "YES, "please state below the value ofyour open positions,
unliquidated
securities and/or other unliquidated property. In addition, please see the instructions for
additional information required regarding open positions, unliquidated securities and
other unliquidated property.
Value of all open positions, unliquidated securities and/or other unliquidated property:
$- - - - - - - - - - -
(3) To the extent you are claiming unliquidated securities or other unliquidated property held in
your account, do you wish to receive payment in kind, if possible?[§ 190.03(e)(9)]
Check one:
0
YES
O NO
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Ifyou selected "YES," please see the instructions for additional required information.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
IV.
19449
CONNECTIONS WITH THE DEBTOR[§ 190.03(e)(2)]
(1) Is the customer making this claim one of the following persons (check all that are applicable):
D a. Officer, director, general partner or owner often percent or more of the capital
stock of the Debtor.
Db. An employee, limited partner or special partner of the Debtor whose duties
include (1) the management of the business of the Debtor or any part
thereof; (2) the handling of the trades or customer funds; (3) the keeping
of records pertaining to the trades or funds of customers; or (4) the signing
or cosigning of checks or drafts on behalf of Debtor.
D c. A spouse or minor dependent living in the same household as any person listed
in this section.
D d. A business affiliate that directly or indirectly controls the Debtor, or is directly or
indirectly controlled by or is under common control with the Debtor.
(2) Is the customer making the claim on behalf of any account that is owned 10% or more by the
Debtor or by any of the persons, alone or jointly, identified in IV.(1)?
Check one:
0
YES ONO
lfyou selected "YES, "please identify such person(s) and the category identified in IV (I)
under which they fit.
SECURITY FUTURES PRODUCTS[§ 190.03(e)(8)] 332
V.
Is any portion of your claim based on security futures products (i.e. futures whose underlying
instrument is either a single security or a narrow-based security index) held in a securities
account with the Debtor?
Check one:
0
YES
O NO
This section is for use only in cases where the debtor is jointly registered as a futures commission merchant and
securities broker-dealer.
332
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lfyou selected "YES, "you will need to file a separate claim in accordance with the
procedures established for claims based on securities accounts at the Debtor.
19450
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
OTHER ACCOUNTS WITH DEBTOR[§ 190.03(e)(4)]
VI.
Do you have any accounts with the Debtor that are not commodity contract accounts listed in
response to Section III above?
Check one:
0
YES ONO
Ifyou selected "YES," specify the other account number(s) and the type ofeach such
account.
Account Number
1.
Type of Account
----------
2. - - - - - - - - - - -
(Attach additional page(s) if necessary)
OTHER CLAIMS AGAINST DEBTOR[§ 190.03(e)(5)]
VII.
Do you have any other claims against the Debtor not already taken into account in the claim and
account information provided in response to Sections I, II, III and VI above?
Check one:
0
YES ONO
Ifyou selected "YES," please provide a detailed description in an attachment of any such
claim or claims, and attach any supporting documentation you have.
AMOUNTS OWED TO DEBTOR[§ 190.03(e)(6)]
VIII.
Do you owe any amounts to the Debtor not already taken into account in the claim and account
balance information provided in response to the questions in sections I and II above?
Check one: YES O NO
0
Ifyou selected "YES," please provide a detailed description in an attachment of any such
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claim or claims, and attach any supporting documentation you have.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
IX.
19451
VERIFICATION
CHECK THE APPROPRIATE BOX:
DI am the customer
DI am the customer's authorized agent.
D I am a guarantor, surety, indorser
or other (See Bankruptcy Rule 3005.)
I declare under penalty ofperjury that the information provided in this claim is true and
correct to the best of my knowledge, information, and reasonable belief.
Print Name: - - - - - - - - - - - - - - - - - Title: - - - - - - - - - - - - - - - - - - - Company:-----------------Address and telephone number (if different from notice address above):
Telephone number: _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
Email:- - - - - - - - - - - - - - - - - - - -
Signature
(Date)
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Penalty for presenting fraudulent claim: Fine ofup to $500,000 or imprisonment for up to 5
years, or both. 18 U.S.C. §§ 152 and 3571.
19452
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
INSTRUCTIONS FOR CUSTOMER PROOF OF CLAIM FORM
•
Types of Customer Accounts:
•
A "futures account" is an account
opened for the purpose of trading futures or
options on futures on a U.S. futures exchange.
Your account statement for a "futures account"
would typically include the term "SEG" in the
title or description of the account.
•
A "foreign futures account" is an
account opened for the purpose of trading futures
or options on futures on an exchange located
outside the U.S. Your account statement for a
"foreign futures account" would typically include
the term "30.7" in the title or description of the
account.
•
A "cleared swaps account" is an account
opened for the purpose of holding swaps traded
bilaterally or in off-exchange markets that are
submitted to a CFTC-registered derivatives
clearing organization for settlement and clearing.
A "cleared swaps account" also is an account
opened for the purpose of trading swaps or
options on swaps on a designated contract market
or swap execution facility and cleared by a
CFTC-registered derivatives clearing
organization. Your account statement for a
"cleared swaps account" would typically include
the term "swap" in the title or description of the
account.
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•
A "delivery account" is an account
denominated as such and through which
deliveries of commodities, whether tangible or
intangible, occur or have occurred under expiring
futures contracts. A delivery account also may
hold cash balances, title documents for
commodities such as metals warehouse receipts,
or other commodities, whether tangible or
intangible, that are deliverable under an
exchange's futures contract.
Your account statement may include
•
multiple types of customer accounts in a single
account statement.
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Date on Which Claim is Valued:
Your claim should be valued as of[the last date on which
any contracts or property not liquidated to cash balances
remained in your account. Do not include the value of
any contracts, funds or other property transferred to
another commodity broker] [1' , the date established by the
Court as the date on which customer accounts should be
valued].
Estimated Claim Amount: If you cannot compute the
amount of your claim, you must file an estimated claim.
In that case, please be sure to indicate that your claim is
an estimated claim.
Joint Accounts: If any commodity contract account for
which you are making a claim is a joint account, please
include an attachment listing the account number and the
name, address and contact information for each joint
account holder other than yourself.
If you are making a claim with respect to multiple joint
accounts, and those joint accounts are not owned by the
same holders in the same legal capacities and in identical
ownership percentages, please complete a separate claim
form for each joint account.
Discretionary Accounts: If any commodity contract
account for which you are making a claim is a
discretionary account, please include an attachment
listing the account number and the name, address, and
contact information for all persons with trading authority
over any of those accounts. If different persons have
trading authority over different accounts, please provide
this information for each such account, listing applicable
account numbers.
Individual Retirement Accounts for which there is a
Custodian: If any commodity contract account for
which you are making a claim is an individual retirement
account for which there is a custodian, please include an
attachment listing the account number and the name,
address, and contact information for both the custodian
and the account owner.
Cross-Margining Accounts for Futures and
Securities: If any commodity contract account for which
you are making a claim is a cross-margining account for
futures and securities, please include an attachment
listing the account number and whether the securities
positions are held in an account with the debtor or in an
account with an affiliate of the debtor. If such positions
are held in an account with an affiliate of the debtor,
please identify and include contact information for such
affiliate.
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Customer's Name and Address:
Fill in the name of the person or entity asserting the claim,
and the name and address of the person who should
receive notices issued during the bankruptcy case. A
separate space is provided for the payment address if it
differs from the notice address. The customer has a
continuing obligation to keep the court informed of its
current address. See Federal Rule of Bankruptcy
Procedure (FRBP) 2002(g).
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19453
Other types of derivatives trading accounts that you may
have with the debtor, such as accounts holding offexchange retail forex positions subject to part 5 of the
regulations of the CFTC and funds to margin such
positions, are not customer accounts entitled to special
protection under the Bankruptcy Code.
Claim in foreign currencies: If some or all of your claim
is based on a currency other than U.S. dollars, please file
you claim in U.S. dollars based on the exchange rate in
effect as of the petition date ([INSERT]), and identify the
exchange rate used in calculating your claim in a separate
attachment.
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If the position, unliquidated security or other item of
unliquidated property is already reflected in the account
statement that you attached in response to Section III of
this form, and you agree with the quantity and any value
set forth therein, please say so. Otherwise, please (i) state
the quantity and value you claim with respect to such open
position, unliquidated security and/or other unliquidated
property, and explain the basis for that quantity and value;
and (ii) attach any documentary evidence supporting such
value.
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•
Documentation:
•
Please attach a copy (not the original) of the
most recent account statement for each account on which
this claim is based.
•
Please enclose copies (not originals) of any
documentation or correspondence you believe will be of
assistance in processing your claim, including, but not
limited to, customer confirmations, account statements,
and statements of purchase or sale.
If, at any time, you complained in writing about the
handling of your account to any person or entity or
regulatory authority, and the complaint relates to the
claim that you are asserting in this claim form, please
provide copies of the complaint and all related
correspondence, as well as any replies that you received.
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Open positions, Unliquidated Securities and Other
Unliquidated Property: To the extent you have any open
positions, unliquidated securities and/or other unliquidated
property in a commodity contract account, please include
an attachment (i) describing each such open position,
unliquidated security and/or other item of unliquidated
property (e.g., for positions, by contract, delivery date,
long/short, quantity, and strike price for options; for
securities, by CUSIP and quantity); (ii) identifying
whether such open position, unliquidated security and/or
other unliquidated property is specifically identifiable
property; and (iii) identifying whether you would prefer, if
practicable, payment in kind for each unliquidated security
or other item ofunliquidated property or to have it
liquidated.
19454
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
Verification:
The individual completing this proof of claim must sign
and date it. If the claim is filed electronically, the
Bankruptcy Code authorizes courts to establish local rules
specifying what constitutes a signature. If you sign this
form, you declare under penalty of perjury that the
information provided is true and correct to the best of your
knowledge, information, and reasonable belief. Your
signature is also a certification that the claim meets the
requirements of FRBP 9011 (b ). Whether the claim is filed
electronically or in person, if your name is on the signature
line, you are responsible for the declaration.
Credits:
An authorized signature on this proof of claim serves as
an acknowledgment that when calculating the amount of
the claim, the customer gave the Debtor credit for any
obligations of the customer to the Debtor.
•
Print the name and title, if any, of the
customer or other person authorized to file this claim.
State the filer's address and telephone number ifit differs
from the address given on the top of the form for purposes
ofreceiving notices. If the claim is filed by an authorized
agent, provide both the name of the individual filing the
claim and the name of the agent. Criminal penalties apply
for making a false statement on a proof of claim.
ADDITIONAL INFORMATION
Acknowledgment of Receipt of Claim
[Instructions for acknowledgment of filing]
Appendix B to Part 190—Special
Bankruptcy Distributions
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Framework 1—Special Distribution of
Customer Funds When the CrossMargining Account Is a Futures
Account
(a) This framework 1 applies when a
debtor futures commission merchant
has participated in a cross-margining
(‘‘XM’’) program for futures and
securities under which the crossmargined positions of its futures
customers (as defined in § 1.3 of this
chapter) and the property received to
margin, secure or guarantee such
positions are held in one or more
accounts pursuant to a Commission
order that requires such positions and
property to be segregated, pursuant to
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section 4d(a) of the Act, from the
positions and property of:
(1) The futures commission merchant;
(2) If applicable, any affiliate carrying
the securities positions as a participant
in the XM program (‘‘Affiliate’’); and
(3) Other futures customers of the
futures commission merchant (such
segregated accounts, the ‘‘XM
accounts’’).
(b) The futures commission merchant
may, and any Affiliate that holds the
securities positions in an XM account
that it directly carries will, be registered
as a broker-dealer under the Exchange
Act. The Commission order approving
the XM program may limit participating
customers to market professionals and
will require a participating customer to
sign an agreement, in a form approved
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by the Commission, that refers to this
distributional rule.
(c) A futures commission merchant is
deemed to receive securities held in an
XM account, including securities and
other property held by an Affiliate in an
XM account, as ‘‘futures customer
funds’’ (as defined in § 1.3 of this
chapter) that margin, guarantee or
secure commodity contracts in the XM
account (or paired XM accounts at the
futures commission merchant and an
Affiliate). Under the agreement signed
by the customer, in the event that the
futures commission merchant (or
Affiliate) is the subject of a SIPA
proceeding, the customer agrees that
securities in an XM account are
excluded from the securities estate for
purposes of SIPA, and that its claim for
return of the securities will not be
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Offers to Purchase a Claim
Certain entities are in the business of purchasing claims
for an amount less than the face value of the claims. One
or more of these entities may contact you and offer to
purchase the claim. Some of the written communications
from these entities may easily be confused with official
court documentation or communications from the Debtor.
These entities do not represent the Bankruptcy Court or
the Debtor. A customer has no obligation to sell its claim.
However, if a customer decides to sell its claim, any
transfer of such claim is subject to FRBP 3001(e), any
applicable provisions of the Bankruptcy Code (11 U.S.C.
§ 101 et seq.), and any applicable orders of the
Bankruptcy Court.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
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treated as a customer claim under SIPA.
These restrictions apply to the customer
only, and should not be read to limit
any action that the trustee may take to
seek recovery of property in an XM
account carried by an Affiliate as part of
the customer estate of the futures
commission merchant.
(d) XM accounts, and other futures
accounts that are subject to segregation
under section 4d(a) of the Act (pursuant
to the Commission’s regulations in part
1 of this chapter) (‘‘non-XM accounts’’),
are treated as two subclasses of futures
account with two separate pools of
segregated futures customer property, an
XM pool and a non-XM pool, each of
which constitutes a segregated pool
under section 4d(a) of the Act. If the
futures commission merchant has
participated in multiple XM programs,
the XM accounts in the different
programs are combined and treated as
part of the same XM subclass of futures
accounts. A futures customer could hold
both non-XM and XM accounts.
(e) Customer claims under this part
arising out of the XM subclass of
accounts are subordinated to customer
claims arising out of the non-XM
subclass of accounts in certain
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circumstances in which the futures
commission merchant does not meet its
segregation requirements. The
segregation requirement is the amount
of futures customer funds that the
futures commission merchant is
required by the Act and Commission
regulations in part 1 of this chapter or
Commission orders to hold on deposit
in segregated accounts on behalf of its
futures customers (exclusive of its
targeted residual amount obligations
pursuant to § 1.3 of this chapter).
(f)(1) If there is a shortfall in the nonXM pool and no shortfall in the XM
pool, all customer net equity claims,
whether or not they arise out of the XM
subclass of accounts, will be combined
and paid pro rata out of the combined
XM and non-XM pools of futures
customer property.
(2) If there is a shortfall in the XM
pool and no shortfall in the non-XM
pool, customer net equity claims arising
from the XM subclass of accounts must
be satisfied first from the XM pool, and
customer net equity claims arising from
the non-XM subclass of accounts must
be satisfied first from the non-XM pool.
(3) If there is a shortfall in both the
non-XM and XM pools:
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19455
(i) If the non-XM shortfall as a
percentage of the segregation
requirement for the non-XM pool is
greater than or equal to the XM shortfall
as a percentage of the segregation
requirement for the XM pool, all
customer net equity claims will be paid
pro rata out of the combined XM and
non-XM pools of futures customer
property; and
(ii) If the XM shortfall as a percentage
of the segregation requirement for the
XM pool is greater than the non-XM
shortfall as a percentage of the
segregation requirement for the non-XM
pool, non-XM customer net equity
claims will be paid pro rata out of the
available non-XM pool, and XM
customer net equity claims will be paid
pro rata out of the available XM pool.
(4) In this way, non-XM customers
will never be adversely affected by an
XM shortfall.
(g) The following examples illustrate
the operation of this framework 1. The
examples assume that the FCM has two
futures customers, one with exclusively
XM accounts and one with exclusively
non-XM accounts.
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19456
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
1. Sufficient Funds to Meet Non-XM and XM Customer Claims:
Non-XM
XM
Funds in 4d(a) se!lfe2ation
150
150
4d(a) Segregation requirement
150
150
Shortfall (dollars)
0
0
Shortfall (nercent)
0
0
Distribution
150
150
Total
300
300
300
There are adequate funds available and both the non-XM and the XM customer
claims will be paid in full.
.
2 Sh0 rtfia11 m
. N on-XM Onl1y:
Funds in 4d(a) seg:re2ation
4d(a) Se!lfegation requirement
Shortfall (dollars)
Shortfall foercent)
Pro rata (percent)
Pro rata (dollars)
Distribution
Non-XM
100
150
50
50/150=33.3
150/300=50
125
125
XM
Total
150
150
0
0
150/300=50
125
125
250
300
250
Due to the non-XM account, there are insufficient funds available to meet both the
non-XM and the XM customer claims in full. Each customer will receive his pro rata
share of the funds available, or 50% of the $250 available, or $125.
3. Sh0 rtfall m
. XM Onttv:
Funds in 4d(a) se2re2ation
4d(a)Seg:reaationreauirement
Shortfall (dollars)
Shortfall foercent)
Pro rata (percent)
Pro rata (dollars)
Distribution
Non-XM
150
150
0
0
150/300=50
125
150
XM
Total
100
150
50
50/150=33.3
150/300=50
125
100
250
300
250
Due to the XM account, there are insufficient funds available to meet both the nonXM and the XM customer claims in full. Accordingly, the XM funds and non-XM funds
are treated as separate pools, and the non-XM customer will be paid in full, receiving
$150 while the XM customer will receive the remaining $100.
.
4 ShOrtfall m
. B 0 th ' w·th
1 XM Shortfall E xcee d"mg N on-XM ShOrtfla II
Non-XM
XM
Funds in 4d(a) se1Zre2ation
125
100
4d(a) Se1Zre12:ation requirement
150
150
Shortfall (dollars)
25
Shortfall foercent)
25/150=16.7 50/150=33.3
Pro rata (oercent)
150/300=50
150/300=50
Pro rata (dollars)
112.50
112.50
Distribution
125
100
.
225
300
225
There are insufficient funds available to meet both the non-XM and the XM
customer claims in full, and the XM shortfall exceeds the non-XM shortfall. The non-XM
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so
Total
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19457
customer will receive the $125 available with respect to non-XM claims while the XM
customer will receive the $100 available with respect to XM claims.
5 ShortfiaII m
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depository outside the United States
(‘‘U.S.’’) or in a foreign currency. If a
futures commission merchant enters
into bankruptcy and maintains futures
customer funds or Cleared Swaps
Customer Collateral in a depository
outside the U.S. or in a depository
located in the U.S. in a currency other
than U.S. dollars, the trustee shall use
the following allocation procedures to
calculate the claim of each public
customer in the futures account class or
each public customer in the cleared
swaps account class, as applicable,
when a sovereign action of a foreign
government or court has occurred that
contributes to shortfalls in the amounts
of futures customer funds or Cleared
Swaps Customer Collateral. In the event
a sovereign action creates or contributes
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to a shortfall in customer property,
applying the allocation convention will
result in a reallocation of distributions
of futures customer funds or Cleared
Swaps Collateral to take into account
the impact of the sovereign action. For
purposes of this bankruptcy convention,
sovereign action of a foreign government
or court would include, but not be
limited to, the application or
enforcement of statutes, rules,
regulations, interpretations, advisories,
decisions, or orders, formal or informal,
by a Federal, state, or provincial
executive, legislature, judiciary, or
government agency. The trustee should
perform the allocation procedures
separately with respect to each public
customer in the futures account class or
cleared swaps account class.
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These examples illustrate the principle that pro rata distribution across both accounts
is the preferable approach except when a shortfall in the XM account could harm nonXM customers. Thus. pro rata distribution occurs in Examples 1, 2, 5 and 6. Separate
treatment of the XM and non-XM accounts occurs in Examples 3 and 4.
19458
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
I. Reduction In Distributions For General Shortfall
A.
Determination of losses not attributable to sovereign action
Convert the claim of each futures customer or Cleared Swaps Customer in each
currency to U.S. Dollars at the exchange rate in effect on the Final Net Equity
Determination Date, as defined in §190.0l(s) (the "Exchange Rate").
1.
Determine the amount of assets available for distribution to futures customers or
Cleared Swaps Customers. In making this calculation, include customer funds for futures
contracts and Cleared Swaps Customer Collateral that would be available for distribution
but for the sovereign action.
2.
Convert the amount of customer funds for futures contracts and Cleared Swaps
Customer Collateral available for distribution to U.S. Dollars at the Exchange Rate.
3.
Determine the Shortfall Percentage that is not attributable to sovereign action, as
4.
follows:
I Total Customer Assets
Shortfall Percentage =
(
1-
[
]
)
Total Customer Claims
B.
Allocation of Losses Not Attributable to Sovereign Action
Reduce the claim of each futures customer or Cleared Swaps Customer by the
Short fall Percentage.
1.
II. Reduction in Distributions for Sovereign Loss
A.
Determination of Losses Attributable to Sovereign Action ("Sovereign Loss'?
1.
If any portion of the claim of a futures customer or Cleared Swaps Customer is
required to be kept in U.S. dollars in the U.S., that portion of the claim is not exposed to
Sovereign Loss.
If any portion of the claim of a futures customer or Cleared Swaps Customer is
authorized to be kept in only one location and that location is:
2.
A location in which there is Sovereign Loss, then that entire portion of the
claim is exposed to Sovereign Loss.
b.
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a. The U.S. or a location in which there is no Sovereign Loss, then that portion
of the claim is not exposed to Sovereign Loss.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19459
If any portion of the claim of a futures customer or Cleared Swaps Customer is
authorized to be kept in only one currency and that currency is:
3.
a. U.S. dollars or a currency in which there is no Sovereign Loss, then that
portion of the claim is not exposed to Sovereign Loss.
b. A currency in which there is Sovereign Loss, then that entire portion of the
claim is exposed to Sovereign Loss.
4.
If any portion of the claim of a futures customer or Cleared Swaps Customer is
authorized to he kept in more than one location and:
a. There is no Sovereign Loss in any of those locations, then that portion of the
claim is not exposed to Sovereign Loss.
b. There is Sovereign Loss in one of those locations, then that entire portion of
the claim is exposed to Sovereign Loss.
c. There is Sovereign Loss in more than one of those locations, then an equal
share of that portion of the claim will be exposed to Sovereign Loss in each such location.
5.
If any portion of the claim of a futures customer or Cleared Swaps Customer is
authorized to be kept in more than one currency and:
a. There is no Sovereign Loss in any of those currencies, then that portion of
the claim is not exposed to Sovereign Loss.
b. There is Sovereign Loss in one of those currencies, then that entire portion of
the claim is exposed to Sovereign Loss.
c. There is Sovereign Loss in more than one of those currencies, then an equal
share of that portion of the claim will be exposed to Sovereign Loss.
B.
1.
Calculation of Sovereign Loss
The total Sovereign Loss for each location is the difference between:
a. The total customer funds for futures contracts or Cleared Swaps Customer
Collateral deposited in depositories in that location and
b. The amount of customer funds for futures contracts or Cleared Swaps
Customer Collateral in that location that is available to be distributed to futures customers
or Cleared Swaps Customers, after taking into account any sovereign action.
2.
The total Sovereign Loss for each currency is the difference between:
b. The value, in U.S. dollars, of the customer funds for futures contracts or
Cleared Swaps Customer Collateral held in that currency on the date of the calculation.
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a. The value, in U.S. dollars, of the customer funds for futures contracts or
Cleared Swaps Customer Collateral held in that currency on the day before the sovereign
action took place and
19460
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
C.
Allocation ofSovereign Loss
1.
Each distribution on account of the claim of a futures customer or Cleared Swaps
Customer exposed to Sovereign Loss in a location will be reduced by:
Portion of the customer's claim exposed to loss in that
location
Total Sovereign Loss x > - - - - - - - - - - - - - - - - - - - - - - - - <
All portions of customer claims exposed to loss in that
location
2.
Each distribution on account of the claim of a futures customer or Cleared Swaps
Customer exposed to Sovereign Loss in a currency will be reduced by:
Portion of the customer's claim exposed to loss in that
Total Sovereign Loss x >-c_ur_re_n_c~-------------------<
All portions of customer claims exposed to loss in that
currency
3.
A distribution to a futures customer or Cleared Swaps Customer exposed to
Sovereign Loss in a location or currency will not be reduced below zero. (The above
calculations might yield a result below zero where the FCM kept more customer funds for
futures contracts or Cleared Swaps Customer Funds in a location or currency than it was
authorized to keep.)
4.
Any amount of Sovereign Loss from a location or currency in excess of the total
amount of customer funds for futures contracts or Cleared Swaps Customer Funds
authorized to be kept in that location or currency (calculated in accord with section II. I
above) ("Total Excess Sovereign Loss") will be allocated among all futures customers or
Cleared Swaps Customer that have authorized funds to be kept outside the U.S., or in
currencies other than U.S. dollars, with each such futures customer or Cleared Swaps
Customer distribution reduced by the following amount:
This customer's total claim-The portion of
this Customer's claim required to be kept in
Total Excess Sovereign
U.S. dollars, in the U.S.
Lossx
Total customer claims -
Total of all
customer claims required to be kept in U.S.
dollar, in the U.S.
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The following examples illustrate the operation of this convention.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19461
Example 1. No shortfall in any location.
Customer
Claim
Location(s) customer has consented to havin2 funds held
A
$50
U.S.
B
U.K.
€50
Germany
C
€50
D
£300
U.K.
Location
Actual asset balance
$50
U.S.
U.K.
£300
U.K.
€50
Germany
€50
Note: Conversion Rates: €1 = $1; £1=$1.5.
Convert the claim of each futures customer or Cleared Swaps Customer in each currency to U.S.
Dollars:
Customer
Claim
A
B
C
D
Conversion rate
$50
€50
€50
£300
Claim in U.S. dollars
1.0
1.0
1.0
1.5
$50
50
50
450
Total
$600
Determine assets available for distribution to futures customers or Cleared Swaps Customers,
converting to U.S. dollars:
Location
$50
£300
€50
€50
There are no shortfalls in funds held in any location. Accordingly, there will be no reduction in
distributions to holders of futures or Cleared Swaps Customer claims.
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U.S.
U.K.
U.K.
Germany
Total
Assets
Shortfall due
Actual
Assets in
Amount
Conversion
to sovereign shortfall due
actually
U.S.
rate
action
to sovereign
dollars
available
action
percenta2e
$50
$50
1.0
1.5
450
450
1.0
50
50
1.0
50
50
$600
$600
0
19462
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
Claims:
Customer
A
B
C
D
Total
Claim in U.S. dollars after
Allocation of shortfall Distributions after
allocated non-sovereign
due to sovereign action
all reductions
shortfall
$50
$0
$50
50
0
50
50
0
50
450
450
0
$600
$0
$600
Example 2. Shortfall in funds held in the U.S.
Location(s) customer has consented to havine: funds held
Customer
Claim
A
$100
U.S.
B
€50
U.K.
U.S., Germany, or Japan
C
€100
Location
Actual asset balance
U.S.
$50
U.K.
€100
Germany
€50
Note: Conversion Rates: €1 =$1.
REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL
There is a shortfall in the funds held in the U.S. such that only 1/2 of the finds are available. Convert
the claim of each futures customer or Cleared Swaps Customer in each currency to U.S. Dollars:
Convert each customer's claim in each currency to U.S. Dollars:
Customer
A
B
C
Total
Claim
$100
€50
€100
Conversion rate
1.0
1.0
1.0
Claim in US$
$100
50
100
$250
Determine assets available for distribution to futures customers or Cleared Swaps Customers,
converting to U.S. dollars:
Location
$50
€100
€50
1.0
1.0
1.0
Shortfall due
Actual
Assets in
Amount
to sovereign shortfall due
actually
U.S.
to sovereign
action
available
dollars
percentae:e
action
$50
$50
100
100
50
50
$200
$200
Determine the percentage of shortfall that is not attributable to sovereign action:
Shortfall Percentage= (1---(200/250)) = (1-80%) = 20%.
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U.S.
U.K.
Germany
Total
Assets
Conversion
rate
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19463
Reduce each distribution to the holder of a futures or Cleared Swaps Customer claim by the
Shortfall Percentage:
Customer
A
B
C
Total
Claim in
US$
$100
50
100
$250
Allocation shortfall
(non-sovereign)
$20
10
20
$50
Distribution in U.S. dollars
after allocated shortfall
$80
40
80
$200
REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION
There is no shortfall due to sovereign action. Accordingly, distributions to holders of futures or
Cleared Swaps Customer claims will not be further reduced.
DISTRIBUTIONS AFTER REDUCTIONS
Customer
A
B
C
Total
Distribution in US$
before allocation of
soverei2n shortfall
$80
40
80
$200
Allocation of shortfall
due to sovereign action
Distribution after
all reductions
$80
40
80
$200
$0
Example 3. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, not due
to sovereign action.
Location(s) customer has consented to having funds held
Customer Claim
A
$150 U.S.
B
€100 U.K.
C
€50 Germany
D
$100 U.S.
D
€100 U.K. or Germany
Location
Actual asset balance
U.S.
$250
U.K.
€50
Germany
€100
Note: Conversion Rates: €1=$1.
REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL
Customer
A
B
C
D
D
Total
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Claim
$150
€100
€50
$100
€100
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1.0
1.0
1.0
1.0
1.0
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Claim in US$
$150
100
50
100
100
$500
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Convert the claim of each futures customer or Cleared Swaps Customer in each currency to U.S.
Dollars:
19464
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
Determine assets available for distribution to futures customers or Cleared Swaps
Customers, converting to U.S. dollars:
Location
Assets
U.S.
U.K.
Germany
Total
Conversion
rate
$250
€50
€100
1.0
1.0
1.0
Shortfall due
Actual
Assets in
Amount
to sovereign shortfall due
U.S.
actually
action
to sovereign
dollars
available
percentae:e
action
$250
$250
50
50
100
100
$400
$400
$0
Determine the percentage of shortfall that is not attributable to sovereign action:
Shortfall Percentage= (1--400/500) = (1-80%) = 20%.
Reduce each distribution to the holder of a futures customer or Cleared Swaps Customer by the
Shortfall Percentage:
Customer
A
B
C
D
Total
Claim in
US$
$150
100
50
200
$500
Allocation shortfall
(non-sovereie:n)
$30
20
10
40
$100
Distribution in U.S. dollars
after allocated shortfall
$120
80
40
160
$400
REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION
There is no shortfall due to sovereign action. Accordingly, the distributions will not be further
reduced.
DISTRIBUTIONS AFTER REDUCTIONS
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A
B
C
D
Total
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Distribution in US$
before allocation of
sovereie:n shortfall
$120
80
40
160
$400
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due to sovereign action all reductions
0
$0
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$120
80
40
160
$400
13APR2
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Customer
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19465
Example 4. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to
sovereign action.
Customer Claim Location(s) customer has consented to havine funds held
A
$50 U.S.
B
€50 U.K.
C
€50 Germany
D
$100 U.S.
D
€100 U.K. or Germany
Location
Actual asset balance
$150
U.S.
100
U.K.
Germany
100
Notice: Conversion Rates: €1 = $1; £1 = $1.5.
REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL
Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S.
Dollars:
Customer
A
B
C
D
D
Total
Claim
Conversion rate
1.0
1.0
1.0
$50
€50
€50
$100
€100
Claim in US$
$50
50
50
100
100
$350
1.0
1.0
Determine assets available for distribution to futures customers or Cleared Swaps Customers,
converting to U.S. dollars:
Location
U.S.
U.K.
Germany
Total
Conversion
Assets
rate
$150
€100
€100
1.0
1.0
1.0
Shortfall due
Actual
Assets in
Amount
to sovereign shortfall due
U.S.
actually
to sovereign
action
available
dollars
percentage
action
$150
$150
100
100
50%
100
50
50
$350
$50
$300
Determine the percentage of shortfall that is not attributable to sovereign action:
Shortfall Percentage= (1-350/350) = (1-100%) = 0%.
Reduce each distribution to the holder of a futures customer or Cleared Swaps Customer claim by
the Shortfall Percentage:
Claim in US$
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A
B
C
D
$50
50
50
200
$350
Total
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(non-sovereien)
$0
0
0
0
$0
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Distribution in U.S. dollars
after allocated shortfall
$50
50
50
200
$350
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Customer
19466
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
REDUCTION IN DISTRIBUTIONS FOR DUE TO SOVEREIGN ACTION
Due to sovereign action, only 1/2 of the funds in Germany are available.
Customer
Presumed location of funds
Germany
U.K.
U.S.
A
B
C
D
$50
$50
100
$150
Total
$50
100
$150
$50
Calculation of the allocation of the shortfall due to sovereign action--Germany ($50 shortfall to
be allocated):
C
Allocation
share
$50/$150
Allocation share of
actual shortfall
33.3% of $50
D
$100/$150
66.7% of$50
Customer
Actual shortfall
allocated
$16.67
33.33
Total
$50.00
DISTRIBUTIONS AFTER REDUCTIONS
Customer
A
B
C
D
Total
Allocation of shortfall
Distribution after
due to sovereign action
all reductions
from Germany
$50
50
$16.67
33.33
33.33
166.67
$50.00
$300.00
Distribution in US$
before allocation of
sovereie;n shortfall
$50
50
50
200
$350.00
Customer Claim
A
$100
B
€50
€150
C
D
$100
D
£300
D
€150
Location
U.S.
U.K.
U.K.
Germany
Conversion Rates: €1
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Location(s) customer has consented to havine; funds held
U.S.
V.K.
Germany
U.S.
V.K.
U.K. or Germany
Actual asset balance
$100
£300
€200
€150
=
$1; £1
PO 00000
=
$1.5.
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Example 5. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due
to sovereign action and a shortfall in funds held in the U.S.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19467
REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL
Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S.
Dollars:
Customer
Claim
A
B
C
D
D
D
Conversion rate
$100
€50
€150
$100
£300
€150
Claim in US$
1.0
1.0
1.0
1.0
1.5
1.0
$100
50
150
100
450
150
$1000
Total
Determine assets available for distribution to futures customers or Cleared Swaps Customers,
converting to U.S. dollars:
Location
Assets
U.S.
U.K.
U.K.
Germany
Total
$100
£300
€200
€150
Conversion
rate
1.0
1.5
1.0
1.0
Assets Shortfall due
Actual
Amount
in
to sovereign shortfall due
actually
U.S.
action
to sovereign
available
dollars oercenta2e
action
$100
450
200
150
$900
100%
$100
450
200
0
$750
$150
$150
Determine the percentage of shortfall that is not attributable to sovereign action:
Shortfall Percentage = (1 - 900 / 1000) = (1 - 90%) = 10%.
Reduce each distribution to the holder ofa futures customer or Cleared Swaps Customer claim by
the Shortfall Percentage:
Customer
A
B
C
D
Total
Claim in
US$
Allocation shortfall
(non-soverei2n)
$100
50
150
700
$1000
Distribution in U.S. dollars
after allocated shortfall
$10
5
15
70
$100
$90
45
135
630
$900
REDUCTION IN DISTRIBUTIONS FOR SHORTFALL DUE TO SOVEREIGN ACTION
Due to sovereign action, none of the money in Germany is available.
Customer
U.S.
A
B
C
D
Germany
$100
$50
100
$200
Total
450
$500
$150
150
$300
Calculation of the allocation of the shortfall due to sovereign action Germany ($150 shortfall to
be allocated):
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Presumed location of funds
U.K.
19468
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
Customer
C
D
Allocation
share
$150/$300
$150/$300
Allocation Share of actual
shortfall
50% of$150
50% of$150
Total
Actual shortfall
allocated
$75
75
$150
DISTRIBUTIONS AFTER REDUCTIONS
Customer
A
B
C
D
Total
Distribution in US$
before allocation of
sovereie:n shortfall
$90
45
135
630
$900
Allocation of shortfall
due to sovereign action
from Germany
$75
75
$150
Distributions
after all
reductions
$90
45
60
555
$750
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Example 6. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due
to sovereign action, shortfall in funds held outside the U.S., or in a currency other than U.S.
dollars, not due to sovereign action, and a shortfall in funds held in the U.S.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
Customer
Claim
A
$50
B
€50
$20
C
C
€50
D
$100
D
£300
D
€100
E
$80
E
¥10,000
Location
U.S.
U.K.
U.K.
Germany
Japan
Conversion Rates: €1
19469
Location(s) customer has consented to havine: funds held
U.S.
U.K.
U.S.
Germany
U.S.
U.K.
U.K., Germany, or Japan
U.S.
Japan
Actual asset balance
$200
£200
€100
€50
¥10,000
= $1; ¥1 = $0.01, £1 = $1.5.
REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL
Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S.
Dollars:
Customer
A
B
C
C
D
D
D
E
E
Total
Claim
$50
€50
$20
€50
$100
£300
€100
$80
¥10,000
Conversion rate
1.0
1.0
1.0
1,0
1.0
1.5
1.0
1.0
0.01
Claim In US$
$50
50
20
50
100
450
100
80
100
$1000
Determine assets available for distribution to futures customers or Cleared Swaps Customers,
converting to U.S. dollars:
Location
Assets
$200
U.S.
U.K.
£200
€100
U.K.
Germany
€50
Japan
¥10,000
Total
Shortfall
Actual
Amount
Assets in
due
Conversio
shortfall due
to sovereign
actually
U.S.
to sovereign
n rate
dollars
action
available
action
percentae:e
$200
$200
1.0
1.5
300
300
100
100
1.0
100%
1.0
50
$50
0
100
50%
50
50
O.ol
$750
$100
$650
Reduce each distribution to the holder of a futures or Cleared Swaps Customer claim by the
Shortfall Percentage:
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Determine the percentage of shortfall that is not attributable to sovereign action:
Shortfall Percentage= (1 =750/1000) = (1 =75%) = 25%.
19470
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Claim in US$
Customer
A
B
C
D
E
$50
50
70
650
180
$1000.00
Total
Allocation shortfall Distributions in U.S. dollars
( non-sovereie:n)
after allocated shortfall
$12.50
$37.50
12.50
37.50
17.50
52.50
162.50
487.50
45.00
135.00
$250.00
$750.00
REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION
Due to sovereign action, none of the money in Germany and only 1/2 of the funds in Japan are
available.
Customer
A
B
C
D
E
Total
Presumed location of funds
Germany
U.K.
U.S.
Japan
$50
$50
20
100
80
$250
450
$50
50
$500
$100
$50
100
$150
Calculation of the allocation of the shortfall due to sovereign action-Germany ($50 shortfall to
be allocated):
Customer
Allocation
C
D
Total
Allocation
share
$50/$100
50/100
Allocation Share of
actual shortfall
50% of$50
50% of 50
Actual shortfall allocated
$25
25
50
Japan ($50 shortfall to be allocated):
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Allocation
share
$50/$150
100/150
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Allocation Share of
actual shortfall
33.3% of$50
66.6% of50
Frm 00148
Fmt 4701
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Actual shortfall allocated
$16.67
33.33
$50.00
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Customer
Allocation
D
E
Total
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19471
DISTRIBUTIONS AFTER REDUCTIONS
Distribution in US$
Customer before allocation of
sovereign shortfall
A
Allocation of
Allocation of Distributi
shortfall due to shortfall due to on after
sovereign action sovereign action
all
from Germany
from Japan
reductions
$37.50
37.50
52.50
487.50
135.00
$750.00
B
C
D
E
Total
$25
$25
37.50
37.50
27.50
445.83
101.67
$650.00
16.67
33.33
$50.00
$50.00
Example 7. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollar, due to
sovereign action, where the FCM kept more funds than permitted in such location or currency.
Customer
Claim
A
B
B
C
D
C
E
E
$50
50
€50
€50
100
€100
50
€50
Location(s) customer has consented to havine: funds held
U.S.
U.S.
U.K.
Germany
U.S.
U.K. or Germany
U.S.
U.K.
Location
Actual asset balance
$250
€50
€200
U.S.
U.K.
Germany
Conversion Rates: 1 = $1.
REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL
Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S.
Dollars:
Customer
A
B
B
C
D
D
Claim
Conversion rate
$50
50
€50
€50
€100
€100
50
€50
E
E
Claim in US$
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
$50
50
50
50
100
100
50
50
500.00
Determine assets available for distribution to futures customers or Cleared Swaps Customers,
converting to U.S. dollars:
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Total
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Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
Conversion
Assets
rate
Location
U.S.
U.K.
Germany
Total
$250
€50
€200
Assets in
U.S.
dollars
1.0
1.0
1.0
$250
50
200
$500
Shortfall due
Actual
Amount
to sovereign shortfall due
actually
action
to sovereign
available
action
percenta~e
$250
50
100%
200
0
$200
$300
Determine the percentage of shortfall that is not attributable to sovereign
Shortfall Percentage= (1-500/500) = (1-100%) = 0%.
Reduce each distribution to the holder of a futures or Cleared Swaps Customer claim by the
Shortfall Percentage:
Claim in
US$
$50
100
50
200
100
$500
Customer
A
B
C
D
E
Total
Allocation shortfall (non- Distribution in U.S. dollars
sovereign)
after allocated shortfall
$0
$50
0
100
0
50
200
0
0
100
$0
$500
REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION
Due to sovereign action, none of the money in Germany is available.
Customer
A
B
C
D
E
Total
U.S.
$50
50
Presumed location of funds
Germanv
U.K.
50
50
100
100
50
$250
50
$100
$150
Calculation of the allocation of the shortfall due to sovereign action-Germany ($200 shortfall to
be allocated):
Allocation
share
$50/$150
$100/$150
Customer
C
D
Total
Allocation Share of
actual shortfall
33.3% of$200
66. 7% of $200
Actual shortfall
allocated
$66.67
$133.33
$200.00
This would result in the distributions to customers C and D being reduced below zero.
Actual
shortfall
$200
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Allocation of shortfall Allocation of shortfall
for customer C
for customer D
$50
$100
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Total excess
shortfall
$50
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Accordingly, the distributions to customer C and D will only be reduced to zero, or $50 allocated
to C and $100 allocated to D. This results in a Total Excess Shortfall of$50.
Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
19473
This shortfall will be allocated among the remaining futures customers or Cleared Swaps
Customers who have authorized funds to be held outside the U.S. or in a currency other than U.S.
dollars.
Total claims
Allocation share
Portion of
(column Bof customers
claim
permitting
C/column B
required to
Customer
Total-all
funds to be
be in the
held outside
customer claims
U.S.
the U.S.
in U.S.)
B
$100
$50/$200
$50
(1)
C
50
0
D
200
100
$100/200
E
100
50
50/100
Total
$450.00
1Claim already reduced to $0.
Allocation
Actual
total
share of
excess
actual total
excess
shortfall
shortfall allocated
25% of$50
50% of $50
25% of$50
$12.50
0
25
12.50
$50.00
DISTRIBUTIONS AFTER REDUCTIONS
Allocation of
Allocation of Distribution
Distribution in US$
shortfall due to
total excess
after all
Customer before allocation of
sovereign action
sovereign shortfall
shortfall
reductions
Germany
A
$50
$50.00
B
100
12.50
87.50
C
50
50
0
D
200
100
25
75.00
E
100
12.50
87.50
Total
$500.00
$150.00
$50.00
$300.00
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Bankruptcy
Regulations—Commission Voting
Summary, Chairman’s Statement, and
Commissioners’ Statements
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Appendix 1—Commission Voting
Summary
On this matter, Chairman Tarbert and
Commissioners Quintenz, Behnam,
Stump, and Berkovitz voted in the
affirmative. No Commissioner voted in
the negative.
Appendix 2—Statement of Support of
Chairman Heath P. Tarbert
When our Commission considered the
proposal to amend the CFTC’s
bankruptcy rules in Part 190,1 I noted
that, in his 1926 novel The Sun Also
Rises, Ernest Hemingway offered what
is perhaps the best chronicle of the
1 Bankruptcy Regulations, 85 FR 36000 (June 12,
2020).
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anatomy of a typical bankruptcy. In the
novel, the character Mike Campbell is
asked how he went bankrupt. He
answers: ‘‘two ways . . . gradually and
then suddenly.’’ 2
As Hemingway’s dialogue succinctly
describes, bankruptcies often come on
unexpectedly. A business’s relatively
minor financial or operational troubles
may be exacerbated by a sudden crisis—
whether a firm-level issue, or a national
or even global event. Many catalysts for
insolvency are entirely unpredictable.
We must therefore be prepared with a
bankruptcy regime that fosters a swift
and equitable resolution to protect
customer funds and promote financial
stability.
Background on the CFTC’s Bankruptcy
Regime
Part 190 of the CFTC’s rules,
addressing commodity broker 3
2 See Statement of Chairman Heath P. Tarbert in
Support of Long-Awaited Updates to the CFTC’s
Bankruptcy Regime (Apr. 14, 2020), available at
https://www.cftc.gov/PressRoom/
SpeechesTestimony/tarbertstatement041420.
3 The term ‘‘commodity broker’’ may refer either
to a futures commission merchant (‘‘FCM’’) or a
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bankruptcies, was finalized in 1983.
Since that time, the commodity broker
bankruptcy process and the state of the
industry have gradually changed. Yet in
the nearly four decades since, Part 190
has never been comprehensively
updated. This regime is intended to
protect customer funds, but having
antiquated rules does not help achieve
that goal.
CFTC staff has accordingly embarked
on a process of updating Part 190 over
the last several years, when a thenhealthy economy made bankruptcies
relatively unlikely. Now that we find
ourselves in the midst of the COVID–19
pandemic and its economic
ramifications, the fruits of our
investment arguably could have not
been better timed. The good news is that
during 2020, U.S. derivatives markets
and their participants have weathered
the volatility associated with the
coronavirus pandemic admirably. But as
I just noted, we cannot know for certain
what the future holds—for bankruptcy
often comes ‘‘gradually and then
derivatives clearing organization (‘‘DCO’’). 11
U.S.C. 101(6).
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Issued in Washington, DC, on December
17, 2020, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
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Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
suddenly.’’ We must therefore be
prepared for all contingencies.
Accordingly, I am pleased to support
today’s final rule to update Part 190 for
the 21st century.4 The final rule is a
product of both hard work by CFTC staff
and Commissioners as well as
contributions from external stakeholders
and subject matter experts, including a
subcommittee of the American Bar
Association. The final rule promotes the
CFTC’s core values in a number of ways,
particularly the values of clarity and
forward thinking. It also furthers the
agency’s strategic goal of regulating our
derivatives markets to promote the
interests of all Americans.5
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Clarity for Customers and Creditors
The final rule serves our core value of
clarity by incorporating key principles
and actual practice as they have evolved
in commodity broker bankruptcies and
related judicial decisions in the years
since 1983.
A new introductory section of the rule
enumerates certain ‘‘core concepts’’ of
commodity broker bankruptcies. This
section is intended to offer a readily
understandable primer on relevant law,
policy, and practical considerations in
this area, thereby providing a common
mental framework for brokers,
customers, bankruptcy trustees, courts,
and the public. Among other things, this
section provides an overview of the
various classes of customer segregated
accounts held by a commodity broker;
the priority of public customers over
insiders; the requirement of pro rata
distribution; and the preference to
transfer rather than liquidate open
positions.
The final rule codifies a number of
approaches and practices that have
proven necessary or desirable in
commodity broker bankruptcies in the
intervening years since 1983. For
example, the final rule authorizes a
bankruptcy trustee to treat a broker’s
customers in the aggregate for certain
purposes, rather than handling each
4 After considering comments that were received
on the original proposal, our Commission
subsequently issued a Supplemental Proposal that
withdrew § 190.14(b)(2) and (3), and proposed other
revisions to § 190.14. See Bankruptcy Regulations,
85 FR 60110 (Sept. 24, 2020) (‘‘Supplemental
Proposal’’). However, in light of comments raised
on the Supplemental Proposal, as well as the
original proposal, our Commission concluded that,
at this point, it should engage in further analysis
and development before proposing this, or any
other, alternative approach. Such further analysis
and development will better enable the CFTC to
propose, in detail, a solution that is effective, and
that mitigates any attendant concerns.
5 See Remarks of CFTC Chairman Heath P.
Tarbert to the 35th Annual FIA Expo 2019 (Oct. 30,
2019), available at https://www.cftc.gov/PressRoom/
SpeechesTestimony/opatarbert2 (outlining the
CFTC’s strategic goals).
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customer’s account on a bespoke basis.
This aggregate treatment has in practice
proven unavoidable in more recent
commodity broker bankruptcies, which
have required disposition of hundreds
of thousands of derivatives contracts—
on behalf of thousands or tens of
thousands of customers—within days or
even hours. By making clear that such
aggregate disposition of accounts is
permissible and may even be more
likely to occur than the alternative, the
final rule provides greater clarity on
potential outcomes for trustees, brokers,
and customers.
For example, the final rule expressly
permits the trustee—following
consultation with CFTC staff—to
determine whether to treat open
positions of public customers in a
designated hedging account as
specifically identifiable property
(requiring the trustee to solicit and
comply with individual customer
instructions), or instead transfer or
‘‘port’’ all such positions to a solvent
commodity broker where possible. This
provision recognizes that requiring the
trustee to identify hedging accounts and
provide account holders the opportunity
to give individual instructions is often
a resource-intensive endeavor, which
could interfere with the trustee’s ability
to act in a timely and effective manner
to protect all the broker’s customers.6
The final rule also includes explicit
rules governing the bankruptcy of a
clearinghouse, otherwise known as a
derivatives clearing organization or
DCO. Since its inception, Part 190 has
contemplated only a ‘‘case-by-case’’
approach with no corresponding rules
to spell out what would happen in the
event of a DCO bankruptcy. While such
a bankruptcy is extremely unlikely, it is
important to provide ex ante clarity to
DCO members and customers as to how
it would be handled. The final rule
favors following the DCO’s existing
default management and recovery and
wind-down rules and procedures, but
gives the trustee discretion to apply
them reasonably and practicably. This
allows the bankruptcy trustee to take
advantage of and adapt an established
‘‘playbook,’’ rather than being forced
either to follow a rigid, ‘‘one-size-fitsall’’ framework or to form a resolution
plan in a matter of hours during the
onset of a crisis. The final rule also gives
legal certainty to DCO actions taken in
accordance with a recovery and winddown plan filed with the CFTC by
6 The final rule also grants the trustee appropriate
discretion in other respects—for example, by
allowing the trustee to modify the customer proof
of claim form as needed for a particular bankruptcy.
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precluding the trustee from voiding any
such action.
I support codifying these and other
practices within our rules in order to
provide greater transparency and
predictability to brokers, customers, and
other key stakeholders regarding
permissible and expected procedures in
a bankruptcy scenario.
Forward Thinking on Future
Insolvencies
The final rule updates a number of
provisions to reflect changes in financial
technology since Part 190 was enacted
37 years ago. The enhanced discretion
discussed above would in many cases
help the trustee to account for the
increase in transaction execution and
processing speed, as well as the
potential for large and unpredictable
market moves given the rise of global
trading and the 24-hour trading cycle. In
addition, the final rule acknowledges
digital assets as a physically deliverable
asset class, in light of the listing of a
number of physically delivered ‘‘virtual
currency’’ derivatives contracts.
The final rule also reflects advances
in communications technology. For
example, under the final rule, notice of
a bankruptcy filing and related filed
documents will be provided to the
CFTC by electronic rather than paper
means. Furthermore, required customer
notice procedures no longer include
publication in a ‘‘newspaper of general
circulation’’ in light of the downward
trend in newspaper readership. The
final rule similarly recognizes changes
from paper-based to electronic recording
of documents of title.
Promoting the Interests of All
Americans
Protection of customer funds is the
lynchpin of the commodity broker
bankruptcy regime of Part 190. The final
rule includes a number of measures to
enhance those protections, including by
buttressing provisions already in place
under existing law and regulation. In
doing so, the final rule seeks to ensure
that the CFTC’s bankruptcy regime
works for the derivatives market
participants it was meant to serve—
particularly public brokerage customers,
with a special emphasis on customers
using derivatives to hedge their
commercial risks.
For example, the final rule reinforces
the bankruptcy priority of public broker
customers over ‘‘non-public’’ customers
(e.g., the broker’s proprietary and
affiliate accounts). It also strengthens
the CFTC’s longstanding position that
shortfalls in segregated customer assets
should be made up from the broker’s
general estate. As a result, our final rule
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makes clear that the CFTC’s bankruptcy
regime is complementary to relatively
recently-enacted customer protection
rules for day-to-day broker operations.7
The final rule also furthers the
preference—consistent with Subchapter
IV of the Bankruptcy Code 8—for
transferring or ‘‘porting’’ customer
positions to a solvent broker, rather than
liquidating those positions. Porting of
positions protects the utility of customer
hedges by avoiding the risk of market
moves between liquidation and reestablishment of the customer’s hedging
position. It also mitigates the risk that
liquidation itself will cause such market
moves. Among other measures, the grant
of trustee discretion as to whether to
treat hedging positions as specifically
identifiable property will serve these
objectives by facilitating porting of such
positions en masse, promptly and
efficiently, along with other customer
property.
Conclusion
While updates to the CFTC’s
bankruptcy rules have been years in the
making, I believe today’s final rule was
well worth the wait. The commodity
broker resolution regime of Part 190 is
respected throughout the world for its
effectiveness and efficiency. In addition,
Part 190 is important to the continued
global competitiveness of American
exchanges, clearinghouses, and market
intermediaries. The final rule further
enhances these features of our regime.
Through its focus on promoting
customer protection, clarity, and
forward thinking, I believe the final rule
will position us well for this decade and
beyond.
Appendix 3—Statement of Support of
Commissioner Brian D. Quintenz
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I am pleased to support today’s final
rule amending the Commission’s
regulations governing the bankruptcy
proceedings of commodity brokers.1
This rulemaking makes the first
comprehensive change to these
regulations since they were first issued
in 1983. I commend both Chairman
Tarbert for his leadership in continuing
the Commission’s rulemaking agenda
and former Chairman Giancarlo for
laying the groundwork for this
important rulemaking when he
7 17 CFR 1.23 (enacted in 2013 and revised in
2014) (requiring an FCM to contribute its own funds
as ‘‘residual interest’’ to top up shortfalls in
customer segregated accounts in the ordinary
course of business).
8 Statutory authority for Part 190 includes
Subchapter IV of Chapter 7 of the Bankruptcy Code.
1 Part 190 of the Commission’s regulations (17
CFR part 190).
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launched the CFTC’s Project KISS
initiative.2
I am pleased that today’s final rule
carefully took into consideration
comments from FCMs, DCOs, asset
managers and other market participants.
I would like to highlight a few aspects
of today’s final rule. The rulemaking
reaffirms the special treatment the U.S.
Bankruptcy Code affords to the
customer account of an insolvent
commodity broker, so that customers’
positions can promptly be transferred.3
The Commission is, for the first time,
issuing rules specific to an insolvent
DCO, which are similar to the rules
applicable to an insolvent FCM. Next,
taking advantage of the Commission’s
experience with a few insolvent FCMs
over the past decades, the final rule
provides deference to the trustee that a
U.S. Bankruptcy Court appoints to
oversee the proceedings of an insolvent
commodity broker. This increased
deference is intended to expedite the
transfer of customer funds. In response
to comments from the asset management
community, the final provisions provide
additional guidance on how a trustee
should balance various interests in
seeking to protect public customers.4 In
light of the Commission’s experience
from the bankruptcy of MF Global in
2011, the new bankruptcy rules
generally treat letters of credit
equivalently to other collateral posted
by customers, so that the pro rata
distribution of customer property in the
event of a shortfall in the customer
account will apply equally to all
collateral. The final rule also reflects
experience from MF Global by dividing
the delivery account into ‘‘physical
delivery’’ and ‘‘cash delivery’’ account
classes. Property other than cash is
generally easier to trace, so it should
have the benefit of a separate account
class. Finally, the final rule’s revised
treatment of the ‘‘delivery account,’’
applicable in the context of physicallysettled futures and cleared swaps, will
apply not only to tangible commodities,
as is currently the case, but also to
digital assets. This amendment will
provide important legal certainty to the
growing exchange-traded market for
cleared, physically-settled, digital asset
derivatives.
I acknowledge that the asset
management community has raised
concerns with certain existing DCO
rules that would be recognized in the
bankruptcy of an FCM or DCO. I would
2 CFTC Requests Public Input on Simplifying
Rules, https://www.cftc.gov/PressRoom/
PressReleases/pr7555-17.
3 11 U.S.C. 761 et seq.
4 § 190.00(c)(3)(i)(C).
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19475
support an on-going dialogue between
the DCOs and their members and
customers on resolution and resiliency
concerns.
Appendix 4—Statement of
Commissioner Rostin Behnam
I respectfully support the Commodity
Futures Trading Commission’s (the
‘‘Commission’’ or ‘‘CFTC’’) final rule
amending Part 190 of its regulations,
which governs bankruptcy proceedings
of commodity brokers. First and
foremost, I want to thank Commission
staff for all of their hard work on the
final rule. This is the first major update
of the CFTC’s existing Part 190 since
1983, when it was originally
implemented by the Commission.1
The final rule is the product of years
of staff analysis and engagement with
market participants, including the Part
190 Subcommittee of the Business Law
Section of the American Bar
Association, which provided a detailed
submission of suggested model Part 190
rules in response to a prior Commission
request for information.2 Several agency
Chairs going back many years deserve
recognition and thanks for pushing to
update Part 190 and starting this
process. Customer protections are at the
heart of the Commodity Exchange Act,
and it is imperative that the
Commission have clear rules that direct
how proceedings occur during a
commodity broker bankruptcy.
The revision is designed to recognize
the many changes in our industry over
the past 37 years. Most importantly, it
is informed by the Commission’s
experience with past bankruptcies.
More recently, the MF Global
bankruptcy in 2011 was the eighth
largest corporate bankruptcy in
American history.3 It gave the
Commission first hand experience with
what worked, what did not, and what
could be improved.
I was a lead advisor during the U.S.
Senate’s investigation of the MF Global
bankruptcy, and during the Senate
investigation, I learned the intricate
contours of Part 190, its relationship to
the Bankruptcy Code, and how the
larger puzzle of creditors, customers,
and equity holders, among others, fits
1 Bankruptcy,
48 FR 8716 (March 1, 1983).
FR 23765 (May 3, 2017). The ABA
Submission can be found at: https://
comments.cftc.gov/PublicComments/
ViewComment.aspx?id=61331&SearchText; the
accompanying cover note (‘‘ABA Cover Note’’) can
be found at: https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=61330&SearchText.
3 John Gapper and Isabella Kaminska, Downfall of
MF Global, Financial Times, Nov. 4, 2011, available
at https://www.ft.com/content/2882d766-06fb-11e190de-00144feabdc0.
2 82
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together. It was during those frenzied
days that I truly appreciated the
regulatory principle that customer
margin is sacrosanct property. Because
of my experience during those few
months, I have made customer
protections an absolute priority in my
time as a Commissioner. Having spoken
with many market participants
throughout the MF Global bankruptcy
proceedings, including those whose
money disappeared in the days
immediately following, customer
protection is my most pressing
responsibility.
Just a few months later in early 2012,
the bankruptcy of Peregrine Financial
Group (‘‘PFG’’), the catastrophic
culmination of a fraudulent scheme by
a futures commission merchant
(‘‘FCM’’) involving over $220M in
customer funds,4 further laid bare the
strengths and weaknesses of the
Commission’s bankruptcy regime.
Important lessons have been learned,
both in terms of what works and what
does not, and I believe today’s final rule
implements the lessons learned in both
of those events, and those that preceded
them.
Many of the changes to Part 190 in
today’s final rule further support
provisions that have worked in prior
bankruptcies. One of the themes of this
refresh is clarity. The goal is to be as
clear as possible about the
Commission’s intentions regarding Part
190 in order to enhance the
understanding of Designated Clearing
Organizations (‘‘DCOs’’), FCMs, their
customers, trustees, and the public at
large. Changes in this final rule will
foster the longstanding and continuing
policy preference for transferring (as
opposed to liquidating) the positions of
public customers—an important
customer protection aimed at preserving
the status quo/asset value. Other
changes further support existing
requirements including that shortfalls in
segregated property should be shored up
from the FCM’s general assets, and that
public customers are favored over nonpublic customers. The new provisions
provide trustees with enhanced
discretion based upon prior positive
experience, and codify practice adopted
in past bankruptcies by requiring FCMs
to notify the Commission of their intent
to file for voluntary bankruptcy.
Other changes address what has not
worked or become outdated. In light of
lessons learned from MF Global, the
Commission is enacting changes to the
treatment of letters of credit as
collateral, both during business as usual
and during bankruptcy, in order to
ensure that customers who post letters
of credit as collateral have the same
proportional loss as customers who post
other types of collateral.
The final rule also addresses a
number of changes that have naturally
occurred in our markets since the
original Part 190 finalization in 1983.
The Commission is promulgating a new
subpart C to part 190, specifically
governing the bankruptcy of a clearing
organization. As DCOs have grown in
importance over time, including being
deemed systemically important by the
Financial Stability Oversight Council
following the financial crisis,5 the
Commission believes that it is
imperative to have a clear plan in place
for exactly how a DCO bankruptcy
would be resolved. The final rule also
addresses changes in technology over
the past 37 years, and the movement
from paper-based to electronic-based
means of communication—a lesson
learned from the PFG bankruptcy.
In many ways, this final rule is
exactly how the rulemaking process
should work. It looks retrospectively at
major relevant events, and applies
important lessons learned regarding
what works in the existing Part 190
rules, what does not, and what can be
improved. But it also looks forward in
a sense, recognizing changes in market
structure and thinking ahead to the
possibility of the bankruptcy of a
clearing organization. This is a stark
contrast to the risk principles final rule
that we consider today. While the
bankruptcy final rule looks back at the
Commission’s past experiences with MF
Global and PFG, the risk principles final
rule seems to ignore past events. While
the bankruptcy final rule looks ahead
and plans for the possibility of
addressing a DCO bankruptcy, the risk
principles final rule ignores future
events such as climate change.
My only concern regarding the
bankruptcy rule, and it is a relatively
small one, is one of timing. The
proposal for this rule was issued this
past April.6 The comment period just
closed on July 13. The Commission then
issued a supplemental notice of
proposed rulemaking in September.7
4 See Press Release Number 6300–12, CFTC,
CFTC Files Complaint Against Peregrine Financial
Group, Inc. and Russell R. Wasendorf, Sr., Alleging
Fraud, Misappropriation of Customer Funds,
Violation of Customer Fund Segregation Laws, and
Making False Statements (July 10, 2012), https://
www.cftc.gov/PressRoom/PressReleases/6300-12.
5 https://www.federalreserve.gov/
paymentsystems/designated_fmu_about.htm.
6 Bankruptcy Regulations, 85 FR 36000 (June 12,
2020). https://www.cftc.gov/LawRegulation/
FederalRegister/proposedrules/2020-08482.html.
7 Bankruptcy Regulations, 85 FR 60110
(September 24, 2020). https://www.cftc.gov/
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18:22 Apr 12, 2021
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Frm 00154
Fmt 4701
Sfmt 4700
That comment period ended October 26.
Particularly for a rule of this size and
intricacy, the time that staff had to
review and analyze the comment letters
and draft the final rule and preamble
has been incredibly short. Staff has
worked tirelessly on this rule to get to
the finish line. However, I think both
the Commission and the public might
well have benefited from more time for
review and reflection before issuing
such an important rule.
On that note, I would like to close by
again thanking staff for all of their hard
work in producing this refresh of the
Commission’s part 190 rules to provide
important customer protections.
Appendix 5—Statement of
Commissioner Dan M. Berkovitz
I support the final rule amending the
Commission’s part 190 bankruptcy
regulations. The amendments
comprehensively update these
regulations to address the increased size
and speed of our markets and
incorporate ‘‘lessons learned’’ from
futures commission merchant (FCM)
bankruptcies that occurred since the
regulations were first adopted in 1983.
The new derivatives clearing
organization (DCO) bankruptcy
regulations provide a framework to help
market participants be prepared for such
an event. While FCM bankruptcies are
infrequent, and a registered DCO has
never gone bankrupt, any such event
could have significant financial impacts
on many market participants, which, in
turn, could have systemic implications.
Improving the overall effectiveness and
efficiency of the bankruptcy process
fosters systemic stability and helps to
better protect, preserve, and quickly
return customer assets.
The Bankruptcy Code provides
express preferences for positions and
property of customers of an FCM or
DCO debtor so that the customers and
their counterparties can be assured that
those positions and property will not be
included in the debtor’s general assets
or clawed back post-filing. As a result,
those positions and property (e.g.,
customer margin) can be transferred to
another FCM or liquidated for value
quickly and returned to customers
following the filing of the bankruptcy.
In this way, an FCM bankruptcy can be
resolved expeditiously, greatly reducing
any uncertainty as to the treatment of
positions and property held in the name
of the debtor.1 The protection of
LawRegulation/FederalRegister/proposedrules/
2020-21005.html.
1 The bankruptcy trustee is directed to ‘‘return
promptly to a customer any specifically identifiable
security, property, or commodity contract to which
such customer is entitled, or shall transfer, on such
E:\FR\FM\13APR2.SGM
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Federal Register / Vol. 86, No. 69 / Tuesday, April 13, 2021 / Rules and Regulations
customer assets and positions furthers
market stability by reducing the need for
customers to rush to liquidate or
transfer the positions themselves prior
to the bankruptcy to avoid such assets
being entangled in the debtor’s general
assets. I am voting for the final rule
because it significantly improves the
likelihood of achieving these objectives.
As a general matter, commenters
agreed that, overall, the final rule is a
significant improvement. As described
in the final rule release and my
statement on the proposed rule, the
revised regulations further solidify and
implement important principles such as
the preference for public customers, pro
rata distributions within account
classes, and prompt return of assets. The
final rule does this not only through
general statements, but also in specific
procedures established in the rule.
Commenters raised a number of
specific concerns regarding the final
rule. As would be expected, these
concerns were often (though not always)
grouped by the specific interests of
different types of market participants in
the event of a bankruptcy of an FCM or
DCO.
Bankruptcy occurs because there are
not enough assets to cover a debtor’s
liabilities. In resolving the claims on the
debtor’s assets during a bankruptcy
proceeding, the allocation of the
shortfall must entail a balancing of
equities that, unfortunately, most often
leaves one or more creditors and other
interested parties (e.g., shareholders)
with less than they expected to have if
a bankruptcy had not occurred. As such,
different creditor groups may have
competing interests in the preferences
jbell on DSKJLSW7X2PROD with RULES2
customer’s behalf, such security, property, or
commodity contract to a commodity broker that is
not a debtor’’ subject to CFTC regulations. 11 U.S.C.
766(c). Section 764(a) of the Bankruptcy Code
provides that ‘‘any transfer by the debtor of
property that, but for such transfer, would have
been customer property, may be avoided by the
[bankruptcy] trustee . . . .’’ 11 U.S.C. 764(a).
VerDate Sep<11>2014
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and processes established in the
Commission’s bankruptcy regulations.
This reality is reflected in the
thoughtful comments we received in
response to the proposed rule. The final
rule release addresses these comments
in turn, discussing the pros and cons of
the changes requested. In a number of
instances, the final rule has been
modified to address concerns raised
where such modifications better achieve
the stated principles of the regulations.
For other concerns raised, as explained
in the release, the balancing of the
equities meant that the overall outcome
of the bankruptcy proceeding would be
better served by maintaining the rule as
proposed. Particularly with respect to
the bankruptcy rules, the fact that
nobody gets everything they want likely
means that the rule, for the most part,
is well-balanced.
I would like to take this opportunity
to address two particular areas of
comments. Entities that represent
certain ‘‘public customers’’ expressed
concern regarding the greater
‘‘reasonable’’ discretion provided to
bankruptcy trustees, which is intended
to facilitate a speedier resolution and
return of value to customers generally.
These commenters are concerned that
some customers could receive less than
they could otherwise if the trustee
makes poor choices when exercising its
discretion or does not implement
specific customer instructions. This
concern is partially addressed with the
addition of § 190.00(c)(3)(i)(C) to clarify
how a trustee shall exercise its
discretion to ‘‘best achieve the
overarching goal of protecting public
customers as a class by enhancing
recoveries for, and mitigating
disruptions to, public customers as a
class.’’ Otherwise, as explained in the
preamble, the discretion granted to the
trustee is appropriate when weighing
the benefits of prompt resolution of the
bankruptcy with the other goals of the
regulations.
PO 00000
Frm 00155
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Sfmt 9990
19477
The Commission also received
numerous comments on the proposed
DCO bankruptcy regulations. This is not
surprising given that these regulations
create, for the first time, a regulatory
scheme for DCO bankruptcies. Many
commenters expressed concerns
regarding the direction in § 190.15 to the
trustee to, within reasonable discretion,
follow the debtor DCO’s recovery and
wind-down plans. The final rule, while
largely leaving the proposed provision
in place, did modify the rule text to
emphasize that the trustee must act in
a manner ‘‘consistent with the
protection of customers.’’ In addition,
the preamble notes that some of the
concerns raised in this context are part
of a broader discussion in the
derivatives industry regarding the
involvement of DCO members and
customers in the governance,
rulemaking, and structuring of the
DCOs, and that the Commission
continues to review these matters. I look
forward to engaging in further
discussions on these issues.
I commend the Commission staff,
particularly Bob Wasserman, for the
thoughtful effort that has clearly been
put into the final rule release. The
Commission staff has done an
exemplary job of reviewing the
comments received, addressing those
concerns, and drafting the preamble in
very understandable language. I also
appreciate Commission staff’s
engagement with my office on a number
of areas in the final rule.
The final rule modernizes the
Commission’s bankruptcy regulations
and furthers the general principles these
regulations serve. Public customers and
markets will be better protected in the
event of an FCM or DCO bankruptcy.
For these reasons, I support the final
rule.
[FR Doc. 2020–28300 Filed 4–12–21; 8:45 am]
BILLING CODE 6351–01–P
E:\FR\FM\13APR2.SGM
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Agencies
[Federal Register Volume 86, Number 69 (Tuesday, April 13, 2021)]
[Rules and Regulations]
[Pages 19324-19477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28300]
[[Page 19323]]
Vol. 86
Tuesday,
No. 69
April 13, 2021
Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 4, 41, and 190
Bankruptcy Regulations; Final Rule
Federal Register / Vol. 86 , No. 69 / Tuesday, April 13, 2021 / Rules
and Regulations
[[Page 19324]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 4, 41, and 190
RIN 3038-AE67
Bankruptcy Regulations
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')
is amending its regulations governing bankruptcy proceedings of
commodity brokers. The amendments are meant comprehensively to update
those regulations to reflect current market practices and lessons
learned from past commodity broker bankruptcies.
DATES:
Effective date: The effective date for this final rule is May 13,
2021.
Compliance date: The compliance date for Sec. 1.43 is April 13,
2022, for all letters of credit accepted, and customer agreements
entered into, by a futures commission merchant prior to May 13, 2021.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel and
Senior Advisor, 202-418-5092, [email protected], Ward P. Griffin,
Senior Special Counsel, 202-418-5425, [email protected], Jocelyn
Partridge, 202-418-5926, [email protected], Abigail S. Knauff, 202-
418-5123, [email protected], Division of Clearing and Risk; Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Background of the Notice of Proposed Rulemaking
B. Major Themes in the Revisions to Part 190
II. Finalized Regulations
A. Subpart A--General Provisions
1. Regulation Sec. 190.00: Statutory Authority, Organization,
Core Concepts, Scope, and Construction
2. Regulation Sec. 190.01: Definitions
3. Regulation Sec. 190.02: General
B. Subpart B--Futures Commission Merchant (FCM) as Debtor
1. Regulation Sec. 190.03: Notices and Proofs of Claims
2. Regulation Sec. 190.04: Operation of the Debtor's Estate--
Customer Property
3. Regulation Sec. 190.05: Operation of the Debtor's Estate--
General
4. Regulation Sec. 190.06: Making and Taking Delivery Under
Commodity Contracts
5. Regulation Sec. 190.07: Transfers
6. Regulation Sec. 190.08: Calculation of Funded Net Equity
7. Regulation Sec. 190.09: Allocation of Property and Allowance
of Claims
8. Regulation Sec. 190.10: Provisions Applicable to Futures
Commission Merchants During Business as Usual
C. Subpart C--Clearing Organization as Debtor
1. Regulation Sec. 190.11: Scope and Purpose of Subpart C
2. Regulation Sec. 190.12: Required Reports and Records
3. Regulation Sec. 190.13: Prohibition on Avoidance of
Transfers
4. Regulation Sec. 190.14: Operation of the Estate of the
Debtor Subsequent to the Filing Date
5. Regulation Sec. 190.15: Recovery and Wind-Down Plans;
Default Rules and Procedures
6. Regulation Sec. 190.16: Delivery
7. Regulation Sec. 190.17: Calculation of Net Equity
8. Regulation Sec. 190.18: Treatment of Property
9. Regulation Sec. 190.19: Support of Daily Settlement
D. Appendix A Forms
E. Appendix B Forms
F. Technical Corrections to Other Parts
1. Part 1
2. Part 4
3. Part 41
G. Additional Comments
H. Supplemental Proposal
III. Cost-Benefit Considerations
A. Introduction
1. Baseline
2. Overarching Concepts
a. Changes to Structure of Industry
b. Trustee Discretion
c. Cost Effectiveness and Promptness Versus Precision
d. Unique Nature of Bankruptcy Events
e. Administrative Costs Are Costs to the Estate, and Often to
the Customers
f. Preference for Public Customers Over Non-Public Customers and
for Both Over General Creditors
B. Subpart A--General Provisions
1. Regulation Sec. 190.00: Statutory Authority, Organization,
Core Concepts, Scope, and Construction: Consideration of Costs and
Benefits
2. Regulation Sec. 190.01: Definitions: Consideration of Costs
and Benefits
3. Regulation Sec. 190.02: General: Consideration of Costs and
Benefits
4. Section 15(a) Factors--Subpart A
C. Subpart B--Futures Commission Merchant as Debtor
1. Regulation Sec. 190.03: Notices and Proofs of Claims:
Consideration of Costs and Benefits
2. Regulation Sec. 190.04: Operation of the Debtor's Estate--
Customer Property: Consideration of Costs and Benefits
3. Regulation Sec. 190.05: Operation of the Debtor's Estate--
General: Consideration of Costs and Benefits
4. Regulation Sec. 190.06: Making and Taking Delivery Under
Commodity Contracts: Consideration of Costs and Benefits
5. Regulation Sec. 190.07: Transfers: Consideration of Costs
and Benefits
6. Regulation Sec. 190.08: Calculation of Funded Net Equity:
Consideration of Costs and Benefits
7. Regulation Sec. 190.09: Allocation of Property and Allowance
of Claims: Consideration of Costs and Benefits
8. Regulation Sec. 190.10: Provisions Applicable to Futures
Commission Merchants During Business as Usual: Consideration of
Costs and Benefits
9. Section 15(a) Factors--Subpart B
D. Subpart C--Clearing Organization as Debtor
1. Regulation Sec. 190.11: Scope and Purpose of Subpart C:
Consideration of Costs and Benefits
2. Regulation Sec. 190.12: Required Reports and Records:
Consideration of Costs and Benefits
3. Regulation Sec. 190.13: Prohibitions on Avoidance of
Transfers: Consideration of Costs and Benefits
4. Regulation Sec. 190.14: Operation of the Estate of the
Debtor Subsequent to the Filing Date: Consideration of Costs and
Benefits
5. Regulation Sec. 190.15: Recovery and Wind-Down Plans;
Default Rules and Procedures: Consideration of Costs and Benefits
6. Regulation Sec. 190.16: Delivery: Consideration of Costs and
Benefits
7. Regulation Sec. 190.17: Calculation of Net Equity:
Consideration of Costs and Benefits
8. Regulation Sec. 190.18: Treatment of Property: Consideration
of Costs and Benefits
9. Regulation Sec. 190.19: Support of Daily Settlement:
Consideration of Costs and Benefits
10. Section 15(a) Factors--Subpart C
E. Changes to Appendices A and B
F. Technical Corrections to Parts 1, 4, and 41
IV. Related Matters
A. Antitrust Considerations
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
1. Reporting Requirements in an FCM Bankruptcy
2. Recordkeeping Requirements in an FCM Bankruptcy
3. Third-Party Disclosure Requirements Applicable to a Single
Respondent in an FCM Bankruptcy
4. Reporting Requirements in a Derivatives Clearing Organization
(DCO) Bankruptcy
5. Recordkeeping Requirements in a DCO Bankruptcy
6. Third-Party Disclosure Requirements Applicable to a Single
Respondent in a DCO Bankruptcy
7. Third-Party Disclosure Requirements Applicable to Multiple
Respondents During Business as Usual
I. Background
A. Background of the Notice of Proposed Rulemaking
The basic structure of the Commission's bankruptcy regulations,
part 190 of title 17 of the Code of Federal Regulations, was proposed
in 1981 and finalized in 1983. In April of
[[Page 19325]]
this year, the Commission proposed a comprehensive revision of part 190
(the ``Proposal''),\1\ and in September of this year, the Commission
issued a supplemental proposal (the ``Supplemental Proposal'') \2\
addressing a particular issue involving the interaction between
bankruptcy and resolution of a clearing organization pursuant to Title
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act \3\
(hereinafter, ``Title II'' and ``Dodd-Frank'').
---------------------------------------------------------------------------
\1\ 85 FR 36000 (June 12, 2020).
\2\ 85 FR 60110 (Sept. 24, 2020).
\3\ Public Law 111-203 (July 21, 2010).
---------------------------------------------------------------------------
The Commission is revising part 190 comprehensively in light of
several major changes to the industry over the 37 years since part 190
was first finalized. These changes include exponential growth in the
speed of transactions and trade processing, important lessons learned
over prior bankruptcies, and the increased importance of derivatives
clearing organizations (``DCOs'') to the financial system.
In promulgating these rules, the Commission is exercising its broad
power under the Commodity Exchange Act (``CEA'' or ``Act'') to make
regulations with respect to commodity broker debtors. Specifically,
section 20(a) states that notwithstanding title 11, the Commission may
provide, with respect to a commodity broker that is a debtor under
chapter 7 of title 11, by rule or regulation (1) that certain cash,
securities, other property, or commodity contracts are to be included
in or excluded from customer property or member property; (2) that
certain cash, securities, other property, or commodity contracts are to
be specifically identifiable to a particular customer in a specific
capacity; (3) the method by which the business of such commodity broker
is to be conducted or liquidated after the date of the filing of the
petition under such chapter, including the payment and allocation of
margin with respect to commodity contracts not specifically
identifiable to a particular customer pending their orderly
liquidation; (4) any persons to which customer property and commodity
contracts may be transferred under section 766 of title 11; and (5) how
the net equity of a customer is to be determined.\4\
---------------------------------------------------------------------------
\4\ See CEA section 20(a), 7 U.S.C. 24(a).
---------------------------------------------------------------------------
In developing this rulemaking, the Commission benefited from
outside contributions. In particular, the Proposal benefited from a
thoughtful and detailed model set of part 190 rules submitted by the
Part 190 Subcommittee of the Business Law Section of the American Bar
Association (``ABA Subcommittee'').\5\ In addition, and as discussed
further below, the Commission benefited from thoughtful, analytical,
and detailed public comments submitted in response to the Proposal and
Supplemental Proposal.
---------------------------------------------------------------------------
\5\ The submission by the ABA Subcommittee cautioned that
``[t]he views expressed in this letter, and the proposed Model Part
190 Rules, are presented on behalf of the [ABA Subcommittee]. They
have not been approved by the House of Delegates or Board of
Governors of the ABA and, accordingly, should not be construed as
representing the policy of the ABA. In addition, they do not
represent the position of the ABA Business Law Section, nor do they
necessarily reflect the views of all members of the Committee.''
---------------------------------------------------------------------------
B. Major Themes in the Revisions to Part 190
The major themes in the revisions to part 190 include the
following:
(1) The Commission is adding Sec. 190.00, which sets out the
statutory authority, organization, core concepts, scope, and rules of
construction for part 190. More generally, this section sets out, after
notice and comment rulemaking, the Commission's thinking and intent
regarding part 190 in order to benefit and to enhance the understanding
of DCOs, FCMs, their customers, trustees,\6\ and the public at large.
---------------------------------------------------------------------------
\6\ Including bankruptcy and SIPA trustees, as well as the FDIC
in its role as a receiver.
---------------------------------------------------------------------------
(2) Some of the provisions support the implementation of the
requirements, established consistent with section 4d of the CEA, that
shortfalls in segregated property should be made up from the FCM's
general assets, while others further the preferences, arising from both
title 11 of the United States Code (i.e., the ``Bankruptcy Code''),
section 766(h), and Commission policy, that with respect to customer
property, public customers are favored over non-public customers, and
that public customers are entitled inter se to a pro rata distribution
based on their respective claims.
(3) Other provisions foster the longstanding and continuing policy
preference for transferring (as opposed to liquidating) positions of
public customers and those customers' proportionate share of associated
collateral.\7\
---------------------------------------------------------------------------
\7\ This policy preference is manifest in section 764(b) of the
Bankruptcy Code, 11 U.S.C. 764(b) (protecting from avoidance
transfers approved by the Commission up to seven days after the
order for relief), and in current Sec. 190.02(e).
---------------------------------------------------------------------------
(4) The Commission is promulgating a new subpart C to part 190,
governing the bankruptcy of a clearing organization. In doing so, the
Commission is establishing ex ante the approach to be taken in
addressing such a bankruptcy, in order to foster prompt action in the
event such a bankruptcy occurs, and in order to establish a more clear
counterfactual (i.e., ``what would creditors receive in a liquidation
in bankruptcy?'') in the event of a resolution of a clearing
organization pursuant to Title II of Dodd-Frank.\8\ The Commission's
approach toward a DCO bankruptcy is characterized by three overarching
concepts:
---------------------------------------------------------------------------
\8\ Section 210(d)(2), 12 U.S.C. 5390(d)(2), provides that the
maximum liability of the FDIC, acting as a receiver for a covered
financial company in a resolution under Title II, is the amount the
claimant would have received if the FDIC had not been appointed
receiver and the covered financial company had instead been
liquidated under chapter 7 of the Bankruptcy Code. Thus, in
developing resolution strategies for a DCO while mitigating claims
against the FDIC as receiver, it is important to understand what
would happen if the DCO was instead liquidated pursuant to chapter 7
of the Bankruptcy Code (and this part 190), and such a liquidation
is the counterfactual to resolution of that DCO under Title II.
---------------------------------------------------------------------------
a. First, the trustee should follow, to the extent practicable and
appropriate, the DCO's pre-existing default management rules and
procedures and recovery and wind-down plans that have been submitted to
the Commission. These rules, procedures, and plans will, in most
cases,\9\ have been developed pursuant to the Commission's regulations
in part 39, and subject to staff oversight. This approach relieves the
trustee of the burden of developing, in the moment, models to address
an extraordinarily complex situation. It would also enhance the clarity
of the counterfactual for purposes of resolution under Title II.
However, as discussed further below, such plans are not rigid formulae.
Moreover, the Commission's approach gives the trustee discretion in
following those plans. Accordingly, the approach seeks to balance
advance planning with flexibility to tailor the implementation to the
specific circumstances.
---------------------------------------------------------------------------
\9\ Only those DCOs that are subject to subpart C of part 39
(i.e., those that have been designated as systemically important by
the Financial Stability Oversight Council (FSOC) or that have
elected to be subject to subpart C of part 39) are subject to Sec.
39.35 (default rules and procedures) and Sec. 39.39 (recovery and
wind-down plans).
---------------------------------------------------------------------------
b. Second, resources that are intended to flow through to members
as part of daily settlement (including both daily variation payments
and default resources) are devoted to that purpose, rather than to the
general estate.\10\
---------------------------------------------------------------------------
\10\ See generally Sec. 190.19.
---------------------------------------------------------------------------
c. Third, other provisions draw, with appropriate adaptations, from
provisions applicable to FCMs.\11\
---------------------------------------------------------------------------
\11\ See, e.g., Sec. Sec. 190.16, 190.17(c).
---------------------------------------------------------------------------
(5) The Commission is noting the applicability of part 190 in the
context
[[Page 19326]]
of proceedings under the Securities Investors Protection Act (``SIPA'')
in the case of FCMs subject to a SIPA proceeding,\12\ and Title II of
Dodd-Frank in the case of a commodity broker where the Federal Deposit
Insurance Corporation (``FDIC'') is acting as a receiver.
---------------------------------------------------------------------------
\12\ Those would be FCMs that are also registered as broker-
dealers with the Securities and Exchange Commission. See generally
SIPA, 15 U.S.C. 78aaa et seq.
---------------------------------------------------------------------------
(6) The Commission is enacting changes to the treatment of letters
of credit as collateral, both during business as usual and during
bankruptcy, in order to ensure that, consistent with the pro rata
distribution principle, customers who post letters of credit as
collateral suffer the same proportional loss as customers who post
other types of collateral.
(7) The Commission is granting trustees enhanced discretion, based
on both practical necessity and positive experience.
a. Recent commodity broker bankruptcies have involved many
thousands of customers, with as many as hundreds of thousands of
commodity contracts. Trustees must make decisions as to how to handle
such customers and contracts in the days--in some cases, the hours--
after being appointed. Moreover, each commodity broker bankruptcy has
unique characteristics, and bankruptcy trustees need to adapt
correspondingly quickly to those unique characteristics.
i. In order to foster the ability of the trustee to operate
effectively, some of the changes would permit the trustee enhanced
discretion generally.
ii. Others, recognizing the difficulty in treating large numbers of
public customers on a bespoke basis, would permit the trustee to treat
public customers on an aggregate basis. These changes represent a move
from a model where the trustee receives and complies with instructions
from individual public customers, to a model--reflecting actual
practice in commodity broker bankruptcies in recent decades--where the
trustee transfers as many open commodity contracts as possible on an
omnibus basis.
b. These grants of discretion are also supported by the
Commission's positive experience working in cooperation and
consultation with bankruptcy and SIPA trustees.
c. On a related note, and as discussed further as the third
overarching concept in the section below on cost-benefit
considerations,\13\ part 190 favors cost effectiveness and promptness
over precision in certain respects, particularly with respect to the
concept of pro rata treatment. Following the policy choice made by
Congress in section 766(h) of the Bankruptcy Code, the Commission's
policy is that it is more important to be cost effective and prompt in
the distribution of customer property (i.e., in terms of being able to
treat customers as part of a class) than it is to value each customer's
entitlements on an individual basis. The Commission believes that this
approach would lead to (1) in general, a faster administration of the
proceeding, (2) customers receiving their share of the debtor's
customer property more quickly, and (3) a decrease in administrative
costs (and thus, in case of a shortfall in customer property, a greater
return to customers).
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\13\ See the overarching concept discussed in section III.A.2.c
below.
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(8) Many of the changes are intended to update part 190 in light of
changes to the regulatory framework over the past three decades,
including cross-references to other Commission regulations. Some of
these codify actual practice in prior bankruptcies, such as a
requirement that an FCM notify the Commission of its imminent intention
to file for voluntary bankruptcy. In another case, the Commission is
addressing for the first time the interaction between part 190 and
recent revisions to the Commission's customer protection rules.\14\
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\14\ 78 FR 68506 (Nov. 14, 2013). This refers to Sec. 190.05(f)
in section II.B.3 below.
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(9) Other changes follow from changes to the technological
ecosystem, in particular changes from paper-based to electronic-based
means of communication and recording, (for example, the use of
communication to customers' electronic addresses rather than by paper
mail, as well as the use of websites as a means for the trustee to
communicate with customers on a regular basis). The proposal would also
recognize the change from paper-based to electronic recording of
``documents of title.'' Many of these changes also recognize the actual
practice in prior bankruptcies.
(10) Finally, many of the changes are intended to clarify language
in existing regulations, without any intent to change substantive
results. While some of these changes will, as discussed below, address
ambiguities that have complicated past bankruptcies, this comprehensive
revision of part 190 has also provided opportunities to clarify
language in order to avoid future ambiguities, and to add provisions to
address circumstances that have not yet arisen, in order to accomplish
better and more reliably the goals of promptly and cost-effectively
resolving commodity broker bankruptcies while mitigating systemic risk
and protecting the commodity broker's customers.
The Commission invited comments on all aspects of the proposed
rulemaking and received a total of 16 substantive comment letters in
response.\15\ The comments generally supported the adoption of
revisions to part 190, though several provided suggestions as to
particular elements of the proposal that should be modified, clarified,
deleted, or otherwise improved. The Commission has adopted many, though
not all, of these suggestions, and in some cases has sought to address
the concerns raised through alternative drafting.\16\
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\15\ The Commission received comment letters submitted by the
following: American Council of Life Insurers (ACLI); Better Markets,
Inc. (Better Markets); Cboe Global Markets, Inc. (CBOE); CME Group
Inc. (CME); Commodity Markets Council (CMC); Futures Industry
Association (FIA); Investment Company Institute (ICI);
Intercontinental Exchange Inc. (ICE); International Swaps and
Derivatives, Inc. (ISDA); LCH Group (LCH); National Grain and Feed
Association (NGFA); Options Clearing Corporation (OCC); Part 190
Subcommittee of the Business Law Section of the American Bar
Association (ABA Subcommittee); Securities Industry and Financial
Markets Asset Management Group and Managed Funds Association (SIFMA
AMG/MFA);); Kathryn Trkla; Geoffrey Goodman; and Vincent Lazar, as
individuals (Subcommittee Members), and Vanguard Group, Inc.
(Vanguard).
\16\ The Commission also issued the Supplemental Proposal, which
withdrew proposed Sec. 190.14(b)(2) and (3), and proposed an
alternative. The Commission received 5 substantive comment letters
in response, each of which was from an entity that had also
submitted a comment letter on the Proposal. For the reasons
discussed in section II.H below, the Commission is not adopting the
Supplemental Proposal.
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II. Finalized Regulations
In the discussion below, the Commission highlights topics of
interest to commenters and discusses comment letters that are
representative of the views expressed on those topics. The discussion
does not explicitly respond to every comment submitted; rather, it
addresses important issues raised by the proposed rulemaking and
analyzes those issues in the context of specific comments.
A. Subpart A--General Provisions \17\
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\17\ The Commission is adopting the proposed technical
corrections and updates to parts 1, 4, and 41, which are discussed
in section II.F. below. Moreover, as discussed in section II.B.8,
parts of proposed Sec. 190.10 are being adopted, but codified in
part 1.
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The Commission is adopting as subpart A (Sec. Sec. 190.00-190.02)
general provisions to address both debtors that are both FCMs and
debtors that are DCOs.
[[Page 19327]]
1. Regulation Sec. 190.00: Statutory Authority, Organization, Core
Concepts, Scope, and Construction
The Commission is adopting Sec. 190.00 as proposed with the
addition of Sec. 190.00(c)(3)(i)(C) and the modification to Sec.
190.00(d)(3)(v), as set forth below. The Commission is adopting Sec.
190.00 to set forth general provisions that state facts and concepts
that exist in the Commission's bankruptcy regulations. It is applicable
to all of part 190. The Commission's intent is to assist trustees,
bankruptcy courts, customers, clearing members, clearing organizations,
and other interested parties in understanding the Commission's
rationale for, and intent in promulgating, the specific provisions of
part 190. The Commission also believes that the regulation may be
particularly useful in a time of crisis for those individuals who may
not have extensive experience with the CEA or Commission regulations.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.00. The Commission also raised specific questions as
to whether a regulation setting forth core concepts would be useful;
whether the core concepts were under or over inclusive; and whether the
definitions and discussions for each core concept would be helpful. The
Commission received several comments expressing support for various
aspects of proposed Sec. 190.00, including comments from SIFMA AMG/
MFA, CME, and the ABA Subcommittee. CME noted in particular that it
believed that the regulation ``may prove particularly useful to a
trustee who has little experience with the CEA or the Commission's
customer funds segregation rules, as they try to get `up to speed' in
the critical early hours and days following the trustee's appointment
when the trustee is expected to act quickly on various matters.''
The Commission is adopting Sec. 190.00(a) to set forth the
Commission's statutory authority to adopt the proposed part 190
regulations under section 8a(5) of the CEA, which empowers the
Commission to make and promulgate such rules and regulations as are
necessary to effectuate any of the provisions or to accomplish any of
the purposes of the CEA, and section 20 of the CEA, which provides that
the Commission may, notwithstanding the Bankruptcy Code, adopt certain
rules or regulations governing a proceeding involving a commodity
broker that is a debtor under subchapter IV of chapter 7 of the
Bankruptcy Code. The Commission received comments from CME and the ABA
Subcommittee specifically supporting the inclusion of an explanation of
the Commission's authority to adopt the part 190 regulations in Sec.
190.00.
The Commission is adopting Sec. 190.00(b) to explain that the part
190 regulations are organized into three subparts. Subpart A contains
general provisions applicable in all cases. Subpart B contains
provisions that apply when the debtor is an FCM, the definition of
which includes acting as a foreign FCM.\18\ Subpart C contains
provisions that apply when the debtor is a DCO, as defined by the CEA.
The Commission received comments from the ABA Subcommittee, CME, and
ICI in support of the reorganization of part 190.
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\18\ See CEA section 1a(28), 7 U.S.C. 1a(28). The definition of
foreign FCM involves soliciting or accepting orders for the purchase
or sale of a commodity for future delivery executed on a foreign
board of trade, or by accepting property or extending credit to
margin, guarantee or secure any trade or contract that results from
such a solicitation or acceptance. See section 761(12) of the
Bankruptcy Code, 11 U.S.C. 761(12).
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The Commission is adopting Sec. 190.00(c) to set forth the core
concepts \19\ of part 190 that are central to understanding how a
commodity broker bankruptcy works. These include concepts related to
commodity brokers and commodity contracts, account classes, public
customers and non-public customers, Commission segregation
requirements, member property,\20\ porting of public customer commodity
contract positions, pro rata distribution, and deliveries.
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\19\ The Commission is using to use the term ``core concepts''
to avoid confusion with the core principles applicable to registered
entities. Cf. CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2).
\20\ ``Member property'' is defined in Sec. 190.01 and will be
used to identify cash, securities, or property available to pay the
net equity claims of clearing members based on their house account
at the clearing organization. Cf. 11 U.S.C. 761(16).
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The Commission is adopting Sec. 190.00(c)(1) to explain that
subchapter IV of chapter 7 of the Bankruptcy Code applies to a debtor
that is a ``commodity broker,'' the definition of which requires a
``customer.'' \21\ Section 190.00(c)(1) states that the regulations in
part 190 apply to commodity brokers that are FCMs as defined by the
Act, or DCOs as defined by the Act.
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\21\ See 11 U.S.C. 101(6) (definition of ``commodity broker''),
761(9) (definition of ``customer'' referred to in 101(6)).
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The Commission is adopting Sec. 190.00(c)(2) to explain that the
CEA and Commission regulations provide separate treatment and
protections for different types of cleared commodity contracts or
account classes. The four account classes include the (domestic)
futures account class (including options on futures),\22\ the foreign
futures account class (including options on foreign futures),\23\ the
cleared swaps account class for swaps cleared by a registered DCO
(including cleared options other than options on futures or foreign
futures),\24\ and the delivery account class for property held in an
account designated as a delivery account. Delivery accounts are used
for effecting delivery under commodity contracts that provide for
settlement via delivery of the underlying when a commodity contract is
held to expiration or, in the case of an option on a commodity, is
exercised.\25\
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\22\ This corresponds to segregation pursuant to section 4d(a)
of the CEA, 7 U.S.C. 6d(a).
\23\ This corresponds to segregation pursuant to Sec. 30.7
(enacted pursuant to section 4(b)(2)(A) of the CEA, 7 U.S.C.
6(b)(2)(A).
\24\ This corresponds to segregation pursuant to section 4d(f)
of the CEA, 7 U.S.C. 6d(f).
\25\ Delivery accounts are discussed further below in, e.g.,
Sec. Sec. 190.00(c)(6), 190.01 (definition of delivery account,
cash delivery property, physical delivery property) and 190.06.
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The Commission is adopting Sec. 190.00(c)(3)(i) to prescribe the
separate treatment of ``public customers'' and ``non-public
customers,'' as defined in Sec. 190.01, within each account class in
the event of a proceeding in which the debtor is an FCM. It explains
that, in a bankruptcy, public customers are generally entitled to a
priority distribution of cash, securities, or other customer property
over ``non-public customers,'' and both are given a priority over all
other claimants (except for claims relating to the administration of
customer property) pursuant to section 766(h) of the Bankruptcy
Code.\26\ The Commission is adopting Sec. 190.00(c)(3)(ii) to address
the division of customer property and member property in proceedings in
which the debtor is a clearing organization. In such a proceeding,
customer property consists of member property, which is distributed to
pay member claims based on members' house accounts, and
[[Page 19328]]
customer property other than member property, which is reserved for
payment of claims for the benefit of members' public customers. The
Commission is adopting Sec. 190.00(c)(3)(iii) to address the
preferential assignment of property among customer classes and account
classes in clearing organization bankruptcies. Certain customer
property, as specified in Sec. 190.18(c), will be preferentially
assigned to ``customer property other than member property'' (i.e.,
property for the public customers of members) instead of ``member
property'' to the extent that there is a shortfall in funded balances
for members' public customer claims. To the extent that there are
excess funded balances for members' claims in any customer class/
account class combination, that excess will also be assigned
preferentially to ``customer property other than member property'' for
other account classes to the extent of any shortfall in funded balances
for members' public customer claims in such account classes. Where
property will be assigned to a particular customer class with more than
one account class, it will be assigned on a least funded to most funded
basis among the account classes.
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\26\ Section 766(h) of the Bankruptcy Code explicitly states
that the trustee shall distribute property ratably to customers in
priority to all other claims, except claims that are attributable to
the administration of customer property. Notwithstanding any other
provision of this subsection, a customer net equity claim based on a
proprietary account may not be paid either in whole or in part,
directly or indirectly, out of customer property unless all other
customer net equity claims have been paid in full. Thus, all
customer property will be allocated to public customers so long as
the funded balance in any account class for public customers is less
than one hundred percent of public customer net equity claims. Once
all account classes for public customers are fully funded (i.e., at
one hundred percent of net equity claims), any excess will be
allocated to non-public customers' net equity claims until all of
those are fully funded.
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The Commission is adopting Sec. 190.00(c)(4) to explain that, in a
proceeding in which the debtor is an FCM, part 190 details the policy
preference for transferring to another FCM (commonly known as
``porting''), the open commodity contract positions of the debtor's
customers along with all or a portion of such customers' account
equity.\27\
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\27\ Transfer or porting of customer positions mitigates risks
to both the customers of the debtor FCM and to the markets.
Specifically, porting (rather than the alternative, liquidation) of
customer positions protects customers' hedges from changes in value
between the time they are liquidated and the time, if any, that the
customer may be able to re-establish them (and thus mitigates the
market risk that some customers use the futures markets to
counteract), and similarly protects customers' directional
positions. Moreover, not all customers may be able to re-establish
positions with the same speed--in particular, smaller customers may
be subject to longer delays in re-establishing their positions. In
addition, liquidation of an FCM's book of positions can increase
volatility in the markets, to the detriment of all market
participants (and also contribute to making it more expensive for
customers to re-establish their hedges and other positions).
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The Commission is adopting Sec. 190.00(c)(5) to address pro rata
distribution. It explains that, if the aggregate value of customer
property in a particular account class is less than the amount needed
to satisfy the net equity claims of public customers in that account
class (i.e., there is a ``shortfall''), customer property in that
account class will be distributed pro rata to those public customers.
The pro rata distribution principle carries forth the statutory
direction in section 766(h) of the Bankruptcy Code. It ensures that all
public customers within an account class will suffer the same
proportional loss, including those public customers that post as
collateral letters of credit or specifically identifiable property.\28\
Any customer property that is not attributable to any particular
account class or which is in excess of public customer net equity
claims for the account class to which it is attributed, will be
distributed to public customers in respect of net equity claims in
other account classes where there is a shortfall. Thus, as noted in
Sec. 190.00(c)(3), all public customer net equity claims would receive
priority over non-public customer claims.
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\28\ In prior bankruptcies, some customers posting letters of
credit or specifically identifiable property as collateral sought to
escape pro rata treatment for these categories of collateral,
contrary to the Commission's intent. See discussion of Sec.
190.04(d)(3) in section II.B.2 below.
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The Commission is adopting Sec. 190.00(c)(6) to address
deliveries. It explains that the delivery provisions of part 190 apply
to any commodity that is subject to delivery under a commodity
contract, including agricultural commodities, other non-financial
commodities (such as metals or energy), and commodities that are
financial in nature (including virtual currencies). In the ordinary
course of business, commodity contracts with delivery obligations are
offset before reaching the delivery stage (i.e., prior to triggering
bilateral delivery obligations). Nonetheless, when delivery obligations
do arise, a delivery default could have a disruptive effect on the cash
market for the commodity and could adversely impact the parties to the
transaction. In a proceeding in which the debtor is an FCM, the
delivery provisions in part 190 reflect the policy preferences (A) to
liquidate commodity contracts that settle via delivery before they move
into a delivery position and (B) when contracts do move into a delivery
position, to allow the delivery to occur, where practicable, outside
the administration of the debtor's estate (i.e., directly between the
debtor's customer and the delivery counterparty assigned by the
clearing organization).
The Commission received several comments expressing support for
certain provisions in Sec. 190.00(c) and two comments expressing
concerns. CME expressed support for ``limiting the scope of part 190 to
the bankruptcy of a commodity broker that is an FCM or a DCO and to
commodity contracts that are cleared'' as set forth Sec. 190.00(c)(1).
CME, OCC, Vanguard, and NGFA supported the concept of preferring the
claims of public customers over non-public customers in a bankruptcy
proceeding. CME agreed with the inclusion of the core concept set forth
Sec. 190.00(c)(3)(ii), noting that ``it aids understanding to explain
how the distinction between the public customer class and the non-
public customer class is reflected at the DCO-level in the distinctions
made between customer accounts and house accounts and between the two
categories of customer property--customer property and member
property--that are available to satisfy the net equity claims of
each.'' Better Markets supported the clarification in Sec.
190.00(c)(5)(ii) that customers relying on letters of credit must carry
the same proportional losses as customers posting other forms of
acceptable collateral.
NGFA supported the core concept of prioritizing the prompt transfer
of customer accounts and positions to another FCM as opposed to
liquidating customer accounts. OCC, however, disagreed with this policy
preference. OCC supported ``the Commission's objective to mitigate risk
to an FCM's customers and limit market volatility,'' noting that
``[p]orting positions and associated collateral in an FCM bankruptcy
proceeding can be an effective way to achieve these objectives in some
instances.'' OCC believed, however, that the trustee should retain
broad discretion to decide, on a case-by-case basis and in
consideration of certain factors (e.g., the defaulting FCM's total book
of positions and market conditions) whether porting or liquidating
positions will achieve the best result for customers involved in an
FCM's bankruptcy. OCC further commented that the market risk associated
with closing out and reopening positions for certain customers that may
be introduced with liquidation should be weighed against potential
drawbacks of porting, including that ``(i) a trustee (or DCO) must
first identify a transferee to accept the open position[s] and
collateral, which depending on market conditions could be a difficult
and time consuming process; (ii) until the transfer is complete, the
customer may face uncertainty as to how its position and associated
collateral will be resolved and may not be able to exit the position in
a timely and efficient manner; and (iii) a customer may be required to
post additional collateral at a new FCM prior to or immediately after a
transfer.''
In response to the concerns raised by OCC, the Commission notes
first that, as OCC forthrightly acknowledges,
[[Page 19329]]
liquidating customer positions may introduce market risk associated
with closing out and reopening positions for certain customers.
Additionally, liquidating a mass of customer positions may roil the
markets, if any, where those positions are concentrated. For these
reasons, the policy preference in favor of transfer is both supported
by statute and quite longstanding. It is supported by Sec. 764(b) of
the Bankruptcy Code, which explicitly permits transfers of commodity
contracts that are authorized by the Commission up to seven calendar
days after the order for relief. It is also embodied in current Sec.
190.02(e), which requires the trustee to immediately use its best
efforts to effect a transfer, and is continued in proposed (and
adopted) Sec. 190.04(a)(1).
Furthermore, Sec. 190.00(c)(4) establishes, consistent with Sec.
764(b), a policy preference for porting, rather than a mandate for
porting. This recognizes that finding willing and able transferees for
all customer positions may or may not be practicable. Moreover, Sec.
190.04(a)(1) requires the trustee to use its best efforts to effect a
transfer no later than the seventh calendar day after the order for
relief,\29\ and Sec. 190.04(d) requires the trustee promptly to
liquidate most remaining contracts after than time. Indeed, as a
practical matter, there is cause for doubt that a DCO will permit the
trustee of a debtor that is a clearing member to hold open contracts
quite that long.\30\ Thus, despite the preference for porting, there
are practical limits to how long contracts will be held open before
being liquidated. This also imposes temporal limits on the uncertainty
customers will face as to how their positions will be resolved.
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\29\ Indeed, the preference contained Sec. 190.00(c)(4) does
not represent a departure from the existing standards under current
part 190. It merely highlights the requirement in Sec. 190.04(a)(1)
that the trustee use its best efforts to effect a transfer no later
than the seventh calendar day after the order for relief; that
requirement is substantially identical to the requirement in current
Sec. 190.02(e).
\30\ For example, OCC Rule 1102(a) provides that OCC may
summarily suspend any Clearing Member which is in such financial or
operating difficulty that OCC determines and so notifies the
Securities and Exchange Commission or the Commodity Futures Trading
Commission that suspension is necessary for the protection of the
Corporation, other Clearing Members, or the general public. OCC Rule
1106 permits OCC to close out the positions of a suspended clearing
member.
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Finally, while a customer may indeed be called for additional
collateral at a transferee FCM (particularly if less than 100% of the
collateral is transferred along with the positions), a customer that is
unwilling to meet such a call will at the least be permitted to have
their positions liquidated. That would entitle the customer to prompt
return by the transferee FCM of the remaining collateral that was
transferred--which may well be more prompt than a distribution in the
bankruptcy proceeding of the debtor.
ICI expressed concerns with respect to the discretion granted to
the trustee under the part 190 regulations. ICI agreed with the
Commission ``that trustees need flexibility given the myriad of
decisions they must make in a short period of time and the unique
circumstances that each commodity broker insolvency may present,'' and
that ``trustees to date have exercised their discretion in a manner
that has generally promoted customer protection.'' ICI cautioned,
however, that the Commission should take steps to help ensure that the
trustee prioritizes the protection of public customers. ICI urged the
Commission to make clear in Sec. 190.00 ``that the trustee must
exercise [its] discretion in a manner that it determines will result in
the greatest recovery for, and the least disruption to, public
customers.'' With respect to part 190 regulations that are
``specifically aimed at protecting customers,'' ICI asserted the
trustee's discretion should be more limited. While ICI acknowledged
that, at times, compliance with such provisions ``may be impractical or
impossible or may cause harm to customers,'' ICI was concerned that a
``reasonable efforts'' standard ``could signal that the trustee has
wider latitude to depart from the requirement at issue.'' ICI asked the
Commission to impose a ``best efforts'' standard in certain cases.
The Commission agrees with ICI that the trustee should exercise its
discretion in a manner that best achieves the overarching goal of
protecting the interests of public customers as a class, and
specifically should act in the manner that it determines will result in
the greatest recovery for, and the least disruption to, public
customers. The Commission notes that, at times, those two sub-goals may
be in tension. Because the Commission does not believe that there is a
universally optimal means to reconcile the two sub-goals in aid of best
achieving the overarching goal of protecting the interests of public
customers, the Commission concludes that it is best to leave the
balancing of the two sub-goals to the discretion of the trustee. It is
in that context that the Commission has decided to direct the trustee
to exercise ``reasonable efforts'' rather than ``best efforts'' to
achieve certain standards. In determining what efforts are
``reasonable,'' the trustee should act to achieve the overarching goal.
In light of the foregoing and to provide clarity with respect to
the scope of the trustee's discretion, the Commission is adopting new
Sec. 190.00(c)(3)(i)(C) which provides that where a provision in part
190 affords the trustee discretion, that discretion should be exercised
in a manner that the trustee determines will best achieve the
overarching goal of protecting public customers as a class by enhancing
recoveries for, and mitigating disruptions to, public customers as a
class. In seeking to achieve that overarching goal, the trustee has
discretion to balance those two subgoals when they are in tension.
Where the trustee is directed to exercise ``reasonable efforts'' to
meet a standard, those efforts should only be less than ``best
efforts'' to the extent that the trustee determines that such an
approach would support the foregoing goals.\31\
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\31\ While `` `[b]est efforts' is a term which necessarily takes
its meaning from the circumstances,'' the trustee in exerting best
efforts to meet a standard must diligently exert efforts to meet
that standard ``to the extent of its own total capabilities.'' See
generally Bloor v. Falstaff Brewing Corp, 454 F.Supp. 258, 266-67
aff'd 601 F.2d 609 (2nd. Cir. 1979). By contrast, in exerting
``reasonable efforts'' to meet a standard, the Commission expects
that the trustee will work in good faith to meet the standard, but
will also take into account other considerations, including the
impact of the effort necessary to meet the standard on the
overarching goal of protecting public customers as a class.
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The Commission is adopting Sec. 190.00(d)(1) to describe the scope
of commodity broker proceedings under subchapter IV of chapter 7 of the
Bankruptcy Code,\32\ and the relationship between part 190 to SIPA
proceedings (where the debtor is a commodity broker) and to resolution
of commodity brokers under Title II of the Dodd-Frank Act.''
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\32\ 12 U.S.C. 5381 et seq.
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Section 190.00(d)(1)(i) acknowledges that, while section 101(6) of
the Bankruptcy Code recognizes ``commodity options dealers'' and
``leverage transaction merchants'' (as defined in sections 761(6) and
(13) of the Bankruptcy Code), as separate categories of commodity
brokers, there are no commodity options dealers or leverage transaction
merchants currently registered as such. As set forth in the Note to
paragraph (d)(1)(i)(B), the Commission is declaring its intent to adopt
regulations with respect to commodity options dealers and leverage
transaction merchants, respectively, at such time as an entity
registers as such.
Section 190.00(d)(1)(ii) explains that, pursuant to section 7(b) of
SIPA,\33\ the
[[Page 19330]]
trustee in a SIPA proceeding where the debtor is also a commodity
broker has the same duties as a trustee in a proceeding under
subchapter IV of chapter 7 of the Bankruptcy Code, to the extent
consistent with SIPA or as ordered by the court.\34\ This part
implements subchapter IV of chapter 7 by establishing the trustee's
duties thereunder, consistent with the broad authority granted to the
Commission pursuant to section 20 of the CEA. Therefore, this part also
applies to a proceeding commenced under SIPA with respect to a debtor
that is registered as a broker or dealer under section 15 of the
Securities Exchange Act of 1934 \35\ when the debtor also is an FCM.
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\33\ 15 U.S.C. 78aaa et seq.
\34\ See SIPA section 7(b), 15 U.S.C. 78fff-1(b) (To the extent
consistent with the provisions of [SIPA] or as otherwise ordered by
the court, a trustee shall be subject to the same duties as a
trustee in a case under chapter 7 of title 11, including, if the
debtor is a commodity broker, as defined under section 101 of such
title, the duties specified in subchapter IV of such chapter 7).
\35\ 15 U.S.C. 78o.
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Moreover, in the context of a resolution proceeding under Title II
of Dodd-Frank, section 210(m)(1)(B) \36\ provides that the FDIC (in its
role as resolution authority) must apply the provisions of subchapter
IV of chapter 7 of the Bankruptcy Code in respect of the distribution
of customer property and member property of a resolution entity \37\
that is a commodity broker as if the resolution entity were a debtor
for purposes of subchapter IV. Accordingly, Sec. 190.00(d)(1)(iii)
explains that this part shall serve as guidance with respect to the
distribution of property in a proceeding in which the FDIC acts as a
receiver for an FCM or DCO pursuant to Title II of Dodd-Frank.\38\
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\36\ 12 U.S.C. 5390(m)(1)(B).
\37\ That is, the entity being resolved under Title II. Section
210(m)(1)(b) refers to ``any covered financial company or bridge
financial company.''
\38\ 12 U.S.C. 5390(m)(1)(B) provides that the FDIC must apply
the provisions of subchapter IV of chapter 7 of the Code with
respect to the distribution of customer property and member property
in connection with the liquidation of a commodity broker that is a
``covered financial company'' or ``bridge financial company'' (terms
defined in 12 U.S.C. 5381(a)).
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The Commission is adopting Sec. 190.00(d)(2)(i) to clarify that a
trustee may not recognize any account classes not explicitly provided
for in part 190. Section 190.00(d)(2)(ii) provides that no property
that would otherwise be included in customer property, as defined in
Sec. 190.01, shall be excluded from customer property because it is
considered to be held in a constructive trust, resulting trust, or
other trust that is implied in equity.
Generally, in a commodity broker bankruptcy, the basis for
distributing segregated customer property is pro rata treatment. To
achieve this goal, the FCM's segregation records (including account
statements) and reporting to the Commission and self-regulatory
organizations (``SROs'') and DCOs must reflect what is actually
available for customers. This is necessary to enable FCMs, SROs, DCOs,
and the Commission to ensure, during business as usual, that (a)
customer property is being properly protected pursuant to the
segregation requirements of section 4d of the CEA and the regulations
thereunder, and (b) customer property is not subject to hidden
arrangements that cannot be accounted for transparently and reliably.
Through Sec. 190.00(d)(2)(ii), the Commission is making clear that
customer property cannot be burdened by equitable trusts. Attempting to
account for such equitable trusts in a bankruptcy proceeding under part
190 would undermine the Commission's implementation and enforcement of
the statutory scheme under the CEA.
Section 190.00(d)(3) provides that certain transactions, contracts,
or agreements are excluded from the term ``commodity contract.'' \39\
The excluded agreements and transactions traditionally have not been
considered to be commodity contracts for purposes of segregation and
customer protection, while those that are excepted from these
exclusions are so considered, and thus are covered by part 190.
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\39\ The contracts that would be excluded include: Options on
commodities unless cleared by a DCO (or, in the context of a foreign
futures clearing member, a foreign clearing organization); forwards
(defined as such pursuant to the exclusions in sections 1a(27) or
1a(47)(B)(ii) of the CEA), unless they are cleared by a DCO (or, in
the context of a foreign futures clearing member, a foreign clearing
organization); security futures products when they are carried in a
securities account; retail foreign currency transactions described
in sections 2(c)(2)(B) or (C) of the CEA; security-based swaps or
other securities carried in a securities account (other than
security futures products carried in an enumerated account class);
and retail commodity transactions described in section (2)(c)(2)(D)
of the CEA (other than transactions executed on or subject to the
rules of a designated contract market (``DCM'') or foreign board of
trade (``FBOT'') as if they were futures).
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The Commission received four comments supportive of specific
provisions of proposed Sec. 190.00(d) and one comment requesting a
modification of the regulation. CME agreed that removing provisions
relating to commodity option dealers and leverage transaction merchants
would ``improve the rules' clarity.'' CME and Cboe expressed support
for the clarification in Sec. 190.00(d)(1)(ii) of the applicability of
SIPA in the bankruptcy proceeding of a firm that is dually registered
as an FCM and a broker-dealer where the bankruptcy must be handled
pursuant to SIPA rather than by the FCM rules. Cboe noted that such
clarity will be ``beneficial to the entire ecosystem, including
customers of FCMs and broker-dealers'' and will ``further the ability
of market participants to utilize portfolio margining and the
associated efficiencies.'' CME expressed support for Sec.
190.00(d)(1)(iii). CME specifically supported ``setting out that Part
190 `shall serve as guidance' to the FDIC as receiver for an FCM or DCO
in a proceeding under Title II of Dodd Frank, with respect to the
distribution of customer property and member property.'' Noting that
``Title II [of the Dodd-Frank Act] directs the FDIC to apply the
provisions of subchapter IV of chapter 7 of the [Bankruptcy] Code with
respect to such distributions,'' CME stated its belief that ``it is
reasonable to read Title II's cross-reference to subchapter IV of
chapter 7 ``as indirectly bringing [p]art 190 into the scope of that
provision given the need for Commission regulations to give specificity
and meaning to the general principles set out in subchapter IV.'' SIFMA
AMG/MFA supported the principle of excluding property held in a
constructive trust from customer property as set forth in Sec.
190.00(d)(2)(ii), noting that this principle ``serves to preserve the
integrity of customer property.'' ICI strongly supported setting forth
the prohibition on excluding property from ``customer property''
because it is considered to be held in a trust implied in equity in
Sec. 190.00(d)(2)(ii), and the exclusion from the term ``commodity
contract'' of off-exchange retail foreign currency transactions in
Sec. 190.00(d)(3)(iv).
The ABA Subcommittee recommended one modification to this
regulation. It asked the Commission to amend proposed Sec.
190.00(d)(3)(v) to clarify that mixed swaps could be commodity
contracts subject to part 190. In support of its position, the ABA
Subcommittee asserted that a DCO could theoretically provide clearing
services to FCMs and their customers with respect to mixed swaps, where
the mixed swap positions are carried in accounts subject to part 22 and
customers are part of the cleared swap account class under part 190.
The ABA Subcommittee analogized the inclusion of mixed swaps within the
``commodity contract'' definition to the Commission's proposal to not
exclude security futures products from the commodity contract
definition when the security futures product is carried in an account
for which there is a corresponding account class under part 190. The
Commission agrees with the
[[Page 19331]]
ABA Subcommittee's reasoning with respect to proposed Sec.
190.00(d)(3)(v) and is amending Sec. 190.00(d)(3)(v) to read in
pertinent part, that ``. . . a security futures product or mixed swap
(as defined in 1a(47)(D) of the Act) that is, in either case, carried
in an account for which there is a corresponding account class under
part 190 is not excluded.''
The Commission is adopting Sec. 190.00(e) to explain the context
in which part 190 should be interpreted. It states that any references
to other federal rules and regulations refer to the most current
versions of these rules and regulations (i.e., ``as the same may be
amended, superseded or renumbered'') and that, where they differ, the
definitions set forth in Sec. 190.01 shall be used instead of the
defined terms set forth in section 761 of the Bankruptcy Code. The
Commission notes that other regulations in part 190 are designed to be
consistent with subchapter IV of chapter 7 of the Bankruptcy Code.
Section 190.00(e) addresses account classes in the context of
portfolio margining and cross margining programs. Where commodity
contracts (and associated collateral) that would be attributable to one
account class are, instead, commingled with the commodity contracts
(and associated collateral) in a second account class (the ``home
field''), then the trustee must treat all such commodity contracts and
associated collateral as being held in, and consistent with the
regulations applicable to, an account of the second account class. The
approach of following the rules of the ``home field'' also pertains to
securities positions held in a commodity account class (and thus
treated in accord with the relevant commodity account class) and
commodity contract positions (and associated collateral) held in the
securities account, in which case the rules applicable to the
securities account will apply, consistent with section 16(2)(b)(ii) of
SIPA, 15 U.S.C. 78lll(2)(b)(ii).
The Commission received two comments on proposed Sec. 190.00(e).
ICI and Cboe expressed support for the clarity provided by Sec.
190.00(e) with respect to portfolio margining and cross margining
programs. ICI strongly supported the ``home field'' rule in proposed
Sec. 190.00(e), noting that providing ``clarity regarding how
transactions and margin that are portfolio margined in the same account
will be treated in the event that an FCM or broker-dealer becomes
insolvent is a ``prerequisite for an effective portfolio margining
regime.''
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.00 as
proposed with the addition of Sec. 190.00(c)(3)(i)(C) and the
modification to Sec. 190.00(d)(3)(v), as set forth above.
2. Regulation Sec. 190.01: Definitions
The Commission is adopting Sec. 190.01 as proposed with
modifications set forth below, to update the definitions for revised
part 190. Most of the changes in Sec. 190.01 are conforming changes,
such as correcting cross-references and deleting definitions of certain
terms that are not used in part 190, as amended. Other changes tie the
definitions in Sec. 190.01 more closely to the definitions in Sec.
1.3 and other Commission regulations, to reflect changes in Commission
regulations. In some cases, the Commission is adopting more substantive
changes to the definitions, such as amending or adding definitions to
further clarify and provide additional details where the current
definitions are silent or unclear, or to reflect concepts that are new
to part 190. In particular, the Commission is separating the delivery
account class into two subclasses, a physical delivery account class
and a cash delivery account class; the relevant terms are defined
below. The definitions of commodity contract and physical delivery
property codify positions that the Commission has taken in recent
commodity broker bankruptcies.\40\
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\40\ Respectively, In Re Peregrine Financial Group, Inc., No.
12-B27488 (Bankr. N.D. Ill.), and MF Global, Inc.
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The Commission is also amending Sec. 190.01 to replace the
paragraphs identified with an alphabetic designation for each defined
term (e.g., ``Sec. 190.01(ll)'') with a simple alphabetized list, as
is recommended by the Office of the Federal Register, and as recently
implemented by the Commission with respect to, e.g., Sec. 1.3.\41\
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\41\ See generally 83 FR 7979, 7979 & n.6 (Feb. 23, 2018).
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The Commission requested comment with respect to all aspects of
proposed Sec. 190.01, including the usefulness and any unintended
consequences of the revised definitions. The Commission received a
number of comments on the proposed definitions in Sec. 190.01. As
further detailed below, the Commission is modifying some of the
definitions in response to comments. Unless stated otherwise below, the
Commission did not receive any comments on a proposed definition in
Sec. 190.01 and is adopting each definition as proposed.\42\
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\42\ The Commission did not receive comments with respect to the
following part 190 definitions as proposed in Sec. 190.00: Act,
Bankruptcy code, Business day, Calendar day, Cash delivery account
class, Cash equivalents, Clearing organization, Commodity broker,
Commodity contract account, Court, Cover, Customer, Customer claim
of record, Customer class, Dealer option, Debtor, Distribution,
Equity, Exchange Act, FDIC, Filing Date, Final net equity
determination date, Foreign board of trade, Foreign clearing
organization, Foreign future, Foreign futures commission merchant,
Foreign futures intermediary, Funded balance, Futures and futures
contract, In-the-money amount, Joint account, Leverage contract,
Leverage transaction merchant, Member property, Net equity, Open
commodity contract, Order for relief, Person, Premium, Primary
liquidation date, Principal contract, Securities Account, SIPA,
Security, Short term obligation, Specifically identifiable property,
Strike price, Substitute customer property, Swap, Trustee, and
Undermargined. Accordingly, the Commission is adopting those
definitions as proposed, as discussed later in section II.A.2.
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The Commission is adopting the definition of ``account class'' as
proposed with the modifications described below. The current definition
of the term ``account class'' specifies that it includes certain types
of customer accounts, each of which is to be recognized as a separate
class of account. The types are ``futures account,'' ``foreign futures
accounts,'' ``leverage accounts,'' ``delivery accounts,'' and ``cleared
swap accounts.'' The Commission is adding detail to the definition of
``account class'' by including therein definitions of ``futures
account,'' ``foreign futures accounts,'' ``cleared swaps accounts,''
and ``delivery accounts.'' However, as discussed above with respect to
Sec. 190.00(d)(1)(i), the Commission is removing, at least
temporarily, the ``commodity options'' and ``leverage account'' account
classes.\43\
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\43\ The Commission is adopting paragraph (2) of the definition
of account class to address commingling orders and rules.
Specifically, there are cases where commodity contracts (and
associated collateral) that would be attributable to one account
class are held separately from contracts and collateral associated
with that first account class, and instead are allocated to a
different account class and commingled with contracts and collateral
in that latter account class. This would take place because the
contracts in question are risk-offsetting to contracts in the latter
account class. For example, this could involve portfolio margining
within a DCO or cross-margining between a DCO and another central
counterparty, which may or may not be a DCO. This commingling may be
authorized pursuant to a Commission regulation or order, or pursuant
to a clearing organization rule that is approved in accordance with
Sec. 39.15(b)(2). The Commission is adopting paragraph (2) to
confirm that the trustee must treat the commodity contracts in
question (and the associated collateral) as being held in an account
of the latter account class. The Commission is also adopting
paragraph (3) of the definition of account class to address cases
where the commodity broker establishes internal books and records in
which it records a customer's commodity contracts and collateral,
and related activity. It confirms that the commodity broker is
considered to maintain such an account for the customer regardless
of whether it has kept such books and records current or accurate.
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[[Page 19332]]
The Commission is adopting the definition of ``futures account'' to
cross-reference the definition of the same term in Sec. 1.3 of the
Act, while the definition of ``cleared swaps account'' cross-references
the definition of ``cleared swaps customer account'' in Sec. 22.1.
These definitions apply to both FCMs and DCOs. The definition of
``foreign futures account'' cross-references the definition of ``30.7
account'' in Sec. 30.1(g). As that latter definition is limited to
FCMs, the Commission is adopting a corresponding reference to such
accounts at a clearing organization, in the event that a clearing
organization clears foreign futures transactions for members that are
FCMs, where those accounts are maintained on behalf of those FCM
members' 30.7 customers (as that latter term is defined in Sec.
30.1(f)). The Commission clarifies that this would not apply if a
foreign clearing organization is clearing foreign futures for clearing
members that are not subject to the requirements of Sec. 30.7.
The ABA Subcommittee and CME recommended that the Commission expand
the definitions of ``futures account,'' ``foreign futures account,''
and ``cleared swaps account'' within the Sec. 190.01 definition of
``account class'' to cover the accounts of non-public customers. The
ABA Subcommittee and CME stated that as proposed, the cross-references
to Sec. 1.3, the ``30.7 account'' in 30.1, and the ``cleared swaps
customer account'' in Sec. 22.1 within the account class definitions,
limited the scope of those definitions to only segregated accounts of
public customers despite the Commission's intention to use those same
account class distinctions for non-public customers elsewhere in the
part 190 rules. The ABA Subcommittee and CME suggested that those
account class distinctions are also relevant for the non-public
customer class (i.e., the holders of proprietary accounts carried by
FCMs and for clearing members' house accounts carried by DCOs).
The Commission is persuaded by the comments that there are, in at
least some cases, account class distinctions within the customer class
for non-public customers,\44\ and thus agrees that the revised
definitions of ``futures account,'' ``foreign futures account,'' and
``cleared swaps account'' within the Sec. 190.01 definition of
``account class'' should address separately non-public customers, and
has amended the definitions to do so.
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\44\ See, e.g., Sec. 190.09(c)(2)(iv) (allocating residual
property to the non-public customer estate for each account class in
the same order as is prescribed in paragraphs (c)(2)(i) through
(iii) of this section for the allocation of the customer estate
among account classes.)
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Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting the ``account class,''
``futures account,'' foreign futures account,'' and ``cleared swaps
account'' definitions in Sec. 190.01 as proposed with the
modifications referred to above.
The ``delivery account'' class is the fourth type of account class.
It is the relevant account through which an FCM or DCO accounts for the
making or taking of physical delivery under commodity contracts whose
terms require settlement by delivery of a commodity. The FCM or DCO
designates such account as a delivery account on its books and records.
The Commission is adopting the definition of ``delivery account'' as
proposed within paragraph (1)(iv) of the definition of account class,
with a modification to conform to the issue addressed in the preceding
paragraph: The delivery account applies to ``both public and non-public
customers, considered separately.'' \45\
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\45\ This separate consideration is a consequence of the fact
that, pursuant to Bankruptcy Code section 766(h), public customer
claims must be paid in full before non-public customer claims.
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The current definition of ``delivery account'' in Sec.
190.05(a)(2) refers to an account that contains only property described
in three of the nine categories of property in the current definition
of ``specifically identifiable property.'' The Commission has
determined to adopt a more functional definition of ``delivery
account'' in Sec. 190.01. This revised definition will focus on an
account maintained on the books and records of an FCM or DCO for the
purpose of accounting for the making or taking of delivery under
commodity contracts whose terms require settlement by delivery of a
commodity.\46\
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\46\ See Sec. 190.01.
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The Commission is thus adopting paragraph (1)(iv)(A)(1) to define
delivery accounts for FCMs. The Commission is adopting paragraph
(1)(iv)(A)(2) to incorporate the same concepts for clearing
organizations, and also permit a clearing organization to act as a
central depository for physical delivery property represented by
electronic title documents, or otherwise in electronic (dematerialized)
form.
As set forth in paragraph (1)(iv)(B), the delivery account class is
being subdivided into separate physical and cash delivery account
classes, as provided in Sec. 190.06(b), for purposes of pro rata
distributions to customers for their delivery claims. The definitions
of the terms ``physical delivery property'' and ``cash delivery
property'' are addressed in detail later in this section.
As customer property held in a delivery account is not subject to
the Commission's segregation requirements, the Commission believes it
may be more challenging and time-consuming to identify customer
property for the cash delivery account class,\47\ (and such cash would
thus be commingled with the FCM's own cash intended for operations).
Consequently, the Commission believes separating (1) most cash delivery
property and customer claims from (2) most physical delivery property
and customer claims should promote more efficient and prompter
distribution of the latter to customers. For these reasons, the
Commission is adopting the delivery account definition to be further
divided into physical delivery and cash delivery account classes, for
purposes of pro rata distributions to customers for their delivery
claims.
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\47\ The Commission agrees with a point previously made by the
ABA Committee: ``Based on lessons learned from the MF Global
Bankruptcy, those challenges are likely greater for tracing cash.
Physical delivery property, in particular when held in the form of
electronic documents of title as is prevalent today, is more readily
identifiable and less vulnerable to loss, compared to cash delivery
property that an FCM may hold in an operating bank account.'' See
Transmittal Letter from The Part 190 Subcommittee of the Business
Law Section of the American Bar Association accompanying Model Part
190 Rules (``ABA Cover Note''), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61330&SearchText at 14. See also In re MF Global
Inc., 2012 WL 1424670 (noting how physical delivery property was
traceable).
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The claims with respect to the physical delivery and cash delivery
subclasses are fixed on the ``filing date.'' \48\ Thus, the physical
delivery account class includes, in addition to certain physical
delivery property, cash delivery property received post-filing date in
exchange for physical delivery property held on the filing date that
has been delivered under a commodity contract. Conversely, the cash
delivery account class includes, in addition to certain cash delivery
property, physical delivery property that has been received post-filing
date in exchange for cash delivery property held on the filing date.
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\48\ ``Filing date'' means the date that a petition under the
Bankruptcy Code or application under SIPA commencing a proceeding is
filed or on which the FDIC is appointed as a receiver pursuant to 12
U.S.C. 5382(a).
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CME and ICE supported separate subaccounts of the delivery account
for physical property (the property being delivered) and cash property
(cash used
[[Page 19333]]
to pay for delivery). CME agreed with the proposed definition of the
delivery account class and supported the proposed separation of the
delivery account class into the cash delivery account and physical
delivery account classes, as they delineate the customer property that
is available to distribute to customers in each account class on a pro
rata basis. CME agreed that cash delivery property should include cash
or cash equivalents recorded in a customer's delivery account as of the
filing date, along with any physical delivery property subsequently
received in accepting a delivery, and likewise that physical delivery
property should include any cash delivery property received subsequent
to the filing date in exchange for making a delivery. CME also had
specific comments on each of the two subaccount definitions as
discussed below.
CME noted that the Commission does not impose segregation
requirements on FCMs with respect to the cash or physical delivery
property that an FCM holds on behalf of its customers and records in a
delivery account. As learned from the In re MF Global, Inc. bankruptcy
(hereinafter ``MF Global''),\49\ CME agreed that it can be more
challenging for a trustee to trace the cash recorded in delivery
accounts than to trace physical delivery property. For example, the MF
Global trustee could more readily identify physical delivery property
in the form of electronic title documents, compared to identifying non-
segregated cash belonging to the delivery account class given the
fungible nature of cash.
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\49\ In re MF Global, No. 11-2790 (MG) (SIPA) (Bankr. S.D.N.Y.).
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CME recommended that the Commission address through a separate
rulemaking the broader issues around whether customer property carried
in delivery accounts should be subject to any special customer
protections, such as requirements that FCMs should hold such property
in custody accounts or limitations on how long cash or cash equivalents
should be held in delivery accounts that are not subject to custody
requirements.\50\
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\50\ This recommendation is addressed in section II.G below.
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At this time, after consideration of the comments and for the
reasons stated above the Commission is adopting the definition of
``delivery account'' as proposed, with the modification to note that it
applies to each of public and non-public customers, considered
separately.
The Commission is adopting the definition of ``cash delivery
property'' as proposed with the modifications described below. The
Commission proposed to define cash delivery property to carry through
the concepts from current Sec. 190.01(ll)(4) and (5) that the cash or
cash equivalents, or the commodity must be identified on the books and
records of the debtor as having been received, from or for the account
of a particular customer, on or after three calendar days before the
relevant (i) first delivery notice date in the case of a futures
contract or (ii) exercise date in the case of an option.
The Commission is adopting the cash delivery property definition to
mean any cash or cash equivalents recorded in a delivery account that
is, as of the filing date: (1) Credited to such account to pay for
receipt of delivery of a commodity under a commodity contract; (2)
credited to such account to collateralize or guarantee an obligation to
make or take delivery of a commodity under a commodity contract, or (3)
has been credited to such account as payment received in exchange for
making delivery of a commodity under a commodity contract. It includes
property in the form of commodities that have been delivered after the
filing date in exchange for cash or cash equivalents held in a delivery
account as of the filing date. The definition also requires that the
cash or cash equivalents, or the commodity, must be identified on the
books and the records of the debtor as having been received, from or
for the account of a particular customer, on or after seven calendar
days before the relevant (i) first delivery notice date in the case of
a futures contract or (ii) exercise date in the case of a cleared
option.\51\ In response to comments discussed below, the Commission is
adopting the definition of cash delivery property to also include any
cash transferred by a customer to the trustee on or after the filing
date for the purpose of paying for delivery, consistent with Sec.
190.06(a)(3)(ii)(B)(1). The Commission is also adopting the definition
in response to comments that requested that the Commission provide that
in the case of a contract where one fiat currency is to be exchanged
for another fiat currency, each currency will be considered cash
delivery property to the extent that it is recorded in a delivery
account.
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\51\ As discussed below, the proposal had specified a period of
three calendar days; after consideration of the comments, that
period has been changed to seven calendar days.
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Commenters generally supported separate subaccounts of the delivery
account, and that cash delivery property should include cash or cash
equivalents recorded in a customer's delivery accounts as of the filing
date, along with any delivery property subsequently received in
accepting a delivery. However, the Commission also received several
comments on three aspects of the proposed definition of cash delivery
property.
First, the ABA Subcommittee, CME, ICE, FIA, and CMC recommended
that the Commission remove the three-calendar day restriction proposed
in the definition of cash delivery property in Sec. 190.01. While
several of these commenters recognized the Commission's intention to
encourage customers and their FCMs to hold cash in a segregated account
where it is better protected until needed to pay for a delivery that is
effected in the delivery account, the commenters were concerned that
cash or cash equivalents might be posted to delivery accounts sooner
than three days before the first notice date or exercise date, and
therefore this property might be denied the cash delivery property
protection.
FIA stated that the Federal Register release did not explain why
the Commission proposed to restrict cash delivery property to cash and
cash equivalents received no earlier than three calendar days before
the relevant first notice day or exercise date. FIA and ICE could not
identify any justification as to why cash or cash equivalents that may
be received by a debtor FCM and properly deposited in a cash delivery
account prior to this period should receive different protections under
part 190 than cash and cash equivalents received within the three-
calendar day time frame. The ABA Subcommittee noted that their
Committee eliminated this provision in the Model Part 190 Rules to
avoid unintended consequences.
CME recognized that the three-day limitation is based on the
limitation in current part 190, but stated that it does not make sense
and if not eliminated from the definition, it could be detrimental to
customers, which is contrary to the goal of enhancing customer
protections. CME further explained that if a customer posts cash or
cash equivalents to its delivery account in anticipation of paying for
an upcoming delivery or to guarantee its obligation to take delivery,
the timing of the payment should not matter. If the parties intend to
make and take delivery, CME believed the trustee should be able to
follow the customers' intention. CME explained that a customer is
unlikely to leave cash in an unsegregated delivery account with an FCM
for any extended time, without reason, when it would be better
[[Page 19334]]
protected by holding the cash in a segregated account or withdrawing
the cash if not needed to meet upcoming delivery obligations. CME noted
that there can be times, though, when a customer will legitimately post
cash to its delivery account sooner than the definition would allow,
for example, out of caution to assure that the necessary funds are
available to pay for a delivery when the first notice date or exercise
date immediately follows a weekend or holiday, or to meet payment
deadlines imposed by the FCM, or based on market convention. CME noted
that some FCMs may require customers to post cash sooner than three
days prior to the relevant notice or exercise date, as applicable, to
satisfy a delivery-related obligation. CME believed it could be
potentially disruptive to the delivery process to deny the customer the
protection of having its funds classified as cash delivery property
because it posted the cash or cash equivalents needed to complete an
upcoming delivery too soon.
CME also believed the three-day timing element does not make sense
with respect to cash recorded in a customer's delivery account as of
the filing date, which the customer had previously received as payment
for delivering a commodity under an expired or exercised contract. CME
believed the Commission intended for the timing limitation to apply to
this situation, but the proposed definition does not exclude such cash
from the requirement.
CME understood that the Commission proposed to keep the timing
limitation to encourage FCMs and their delivery customers to hold cash
intended to pay for a delivery in a segregated account until bilateral
delivery obligations are near at hand. However, CME questioned whether
the limitation was effective in encouraging the desired behavior, in
particular when it is contained in bankruptcy regulations and parties
with delivery obligations may not necessarily be aware of it. As a
result, CME recommended that the Commission address the protection of
customer property held in delivery accounts in a more direct and
transparent matter, through a separate rulemaking. Specifically, CME
recommended that the Commission revise the ``cash delivery property''
definition to remove the limitation that cash delivery property must be
recorded in the delivery account no sooner than three calendar days
before the first notice date or exercise date.
The Commission notes that part 190 currently contains the three-day
limitation, which serves to limit delivery property to property that is
transferred into a delivery account shortly before the notice or
exercise date.\52\ Thus, the Commission considered whether a change in
the current standard is warranted. As discussed further below, the
Commission concludes that while the case has been made to extend the
limitation from three calendar days to seven calendar days, the case
has not been made to remove the limitation in its entirety at this
time.
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\52\ See current Sec. 190.05(a)(2) (tying delivery account to
portions of the definition of specifically identifiable property in
Sec. 190.01); Sec. 190.01(ll)(4) and (5) (limiting recognition of
cash as specifically identifiable property to cases where it is
identified on the books and records of the FCM as being received
from or for the account of a particular customer on or after three
calendar days before the first notice date or exercise date
specifically for the purpose of a delivery or exercise).
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While delivery accounts provide some customer protection, in that
they benefit from favorable treatment in bankruptcy, they lack the
protection of segregation requirements, in contrast to futures account,
foreign futures account, and cleared swaps accounts. In the case of the
latter types of accounts, the FCM must maintain in accounts, protected
from the claims of creditors of the FCM other than the customers for
whom they are segregated, sufficient funds to repay the claims of such
customers in full, at all times. Such segregation protections are a
very important means of ensuring that sufficient funds are in fact
available to pay customers in full in the (highly unlikely) event of
the insolvency of an FCM.
Accordingly, the Commission is of the view that changing current
part 190 to completely remove any time limitation for protecting
property transferred into a delivery account would, in light of this
lack of segregation protection, carry the risk of significant
unintended consequences, e.g., customers being encouraged to transfer
funds prematurely into an account without such protection, and thus a
bankruptcy where a greater number of customers receive less than the
full amount of their claims, and greater total shortfalls in repayment
of such claims.
CME, while noting their preference for simply deleting the three-
day limitation, observed that protection of customer property held in
delivery accounts should be addressed in a direct and transparent
manner through a separate rulemaking. The Commission concludes that
deleting entirely the time limitation on posting cash delivery property
should only be undertaken, if at all, in the context of a separate,
dedicated, and explicit rulemaking, in which moving property more
quickly to a delivery account is considered in conjunction with
segregation protection for property in such an account.
However, the Commission believes CME's concerns about long weekends
raise important issues. For example, in the context of an FCM's global
business, there could be a bank holiday on a Friday in the jurisdiction
where a customer is based, a Federal holiday on the following Monday in
the U.S., and the exercise or notice date might be on a Tuesday; in
which event three calendar days may be too short. Similarly, in the
vein of CME's comment, there may be legitimate reasons to transfer the
funds a day or two in advance of when they are needed, to account for
the possibility of a failure in the transfer process.
Weighing the concerns of having funds for an extended time in an
account that is not protected by segregation against the need to
provide a modest amount of flexibility in the process, the Commission
has determined that a reasonable balance can be achieved by changing
the three-day (before notice or exercise date) period to a seven-day
period. The Commission believes this extended time period will address
completely the concern that a delivery date may come after a holiday
weekend, and should mitigate concerns about FCM funding requirements
that extend beyond three days. If and when a separate rulemaking
results in additional protection for delivery accounts, it will be
appropriate to revisit this aspect of part 190 as part of such a
rulemaking.
Second, the ABA Subcommittee, CME, and CMC recommended that the
Committee revise the definition of cash delivery property to allow for
the possibility that cash or cash equivalents could be posted after the
filing date for the purpose of paying for a delivery, and to provide
protection for such deposits. The commenters requested that the
Commission expand the definition to allow for the rare possibility that
a customer may be unable to post funds needed to pay for a delivery in
advance of the filing date so that the definition should also cover
cash delivery property received after the filing date in anticipation
of taking delivery of a commodity. CME noted that as has been seen with
other FCM bankruptcies, the days prior to actual filing can be chaotic
and customers may not have had the opportunity to meet such a deadline.
To allow the delivery to be completed reduces a potential disruptive
situation to commodities markets during an otherwise tumultuous time.
This issue is illuminated by considering the interplay of other
[[Page 19335]]
regulations that affect delivery. The Commission notes that while Sec.
190.04(c) continues the preference for the trustee to liquidate
contracts moving into delivery position before they do so, and Sec.
190.06(a)(2) continues the preference, in cases where the trustee is
unable to do so, for the trustee to arrange for delivery to occur
outside the estate, Sec. 190.06(a)(3) acknowledges that there may be
cases where the trustee will need to facilitate the making or taking of
delivery. Regulation Sec. 190.06(a)(3)(ii)(B)(1) refers to cases where
the trustee pays for delivery (in whole or in part) with cash
transferred by the customer to the trustee on or after the filing date
for the purpose of paying for delivery.
Thus, the Commission agrees with the arguments made by the
commenters who suggested that the Commission expand the definition of
``cash delivery property'' in this context, and consequently is adding
an explicit reference to the cash transferred from a customer to the
trustee after the filing date, consistent with Sec.
190.06(a)(3)(ii)(B)(1). Moreover, for consistency, the Commission will
amend Sec. 190.08(c)(1)(ii) as proposed to explicitly give such post-
petition transfers treatment as 100% funded.
Finally, the ABA Subcommittee suggested that the Commission clarify
that the delivery of two different fiat currencies for foreign currency
commodity contract constitutes cash delivery property. CME suggested a
similar technical change to clarify in the definition that for a
commodity contract that settles by delivery of a foreign currency as
the underlying commodity or by an exchange of a pair of currencies, the
USD or foreign currency recorded to a delivery account in connection
with either side of the delivery constitutes cash delivery property.
In response to the ABA Subcommittee comment regarding the delivery
of two fiat currencies, ``[g]iven the fungible nature of cash,
regardless of currency denomination,'' the Commission has determined to
amend further the definition of ``cash delivery property'' to clarify
that for foreign exchange contracts, i.e., contracts where one fiat
currency is exchanged for another fiat currency, both fiat currencies
will be treated as cash delivery property, and neither currency will be
considered physical delivery property.
Accordingly, in consideration of the comments and the reasons
discussed above, the Commission will adopt the definition of ``cash
delivery property'' in Sec. 190.01 as modified, with the additions
referred to above.
The Commission is adopting the definition of ``physical delivery
property'' in Sec. 190.01 as proposed with modifications, as described
below. The Commission is adopting the definition of ``physical delivery
property'' to include, under the four specified sets of circumstances
discussed below, a commodity, whether tangible or intangible, held in a
form that can be delivered to meet and fulfill delivery obligations
under a commodity contract that settles via delivery if held to a
delivery position.\53\ The Commission is adopting the definition to
include warehouse receipts, other documents of title, or shipping
certificates (including electronic versions of the forgoing), for the
commodity, or the commodity itself.
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\53\ The current definition is found in Sec. 190.01(ll)(3), and
focuses on documents of title and physical commodities.
---------------------------------------------------------------------------
The Commission is amending the physical deliver property definition
to address changes in delivery practices since the 1980s. The reference
to electronic versions of warehouse receipts, other documents of title,
or shipping certificates explicitly recognizes that title documents for
commodities are now commonly held in dematerialized, electronic form,
in lieu of paper. Moreover, the types of commodities that might be
physically delivered would extend beyond tangible commodities to those
that are intangible, including Treasury securities, foreign currencies,
or virtual currencies.\54\
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\54\ See ABA Cover Note at 10, 12-13.
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For purposes of analytical clarity, the Commission is adopting the
definition of physical delivery property as subdivided into four
categories:
First, the commodities or warehouse receipts, other documents of
title, or shipping certificates (including electronic versions of any
of the foregoing) for the commodity that the debtor holds for the
account of a customer for purposes of making delivery of such property
and which, as of the filing date or thereafter, can be identified as
held in a delivery account for the benefit of such customer on the
books and records of the debtor.\55\
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\55\ These first two categories together correspond to current
Sec. 190.01(ll)(3), with the first category corresponding to
physical delivery property held for the purpose of making delivery
and the second category corresponding to physical delivery property
held as a result of taking delivery. The property that is (or should
be) within these two categories, as of the filing date, comprises
the property that will be distributed as part of the physical
delivery class.
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Second, the commodities or warehouse receipts, other documents of
title, or shipping certificates (including electronic versions of any
of the foregoing) for the commodity that the debtor holds for the
account of the customer, where the customer received or acquired such
property by taking delivery under an expired or exercised commodity
contract, and which, as of the filing date or thereafter, can be
identified as held in a delivery account for the benefit of such
customer on the books and records of the debtor.\56\
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\56\ The current definition does not prescribe or imply a limit
to how long such received property can be held in a delivery
account, because there is no principled basis to draw a bright line
delineating how long is too long. The definition the Commission is
adopting explicitly codifies that position.
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The third category addresses property that (a) is in fact being
used, or has in fact been used, for the purpose of making or taking
delivery, but (b) is held in a futures, foreign futures, cleared swaps,
or (if the commodity is a security) securities account.\57\ This
property would be considered physical delivery property solely for the
purpose of the obligations, pursuant to Sec. 190.06, to make or take
delivery of physical delivery property. The property in this category
would be distributed as part of the account class in which it is held
(futures, foreign futures, or cleared swaps, or, in the case of a
securities account, as part of a SIPA proceeding).
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\57\ As the ABA Cover Note explained at 13, ``[w]hen the FCM has
a role in facilitating delivery, deliveries may occur via title
transfer in a futures account, foreign futures account, cleared
swaps account, delivery account, or, if the commodity is a security
. . . in a securities account.''
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Fourth, where such commodities or documents of title are not held
by the debtor, but are delivered or received by a customer in
accordance with Sec. 190.06(a)(2) (either by itself in the case of an
FCM bankruptcy or in conjunction with Sec. 190.16(a) in the case of a
clearing organization bankruptcy), they will be considered physical
delivery property, but, again, solely for purposes of obligations to
make or take delivery of physical delivery property pursuant to Sec.
190.06. As this property is held outside of the debtor's estate (and
there was no obligation to transmit it to the debtor's customer
accounts), it is not subject to pro rata distribution.
The Commission is also adding a special case to correspond with the
special case for cash delivery property, which states that where one
fiat currency is exchanged for another, neither such currency, to the
extent that it is recorded in the delivery account, will be considered
physical delivery property. The Commission is also, as discussed
further below, additionally amending the physical delivery property
definition to address the possibility of a negative delivery price
[[Page 19336]]
where the party obliged to delivery physical delivery property under an
expiring contract or an expired options contract is also obliged to
make a cash payment to the buyer, as such cash or cash equivalents
constitute physical delivery property.
CME and CMC agreed that physical delivery property should include
any cash delivery property received subsequent to the filing date in
exchange for making a delivery.
In light of the evolving nature of intangible assets, and of the
manner in which they may be held, custodied or transferred, ICE
suggested that the definition of physical delivery property include, as
examples (and not by way of limitation), other electronic
representations of commodities (whether or not technically ``an
electronic title document'') or any property entitlement to a commodity
(such as for a commodity held as a financial asset in a securities
account under Article 8 of the Uniform Commercial Code (whether or not
a security) or similar structure).
ICE strongly agreed with the Commission's proposal to clarify that
intangible property received or held for purposes of delivery is
appropriately regarded as subject to the delivery account, without
regard to whether it is ``physical'' as under the current rule. ICE
argued that any asset, tangible or intangible, that can be delivered in
settlement of a contract should be eligible to be treated as delivery
property, as set out in the proposed definition of ``physical delivery
property.'' ICE believed this proposed definition would avoid questions
that may otherwise arise in connection with the delivery of digital
currencies or other novel digital assets. CME also supported the
decision to expand the delivery account class to cover intangible
commodities.
Additionally, CME supported modernizing the definition of physical
delivery property to recognize the use of electronic delivery documents
in effecting deliveries under physical delivery commodity contracts.
CME recommended that the Commission further expand the physical
delivery property definition to cover within its scope any cash or cash
equivalents that a seller may deposit in its delivery account when its
obligation to deliver physical delivery property under an expiring
futures or exercised options contract also includes an obligation to
make a cash payment to the buyer, as could arise if the contract's
final settlement price is negative. CME acknowledged that this scenario
would be unprecedented and may never occur, but believed it prudent to
contemplate the possibility in light of events in April 2020 where
certain physical-delivery oil futures contracts traded below zero in
the days prior to establishment of the final settlement prices.
CME also recommended a technical correction to the definition
relating to the fact that shipping certificates are not electronic
title documents, and instead represent the contractual obligation of a
facility to deliver the underlying commodity to the buyer. Thus, for
clarity CME recommended that the Commission revise the phrase
``including warehouse receipts, shipping certificates or other
documents of title (including electronic title documents) for the
commodity'' to read ``including warehouse receipts, shipping
certificates or other similar documents (including electronic versions
thereof).'' The Commission is not amending the examples to explicitly
address additional ``electronic representations of commodities'' within
the definition of physical delivery property because the definition
already broadly covers ``a commodity, whether tangible or intangible,
held in a form that can be delivered to meet and fulfill delivery
obligations under a commodity contract. . . .''
The Commission is amending the definition of physical delivery
property to address the technical correction recommended by CME by
acknowledging that shipping certificates are not documents of title
while avoiding the phrase ``similar documents'' by instead amending the
last phrase to read ``including warehouse receipts, other documents of
title, or shipping certificates (including electronic versions of any
of the foregoing) for the commodity, or the commodity itself.''
The Commission is also adding a special case, corresponding to the
special case for cash delivery property, stating that where one fiat
currency is exchanged for another, neither such currency would be
considered physical delivery property.
The Commission is further amending the physical delivery property
definition with a second special case in response to CME's suggestion
to address the possibility of a negative delivery price. While negative
prices for deliverable commodities are rare, they are not unprecedented
(e.g., the price of crude oil briefly went negative in April 2020).
While a negative price for actual delivery may be even rarer, it is
theoretically possible. Thus, the Commission is amending the definition
of ``physical delivery property'' to address this special case by
adding the following: In a case where the final settlement price is
negative, i.e., where the party obliged to deliver physical delivery
property under an expiring futures contract or an expired options
contract is also obliged to make a cash payment to the buyer, such cash
or cash equivalents constitute physical delivery property.
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting the definition of
``physical delivery property'' as proposed with the appropriate
modifications to the structure, as set forth above, to correspond to
``(1) In general.'' and to address two special cases in ``(2) Special
cases.'' The Commission is adopting the definition of ``allowed net
equity'' as proposed in Sec. 190.01 and as modified to become ``funded
net equity'' as described below. The Commission proposed ``allowed net
equity'' to update cross-references and allow for two definitions of
the term (as used in subparts B and C of part 190).
The ABA Subcommittee expressed concern in their comment letter that
the definition and the use of the term ``allowed net equity'' as
proposed in Sec. Sec. 190.01 and 190.08(a) could create
inconsistencies and confusion between part 190 and the settled
bankruptcy law terminology in which ``allowed'' typically refers to the
fixed amount of a creditor's claim rather than the amount distributable
on such claim. The ABA Subcommittee recommended three modifications to
address this potential confusion, including the deletion of the
definition of ``allowed net equity'' in proposed Sec. Sec. 190.01 and
190.08(a), as the ABA Subcommittee believes the remainder of proposed
Sec. 190.08 would address how to calculate a customer's net equity
claims and the funded balances for each such claims.\58\
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\58\ The ABA Subcommittee also recommended that the Commission
further amend Sec. 190.02 by adding new paragraph (g) to proposed
Sec. 190.02 to state that the term `allowed' in this part shall
have the meaning ascribed to it in the Bankruptcy Code. The ABA
Subcommittee believed that this would confirm that ``allowed'' under
part 190 equates with the use of ``allowed'' under the Bankruptcy
Code. The ABA Subcommittee also recommended that the Commission add
``funded balance of'' before ``such customer's allowed net equity
claim'' in proposed Sec. 190.09(d)(3). The Commission agrees that
these recommended amendments would avoid confusion with the meaning
of ``allowed'' in Sec. 190.02(g) and is therefore making these
suggested changes.
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The Commission agrees with the ABA Subcommittee that the inclusion
of ``allowed'' in the defined term ``allowed net equity'' could cause
confusion in the broader context of established bankruptcy law, where
``allowed'' refers to the trustee's measure of the proper amount of a
claim, rather than to the
[[Page 19337]]
portion of a claim that is funded (in pro rata distribution).
Accordingly, after consideration of the comments, including the ABA
Subcommittee's suggestion regarding the funded portion of a customer's
allowed claim throughout part 190, and for the reasons stated above,
the Commission is changing the defined term ``allowed net equity'' to
``funded net equity,'' and adopting the definition as so modified. The
Commission is also adding Sec. 190.02(g) (as discussed below) and
adding ``funded balance of'' before ``such customer's allowed net
equity claim'' in Sec. 190.09(d)(3) as suggested.
The Commission is adopting the definition of ``commodity contract''
in Sec. 190.01 as proposed, in order to amend the definition to
incorporate and extend in context (through references to current
Commission regulations) the definition in section 761(4) of the
Bankruptcy Code.\59\
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\59\ It should be noted that, consistent with Sec.
190.00(d)(3)(iv) and the decision In re Peregrine Financial Group,
Inc., 866 F.3d 775, 776 (7th Cir. 2017), adopting by reference
Secure Leverage Group, Inc. v. Bodenstein, 558 B.R. 226 (N.D. Ill.
2016), retail foreign exchange contracts do not fit within the
definition of commodity contracts.
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ICI strongly supported the proposed amendments to the definition of
``commodity contract'' to include any ``futures contract'' and any
``swap'' thereby permitting transactions carried in a futures or
cleared swaps account in accordance with the Commission's regulations
to be eligible for the protections that part 190 affords.
Accordingly, after consideration of the comment and for the reasons
stated above, the Commission is adopting the definition of ``commodity
contract'' as proposed.
The Commission is adopting the definition of ``customer property
and customer estate'' as proposed to update the definition to clarify
cross-references within part 190 and to note that customer property
distribution is addressed in section 766(i) of the Bankruptcy Code in
addition to section 766(h).
ICE supported the Commission's decision to include forward
contracts that are traded on a DCM and cleared by a DCO as customer
property.
Accordingly, after consideration of the comment, and for the
reasons stated above, the Commission is adopting the definition of
``Customer property, customer estate'' in Sec. 190.01 as proposed.
The Commission is adopting the definition of ``house account'' with
modifications, as set forth below to modify the existing definition to
(a) clarify the connection between the concept of a ``house account''
in part 190 and the concept of a proprietary account in Sec. 1.3, and
(b) separately define the term in relation to an FCM, a foreign futures
commission merchant, and a DCO.
The ABA Subcommittee and CME agreed with expanding the current
definition to cover the house accounts that DCOs maintain for clearing
members. However, the commenters noted that ``house account'' is used
in only three places for an FCM proceeding: (i) Proposed Sec.
190.06(a)(5), which addresses deliveries made or taken with respect to
the debtor FCM's house account under open commodity contracts; (ii)
proposed Sec. 190.07(c), which prohibits transfer of the debtor FCM's
house account after the filing date; and (iii) proposed Sec.
190.08(b)(2)(ix), which provides that when a non-debtor FCM maintains
an omnibus account and a house account with a debtor FCM, it holds the
accounts in a separate capacity for purposes of calculating its net
equity claims against the debtor FCM. Assuming the Commission intended
to expand the scope of these provisions in each case, the ABA
Subcommittee and CME suggested that the Commission modify the three
provisions to clarify that they apply to proprietary accounts of FCMs,
and to limit the defined term to house accounts maintained by a DCO for
clearing members. The ABA Subcommittee believed it was unnecessary,
potentially confusing, and could preclude porting of proprietary
accounts.
The Commission agrees with the commenters' recommendation to
streamline the ``house account'' definition and amend the respective
subpart B provisions to limit the use of ``house account'' to the
context of clearing organization bankruptcies to avoid any potential
confusion regarding the ability to port proprietary accounts.
Accordingly, after considering the comments, and for the reasons stated
above, the Commission is adopting the definition of ``house account''
in Sec. 190.01, as modified.
The Commission is adopting the definitions of ``non-public
customer'' and ``public customer'' as proposed to define who is
considered a public versus a non-public customer separately for FCMs
and for clearing organizations. These definitions are complements
(i.e., every customer is either a ``public customer'' or a ``non-public
customer,'' but never both).
In the case of a customer of an FCM, the Commission is adopting the
definition of ``public customer,'' \60\ which would be analyzed
separately for each of the relevant account classes (futures, foreign
futures, cleared swaps, and delivery) with the relevant cross-
references to other Commission regulations. For the ``futures account
class,'' this would be a futures customer as defined in Sec. 1.3,
whose futures account is subject to the segregation requirements of
section 4d(a) of the Act and the Commission regulations thereunder; for
the foreign futures account class, a 30.7 customer as defined in Sec.
30.1, whose foreign futures account is subject to the segregation
requirements of Sec. 30.7; for the cleared swaps account class, a
cleared swaps customer as defined in Sec. 22.1, whose cleared swaps
account is subject to the segregation requirements of part 22; and for
the delivery account class, a customer that would be classified as a
``public customer'' if the property held in the customer's delivery
account had been held in an account described in one of the prior three
categories. The Commission is tying the definition of public customer
for bankruptcy purposes to the definitions of ``customer'' (and
segregation requirements) that apply during business as usual. An FCM's
non-public customers are customers that are not public customers.
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\60\ This is in contrast to the current definition in Sec.
190.01(cc) and (ii), which explicitly define non-public customer,
and define public customer as a customer that is not a non-public
customer. This change is not substantive, but rather fosters closely
tying the account classes to business-as-usual segregation
requirements.
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As part of the process for introducing a bespoke regime for the
bankruptcy of a clearing organization, the Commission is
differentiating between public and non-public customers such that
customers of clearing members (whether such clearing members are FCMs
or foreign brokers) acting on behalf of their proprietary (i.e., house)
accounts, would be non-public customers, while all other customers of
clearing members would be public customers.
In the case of members of a DCO that are foreign brokers, the
determination as to whether a customer of such a member is a
proprietary member would be based on either the rules of the clearing
organization or the jurisdiction of incorporation of such member: If
either designates the customer as a proprietary member, then the
customer would be treated as a non-public customer.
Vanguard agreed that the proposed definition of public customer in
Sec. 190.01 included any customer of an FCM whose commodity contract
is subject to the Commission's segregation
[[Page 19338]]
requirements, and for a DCO, a person whose account with the FCM is not
classified as a proprietary account. CME also supported the proposed
definitions of public customer and non-public customer as it believed
they are more understandable than the prior part 190 definitions.
CME, however, asked the Commission to reconsider the recommendation
of the ABA Subcommittee to include non-U.S. customers of foreign broker
clearing members of a DCO within the public customer definition. CME
noted that it previously considered admitting foreign brokers as
clearing members to clear trades of their non-U.S. customers in futures
or options on futures listed on the CME or the other designated
contract markets (``DCMs'') owned by CME Group, which would be
analogous to a foreign clearing organization admitting FCMs as members
to clear trades of their public customers in futures or options on
futures listed by a foreign board of trade. While that model does not
currently exist for U.S. DCOs and the DCMs for which they provide
clearing services, CME believed it is appropriate to include that
flexibility in part 190 to accommodate that possibility. OCC also
requested clarification as to whether customers of foreign brokers that
access a DCO through an FCM clearing member affiliated with the foreign
broker would be treated as public customers.
The Commission is of the view that including non-U.S. customers of
foreign-broker clearing members as public customers should be
considered as part of a comprehensive review of the issues at such time
as the model of admitting foreign brokers as clearing members for U.S.
DCOs becomes empirical. Such a review of the issues, including issues
related to both bankruptcy and risk management, can be more reliably,
and more efficiently, be conducted in the context of empirical rather
than hypothetical circumstances.
In response to OCC's request for clarification, the Commission
notes that where a foreign broker clears the trades of its (foreign)
customers through an affiliated FCM that is a clearing member, those
trades would be cleared on an omnibus basis through the FCM's customer
account, and would be required to be kept separate from the proprietary
trades of the affiliated foreign broker. Thus, those customers would be
treated as public customers. If a foreign broker clears its own
proprietary trades through an unaffiliated FCM (i.e., there is no
proprietary relationship between the foreign broker and the FCM as set
forth in Sec. 1.3), those trades would be considered as public
customer trades at the FCM, but would not be part of the customer
omnibus account of the foreign broker at the FCM.
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting the definitions of
``non-public customer'' and ``public customer'' as proposed in Sec.
190.01.
The Commission is adopting the definitions of ``variation
settlement'' as proposed to define the payments that a trustee may make
with respect to open commodity contracts. The definition of variation
settlement includes ``variation margin'' as defined in Sec. 1.3, and
also includes ``all other daily settlement amounts (such as price
alignment payments) that may be owed or owing on the commodity
contract'' to cover all of the potential obligations associated with an
open commodity contract.
CME supported defining variation settlement and generally agreed
with the substance of the definition, but recommended that the
Commission adopt one self-contained definition that does not rely on
cross-reference to another Commission definition. CME suggested that
the Commission adopt the ABA Subcommittee's variation settlement
definition which would cover ``any amount paid or collected (or to be
paid or collected) on an open commodity contract relating to changes in
the market value of the commodity contract since the trade was executed
or the previous time the commodity contract was marked to market along
with all other daily settlement amounts (such as price alignment
payments) that may be owed or owing on the commodity contract.''
The ABA Subcommittee believed that the definition of variation
settlement was not used consistently in the Proposal and identified two
places in proposed Sec. 190.14(b) where the term ``variation'' is used
instead of ``variation settlement.'' The ABA Committee recommended
using ``variation settlement'' in both places, to avoid any confusion
as to whether ``variation'' refers to the Commission's variation margin
definition or variation settlement definition.
The Commission notes that the cross-references in Sec. 190.01 to
definitions in other parts of the Commission's rules is intentional to
clarify the relationships with those other definitions, and thus the
Commission declines to make the change proposed by the commenters.\61\
Accordingly, after consideration of the comments and for the reasons
stated above, the Commission is adopting the definition of ``variation
settlement'' in Sec. 190.01 as proposed.
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\61\ The technical correction suggested by the ABA subcommittee
to Sec. 190.14(b) (change ``variation'' to ``variation
settlement'') will be adopted in one case; the subsection where the
second case was found has been removed entirely by the supplemental
notice of proposed rulemaking.
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The Commission did not receive comments on the remaining
definitions in Sec. 190.01 and is therefore adopting them as proposed.
The Commission is adopting the definition of ``Act'' in Sec.
190.01 to refer to the Commodity Exchange Act.
The Commission is amending the definition of ``Bankruptcy Code'' in
Sec. 190.01 to update cross-references.
The Commission is amending the definition of ``Business day'' to
define what constitutes a Federal holiday and clarify that the end of a
business day is one second before the beginning of the next business
day.
The Commission is amending the definition of ``Calendar day'' to
include a reference to Washington, DC as the reference location for the
Calendar day.
The Commission is adopting the definition of ``Cash delivery
account class'' to cross-reference it to the new definition in
``Account class.''
The Commission is adopting the definition of ``Cash equivalents''
to define assets that might be accepted as a substitute for United
States dollar cash.
The Commission is amending the definition of ``Cleared swaps
account'' in Sec. 190.01 to cross-reference it to the new definition
in ``Account class.''
The Commission is adopting the amended definition of ``Clearing
organization'' to update cross-references.
The Commission is amending the definition of ``Commodity broker''
to reflect the current definition of commodity broker in the Bankruptcy
Code and the relevant cross-references.
The Commission is adding the definition of ``Commodity contract
account'' to refer to accounts of a customer based on commodity
contracts in one of the four account classes, as well as, for purposes
of identifying customer property for the foreign futures account class
(subject to Sec. 190.09(a)(1)), accounts maintained by foreign
clearing organizations or foreign futures intermediaries reflecting
foreign futures or options on futures executed on or subject to the
rules of a foreign board of trade, including any account maintained on
behalf of the debtor's public customers.
The Commission is amending the definition of ``Court'' to clarify
that the court having jurisdiction over the
[[Page 19339]]
debtor's estate may not be a bankruptcy court (e.g., in the event of a
withdrawal of the reference).\62\
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\62\ Cf. 28 U.S.C. 157(d).
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The Commission is amending the definition of ``Cover'' to improve
clarity without any substantive change to the current definition.
The Commission is amending the definition of ``Customer'' to
reflect the revisions to part 190 through this rulemaking,
specifically, noting the different meanings of ``customer'' with
respect to an FCM in contrast to with respect to a DCO.
The Commission is amending the definition of ``Customer claim of
record'' to improve clarity without any substantive changes to the
current definition.
The Commission is amending the definition of ``Customer class'' to
reflect the revisions to part 190 through this rulemaking, specifically
emphasizing the difference between public customers and non-public
customers.
The Commission is deleting the definition of ``Dealer option'' as
this term is no longer used.
The Commission is amending the definition of ``Debtor'' to
explicitly refer to commodity brokers involved in a bankruptcy
proceeding, a proceeding under SIPA, or a proceeding under which the
FDIC is appointed as a receiver.
The Commission is newly adopting a definition of ``Distribution''
to include the transfer of property on a customer's behalf, return of
property to a customer, as well as distributions to a customer of
valuable property that is different than the property posted by that
customer.
The Commission is amending the definition of ``Equity'' to update a
cross-reference.
The Commission is adding definitions for ``Exchange Act'' and
``FDIC'' to incorporate the statute and regulator, respectively, in
part 190.
The Commission is revising the definition of ``Filing date'' to
include the commencement date for proceedings under SIPA or Title II of
the Dodd-Frank Act.\63\
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\63\ In SIPA, the term ``filing date'' is defined to occur
earlier than the filing of an application for a protective decree if
the debtor is the subject of a proceeding in which a receiver,
trustee, or liquidator for the debtor has been appointed and such
proceeding is commenced before the date on which the application for
a protective decree under SIPA is filed. In such case, the term
``filing date'' is defined to mean the date on which such proceeding
is commenced. By contrast, this rulemaking does not define the term
``filing date'' to occur earlier in such a case, although it would
(in Sec. 190.02(f) as discussed below) authorize such a to receiver
themselves file a voluntary petition for bankruptcy of the FCM.
This difference is due to the different uses of the ``filing
date'' in these rules and in SIPA. For purposes of part 190,
``filing date'' refers to the date on and after which a commodity
broker is treated as a debtor in bankruptcy. See, e.g., Sec. Sec.
190.00(c)(4), 190.06(a)(1) and (b)(1), 190.08(b)(4), and
190.09(a)(1)(ii)(A). For purposes of SIPA, by contrast, the ``filing
date'' is the date on which securities are valued. See, e.g., SIPA
sections 8(b), 8(c)(1), 8(d), 9 ff-2(b), (c)(1), (d), and 78fff-
3(a)(3).
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The Commission is revising the definition of ``Final net equity
determination date'' stylistically, to provide updated cross-
references, and to further clarify who the parties involved are
intended to be.
The Commission is adding the definition of ``Foreign board of
trade'' and adopting by reference the definition in Sec. 1.3 (which is
consistent with Sec. 48.2(a)).
The Commission is adding the definition of ``Foreign clearing
organization'' to refer to a clearing house, clearing association,
clearing corporation or similar entity, facility or organization that
clears and settles transactions in futures or options on futures
executed on or subject to the rules of a foreign board of trade.
The Commission is retaining the definitions of ``Foreign future''
and ``Foreign futures commission merchant'' as proposed to be
unchanged.
The Commission is adopting the definition of ``Foreign futures
intermediary'' to refer to a foreign futures or options broker, as
defined in Sec. 30.1, acting as an intermediary for foreign futures
contracts between a foreign futures commission merchant and a foreign
clearing organization.
The Commission is revising the definition of ``Funded balance'' to
the definition in Sec. 190.08(c). That definition is discussed further
below in section II.B.6.
The Commission is adding a definition for ``Futures'' and ``Futures
contract,'' used interchangeably, to clarify what these terms mean for
purposes of part 190.
The Commission is deleting the definition of ``In-the-money
amount'' as the term will no longer be used and replacing it with ``in-
the-money,'' a term that is Boolean, and is used in Sec. 190.04(c).
The Commission is amending the definition of ``Joint account'' to
reflect that a commodity pool must be a legal entity.\64\ Thus, the
Commission is removing the reference to a commodity pool that is not a
legal entity.
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\64\ See Sec. 4.20(a)(1).
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The Commission is deleting the definitions of ``Leverage contract''
and ``Leverage transaction merchant'' consistent with the discussion
above with respect to Sec. 190.00(d)(1)(i)(B).
The Commission is removing the definition of ``Member property''
from current Sec. 190.09(a) and addressing it in Sec. 190.01, and
clarifying that member property is the property that may be used to pay
net equity claims based on both the members' house account as well as
claims on behalf of non-public customers of the member.
The Commission is revising the definition of ``Net equity'' to
update cross-references, including the difference between bankruptcy of
an FCM and of a clearing organization.
The Commission is revising the definition of ``Open commodity
contract'' to improve clarity without any substantive changes to the
definition.
The Commission is revising the definition of ``Order for relief''
to update cross-references and incorporate stylistic, non-substantive
changes.
The Commission is adding the definition of ``Person'' to clarify
what this term means in the context of part 190.
The Commission is adding the definition of ``Physical delivery
account class'' to be cross-referenced to the new definition in
``Account class.''
The Commission is deleting the definition of ``Premium'' as that
term is no longer used.
The Commission is revising the definition of ``Primary liquidation
date'' to reflect the removal of the concept of accounts being held
open for later transfer. As a result of such removal, the Commission is
also deleting current Sec. 190.03(a), which set forth provisions
regarding the operation of accounts held open for later transfer, since
there will no longer be any such accounts.
The Commission is deleting the definition of ``Principal contract''
as that term is no longer used. This term was previously used to refer
to contracts that are not traded on designated contract markets, but
the definition excluded cleared swaps.
The Commission is adding the definition of the ``Securities
account'' and ``SIPA'' to address the bankruptcy of an FCM that is also
subject to the Securities Investor Protection Act. These are based on
appropriate cross-references to the Exchange Act and SIPA.
The Commission is amending the definition of ``Security'' to update
the cross-reference to the Bankruptcy Code without any substantive
changes to the definition.
The Commission is removing the definition of ``Short term
obligation'' from Sec. 190.01 as the term is no longer used within the
definition of ``specifically identifiable property.'' The Commission is
instead amending the ``specifically identifiable property''
[[Page 19340]]
definition with respect to securities, as discussed immediately below.
The Commission is amending the definition of ``Specifically
identifiable property'' to update and streamline the definition in
current Sec. 190.01(ll). Paragraph (1)(i) focuses on ``futures
accounts,'' ``foreign futures accounts,'' and ``cleared swaps
accounts.'' Paragraph (1)(i)(A) corresponds in major part to paragraphs
(ll)(1) and (6) of the current definition. For securities, paragraph
(1)(i)(A)(1) substantially copies current paragraph (ll)(1)(i), but
clarifies that a security, to be included as specifically identifiable
property, must have ``a duration or maturity date of more than 180
days.'' Paragraph (1)(i)(A)(2) reformats current paragraph (ll)(6). For
warehouse receipts, bills of lading, or other documents of title
(paragraph (i)(B), corresponding to current paragraph (ll)(1)(ii)), the
definition restates the corresponding portion of the current
definition.
Paragraph (1)(ii) of the definition furthers the approach of
providing discretion to the trustee. It includes as specifically
identifiable property commodity contracts that are treated as such in
accordance with Sec. 190.03(c)(2). As discussed further below,\65\ the
latter provision permits (but does not require) the trustee, following
consultation with the Commission, to treat open commodity contracts of
public customers as specifically identifiable property if they are held
in a futures account, foreign futures account, or cleared swaps account
that is designated as a hedging account in the debtor's books and
records, and if the trustee determines that treating the commodity
contracts as specifically identifiable property is reasonably
practicable under the circumstances of the case. In contrast, paragraph
(ll)(2) of the current definition is more prescriptive.
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\65\ See section II.B.1.c.
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The Commission is amending the definition of ``Strike price'' for
brevity without any substantive change.
The Commission is adding the definition of ``Substitute customer
property'' to refer to the property (in the form of cash or cash
equivalents) delivered to the trustee by or on behalf of a customer in
order to redeem either specifically identifiable property or a letter
of credit.
The Commission is adopting the definition of ``Swap'' to replace
the current definition of ``Cleared swap'' \66\ in part 190. The
definition of reflects the current definition and meaning of the term
``swap'' in section 1a(47) of the CEA and Commission regulation Sec.
1.3. The Commission is also adopting the definition to add as a swap,
for purposes of this part, ``any other contract, agreement or
transaction that is carried in a cleared swaps account pursuant to a
rule, regulation or order of the Commission, provided, in each case,
that it is cleared by a clearing organization [i.e., a DCO] as, or the
same as if it were, a swap.'' \67\
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\66\ See current Sec. 190.01(pp).
\67\ Cf. 11 U.S.C. 761(4)(F)(ii) (including as a commodity
contract ``with respect to a futures commission merchant or clearing
organization, any other contract, option, agreement, or transaction,
in each case, that is cleared by a clearing organization'').
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The Commission is amending the definition of ``Trustee'' to include
the trustee in a SIPA proceeding.
The Commission is adopting a definition of ``Undermargined'' for
purposes of part 190 to mean when the funded balance of a debtor's
futures account, foreign futures account, or cleared swaps account is
below the minimum amount that the debtor is required to collect and
maintain for the open commodity contracts in such account under the
rules of the relevant clearing organization, foreign clearing
organization, DCM, Swap Execution Facility (``SEF''), or FBOT. If any
such rules establish both an initial margin requirement and a lower
maintenance margin \68\ requirement applicable to any commodity
contracts (or to the entire portfolio of commodity contracts or any
subset thereof) in a particular commodity contract account of the
customer, the trustee will use the lower maintenance margin level to
determine the customer's minimum margin requirement for such account.
An undermargined account may or may not be in deficit.\69\
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\68\ For further discussion of maintenance margin and its
relationship to initial margin, see, e.g., https://www.cmegroup.com/education/courses/introduction-to-futures/margin-know-what-isneeded.html.
\69\ An account is in deficit if the balance is negative (i.e.,
the customer owes the debtor instead of the reverse). An account can
be undermargined but not in deficit (if the balance is positive, but
less than the required margin). See discussion of Sec.
190.04(b)(f). For example, if the margin requirement is $100 and the
account balance is $20, the account is undermargined by $80, but is
not in deficit. If the account loses a further $35, the balance
would be ($15). The account would be in deficit by $15, and would be
undermargined by $115.
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Accordingly, after consideration of the comments, and for the
reasons discussed above, the Commission will adopt Sec. 190.01 as
proposed, with the amendments discussed above.
3. Regulation Sec. 190.02: General
Regulation Sec. 190.02 is being adopted as proposed, with the
addition of paragraph (g) as described below. The Commission is
adopting Sec. 190.02(a)(1) based on current Sec. 190.10(b)(1) with
one substantive change to permit a trustee to request an exemption from
the Commission from any procedural provision (rather than limiting such
requests to exemptions from, or extension of, a time limit). Such an
exemption may be subject to conditions, and must be consistent with the
purposes of this part and of subchapter IV of the Bankruptcy Code. The
Commission is adopting Sec. 190.02(a)(1) consistent with major theme
7, discussed in section I.B. above regarding enhanced trustee
discretion. Section 190.02(a)(1) allows the trustee to request to be
permitted to extend a deadline or to amend a form.
The Commission is also adopting Sec. 190.02(a)(2)(i) and (ii),
(a)(3), and (b), as derived from current Sec. Sec. 190.10(b)(2), (3),
and (4) and 190.10(d), respectively, with minor editorial and
conforming changes.
The Commission is adopting Sec. 190.02(b) to delegate the
functions of the Commission set forth in part 190, other than the
authority to disapprove pre-relief transfers pursuant to Sec.
190.07(e)(1), to the Director of the Division of Clearing and Risk,
after consultation with the Director of the Market Participants
Division \70\ (with the possibility of further delegations to members
of the respective Directors' staffs).
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\70\ The Market Participants Division is the successor to the
Division of Swap Dealer and Intermediary Oversight, the title of
that division at the time of the Proposal.
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The Commission is adopting Sec. 190.02(c) to exclude from the
definition of ``customer'' entities who hold claims against a debtor
solely on account of uncleared forward contracts. The Commission is
adopting Sec. 190.02(d) to provide that the Bankruptcy Code will not
be construed to prohibit a commodity broker from doing certain
combinations of business, or to permit any otherwise prohibited
operation, trade or business. The Commission is adopting Sec.
190.02(e) to provide that security futures products held in a
securities account shall not be considered to be part of commodity
futures or options accounts as those terms are used in section 761(9)
of the Bankruptcy Code. The Commission is adopting Sec. 190.02(c)
(forward contracts), (d) (other), and (e) (rule of construction) as
transposed from current Sec. 190.10(e), (g), and (h), respectively.
The Commission continues to believe, as stated in the proposal,
that Sec. 190.02(f) should enhance customer protection in cases where
a receiver has been
[[Page 19341]]
appointed (pursuant to e.g., section 6c of the CEA) for an FCM due to a
violation or imminent violation \71\ of the customer property
protection requirements of section 4d of the CEA or of the regulations
thereunder, or of the Commission's capital rule (Sec. 1.17). Section
190.02(f) explicitly permits such a receiver to file a voluntary
petition for bankruptcy of such FCM in appropriate cases. For example,
the receiver may determine that, due to a deficiency in property in
segregation, bankruptcy is necessary to protect customers' interests in
customer property.
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\71\ Section 6c of the CEA provides in relevant part that
whenever it shall appear to the Commission that any person has
engaged, is engaging, or is about to engage in any act or practice
constituting a violation of any provision of this Act or any rule,
regulation, or order thereunder the Commission may bring an action
in the proper district court to enjoin such act or practice, or to
enforce compliance with this Act (emphasis supplied). Section 6c
also refers to an order appointing a temporary receiver to
administer such restraining order and to perform such other duties
as the court may consider appropriate. 7 U.S.C. 13a-1.
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The Commission requested comment with respect to all aspects of
proposed Sec. 190.02. In particular, the Commission requested comment
as to whether it would be appropriate to permit trustees to request
relief from procedural provisions such as requirements as to forms, in
addition to requesting relief from deadlines; whether it would be
appropriate to permit receivers for FCMs to file voluntary petitions in
bankruptcy; and whether any portion of proposed Sec. 190.02 would
likely to lead to unintended consequences, and, if so, how may these be
mitigated.
The Commission received two comments on proposed Sec. 190.02. CME
generally supported proposed Sec. 190.02, including adding a provision
that would allow the trustee to request an exemption from the
procedural requirements of the rules. CME also favored adding the
proposed provision to clarify that a receiver appointed for an FCM due
to segregation or net capital violations may, in an appropriate case,
file a petition for bankruptcy of the FCM pursuant to section 301 of
the Bankruptcy Code. In contrast, FIA recommended that the Commission
require a receiver to obtain the Commission's consent before the
receiver may file a voluntary petition in bankruptcy on behalf of an
FCM. FIA believed that any receiver that may be appointed by a court
would be in response to a proceeding initiated by the Commission
pursuant to section 6c of the Act, which authorizes the Commission to
file an action in the appropriate U.S. District Court when it appears
that a person has engaged, is engaging, or is about to engage in any
act or practice constituting a violation of any provision of this Act
or any rule, regulation, or order thereunder. FIA noted that there may
be circumstances in which a receiver may determine that a voluntary
petition under the Bankruptcy Code is warranted. However, in light of
the fact that such a petition would effectively close the FCM, FIA
believed that Sec. 190.02(f) should provide that the receiver may file
a voluntary petition only with the prior consent of the Commission.
The Commission notes that Sec. 190.02(f) is limited to cases where
the receiver was appointed due to concerns about either protection of
customer property, or of capital inadequacy, and the appointment would
be in response to a proceeding initiated by the Commission. In such a
case, the Commission believes that it would be appropriate and most
effective to defer to the judgment of the appointed receiver as to the
necessity of the filing of a petition in bankruptcy.
As a technical point, the ABA Subcommittee recommended (consistent
with their recommendation in the definitions section, Sec. 190.01, to
more precisely use the term ``allowed net equity'') \72\ that the
Commission further amend Sec. 190.02 by adding new paragraph (g) to
proposed Sec. 190.02 to state that the term ``allowed'' in this part
shall have the meaning ascribed to it in the Bankruptcy Code. The ABA
Subcommittee believed that this would confirm that ``allowed'' under
part 190 equates with the use of ``allowed'' under the Bankruptcy Code.
The Commission agrees, and is making the change.
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\72\ See section II.A.2. (recommending that the Commission
instead use ``funded net equity'' as the defined term in the Sec.
190.01 definitions.)
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Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is adopting Sec. 190.02 as
proposed, with the addition of paragraph (g).
B. Subpart B--Futures Commission Merchant (FCM) as Debtor
The Commission is adopting subpart B (Sec. Sec. 190.03-190.10) to
address debtors that are FCMs.
1. Regulation Sec. 190.03: Notices and Proofs of Claims
The Commission is adopting Sec. 190.03 as proposed with
modifications to Sec. 190.03(c)(2), as set forth below.
The Commission is adopting Sec. 190.03 to set forth requirements
for the notices and proofs of claim that are applicable to subpart B of
part 190. It reorganizes and revises much of current Sec. 190.02, and
incorporates some portions of current Sec. 190.10.
a. Regulation Sec. 190.03(a): Notices--Means of Providing
The Commission is adopting Sec. 190.03(a) to set forth the means
by which notices required under subpart B of part 190 are to be
provided. Section 190.03(a)(1) is substantially similar to current
Sec. 190.10(a), but, in an effort to modernize part 190, the
Commission is deleting the requirement that notices be given to it via
overnight mail (i.e., in hard copy). The Commission is retaining the
requirement that all such notices be sent via electronic mail. The
Commission believes that overnight hard copy delivery is unnecessary
and that removing the requirement to send notices to the Commission via
overnight mail will result in cost savings.
The Commission is adopting Sec. 190.03(a)(2) to provide a
generalized approach for giving notice to customers under part 190. In
light of evolving technology, Sec. 190.03(a)(2) replaces the specific
procedures for providing notice to customers that appear in current
Sec. 190.02(b) with the requirement that the trustee must establish
and follow procedures ``reasonably designed'' for giving notice to
customers under subpart B of part 190. Such notice procedures should
generally include the use of a website and customers' electronic
addresses. In the Commission's view, this new approach provides
trustees with the necessary flexibility to determine the best way to
provide notice and is consistent with the manner in which bankruptcy
trustees in recent FCM bankruptcy cases have provided notice to
customers. The Commission also believes that adopting a generalized
notice requirement in lieu of retaining more specific notice
obligations (e.g., newspaper publication) will result in both cost
savings for the debtor's estate, and more efficient and effective
notification of customers.
The Commission requested comment on the approach to the notice
requirements set forth in proposed Sec. 190.03(a). The Commission
specifically asked whether the proposed changes would be helpful; would
be likely to lead to unintended consequences; and how any unintended
consequences could be mitigated. CME supported providing trustees with
the flexibility, in consultation with the Commission, to establish
appropriate procedures for giving notice to customers and moving away
from outdated and impractical notice requirements. CME also agreed that
the changes align with how trustees in recent FCM cases have
communicated with the FCM's customers and are more customer-friendly.
[[Page 19342]]
b. Regulation Sec. 190.03(b): Notices to the Commission and Designated
Self-Regulatory Organizations
Section 190.03(b)(1) is derived from current Sec. 190.02(a)(1),
but includes revised notice requirements that are designed to ensure
that the Commission and the relevant designated self-regulatory
organization (``DSRO'') \73\ will be aware of a voluntary or
involuntary bankruptcy filing or SIPA application as soon as is
practicable and to codify the practices observed in recent bankruptcy
and SIPA cases.\74\ First, Sec. 190.03(b)(1) provides that, in the
event of a voluntary bankruptcy filing, the commodity broker must
notify the Commission and the appropriate DSRO as soon as practicable
before, and in any event no later than, the time of filing. Second,
Sec. 190.03(b)(1) provides that, in the event of an involuntary
bankruptcy filing or an application for a protective decree under
SIPA,\75\ the commodity broker must notify the Commission and the
appropriate DSRO immediately upon the filing of such petition or
application. The Commission notes that, as a practical matter, a
decision to file for bankruptcy takes measurable time, as does the
preparation of the necessary papers. In previous FCM voluntary
bankruptcy filings, the commodity broker has provided the Commission
and its DSRO with notice ahead of the bankruptcy filing. Section
190.03(b)(1) merely codifies the expectation that such advance notice
should, in fact, occur to the extent practicable. Section 190.03(b)(1)
allows the commodity broker to provide the relevant docket number of
the bankruptcy or SIPA proceeding to the Commission and the DSRO ``as
soon as known,'' in order to account for the fact that there may be a
time lag between the filing of a proceeding and the assignment of a
docket number.
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\73\ For further detail regarding SROs and DSROs see generally
Sec. 1.52.
\74\ A voluntary case under a chapter of the Bankruptcy Code is
commenced by the debtor by filing a petition under that chapter.
Section 301(a) of the Bankruptcy Code, 11 U.S.C. 301(a). Under
certain circumstances, creditors of a person may file an involuntary
case against that person pursuant to section 303 of the Bankruptcy
Code, 11 U.S.C. 303. In such cases, the order for relief will be
granted only if the petition is not timely controverted or if the
court makes specific findings. Id. There is no historical precedent
for an involuntary petition in bankruptcy being filed against a
commodity broker.
\75\ A SIPA proceeding is commenced when the Securities
Investors Protection Corporation (``SIPC'') files a petition for a
protective order. See generally SIPA section 5, 15 U.S.C. 78eee.
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Section 190.03(b)(2) sets forth the requirements for the provision
of notice to the Commission of an intent to transfer or to apply to
transfer open commodity contracts in accordance with section 764(b) of
the Bankruptcy Code and relevant provisions of part 190. It is derived
from current Sec. 190.02(a)(2). While Sec. 190.03(b)(2) retains the
requirement that such notice be provided ``[a]s soon as possible,'' it
removes the requirement that such notice be provided no later than
three days after the order for relief. The Commission believes that the
three-day deadline set forth in current Sec. 190.02(a)(2) is likely in
many cases to be too long, but may, in some cases, be too short.
The Commission expects that the bankruptcy trustee would begin
working on transferring any open commodity contracts as soon as the
trustee is appointed and that, by the end of three days following entry
of the order for relief, any such transfers likely will be either
completed, actively in process, or determined not to be possible.
Indeed, the Commission expects that a DCO would, in most cases, be
reluctant to hold a position open for more than three days following
the entry of the order for relief unless a transfer is actively in
process and imminent. Thus, while the Commission recognizes that the
``[a]s soon as possible'' language is somewhat vague, given past
experience, the Commission views the current timeframe of three days
after the entry of the order for relief as generally too long, and it
is not clear what precise shorter period of time would be generally
appropriate, given the uniqueness of each case. Under different
circumstances, that is, where transfer arrangements cannot be made
within three days after the order for relief, a specified deadline for
notification may in fact be harmful, in that it could be interpreted to
prohibit notification after the expiration of such deadline (and thus,
impliedly prohibit the trustee from forming the intent to transfer
after that time).
In the event of an FCM bankruptcy, the Commission anticipates that
there will be frequent contact between the trustee, the relevant DSRO,
any relevant clearing organization(s), and Commission staff. Thus, a
specified deadline for such notification would not appear to be
helpful. Section 190.03(b)(2) also clarifies that notification should
be made with respect to a transfer of customer property.
The Commission requested comment on proposed Sec. 190.03(b).
Specifically, the Commission asked whether proposed Sec. 190.03 would
meet the objective of ensuring that the Commission and the relevant
DSRO will be aware of a bankruptcy filing or SIPA proceeding as soon as
is practicable. LCH expressed support for the requirement that FCMs
notify DSROs, in addition to the CFTC, of involuntary bankruptcy
filings. LCH also requested that the Commission consider ways in which
this information could be quickly transmitted to the DCOs that may be
impacted, given the interconnectedness of the derivatives market.
While, as noted above, staff would be in contact with DCOs that might
be impacted by a bankruptcy proceeding involving an FCM as a matter of
supervisory practice, this practice does not need to be incorporated
into regulation. Moreover, the Commission notes that many DCOs,
including LCH, require as part of their own rules and procedures that
their clearing members provide prompt notice of a bankruptcy filing
affecting the clearing member.\76\
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\76\ See, e.g., LCH Ltd.: FCM Procedures of the Clearing House
1.6(b)(G) (``All FCM Clearing Members must provide the Clearing
House in a prompt and timely manner with: . . . notice if the FCM
Clearing Member becomes the subject of a bankruptcy petition.'').
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c. Regulation Sec. 190.03(c): Notices to Customers; Treatment of
Hedging Accounts and Treatment of Specifically Identifiable Property
The Commission is adopting Sec. 190.03(c) to address notices to
customers and the treatment of hedging accounts and specifically
identifiable property.
Section 190.03(c)(1) requires the trustee to use all reasonable
efforts to notify promptly any customer whose futures account, foreign
futures account, or cleared swaps account includes specifically
identifiable property, other than open commodity contracts, which has
not been liquidated, that such property may be liquidated on and after
the seventh day after the order for relief if the customer has not
instructed the trustee in writing before the deadline specified in the
notice to return such property pursuant to the terms for distribution
of customer property contained in part 190. It also requires that the
trustee's notice to customers with specifically identifiable property
include, where applicable, a reference to substitute property.
Section 190.03(c)(1) is derived from current Sec. 190.02(b)(1),
but replaces the requirement that the trustee publish such notice to
customers in a newspaper for two consecutive days prior to liquidating
the specifically identifiable property with the requirement that the
trustee notify customers in accordance with Sec. 190.03(a)(2). This
change is intended to provide the trustee with flexibility in notifying
customers regarding specifically identifiable
[[Page 19343]]
property and to modernize part 190 to allow the trustee to provide
notice to customers in a way that will maximize the number of customers
reached. The timeframe in which the Commission would allow the trustee
to commence liquidation of specifically identifiable property has been
modified to reflect the revised notice requirements. Because Sec.
190.03(c)(1) does not require newspaper publication of customer notice,
the Commission is allowing the trustee to commence liquidation of
specifically identifiable property on the seventh day after the order
for relief (or such other date as specified by the trustee with the
approval of the Commission or the court), so long as the trustee has
used all reasonable efforts promptly to notify the customer under Sec.
190.03(a)(2) and the customer has not instructed the trustee in writing
to return such specifically identifiable property.
The Commission is adopting Sec. 190.03(c)(2) to address how a
bankruptcy trustee may treat open commodity contracts carried in
hedging accounts. This regulation moves from the bespoke approach of
current Sec. 190.02(b)(2) to a categorical approach, in light of the
practical difficulties of treating large numbers of customers with
similar open contracts on a bespoke basis.\77\ The Commission notes
that recent commodity broker bankruptcies have involved thousands of
customers, with as many as hundreds of thousands of commodity
contracts. Trustees must make decisions as to how to handle such
customers and contracts within days--in some cases, hours--after being
appointed. Therefore, the Commission is giving the trustee the
authority (i.e., an option, but not an obligation) to treat open
commodity contracts of public customers held in hedging accounts
designated as such in the debtor's records as specifically identifiable
property, after consulting with the Commission and when practical under
the circumstances. To the extent the trustee exercises such authority,
the trustee is required to notify each relevant public customer in
accordance with Sec. 190.03(a)(2). As proposed, Sec. 190.03(c)(2)
would have required the trustee, in all cases, to request that the
customer provide instructions as to whether to transfer or liquidate
the relevant open commodity contracts.\78\ As discussed further below,
in response to a comment, the Commission is modifying this proposal to
address cases where, in the judgment of the trustee, the books and
records of the debtor reveal a clear preference by the public customer
with respect to transfer or liquidation of open commodity contracts.
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\77\ See major theme 7 in section I.B. above.
\78\ The Commission is also making other changes that are
intended to make it simpler for the trustee to identify hedging
positions and allow an FCM to designate an account as a hedging
account by relying on explicit customer representations that the
account contains a hedging position. See Sec. 1.41. This would
simplify the existing requirement that FCMs provide a hedging
instructions form when a customer first opens up a hedging account.
For commodity contract accounts opened prior to the effective date
of the part 190 revisions, the Commission is proposing that FCMs may
rely on written hedging instructions received from the customer in
accordance with current Sec. 190.06(d). See Sec. 1.41(c).
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Section 190.03(c)(2) also delineates certain information that the
trustee must include in the notice. As proposed, the notice must inform
the customer that (1) if the customer does not provide instructions in
the prescribed manner and by the prescribed deadline, the customer's
open commodity contracts will not be treated as specifically
identifiable property; (2) any transfer of the open commodity contracts
is subject to the terms for distribution contained in Sec.
190.09(d)(2); (3) absent compliance with any terms imposed by the
trustee or the court, the trustee may liquidate the open commodity
contracts; and (4) providing instructions may not prevent the open
commodity contracts from being liquidated. The Commission is making
conforming changes to this portion of proposed Sec. 190.03(c)(2) to
reflect the modification referenced above. To the extent the trustee
does not exercise its authority to treat public customer positions
carried in a hedging account as specifically identifiable property, the
trustee must endeavor to, as the baseline expectation, treat open
commodity contracts of public customers carried in hedging accounts the
same as other customer property and effect a transfer of such contracts
to the extent possible.\79\ The Commission is making these changes to
reflect the policy preference to port all positions of public
customers. Requiring a trustee to identify hedging accounts and provide
hedging account holders the opportunity to keep their positions open
may be a resource and time intensive process, which the Commission
believes could interfere with the trustee's ability to take prudent and
timely action to manage the debtor FCM's estate to protect all of the
FCM's customers. The Commission believes that allowing the FCM to rely
on representations made by customers during business-as-usual will
alleviate this concern. In cases where it may be practical, the trustee
may elect to provide special hedging account treatment.
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\79\ See Sec. 190.00(c)(4).
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The Commission is adopting Sec. 190.03(c)(3) to make minor
modifications to the notice of the commencement of an involuntary
proceeding that the trustee may provide to customers prior to entry of
an order for relief, and upon leave of the court. Such modifications
include clarifying that such notice must be in accordance with the
notice provisions set forth Sec. 190.03(a)(2), amending certain
terminology, and removing unnecessary references.
Section 190.03(c)(4) requires the bankruptcy trustee to notify
customers that an order for relief has been entered and instruct
customers to file a proof of customer claim. The regulation is derived
from current Sec. 190.02(b)(4), but adds that the notice must be
provided in accordance with Sec. 190.03(a)(2). Section 190.03(c)(4)
replaces the term ``customer of record'' with the term ``customer,'' as
``customer of record'' is not a defined term in part 190 and all
customers should receive notice that an order of relief has been
entered. Section 190.03(c)(4) also provides that the trustee shall
cause the proof of customer claim form to set forth the bar date for
its filing consistent with the current Sec. 190.03(a)(2).
The Commission requested comment on proposed Sec. 190.03(c). It
specifically asked whether the proposed changes to the notice
requirements would be helpful; whether the discretion granted to the
trustee concerning the treatment of hedging accounts as specifically
identifiable property is appropriately tailored; whether the proposed
revisions appeared likely to lead to unintended consequences; and how
such consequences; if any, could be mitigated.
The Commission received three comments on proposed Sec. 190.03.
CME fully endorsed the policy preference that the trustee should use
their best efforts to transfer all public customer positions and
related customer property from the debtor FCM to one or more other
FCMs. Accordingly, CME supported the provisions in Sec. 190.03(c) that
grant the trustee the discretion to not treat customer positions
carried in hedge accounts as specifically identifiable property, unless
the trustee determines that doing so would be practicable under the
circumstances, following consultation with the Commission. CME asserted
that this discretion will allow the trustee to devote their attention
to transferring open positions of all public customers, along with
their proportionate share of the customer property, in the aggregate.
[[Page 19344]]
SIFMA AMG/MFA also generally agreed with Sec. 190.03(c)(2) in that it
grants to the trustee the authority (that is, the option but not the
obligation) to treat open commodity contracts of public customers held
in hedging accounts designated as such in the debtor's record as
specifically identifiable property. SIFMA AMG/MFA stated that
permitting the trustee this flexibility would serve the interest of
customers as a whole by facilitating a more rapid transfer of customer
positions and property. SIFMA AMG/MFA recommended, however, that the
Commission explicitly clarify that Sec. 190.03(c)(2) is not intended
to affect the treatment of hedging accounts under part 39 of the
Commission's regulations and that, to the extent reasonably
practicable, the trustee's goal will be to maximize value to the public
customer.\80\ Additionally, in the context of the treatment of hedging
accounts, SIFMA AMG/MFA recommended that, if the trustee exercises the
authority as granted in this provision, the trustee should be first
required to consult the instructions (regarding preferences with
respect to transfer or liquidation of open commodity contracts)
provided by a public customer to the debtor at the time of opening the
relevant hedging account, and only if such instructions are missing or
unclear should the trustee require such customer to provide it with
written instructions as contemplated by proposed Sec. 190.03(c)(2).
SIFMA AMG/MFA noted that the notice sent by the trustee to the customer
can still provide that existing or previously provided instructions may
not prevent the open commodity contracts from being liquidated. SIFMA
AMG/MFA asserted that adding this first step would further the goal of
expediency.
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\80\ This last point is addressed with the addition of Sec.
190.00(c)(3)(i)(C).
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The Commission agrees with the suggestion by SIFMA AMG/MFA that it
is more efficient to endeavor to follow clear instructions previously
provided rather than to request new instructions. Moreover, this
approach mitigates the risk that a customer who has already made their
preference patent will fail to reply to the request and thus be treated
in a manner contrary to that previously expressed preference.
Accordingly, the Commission is amending and reorganizing Sec.
190.03(c)(2) to implement that suggestion. Specifically, Sec.
190.03(c)(2)(ii)(B) is being amended to provide, in pertinent part
that: (1) Where, in the judgment of the trustee, the books and records
of the debtor reveal a clear preference by a relevant public customer
with respect to transfer or liquidation of open commodity contracts,
the trustee shall endeavor, to the extent reasonably practicable, to
comply with that preference; and (2) Where, in the judgment of the
trustee, the books and records of the debtor do not reveal a clear
preference by a relevant public customer with respect to transfer or
liquidation of open commodity contracts, the trustee will request the
customer to provide written instructions whether to transfer or
liquidate such open commodity contracts. Such notice must specify the
manner for providing such instructions and the deadline by which the
customer must provide instructions.
Other conforming changes are being made to Sec. 190.03(c)(2). With
respect to SIFMA AMG/MFA's request that the Commission explicitly
clarify that proposed Sec. 190.03(c)(2) is not intended to affect the
treatment of hedging accounts under part 39, the Commission notes that
Sec. 190.03(c)(2) governs the trustee's actions, and does not govern
the actions a DCO may take under its default rules or otherwise.
ACLI recommended that the Commission amend proposed Sec.
190.03(c)(2) to require a trustee to transfer a public customer's hedge
positions where the customer has requested the transfer and met the
required terms unless, in consultation with the Commission, it is
determined that it would be unreasonable to transfer such positions.
ACLI further recommended that the Commission add a threshold such as
``impossibility'' or ``exigent circumstances'' to limit a trustee's
ability to liquidate a customer's hedge position in lieu of a requested
transfer. ACLI asserted that the Commission's oversight should be
specifically mandated. In response to ACLI's comment, the Commission
notes that Sec. 190.00(c)(4) sets forth a preference for the porting
of all open commodity contract positions of public customers, along
with all or a portion of such customers' account equity, and Sec.
190.04(a)(1) instructs the trustee promptly to use its best efforts to
effect a transfer of such positions and property in accordance with
Sec. 190.07(c) and (d) not later than seven calendar days after the
order for relief. The discretion granted to the trustee in Sec.
190.03(c)(2) is based on the reality that, in light of limited time and
administrative resources, achieving porting to the maximum extent is
fostered by treating customers on an omnibus, rather than an
individualized, basis. For these reasons, the Commission declines to
adopt ACLI's specific suggestions.
d. Regulation Sec. 190.03(d): Notice of Court Filings
Section 190.03(d) addresses notices of court filings. It is derived
from current Sec. 190.10(f), but makes modernizing changes to the
terminology and method of providing notice to the Commission. The
Commission requested comment on proposed Sec. 190.03(d). The
Commission specifically asked whether the proposed revisions appeared
likely to lead to unintended consequences, and, if so, how such
consequences could be mitigated. The Commission did not receive any
comments on proposed Sec. 190.03(d).
e. Regulation Sec. 190.03(e): Proof of Customer Claim
The Commission is adopting Sec. 190.03(e) to require a trustee to
request that customers provide information sufficient to determine a
customer's claim in accordance with the regulations contained in part
190. Section 190.03(e) lists certain information that customers shall
be requested to provide, to the extent reasonably practicable, but
grants the trustee discretion to adapt the request to the facts of the
particular case. Such discretion is being granted to the trustee in
order to enable the trustee to tailor the proof of claim form to the
information that is most appropriate in light of the specifics of the
types of business that the debtor did (and did not do), the way in
which such types of business were organized, and the available records
of the debtor (as well as the reliability of those records). Section
190.03(e) is generally derived from current Sec. 190.02(d), although
certain items on the list of information to be requested of customers
have been revised and reorganized to: Inter alia, improve clarity; tie
the questions to definitions of terms in part 190; give the claimant an
opportunity to provide a more complete picture of its claims; and
provide its own view as to the value of such open positions,
unliquidated securities or other unliquidated property in order to
support its claim against the debtor.
The Commission requested comment on proposed Sec. 190.03(e).
Specifically, the Commission asked whether the proposed changes would
be helpful; whether the discretion granted to the trustee was
appropriately tailored; whether the proposed revisions appeared likely
to lead to unintended consequences; and how such consequences, if any,
could be mitigated. The Commission received one comment on proposed
Sec. 190.03(e). CME noted that the proposed regulation
[[Page 19345]]
is a major improvement over the current regulation.
f. Regulation Sec. 190.03(f): Proof of Claim Form
Regulation Sec. 190.03(f) provides that a template proof of claim
form is included as appendix A to part 190.\81\ The Commission
substantially revised the customer proof of claim form in order to
streamline it and better map it to the information listed in Sec.
190.03(e). The revised customer proof of claim form now includes, in
each section, citations to the location in the text of Sec. 190.03(e)
where such information is listed.
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\81\ Appendix A is discussed in section II.D below.
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Section 190.03(f)(1) provides that, to the extent there are no open
commodity contracts that are being treated as specifically identifiable
property, the bankruptcy trustee should modify the proof of claim form
to delete any references to open commodity contracts as specifically
identifiable property. For example, this would be the case if all open
commodity contracts had been transferred or liquidated before the proof
of claim form is sent. Section 190.03(f)(2) makes clear that the
trustee has discretion as to whether to use the template proof of claim
form, and that the proof of claim form should be modified to reflect
the specific facts and circumstances of the case. The provisions of
Sec. 190.03(f), taken together, are meant to provide bankruptcy
trustees with appropriate flexibility to determine the best and most
efficient way to compose the customer proof of claim.
The Commission requested comment on proposed Sec. 190.03(f).
Specifically, the Commission asked whether the proposed changes to the
treatment of the proof of customer claim form would be helpful; whether
they would lead to unintended consequences; and how such consequences,
if any, could be mitigated. The Commission also asked whether the
discretion granted to the trustee was appropriately tailored and, if
not, what changes should be made. CME commented that the proof of claim
form had been improved and supported the flexibility provided to the
trustee.
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.03 as
proposed, with modifications to Sec. 190.03(c)(2), as set forth above.
2. Regulation Sec. 190.04: Operation of the Debtor's Estate--Customer
Property
The Commission is adopting Sec. 190.04 as proposed with
modifications, as set forth below to address the collection of margin
and variation settlement, as well as the liquidation and valuation of
positions. The Commission is adopting Sec. 190.04 to clarify and
update portions of Sec. Sec. 190.02, 190.03, and 190.04.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.04 including: Whether the revisions create any
unintended conflicts with customer protection regulations set forth in
parts 1, 22, and 30; how any such conflicts may be resolved; whether
there are any proposed clarification changes that are likely to create
unintended consequences; and, if so, how might those be avoided or
mitigated.
a. Regulation Sec. 190.04(a): Transfers
The Commission is adopting Sec. 190.04(a) as proposed. Section
190.04(a) largely retains the current provisions in current Sec.
190.02(e) regarding transfers for customers in a bankruptcy proceeding.
It also retains the policy preference \82\ that the trustee should use
its best efforts to transfer open commodity contracts and property held
by the failed FCM for or on behalf of its public customers to one or
more solvent FCMs.\83\ Regulation Sec. 190.04(a)(1) provides that the
trustee ``shall promptly'' use its best efforts to effect such
transfers, while current Sec. 190.02(e)(1) states that the trustee
must ``must immediately'' do so. This revision signals that the trustee
must take action to transfer open commodity contracts as soon as
practicable, while avoiding potential pressure of the term
``immediately'' in light of the challenges presented in an FCM
bankruptcy. Regulation Sec. 190.04(a)(2) replaces the term ``equity''
with ``property'' to clarify that the trustee should endeavor to
transfer all types of property that the commodity broker is holding on
behalf of customers; the transfer is not limited to equity. The
Commission is also adding the word ``public'' before ``customers'' to
clarify that the transfers discussed in Sec. 190.04(a)(1) relate to
the open commodity contracts and property of the debtor's public
customers.\84\
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\82\ The Commission discussed the rationale for this policy
preference in the discussion of Sec. 190.00(c)(4). See section
II.A.1. See also ABA Cover Note at 14 (recommending explicitly
identifying in Sec. 190.04(a) a clear policy that the trustee
should use best efforts to transfer open commodity contracts and
property held by the failed FCM for or on behalf of its public
customers to one or more solvent FCMs).
\83\ The Commission is also adopting cross-references in Sec.
190.04(a) to other provisions within proposed part 190 that discuss
transfers of customer property.
\84\ The Commission is adopting the same change--addition of the
word ``public'' before ``customers''--to Sec. 190.04(a)(2), as
discussed below.
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The Commission is adopting Sec. 190.04(a)(2), as derived from
Sec. 190.02(e)(2), to remove the liquidation-only trading limitations
on an FCM that is subject to an involuntary bankruptcy petition unless
otherwise directed by the Commission, by any applicable self-regulatory
organization, or by court. The Commission is instead adopting
limitations on the business of an FCM in bankruptcy in Sec. 190.04(g)
to more generally address involuntary proceedings.\85\
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\85\ The Commission is deleting the reference to ``liquidation''
in Sec. 190.02(e)(4) accordingly since the limitation to trading
for liquidation only is being deleted from Sec. 190.04(a)(2).
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The Commission is adopting Sec. 190.04(a)(2), as derived from
current Sec. 190.02(e)(2), to provide that if such commodity broker
demonstrates to the Commission within a specified period of time that
it is in compliance with the Commission's segregation and financial
requirements on the filing date, the Commission may determine to allow
the commodity broker to continue in business. The Commission is
retaining this provision because any requirement to transfer customers
is properly addressed pursuant to Sec. 1.17(a)(4), which deals with
FCMs that do not meet minimum financial requirements. The Commission is
of the view that an FCM that does meet such requirements should not be
compelled to cease business and transfer its customers absent an
appropriate finding by a court or the Commission.
In addition, similar to Sec. 190.04(a)(1), as discussed above, the
Commission is replacing the term ``equity'' with ``property'' to
clarify that the transfers discussed in Sec. 190.04(a)(2) are for all
types of property that the commodity broker is holding on behalf of
customers, rather than limited to only equity. Also, the Commission is
adding the word ``public'' before ``customers'' to clarify in Sec.
190.04(a)(2) that the transfers discussed in Sec. 190.04(a)(1) relate
to the open commodity contracts and property of the debtor's public
customers.
The Commission did not receive any comments on this aspect of the
Proposal. Accordingly, for the reasons stated above, the Commission is
adopting Sec. 190.04(a) as proposed.
b. Regulation Sec. 190.04(b): Treatment of Open Commodity Contracts
The Commission is adopting Sec. 190.04(b) as proposed to clarify
and update the provisions in current Sec. 190.02(g)(1), which allow a
trustee to make ``variation and maintenance margin payments'' on behalf
of the
[[Page 19346]]
debtor FCM's customers. The Commission is adopting Sec. 190.04(b) to
be generally consistent with the current regulation but with a number
of substantive changes.
First, the Commission is adopting Sec. 190.04(b) to permit the
trustee to make margin payments pending transfer or liquidation; not
just pending liquidation as required by current Sec. 190.02(g)(1). The
amendment is consistent with the Commission's longstanding policy for
the trustee to endeavor to transfer open commodity contracts. The
trustee has two paths for the treatment of such contracts: Transfer
and, if transfer is not possible, liquidation.
Second, the Commission is adopting Sec. 190.04(b)(1) to delete the
phrase ``required to be liquidated under paragraph (f)(1) of this
section'' in current Sec. 190.02(g)(1) to eliminate a complete
prohibition against paying margin on open contracts. While holding
contracts open may or may not be practicable given the particular
circumstances of the bankruptcy, a complete prohibition against paying
margin on such open contracts would undermine the point of having the
possibility to hold those contracts open. Accordingly, the Commission
is deleting the phrase ``required to be liquidated under paragraph
(f)(1) of this section'' and thus will instead apply more broadly to
any open commodity contracts.
The Commission is also adopting several technical amendments.
Third, the Commission is replacing the phrase ``variation and
maintenance margin payments'' with ``payments of initial margin and
variation settlement'' which, in the Commission's view, more accurately
describes the types of payments being reflected in this provision.
Fourth, the Commission is replacing the phrase ``to a commodity
broker'' with ``to a clearing organization, commodity broker, foreign
clearing organization or foreign futures intermediary'' to account for
the various types of entities to which a margin payment described in
this provision may be made. Lastly, the Commission is replacing the
phrase ``specifically identifiable to a particular customer'' with
``specifically identifiable property of a particular customer'' in
order to be consistent with the definitions in part 190, which includes
as a defined term ``specifically identifiable property.''
The Commission is adopting Sec. 190.04(b)(1)(i), as derived from
current Sec. 190.02(g)(1)(i), to prevent the trustee from making any
payments on behalf of any commodity contract account that is in
deficit, to the extent within the trustee's control. The Commission is
including the phrase ``to the extent within the trustee's control'' to
recognize that certain commodity contract accounts may be held on an
omnibus basis (i.e., on behalf of several customers), so to the extent
the trustee is making a margin payment on behalf of the omnibus
account, it may be out of the trustee's control to identify and only
pay on behalf of those underlying customer accounts (within the omnibus
account) that are not in deficit. The Commission is including a proviso
to note that Sec. 190.04(b)(1)(i) shall not be construed to prevent a
clearing organization, foreign clearing organization, FCM, or foreign
futures intermediary from exercising its rights to the extent permitted
under applicable law. This proviso is intended to remove any doubt that
the right of these ``upstream'' entities to use collateral posted by
the FCM on an omnibus basis is not affected by the prohibition on
making margin payments on behalf of accounts that are in deficit.
The Commission is adopting Sec. 190.04(b)(1)(ii) as a new
provision to prohibit the trustee from making an upstream margin
payment with respect to a specific customer account that would exceed
the funded balance of that account. This restriction is consistent with
the pro rata distribution principle discussed in Sec. 190.00(c)(5), in
that any payment in excess of a customer's funded balance would be to
the detriment of other customers.
The Commission is adopting some non-substantive clarifications in
Sec. 190.04(b)(1)(iii), as derived from current Sec.
190.02(g)(1)(ii), to retain the limitation that the trustee may not
make payments on behalf of non-public customers of the debtor from
funds that are segregated for the benefit of public customers.
The Commission is adopting Sec. 190.04(b)(1)(iv)-(v) to clarify
and expand upon current Sec. 190.02(g)(1)(iii),\86\ to require that
margin is used consistent with the requirements of section 4d of the
CEA.\87\ First, the Commission is adopting Sec. 190.04(b)(1)(iv) to
provide that, if the trustee receives payments from a customer in
response to a margin call, then to the extent within the trustee's
control,\88\ the trustee must use such payments to make margin payments
for the open commodity contract positions of such customer. Second, the
Commission is adopting Sec. 190.04(b)(1)(v) to provide that the
trustee may not use payments received from one public customer to meet
the margin (or any other) obligations of any other customer. Given the
restriction in paragraph (b)(1)(v), the Commission believes it may in
some cases be impracticable for a trustee to follow paragraph
(b)(1)(iv). In such a situation, therefore the trustee would hold onto
the funds received in response to a margin payment and such funds would
be credited to the account of the customer that made the payment.\89\
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\86\ Current Sec. 190.02(g)(1)(iii) provides that the trustee
must make margin payments if payments of margin are received from
customers after bankruptcy in response to margin calls.
\87\ See 7 U.S.C. 6d.
\88\ The phrase ``to the extent within the trustee's control''
recognizes the reality that certain accounts are held on an omnibus
basis. See discussion of Sec. 190.04(b)(1)(i) above.
\89\ See Sec. 190.08(c)(1)(ii).
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Regulation Sec. 190.04(b)(1)(vi) builds upon current Sec.
190.02(g)(1)(iv), which provides that no payments need to be made to
restore initial margin, thus noting that such payments are not required
but implicitly allowed to be made. Revised Sec. 190.04(b)(1)(vi)
explains in this in more detail and provides more comprehensive
guidance to the trustee about when such payments may be made.
Specifically, Sec. 190.04(b)(1)(vi) provides that, in the event that
the funds segregated for the benefit of public customers in a
particular account class exceed the aggregate net equity claims for all
customers in that account class, the trustee is permitted to use such
funds to meet the margin obligations for any public customer in such
account class whose account is undermargined, but not in deficit, and
sets conditions around such use.
Regulation Sec. 190.04(b)(2) updates current Sec. 190.02(g)(2),
which concerns margin calls made by trustee with respect to
undermargined accounts of public customers. The Commission is removing
the current requirement in Sec. 190.02(g)(2) that the trustee issue
margin calls, by replacing the term ``must issue margin calls'' with
``may issue a margin call,'' in light of the possibility that the
trustee will determine it impracticable or inefficient to do so.
Current Sec. 190.02(g)(2), which sets up a retail-level analysis on
issuing mandatory margin calls based on the funded balance of the
account, is based on a model of the FCM continuing in business. Revised
Sec. 190.04(b)(d) recognizes that an FCM in bankruptcy will be
operated in crisis mode, and may be pending wholesale transfer or
liquidation of open positions.\90\ Therefore, the Commission is
allowing for the possibility that the trustee may issue margin calls.
The specification of
[[Page 19347]]
highly prescriptive conditions for issuing such calls is no longer
appropriate, given the Commission whether or not to make a margin call
is now based on the trustee's discretion.
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\90\ See generally major theme 7 discussed in section I.B.
above.
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Regulation Sec. 190.04(b)(3), as derived from current Sec.
190.02(g)(3) with updated cross-references, retains the important
concept that margin payments made by a customer in response to a
trustee's margin call are fully credited to the customer's funded
balance. As these post-petition payments made by the customer are fully
counted toward the customer's funded net equity claims under Sec.
190.04(b)(3), they are not subject to pro rata distribution (in
contrast to the treatment of the debtor commodity broker's pre-petition
obligations to customers).
Regulation Sec. 190.04(b)(4) is derived from a combination of
current Sec. Sec. 190.03(b)(1) and (2) and 190.04(e)(4), and addresses
the trustee's obligation to liquidate certain open commodity contracts;
in particular, those in deficit and those where the customer has failed
to promptly meet a margin call. During business-as-usual, an FCM is
required to cover, at all times, any customer accounts in deficit
(i.e., those with debit balances) with its own capital.\91\ The FCM is
also required to cover with its own capital any undermargined amounts
in customer accounts each day by no later than the Residual Interest
Deadline.\92\ These ongoing requirements are intended to protect other
customers with positive account balances.
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\91\ See, e.g., Sec. Sec. 1.22(i)(4), 1.23(a)(2).
\92\ See, e.g., Sec. 1.22(c)(3).
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An FCM in bankruptcy will generally not have capital available to
protect other customers by covering these obligations; rather, any loss
suffered by customers whose accounts are in deficit will be at the risk
of those other customers.\93\ The Commission intends for Sec.
190.04(b)(4) to mitigate the risk to those other customers by directing
the trustee to liquidate such accounts.
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\93\ While the trustee may seek to recover any debit balance
from a customer, see Sec. 190.09(a)(1)(ii)(E), Sec. 190.04(b)(4)
proceeds from the conservative assumption that such efforts will be
unsuccessful.
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In light of the importance of mitigating this fellow-customer risk,
Sec. 190.04(b)(4), in contrast to many of the other proposed changes
to part 190, curtails the trustee's discretion. Specifically, Sec.
190.04(b)(4), as derived from current Sec. 190.03(b)(1) and (2),
provides that the trustee shall, as soon as practicable, liquidate all
open commodity contract accounts in any commodity contract account (i)
that is in deficit; (ii) for which any mark-to-market calculation would
result in a deficit; or (iii) for which the customer fails to meet a
margin call made by the trustee within a reasonable time. Pursuant to
current Sec. 190.03(b)(1), a trustee must liquidate open commodity
contracts if any payment of margin would result in a deficit in the
account in which they are held.\94\ Revised Sec. 190.04(b)(4) adds a
requirement to liquidate all open commodity contracts in any commodity
contract account that is in deficit. The existing language applies to
an account that is on the threshold of deficit; the Commission is
revising the language to clarify that the provision also applies to an
account that is already in deficit. Moreover, the change from ``payment
of margin'' to ``mark-to-market'' calculations addresses the case where
the trustee is aware, based on mark-to-market calculations, that the
account is in deficit. In order to protect other customers more
effectively, the trustee should begin the liquidation process
immediately upon gaining that awareness, rather than delaying until the
time when a margin payment is due.
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\94\ An account is in deficit if the balance is negative (i.e.,
the customer owes the debtor instead of the reverse). An account can
be undermargined but not in deficit (if the balance is positive, but
less than the amount of required margin). For example, a customer
may have a margin requirement of $100 and an equity balance of $80.
Such customer is undermargined by $20, but is not in deficit,
because the liquidation value of the commodity contracts is
positive.
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Regulation Sec. 190.04(b)(4) also provides that, absent exigent
circumstances or unless otherwise provided, a reasonable time for
meeting margin calls made by a trustee shall be one hour or such
greater period not to exceed one business day, as determined by the
trustee.\95\ This language is largely reflective of current Sec.
190.04(e)(4), but adds the concept of ``exigent circumstances'' as a
new exception to the general and long-established rule that a minimum
of one hour is sufficient notice for a trustee to liquidate an
undermargined account. The Commission intends this revision to provide
the trustee with the discretion to deem a period of less than one hour
as sufficient notice to liquidate an undermargined account if the
``exigent circumstances'' so require.
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\95\ See Morgan Stanley & Co. Inc. v. Peak Ridge Master SPC
Ltd., 930 F.Supp.2d 532, 539-540 (S.D.N.Y. 2013)(Morgan Stanley, in
its business discretion, determined Peak Ridge's account had assumed
overly risky positions, necessitating an increase in the margin
requirement and giving Peak Ridge a limited amount of time to bring
the account into compliance. ``Courts have held that as little as
one hour is sufficient notice under similar circumstances.''). See
also Capital Options Invs., Inc. v. Goldberg Bros. Commodities,
Inc., 958 F.2d 186, 190 (7th Cir. 1992) (``One-hour notice to post
additional margin . . . is reasonable where a contract specifically
provides for margin calls on options at any time and without
notice.''); Prudential-Bache Sec., Inc. v. Stricklin, 890 F.2d 704,
706-07 (4th Cir. 1989) (rejecting a claim that 24-hour notice, which
the broker normally gave to customers, was necessary before broker
could liquidate an under-margined account and upholding notice of
one hour as in accordance with the customer agreement); Modern
Settings, Inc. v. Prudential-Bache Sec. Inc., 936 F.2d 640, 645 (2d
Cir. 1991) (upholding a provision of a customer agreement allowing
Defendant-broker to liquidate an under-margined account without
notice).
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The Commission is deleting current Sec. 190.03(b)(3) to permit the
trustee to liquidate open commodity contracts where the trustee has
received no customer instructions with respect to such contracts by the
sixth calendar day following the entry of the order for relief. The
Commission is adopting this change as part of a model where the trustee
receives and complies with instructions from individual customers to a
model--that reflects actual practice in commodity broker bankruptcies
in recent decades--where the trustee transfers as many open commodity
contracts as possible.\96\
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\96\ Cf. major theme 7 in section I.B above.
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The Commission is adopting new Sec. 190.04(b)(5) to provide
guidance to the trustee in assigning liquidating positions \97\ to the
debtor FCM's customers when only a portion of the open commodity
contracts in an omnibus account are liquidated. The new guidance is
designed to protect the customer account as a whole, in light of the
fact that any losses which cause a customer account to go into deficit
are, as discussed in connection with Sec. 190.04(b)(4), at the risk of
other customers. To mitigate the risk of such losses, Sec.
190.04(b)(5) establishes a preference, subject to the trustee's
exercise of reasonable business judgment, for assigning liquidating
transactions to individual customer accounts in a risk-reducing manner.
Specifically, the trustee should endeavor to assign such liquidating
transactions first, in a risk-reducing manner, to commodity contract
accounts that are in deficit; second, in a risk-reducing manner, to
commodity contract accounts that are undermargined; \98\ and finally to
liquidate any remaining open commodity contracts. Where there are
multiple accounts in any of these groups, the trustee is instructed to,
as practicable, to allocate such liquidating transactions pro rata. The
term ``risk-reducing manner'' is measured by the margin methodology and
parameters
[[Page 19348]]
followed by the DCO at which such contracts are cleared. Specifically,
where allocating a transaction to a particular customer account reduces
the margin requirement for that account, such an allocation is ``risk-
reducing.''
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\97\ A liquidating position or transaction is one that offsets a
position held by the debtor, in whole or in part. Thus, if the
debtor has three long March '21 corn contracts, then three (or two,
or one) short March '21 corn contracts would be a liquidating
transaction.
\98\ And thus are next at risk of going into deficit.
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The Commission requested comment on whether the revised approach in
proposed Sec. 190.04(b)(4) regarding the required liquidation of
certain open commodity contract accounts would provide the trustee with
an appropriate amount of discretion and is practicable; whether
customers, who believe they did not benefit from those decisions, would
likely challenge the trustee's choices given the level of discretion
provided; whether such challenges could materially slow down the
distribution of customer property relative to a context where the
trustee was granted less discretion; and whether the proposed approach
in Sec. 190.04(b)(5) for the assignment of liquidating positions to
debtor FCM customers in a ``risk-reducing manner'' is practicable when
only a portion of the open commodity contracts in an omnibus account
are liquidated.
SIFMA AMG/MFA supported most of the substantive amendments in
subpart B of part 190 and believed such changes are generally helpful
for purposes of reducing risk for market participants and allowing the
trustee to act as efficiently as possible. SIFMA AMG/MFA approved of
the inclusion of transfers in addition to liquidation, and the
clarification to apply the proposed regulation to any open commodity
contracts in proposed Sec. 190.04(b).
CME agreed with the general concept of providing the trustee for a
debtor FCM with significant flexibility to operate the FCM and favored
any provision that encourages the transfer of customer positions and
property and continuation of margin payments on behalf of the debtor
FCM pending transfer or liquidation of positions. ICE suggested that
the Commission should clarify that any trustee discretion proposed in
Sec. 190.04 for managing a failed FCM should be subject to the
obligations of the defaulting clearing member and the rights of the DCO
as provided by the DCO's rules.
ICE supported the Commission's proposal in Sec. 190.04(b)(1) to
clarify that a trustee may make variation margin payments on open
contracts, pending their liquidation or transfer. ICI agreed with
proposed Sec. 190.04(b)(1)(ii), which prohibits a trustee from making
any margin payments with respect to a customer account that would
exceed the funded balance for that account.
ICI and Vanguard agreed with the preservation of the existing
requirement within proposed Sec. 190.04(b)(3) that the trustee fully
credit the customer's funded balance for any margin payment made by a
customer in response to trustee's margin call. Vanguard noted that any
customer concerns as to the ability to fully recover margin would
surely de-incentivize customers to post additional margin in critical
times.
SIFMA AMG/MFA generally supported proposed Sec. 190.04(b), but had
concerns regarding the calculation of whether a customer is
undermargined, and the timing of margin calls. SIFMA AMG/MFA questioned
whether the trustee would be able to calculate accurately whether a
customer is undermargined, particularly if the FCM's books and records
do not accurately reflect margin amounts transferred by such customer
to the FCM. SIFMA AMG/MFA requested that the Commission clarify how the
trustee will try to protect customers from being called upon to provide
duplicate margin amounts. SIFMA AMG/MFA recommended that the Commission
amend proposed Sec. 190.04(b) to provide customers with the
opportunity to demonstrate that a margin payment was made even if the
FCM's books and records do not yet reflect its receipt.
SIFMA AMG/MFA disagreed that absent exigent circumstances, a
reasonable time for meeting margin calls made by the trustee shall be
deemed to be one hour, or such greater period not to exceed one
business day, as the trustee may determine in its sole discretion.
SIFMA AMG/MFA stated that the necessary assets may not be readily
available to customers and urged the Commission to require the trustee
to defer to the margin call timings present in the applicable
underlying agreements entered into by the customer pursuant to Sec.
39.13 when determining a reasonable time for meeting margin calls.
SIFMA AMG/MFA opined that this is a reasonable level of deference,
since the trustee will have access to these agreements, which are
already in place with the Commission regulations, and will allow for
customers to satisfy margin calls without causing needless market
panic.
ICI and Vanguard agreed with proposed Sec. 190.04(b)(4), which
would require the trustee to liquidate any customer account in deficit.
ICI supported maintaining the existing requirement that the trustee
promptly liquidate any customer account when a customer fails to meet a
margin call in a reasonable time or where any payment of margin from
the account would result in an account deficit. ICI agreed with the
proposal that a debtor FCM will generally not have capital available to
protect other customers by covering account deficits, so any loss
suffered by customers whose accounts are in deficit will be at risk of
those other non-defaulting customers. As a result, ICI noted that it is
vital that the trustee be required to swiftly crystallize, and
therefore cap the losses resulting from, such deficits by promptly
liquidating accounts in deficit or for which a customer has failed to
meet a margin call. ICI cautioned that if the accounts were allowed to
remain open, additional losses on the delinquent customers'
transactions would be borne by the FCM's non-defaulting customers,
which could dissuade non-defaulting customers from continuing to meet
their margin obligations post-petition.
OCC was concerned that the proposed definition of ``undermargined''
in Sec. Sec. 190.01 and 190.04(b)(2) and (4) could create a situation
in which a trustee offers one public customer an opportunity to deposit
additional margin that ultimately prevents an account deficit and
resulting liquidation of the public customer's account, but exercises
discretion not to offer another public customer the same opportunity to
deposit margin and subsequently must liquidate the account because it
is in deficit, notwithstanding the customer's willingness to post
additional margin to keep its positions open. OCC was concerned that
the use of such trustee discretion would expose a trustee to challenge
by a public customer that asserts, though it was similarly situated to
a public customer that was given this opportunity, it was not given
this opportunity and received inequitable treatment.
In response to SIFMA AMG/MFA's comment, the Commission notes that,
in the case of an FCM in bankruptcy, any deficit in the account of one
customer may come at the expense of distributions to other customers.
As ICI noted, the normal buffer of the capital of an FCM in continuing
operation cannot be relied upon. Accordingly, where a trustee believes,
based on the records and limited time available to them, that a
customer is undermargined, it is important that they act on that belief
in order to protect other customers. Similarly, in a case where a
customer fails to meet a margin call within what the trustee
determines, in their sole discretion, is a reasonable time, the trustee
should liquidate the contracts of that customer to protect other
customers. Forcing the trustee to defer to margin call timings in pre-
bankruptcy agreements, or to give the customer an opportunity to
demonstrate that a margin payment was made, as requested by the
comment, may
[[Page 19349]]
increase: (1) The risk that such customer would default; (2) the risk
that delaying liquidation of such a customer's positions increases the
potential for and likelihood that they would do so with a debit
balance; and (3) the risk that the size of that debit balance would
increase as a result of that delay, thereby reducing the funded
balances of other customers. The Commission is of the view that
timeframes that may have been acceptable during business-as-usual
cannot bind the trustee in addressing the context of an FCM in
bankruptcy, because any post-petition losses incurred by a customer
will be at the cost of other customers (without the normal buffer of
the capital of a going-concern FCM). Moreover, the Commission agrees
with the view championed by ICI and Vanguard that the trustee should be
required to swiftly crystallize and therefore cap the losses resulting
from deficit balances by promptly liquidating accounts in deficit and
those for which a customer has failed to meet a margin call. OCC's
concerns about treating customers equitably inter se are
understandable, but, in the Commission's view, ensuring complete equity
may not be practicable. A trustee must make decisions within a severely
limited timeframe in a situation that is likely to be chaotic and with
information that is limited and may be imperfect. In these
circumstances, the Commission is of the view that it is appropriate to
defer to the trustee's discretion to make the best decisions they can
under the circumstances. Accordingly, the Commission believes that,
where a trustee makes in good faith decisions with regard to margin and
liquidation of accounts, that are, in retrospect, inequitable, the
Commission's regulations should discourage challenges to such a
decision (and, if such a challenge is made, should reduce the
likelihood that it is successful).
While the trustee retains discretion, as specified in, inter alia,
proposed Sec. 190.04, to manage the affairs of the debtor FCM, the
Commission can confirm, as requested by ICE, that a DCO of which that
FCM is a member retains its rights to act under its rules.\99\
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\99\ See, e.g., Sec. 190.04(b)(1) (while trustee shall, to the
extent within its control, not make payments on behalf of an account
in deficit, this shall not be construed to prevent a clearing
organization from exercising its rights to the extent permitted
under applicable law).
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SIFMA AMG/MFA recommended that the Commission amend proposed Sec.
190.04(b) to clearly state that, to the extent gains-based haircutting
has been utilized by a DCO in respect of customer positions, the
trustee should give customers of an FCM credit for any gains that were
haircut during such gains-based haircutting. With respect to this
suggestion, the Commission notes that, where a DCO at which a debtor
FCM is a member applies gains-based haircutting under that DCO's rules,
the measure of the claim of a customer whose account at the debtor FCM
contains contracts cleared on that DCO will be based on the customer
agreement between that customer and the debtor FCM. If, outside of the
FCM's bankruptcy and pursuant to that customer agreement, the
customer's gains would have been reduced by X% or $Y, then the amount
of the customer's claim in bankruptcy would be adjusted
accordingly.\100\ Accordingly, the Commission does not accept that
suggestion.
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\100\ Moreover, there are other reasons to forego an approach
that would reverse the effects of gains-based haircutting. As
discussed in more detail in section II.C.7 below, there is a limited
amount of customer property available. Any increase in some
customers claims (and thus their distributions) due to the reversal
of gains-based haircutting would thus come at the expense of a
reduced share of that limited customer property, and thus reduced
distributions, to other customers.
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ICI and Vanguard agreed with proposed Sec. 190.04(b)(5) which
prohibits a trustee from making margin payments that would exceed the
customer's funded account balance or transfer a customer's transactions
or property and thereby increase the exposure of other customers.
Vanguard supported addressing situations where the trustee could allow
certain customers to avoid the core customer protection of pro rata
treatment at the expense of other customers.
Accordingly, after consideration of the comments, and for the
reasons stated above, Sec. 190.04(b) will be adopted as proposed.
c. Regulation Sec. 190.04(c): Contracts Moving Into Delivery
The Commission is adopting Sec. 190.04(c), as proposed, to direct
the trustee to use its best efforts to avoid delivery obligations
concerning contracts held through the debtor FCM by transferring or
liquidating such contracts before they move into delivery position. The
Commission is adopting Sec. 190.04(c) based on its analog in current
Sec. 190.03(b)(5) and is incorporating a portion of current Sec.
190.02(f)(1)(ii). Current Sec. 190.03(b)(5) instructs the trustee to
liquidate promptly, and in an orderly manner, commodity contracts that
are not settled in cash (implicitly, those that settle via physical
delivery of a commodity) where the contract would remain open beyond
the earlier of (i) the last day of trading or (ii) the first day on
which notice of delivery may be tendered--that is, where the contract
would move into delivery position. The Commission intends Sec.
190.04(c) to have the same purpose as its predecessors, but uses more
explicit language regarding physical delivery to refer to ``any open
commodity contract that settles upon expiration or exercise via the
making or taking of delivery of a commodity,'' and that is moving into
the delivery position. The Commission also intends Sec. 190.04(c) to
expand current Sec. 190.03(b)(5), with the incorporation of some
aspects of current Sec. 190.02(f)(1)(ii), to include an explicit
reference to how options on commodities move into delivery position.
CME supported proposed Sec. 190.04(c), which directs the trustee
to use their best efforts to liquidate open physical delivery commodity
contracts that have not been transferred before the contracts move into
a delivery position as CME believed this would avoid unnecessary
disruptions to the delivery process by customers that did not intend to
participate in making or taking delivery. ICI supported adding
provisions that clarify the standards applicable to an FCM's
liquidation of a debtor FCM's transactions and the way a trustee must
assign liquidating transactions in the context of a partial
liquidation.
According, after consideration of the comments, and for the reasons
stated above, the Commission is adopting Sec. 190.04(c) as proposed.
d. Regulation Sec. 190.04(d): Liquidation or Offset
The Commission is adopting Sec. 190.04(d) as proposed with
modifications, as set forth below. Regulation Sec. 190.04(d), as
derived from current Sec. Sec. 190.02(f) and 190.04(d), sets forth the
categories of commodity contracts and other property held by or for the
account of a debtor that must be liquidated by the trustee in the
market or by book entry offset, promptly, and in an orderly
manner.\101\
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\101\ The Commission is also adopting three non-substantive
changes in the header language to proposed Sec. 190.04(d) from that
in current Sec. 190.02(f): (1) The addition of the phrase ``except
as otherwise set forth in this paragraph (d)'' to account for any
exceptions that are included in the paragraphs under the header
language; (2) the addition of cross-references to proposed Sec.
190.04(e) when discussing liquidation, as that provision contains
instructions on how to effect liquidation; and (3) the deletion of
the phrase ``subject to limit moves and to applicable procedures
under the Bankruptcy Code.''
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Importantly, the Commission is retaining the requirement, present
in the header language to current Sec. 190.02(f), that the trustee
must effect such
[[Page 19350]]
liquidation ``in an orderly manner.'' Regulation Sec. 190.04(d)
recognizes that any factor which, in the trustee's discretion, makes it
imprudent to liquidate a position at a particular point in time would
contribute to the trustee's judgment as to what constitutes liquidation
``in an orderly manner.''
Section 190.04(d)(1), as derived from Sec. 190.02(f)(1), requires
that all open commodity contracts must be liquidated, subject to two
exceptions: (1) Commodity contracts that are specifically identifiable
property and are subject to customer instructions to transfer as
provided in proposed Sec. 190.03(c)(2); and (2) open commodity
contract positions that are in a delivery position.\102\ In the former
case (specifically identifiable property), the Commission is adopting
Sec. 190.04(d)(1) to revise the language of current Sec.
190.02(f)(1)(ii) to add references to the provisions of Sec.
190.03(c)(2) (concerning the trustee's option to treat hedging accounts
as specifically identifiable property) and Sec. 190.09(d)(2)
(concerning the payments that customers on whose behalf specifically
identifiable commodity contracts will be transferred must make to
ensure that they do not receive property in excess of their pro rata
share).\103\ The latter exception, for open commodity contract
positions that are in a delivery position is new, and provides that
such positions should be treated in accordance with Sec. 190.06, which
concerns delivery.\104\
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\102\ Regulation Sec. 190.04(d)(1) deletes the reference in
current Sec. 190.02(f)(1)(i) to dealer option contracts since such
term is no longer used.
\103\ The Commission is incorporating part of current Sec.
190.02(f)(1)(ii) into Sec. 190.04(c), and therefore that will not
appear in Sec. 190.04(d)(1).
\104\ As noted in section II.A.1 above in the discussion of
Sec. 190.00(c)(6), a delivery default could have a disruptive
effect on the cash market for the commodity and could adversely
impact the parties to the transaction.
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Regulation Sec. 190.04(d)(2) describes when specifically
identifiable property, other than open commodity contracts or physical
delivery property, must be liquidated. The Commission derived Sec.
190.04(d)(2) from current Sec. 190.02(f)(2), with a number of
revisions.
First, the provision applies to specifically identifiable property,
other than open commodity contracts or physical delivery property,
while the current regulation applies only to specifically identifiable
property other than open commodity contracts. The Commission intends
for this change to provide the trustee with discretion to avoid
interfering with the physical delivery process.
Second, while the current regulation would require liquidation of
such property if the fair market value of the property drops below 90%
of its value on the date of the entry of the order for relief,\105\
Sec. 190.04(d)(2)(i) changes that standard to 75% of the fair market
value, in order to provide greater discretion to the trustee to forego
or postpone liquidation in appropriate cases.
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\105\ See current Sec. 190.02(f)(2)(i).
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Third, revised Sec. 190.04(d)(2)(ii) adds an additional condition
that will require liquidation where failure to liquidate the
specifically identifiable property may result in a deficit balance in
the applicable customer account, which corresponds to the general
policy of liquidating any accounts that are in deficit.
Lastly, Sec. 190.04(d)(2)(iii), which is similar to current Sec.
190.02(f)(2)(ii), includes updated cross-references to the provisions
in proposed part 190 that discuss the return of specifically
identifiable property.
Regulation Sec. 190.04(d)(3) is a new provision that codifies the
Commission's longstanding policies of pro rata distribution and
equitable treatment of customers in bankruptcy, as described in Sec.
190.00(c)(5) above, as applied to letters of credit posted as
margin.\106\ Accordingly, customers who post letters of credit as
margin will be treated no differently than other customers and thus
would suffer the same pro rata loss.
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\106\ See, e.g., 48 FR 8716, 8718-19 (March 1, 1983) (Commission
intends to assure that customers using a letter of credit to meet
original margin obligations would be treated no differently than
customers depositing other forms of non-cash margin or customers
with excess cash margin deposits. If letters of credit are treated
differently than Treasury bills or other non-cash deposits, there
would be a substantial incentive to use and accept such letters of
credit as margin as they would be a means of avoiding the pro rata
distribution of margin funds, contrary to the intent of the
Bankruptcy Code (11 U.S.C. 766).)
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The implementation of this policy in current Sec.
190.08(a)(1)(i)(E) was challenged in an adversary proceeding in the MF
Global bankruptcy; \107\ the codification of this policy in Sec. Sec.
190.00(c)(5) (clarifying policy), 190.04(d)(3) (treatment in
bankruptcy), and 1.43 (treatment during business-as-usual) are intended
to implement the policy effectively and to forestall any future
challenge.
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\107\ See ConocoPhillips v. Giddens, No. 12 Civ. 6014, 2012 WL
4757866 (S.D.N.Y. 2012).
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Regulation Sec. 190.04(d)(3) provides that the trustee may request
that such a customer deliver substitute customer property with respect
to any letter of credit received, acquired or held to margin,
guarantee, secure, purchase, or sell a commodity contract. This applies
whether the letter of credit is held by the trustee on behalf of the
debtor's estate, a DCO, a foreign broker, or foreign clearing
organization, and whether it is held on a pass-through or other basis.
The amount of the substitute customer property to be posted may be less
than the full-face amount of the letter of credit, in the trustee's
discretion, if such lesser amount is sufficient to ensure pro rata
treatment consistent with proposed Sec. Sec. 190.08 and 190.09. If
required, the trustee may require the customer to post property equal
to the full-face amount of the letter of credit to ensure pro rata
treatment. Regulation Sec. 190.04(d)(3)(i) provides that, if such a
customer fails to provide substitute customer property within a
reasonable time specified by the trustee, the trustee may draw upon the
full amount of the letter of credit or any portion thereof.
Regulation Sec. 190.04(d)(3)(ii) addresses cases where a letter of
credit received, acquired or held to margin, guarantee, secure,
purchase, or sell a commodity contract is not fully drawn upon. The
trustee is instructed to treat any portion of the letter of credit that
is not fully drawn upon as having been distributed to the customer.
However, the amount treated as having been distributed will be reduced
by the value of any substitute customer property delivered by the
customer to the trustee. For example, if the face amount of the letter
of credit is $1,000,000, the customer delivers $250,000 in substitute
customer property, and no portion of the letter of credit is drawn
upon, then the trustee will treat the customer as having received a
distribution of $750,000. In order to avoid an effective transfer of
value, due to an expiration of the letter of credit on or after the
date of the order for relief, to the customer who posted the letter of
credit, this calculation will not be changed due to such an expiration.
Regulation Sec. 190.04(d)(3)(iii) confirms that any proceeds of a
letter of credit drawn by the trustee, or substitute customer property
posted by a customer, shall be considered customer property in the
account class applicable to the original letter of credit.
Regulation Sec. 190.04(d)(4), as derived from current Sec.
190.02(f)(3), provides for the liquidation of all other property not
required to be transferred or returned pursuant to customer
instructions and which has not been liquidated. Regulation Sec.
190.04(d)(4) excepts from the liquidation requirement any ``physical
delivery property held for delivery in accordance with the provision
of'' Sec. 190.06, in order to avoid interfering with the physical
delivery process.
[[Page 19351]]
Several commenters supported proposed Sec. 190.04(d)(3). SIFMA
AMG/MFA, ICI, and Vanguard strongly supported proposed Sec.
190.04(d)(3) because it permits a trustee to demand substitute margin
so that other customers' margin need not be accessed to meet any
shortfall occasioned by the inability to draw on the letters of credit.
SIFMA AMG/MFA noted that the addition of proposed Sec. 190.04(d)(3)
would ensure that customers using letters of credit to meet original
margin obligations will be treated no differently from customers
depositing other forms of non-cash margin or excess cash margin
deposits. SIFMA AMG/MFA ``agree[d] that most letters of credit
currently in use by the industry follow the Joint Audit Committee forms
[and believed] that the impact of these additional requirements
concerning letters of credit will result in clearer guidance for more
equitable treatment of customers within each account class.'' However,
SIFMA AMG/MFA ``questione[d] the one-year transition period and urge[d]
the Commission to shorten it in the interest of investor protection.
For example, if an FCM were to enter bankruptcy proceedings during the
one-year transition period,'' SIFMA AMG/MFA inquired as to how the
letters of credit would be treated in such proceeding.
OCC also supported proposed Sec. 190.04(d)(3) and the pro rata
loss policy objective. OCC stated that it ``expects that it would
generally, to the extent permitted by OCC's rules and default
management arrangements, draw on a defaulted member's letter of credit
collateral as soon as practicable after a declaration of default. OCC
would attempt to do so, whether or not it has immediately identified a
need to draw on a letter of credit to meet the defaulted member's
settlement obligations, as a protective action in anticipation of any
potential increase in the credit risk associated with the letter of
credit. In such cases, a trustee would obtain any remaining proceeds
from the drawn-down letter to distribute pro rata among the FCM's
customers as appropriate.''
However, several commenters including CME, FIA, and CMC believed
the policy reasons for the trustee's general right to demand substitute
collateral do not exist with respect in the narrow context of a
delivery letter of credit.
CME agreed ``that a letter of credit posted to secure obligations
under open commodity contracts (whether drawn upon or not) must be
deemed as part of the customer's property, in addition to any
additional collateral posted by the customer, for purposes of
distribution calculations. [CME agreed] that it is prudent to make
clear that the trustee in either an FCM or DCO bankruptcy can draw upon
posted letters of credit.'' CME supported ``granting the trustee the
power to require a customer to deliver substitute customer property to
the estate and allowing the trustee to draw on the letter of credit if
the customer does not post additional collateral, provided that those
conditions apply only to letters of credit letter that are received,
acquired, or held to guarantee or secure a customer's obligations under
open commodity contracts, and do not apply to delivery letters of
credit.''
With respect to a delivery letter of credit posted as collateral to
secure the customer's obligation to pay for delivery of a commodity it
will receive, CME and CMC believed it was ``critically important that
the letter of credit be available to draw upon if the customer defaults
or is expected to default on its obligation to pay the seller.''
However, CME, CMC, and FIA recommended that the Commission revise
proposed Sec. 190.04(d)(3) to confirm that the authority of the
trustee to require a customer that posts a letter of credit to deliver
substitute customer property does not extend to letters of credit
posted to a delivery account.
CME argued that ``[c]ustomers routinely post letters of credit in
connection with delivery obligations under certain physical delivery
futures contracts held to maturity.'' CME noted that this is the case
for deliveries under certain oil futures listed on the New York
Mercantile Exchange. ``The buyers are required to post collateral for
the full payment amount owed because actual delivery is effected via
physical transfer of oil and thus is typically completed 30 days or so
after buyers and sellers are matched for bilateral delivery
obligations. Given the substantial dollar amounts involved, often
hundreds of millions, letters of credit are often posted as
collateral.'' CMC emphasized that ``unlike other situations, a delivery
[letter of credit] simply serves as collateral for delivery of a
futures contract after expiry but before delivery is taken and while
the seller still has possession of the commodity for delivery.'' CME
stated that ``[t]he value available to CME under such a letter of
credit is wholly independent from the solvency of an FCM, unlike a
letter of credit posted as performance bond, which decays when utilized
to meet margin or variation calls post-FCM bankruptcy.'' CME posited
that the delivery letter of credit does not pose the same issues that
the Commission encountered in the MF Global bankruptcy. FIA argued that
``[a] purchaser that takes delivery under a commodity contract
frequently is not required to take delivery for a significant period of
time after the purchaser and seller have been matched. In these
circumstances, the purchaser may be required to post a letter of credit
as security for full payment when delivery is made.''
CME, CMC, and FIA warned that a trustee's decision to request
substitute collateral of cash or cash equivalents for a delivery letter
of credit or risk having the letter of credit drawn down prior to the
time that delivery is made would create a sudden and unexpected
liquidity need for the delivery participant and introduce unnecessary
strain into physical and derivatives markets. The commenters were
concerned that because the parties' obligations under the delivery
account arise from a commodity account, a trustee's authority under
proposed Sec. 190.04(d)(3) could be interpreted to apply to letters of
credit held in a delivery account. Accordingly, CME and CMC recommended
``that the Commission limit or eliminate the trustee's powers to
request that a market participant substitute other forms of collateral
for a delivery letter of credit upon which the DCO is a beneficiary.''
Specifically, CME and FIA recommended that the Commission revise
proposed Sec. 190.04(d)(3) to exclude delivery letters of credit,
i.e., letters of credit posted by buyers to guarantee their payment for
commodities that they are contractually obligated to purchase under an
expired futures or exercised commodity option contract.
CME also requested clarity in the context of Sec. 190.06 ``that
when a customer posts a delivery letter of credit directly with the DCO
or with its delivery counterparty, and not with or through the FCM, the
letter of credit is outside the delivery account class, i.e., it does
not constitute cash delivery property (or property of the debtor's
estate), and the provisions in other parts of the proposed revisions
regarding treatment of letters of credit posted with or through the
debtor FCM do not apply.''
The Commission notes that, despite the comments of CME, CMC, and
FIA, there are reasons to forego excluding delivery letters of credit
as a class from the application of Sec. 190.04(d)(3), and to adopt
Sec. 190.04(d)(3) as proposed, as supported by ICI, SIFMA AMG/MFA, and
Vanguard: If, at the end of the bankruptcy proceeding, there are
shortfalls in customer property in the cash delivery account class,
those
[[Page 19352]]
shortfalls will necessarily be borne by public customers. If public
customers posting letters of credit (including in the delivery account)
are shielded from such losses, they will be borne in greater proportion
by other public customers. That result would be inconsistent with the
Commission's longstanding policy, embodied in section 766(h) of the
Bankruptcy Code, to treat all customers on a pro rata basis.\108\
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\108\ Pursuant to Sec. 190.08(c)(1)(ii), the customer's funded
balance includes 100% of margin posted after the order for relief.
Accordingly, this principle would not apply to a delivery letter of
credit posted after the order for relief (unless the letter of
credit was delivered in substitution for a pre-bankruptcy letter of
credit).
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However, the concerns raised by commenters regarding sudden and
unexpected liquidity needs are important ones. They are important both
in the context of delivery letters of credit, as discussed by some
commenters, and more broadly as well.\109\ The Commission agrees that
these concerns can and should be mitigated. Specifically, the trustee
has discretion in managing this process with respect to letters of
credit, and should exercise that discretion with the goal of achieving
pro rata treatment among customers in a manner that mitigates, to the
extent practicable, the adverse effects upon customers that have posted
letters of credit.
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\109\ Moreover, and for the avoidance of doubt, as delivery is
simply a stage in the life of a commodity contract, Sec.
190.04(d)(3) applies to letters of credit in connection with
delivery obligations under a commodity contract.
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First, with regard to timing, the commenters expressed concern that
requests for substitute property would cause ``sudden'' liquidity
needs. Regulation Sec. 190.04(d)(3)(i) states that the trustee may
draw upon the letter of credit if the customer fails to provide
substitute customer property within a reasonable time specified by the
trustee. If the expiry date of the letter of credit is not imminent,
the Commission expects that a ``reasonable time'' would be sufficiently
long to enable the customer to mitigate liquidity concerns (consistent
with the trustee's plans to make distributions). If the expiry date of
the letter of credit is imminent, and the customer can and does arrange
to have that expiry date extended, the parties could work in the
context of that extended expiry date. However, if the expiry date is
imminent, and cannot be extended, then the trustee will need to take
promptly whatever steps are, in their discretion, necessary to ensure
pro rata treatment among customers.
Second, with regard to the amount requested, Sec. 190.04(d)(3)
provides that the trustee may request that a customer deliver
substitute customer property with respect to a letter of credit, and
that the amount of the request may equal the full face amount of the
letter of credit or any portion thereof, to the extent required or may
be required, in the trustee's discretion to ensure pro rata treatment
among customer claims within each account class, consistent with
Sec. Sec. 190.08 and 190.09. Thus, the amount of the substitute
customer property requested (or, if substitute customer property is not
provided, the amount of the letter of credit drawn upon (if partial
draws are permitted)) should be proportionate to the amount required or
may be required, in the trustee's discretion, to ensure pro rata
treatment among customer claims. If the amount of the shortfall in the
relevant account class (whether cash delivery property or otherwise) is
estimated to be a small percentage, the amount of substitute customer
property requested would also be a small percentage (subject to the
trustee adding an appropriate buffer for later corrections in
estimates, and taking into account any need to use the letter of credit
as ongoing performance bond for the customer's obligations).
To re-enforce these concepts, the Commission is adding a new Sec.
190.04(d)(3)(iv), which provides that the trustee shall, in exercising
their discretion with regard to addressing letters of credit, including
as to the timing and amount of a request for substitute customer
property, endeavor to mitigate, to the extent practicable, the adverse
effects upon customers that have posted letters of credit in a manner
that achieves pro rata treatment among customer claims. The Commission
intends that this new paragraph will confirm to trustees that they
should steer their discretion in the specified manner, and will provide
assurance to customers that have posted letters of credit that the
trustees will exercise their discretion in that manner. The Commission
believes that this provision will appropriately address concerns
regarding the manner in which the trustee ensures that customers that
have posted letters of credit are treated economically in the same
manner as customers who have posted other forms of collateral
Moreover, in the context of Sec. 190.06, CME requested that the
Commission confirm that ``when a customer posts a delivery letter of
credit directly with the DCO or with its delivery counterparty, and not
with or through the FCM, the letter of credit is outside the delivery
account class, i.e., it does not constitute cash delivery property (or
property of the debtor's estate), and the provisions in other parts of
the proposed revisions regarding treatment of letters of credit posted
with or through the debtor FCM do not apply.''
For example, the Commission understands that upon expiry of certain
deliverable contracts and assignment of delivery obligation, the long/
buyer of the contract must post collateral to the DCO against its final
payment obligation on the delivery. In certain cases, collateral in the
form of a delivery letter of credit collateral is posted by the
customer directly to the DCO. The delivery letters of credit in these
cases are subject to uniform terms that name the DCO as the sole
beneficiary on the instrument. These delivery letters of credit do not
create an obligation of or to a customer's FCM as they are posted
directly to the DCO and the FCM is not a named beneficiary on the
instrument.\110\
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\110\ Similarly, CMC's concerns focus on ``a delivery LOC upon
which the DCO is beneficiary.''
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In the context of a delivery letter of credit that is posted
directly with the DCO or with the delivery counterparty, rather than
with or through the FCM, and for which the FCM is not a named
beneficiary, the Commission confirms that the letter of credit is
outside the delivery account class, i.e., it does not constitute cash
delivery property (or property of the debtor's estate), and the
provisions in other parts of the proposed revisions regarding treatment
of letters of credit posted with or through the debtor FCM do not
apply.\111\
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\111\ The Commission was not requested to opine on whether this
approach vis-[agrave]-vis letters of credit is permissible outside
of the context of the delivery account class, and expresses no view
on that question.
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The Commission believes that this clarification, in combination
with the new provision directing the trustee's discretion in the
context of letters of credit, will ameliorate the commenters concerns
regarding delivery letters of credit.
The foregoing applies to the trustee. DCOs remain free to exercise
any of the rights and powers in their rules vis-[agrave]-vis their
clearing members, in particular with respect to risk management,
limited only by requirements within the Commission's regulations.\112\
However, in this context, the Commission would encourage DCOs holding
letters of credit posted by customers of FCMs in bankruptcy to exercise
their rights under such letters of credit in a
[[Page 19353]]
measured fashion, in order to achieve risk management goals fully but
in a manner that mitigates, to the extent practicable, adverse effects
upon customers that have posted letters of credit.\113\
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\112\ See, e.g., Sec. 190.04(e) (Rules providing for
liquidation other than on the open market shall be designed to
achieve, to the extent feasible under market conditions at the time
of liquidation, a process for liquidating open commodity contracts
that results in competitive pricing.)
\113\ In this connection, the Commission notes that OCC Rule
1104(a)(ii) permits OCC, if the issuer of a letter of credit agrees
to extend the irrevocability of its commitment thereunder in a
manner satisfactory to OCC, to ``demand only such amounts as it may
from time to time deem necessary to meet anticipated
disbursements.''
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Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.04(d) as
proposed, with the addition of new Sec. 190.04(d)(3)(iv) as set forth
above.
e. Regulation Sec. 190.04(e): Liquidation of Open Commodity Contracts
The Commission is adopting Sec. 190.04(e) as proposed to provide
details regarding the liquidation and valuation of open positions.\114\
Paragraph (e) is derived from current Sec. 190.04(d), subject to a
number of changes.
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\114\ The Commission is amending Sec. 190.08(d) to also clarify
the process by which customer positions and other customer property
are valued for purposes of determining the amount of a customer's
claim.
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The Commission is adopting Sec. 190.04(e)(1)(i), as derived from
current Sec. 190.04(d)(1)(ii), to describe the process of liquidating
open commodity contracts when the debtor is a member of a clearing
organization. Regulation Sec. 190.04(e)(1)(i), like its predecessor,
emphasizes the goal of competitive pricing to the extent feasible under
market conditions at the time of liquidation. Treatment under the CEA
of clearing organization rules has evolved from a pre-approval regime
to a primarily self-certification regime. The Commission is of the view
that the various processes set forth in part 40 of the Commission's
regulations (including self-certifications under Sec. 40.6, voluntary
submission for rule approval under Sec. 40.5, and Commission review of
certain rules of systemically important DCOs under Sec. 40.10) are
sufficient, and that a separate rule approval process for rules
regarding settlement price in the context of a bankruptcy is no longer
necessary. The Commission is accordingly adopting Sec. 190.04(e)(1)(i)
to delete the requirement contained in current Sec. 190.04(d)(1)(i)
that a clearing organization must obtain approval pursuant to section
5c(c) of the CEA for its rules regarding liquidation of open commodity
contracts.
Section 190.04(e)(1)(i) also adds a provision regarding open
commodity contracts that are futures or options on futures that were
established on or subject to the rules of a foreign board of trade and
cleared by the debtor as a member of a foreign clearing organization,
providing that such contracts shall by liquidated pursuant to the rules
of the foreign clearing organization or foreign board of trade or, in
the absence of such rules, in the manner the trustee deems appropriate.
This the new provision is analogous to the existing provision but would
extend to cases where the debtor FCM is a member of a foreign clearing
organization.
Section 190.04(e)(1)(ii) provides instructions to the trustee
regarding the liquidation of open commodity contracts where the debtor
is not a member of a DCO or foreign clearing organization, but instead
clears through one or more accounts established with an FCM or a
foreign futures intermediary. In such a case, Sec. 190.04(e)(1)(ii)
provides that the trustee shall use commercially reasonable efforts to
liquidate the open commodity contracts to achieve competitive pricing,
to the extent feasible under market conditions at the time of
liquidation. The Commission is adding this provision to account for
those circumstances where the trustee must liquidate open commodity
contracts for a debtor that is not a clearing member.
As with Sec. 190.04(e)(1)(i), the Commission is adopting Sec.
190.04(e)(2) to delete the rule approval requirement, for the same
reasons stated above. Regulation Sec. 190.04(e)(2) is derived from
current Sec. 190.04(d)(1)(ii) which requires a trustee or clearing
organization to apply to the Commission for permission to liquidate
open commodity contracts by book entry. In such a case, the settlement
price for such commodity contracts shall be determined by the clearing
organization in accordance with its rules, which shall be designed to
establish, to the extent feasible under market conditions at the time
of liquidation, such settlement prices in a competitive manner.
The Commission is adopting Sec. 190.04(e)(3) to recognize that an
FCM or foreign futures intermediary through which a debtor FCM carries
open commodity contracts will generally have enforceable contractual
rights to liquidate such commodity contracts. New Sec. 190.04(e)(3)
confirms that the upstream intermediary may exercise such rights.
However, the liquidating FCM or foreign futures intermediary shall use
commercially reasonable efforts to liquidate the open commodity
contracts to achieve competitive pricing, to the extent feasible under
market conditions at the time of liquidation and subject to any rules
or orders of the relevant clearing organization, foreign clearing
organization, DCM, SEF or foreign board of trade governing its
liquidation of such open commodity contracts.
If the liquidating FCM or foreign futures intermediary fails to do
so, the trustee may seek damages reflecting the difference in price(s)
resulting from such failure. However, such damages would be the
trustee's sole available remedy as the regulation makes clear that
``[i]n no event shall any such liquidation be voided.''
The Commission is adopting Sec. 190.04(e)(4)(i) and (ii) based on
current Sec. 190.04(d)(2) and (3), respectively, with some minor non-
substantive language changes and updated cross-references.
The Commission requested comment in particular on the treatment of
letters of credit in bankruptcy, as set forth in proposed Sec.
190.04(e). The Commission did not receive any comments on this aspect
of the Proposal. Accordingly, for the reasons stated above, the
Commission is adopting Sec. 190.04(e) as proposed.
f. Regulation Sec. 190.04(f): Long Option Contracts
The Commission is adopting Sec. 190.04(f) as proposed to contain
only minor non-substantive changes from the current Sec. 190.04(e)(5),
including (1) a cross-reference to the liquidation provisions in
proposed Sec. 190.04(d) and (e), and (2) a clarification that the
provision is referring to commodity contracts that are long option
contracts, rather than to long option contracts more generally.
The Commission did not receive any comments on this aspect of the
Proposal. Accordingly, for the reasons stated above, the Commission is
adopting Sec. 190.04(f) as proposed.
3. Regulation Sec. 190.05: Operation of the Debtor's Estate--General
The Commission is adopting Sec. 190.05 to revise parts of current
Sec. 190.04 and add new provisions to (1) require a trustee to use all
reasonable efforts to continue to issue account statements for customer
accounts holding open commodity contracts or other property and (2)
clarify the trustee's obligation with respect to residual interest. The
Commission requested comment with respect to all aspects of proposed
Sec. 190.05.
The Commission is adopting Sec. 190.05(a) to amend the requirement
in current Sec. 190.04(a) that the trustee ``shall'' comply with all
provisions of
[[Page 19354]]
the CEA and of the regulations thereunder as if it were the debtor, to
state that the trustee ``shall use reasonable efforts to comply'' with
all provisions of the CEA and of the regulations thereunder as if it
were the debtor. This change is intended to provide the trustee with
some flexibility in making decisions in an emergency bankruptcy
situation, subject to the requirements of the Bankruptcy Code. Given
that an FCM bankruptcy will likely be a fast-paced situation requiring
the trustee to make decisions with little time for consideration, the
Commission recognizes that there may be circumstances under which
strict compliance with the CEA and the regulations thereunder may not
be practicable. The Commission did not receive any comments on proposed
Sec. 190.05(a).\115\
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\115\ To the extent that ICI's comment raising concerns about
trustee discretion applies here, the Commission notes that the
addition of Sec. 190.00(c)(3)(i)(C), which directs the trustee to
use their discretion with the overarching goal of protecting public
customers, should mitigate that concern.
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The Commission is adopting Sec. 190.05(b) to address the
computation of funded balances. It is derived from, and makes several
revisions to, Sec. 190.04(b). The Commission's objective in making
such revisions is to provide the bankruptcy trustee with the latitude
to act reasonably given the circumstances with which the trustee is
confronted, recognizing that information may be more reliable and/or
accurate in some insolvency situations than in others and permitting an
approach that, to an appropriate extent, favors cost effectiveness and
promptness over precision.\116\ First, whereas current Sec. 190.04(b)
provides that a trustee ``must'' compute a daily funded balance for the
relevant customer accounts, Sec. 190.05(b) requires the trustee to use
``reasonable efforts'' to make such computations. Such computations are
required to be ``as accurate as reasonably practicable under the
circumstances, including the reliability and availability of
information.'' Second, Sec. 190.05(b) increases the scope of customer
accounts for which the bankruptcy trustee is obligated to compute a
funded balance from accounts that contain open commodity contracts to
accounts that contain open commodity contracts or other property. In
the Commission's view, there is no reason to exclude customer accounts
that contain only property (the value of which may change) from the
scope of those for which bankruptcy trustees must compute a daily
funded balance. Third, Sec. 190.05(b) revises the length of time that
the trustee is obligated to compute the funded balance of customer
accounts from ``until the final liquidation date'' to until the open
commodity contracts and other property in the account have been
transferred or liquidated. This change ties the computation requirement
to each specific account, such that a bankruptcy trustee is not
required to continue to compute the funded balance of customer accounts
that do not contain any open commodity contracts or other property.
Lastly, the specific deadline by which the computation must be
completed is being removed. The Commission does not believe that the
deadline in current Sec. 190.04(b) (by noon the next business day) is
crucial in a bankruptcy context (as it is with respect to an FCM
conducting ongoing daily business).\117\ Such computation would,
however, inherently need to be accomplished prior to performing any
action where knowledge of funded balances is essential, such as
transfers of accounts or property.
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\116\ See major theme 7 discussed in section I.B above.
\117\ See, e.g., Sec. 1.32(d).
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The Commission received one comment regarding proposed Sec.
190.05(b). CME agreed that allowing the trustee to compute the funded
balance for customers' accounts before transferring or liquidating
customer positions or property using ``reasonable efforts'' to be ``as
accurate as reasonably practicable under the circumstances, including
the reliability and availability of information'' ``should allow the
trustee to act more promptly to transfer the positions of public
customers and their pro rata share of the customer property than if the
trustee were held to a strict standard of precision in calculating
funded balances before it could undertake such transfers.'' This is
consistent with the Commission's view. The Commission is adopting Sec.
190.05(c)(1) to amend the record retention requirements in current
Sec. 190.04(c) to be more comprehensive. Section 190.05(c)(1) expands
the referenced records from ``computations required by this [p]art'' to
``records required under this chapter to be maintained by the debtor,
including records of the computations required by this part.'' To
enable the trustee to mitigate the expenses of record retention,
however, it reduces the time that records are required to be retained
from ``the greater of the period required by Sec. 1.31 of this chapter
or for a period of one year after the close of the bankruptcy
proceeding for which they were compiled'' to ``until such time as the
debtor's case is closed.'' Section 190.05(c)(2) simplifies the
corresponding portion of current Sec. 190.04(c)(2) by omitting the
requirement that the records required in Sec. 190.05(c)(1) be
available to the Court and parties in interest. The requirement that
such records be available to the Commission and the United States
Department of Justice is being retained. A court generally will not
itself look at records, and any parties in interest should have access
to records under the discovery provisions of the Federal Rules of
Bankruptcy Procedure and the Federal Rules of Civil Procedure, as
applicable. The Commission did not receive any comments on proposed
Sec. 190.05(c).
The Commission is adopting new Sec. 190.05(d) to facilitate the
ability of customers of the bankrupt FCM with open commodity contracts
or property to keep track of such open commodity contracts or property
even during insolvency, and promptly to make them aware of the
specifics of the liquidation or transfer of such contracts or property.
Section 190.05(d) requires the trustee to use all reasonable efforts to
continue to issue account statements with respect to any customer for
whose account open commodity contracts or other property is held that
has not been liquidated or transferred. Section 190.05(d) also requires
the trustee to issue an account statement reflecting any liquidation or
transfer that has taken place with respect to a customer account
promptly after such liquidation or transfer has occurred.
The Commission sought comment on the practicability of the proposed
requirements regarding the issuance of account statements. ICI
commented in support of the account statement requirements.
The Commission is adopting Sec. 190.05(e)(1) to amend the
requirement in current Sec. 190.04(e)(2) that a trustee must obtain
court approval to make disbursements to customers, to specifically
carve out transfers of customer property made in accordance with Sec.
190.07. The Commission is making this change to reflect the policy
preference to transfer as many public customer positions as practicable
in the event of an FCM insolvency.\118\ The Commission notes, however,
that this
[[Page 19355]]
carve out does not detract from the trustee's ability to, in their
discretion, nonetheless seek and obtain court approval for certain
transfers of property. The Commission recognizes that there is an
inherent tension between distributing to public customers as much
customer property as possible from the debtor's estate, as quickly as
possible, and ensuring accuracy in distribution, and believes that
Sec. 190.05(e)(1) strikes the right balance between these competing
objectives.\119\
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\118\ The Commission notes that current Sec. 190.08(d) provides
for the return of specifically identifiable property other than
commodity contracts under certain circumstances (namely, where the
customer makes good any pro rata loss related to that property)
without court approval; however, the Commission is deleting this
provision in favor of allowing transfers without court approval for
the reasons stated above.
\119\ The concept of prioritizing cost effectiveness and
promptness over precision is discussed in detail in major theme 7 in
section I.B above and in overarching concept three in the cost-
benefit considerations, section III.A.2.iii below.
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Section 190.05(e)(2) addresses how a bankruptcy trustee may invest
the proceeds \120\ from the liquidation of open commodity contracts and
specifically identifiable property, and other customer property. It is
derived from, and retains much of, current Sec. 190.04(e)(3), but it
expands the provision permitting the bankruptcy trustee to ``invest any
customer equity in accounts which remain open in accordance with Sec.
190.03'' to permit the investment of ``any other customer property.''
It continues to limit the permissible investments to obligations of, or
fully guaranteed by, the United States, and to limit the location of
permissible depositories to those located in the United States or its
territories or possessions. The Commission did not receive any comments
on proposed Sec. 190.05(e).
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\120\ Section 190.05(e)(2) uses the term ``proceeds'' rather
than the term ``equity,'' which is used in current Sec.
190.04(e)(3). This change in wording is not meant to be a
substantive.
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The Commission is adopting new Sec. 190.05(f) to require a
bankruptcy trustee to apply the residual interest provisions contained
in Sec. 1.11 ``in a manner appropriate to the context of their
responsibilities as a bankruptcy trustee'' and ``in light of the
existence of a surplus or deficit in customer property available to pay
customer claims.'' The purpose of the residual interest provisions is
to have the FCM maintain a sufficient buffer in segregated funds ``to
reasonably ensure that the [FCM] . . . remains in compliance with the
segregated funds requirements at all times.'' \121\ The Commission
requested comment with respect to all aspects of proposed Sec. 190.05.
Specifically, the Commission sought comment on the practicability and
appropriateness of proposed Sec. 190.05(f).
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\121\ Section 1.11(e)(3)(i)(D).
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The Commission received supportive comments from CME, SIFMA AMG/
MFA, ICI, and Vanguard. CME supported adding clarity that the trustee
should use reasonable efforts to operate the debtor FCM's estate in
compliance with the CEA and CFTC regulations governing FCMs, including
to apply the residual interest provisions in Sec. 1.11, in a manner
appropriate to the context of their responsibilities and in light of
the existence of a surplus or deficit in customer property available to
pay customer claims. ICI and Vanguard supported the clarification in
proposed Sec. 190.05(f) that an FCM's residual interest is to be
applied to public customer claims. Vanguard noted its belief that ``FCM
residual interest is a valuable buffer to insulate FCM customers from
the risk of delayed or failed margin transfers from other customers.''
Vanguard was ``pleased that the Commission has confirmed that, while
residual interest is fronted by FCMs, it must be used to support
customers through an FCM insolvency,'' noting that its ``purpose is to
enhance core customer protections.'' SIFMA AMG/MFA also believed that
``the proposed use of residual interest as contemplated by proposed
Sec. Sec. 190.05(f) and 190.09 is appropriate,'' and agreed with the
Commission that ``the residual interest provisions contained in Sec.
1.11 remain important.''
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.05 as
proposed.
4. Regulation Sec. 190.06: Making and Taking Delivery Under Commodity
Contracts
The Commission is adopting Sec. 190.06 as proposed. The Commission
is adopting Sec. 190.06 to provide more specificity regarding making
and taking deliveries on commodity contracts in the context of an FCM
bankruptcy and to reflect current delivery practices. Section 190.06 is
derived from current Sec. 190.05, but implements new concepts (with
respect to delivery practices, intangible commodities, and separation
of physical and cash delivery property), as discussed further below.
Generally, open positions may enter a delivery position where the
parties incur bilateral contractual delivery obligations.\122\ It is
important to address deliveries to avoid disruption to the cash market
for the commodity and to avoid adverse consequences to parties that may
be relying on delivery taking place in connection with their business
operations.
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\122\ The timing of the entry of the order for relief in a
subchapter IV proceeding relative to when physical delivery
contracts move into a delivery positions will generally influence
whether a delivery issue may arise. Additionally, during business as
usual, market participants typically offset contracts before
incurring delivery obligations.
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The delivery provisions in the current regulations largely reflect
the delivery practices at the time current part 190 was adopted in
1983. At that time, delivery was effected largely by tendering paper
warehouse receipts or certificates. In contrast, most deliverable title
documents today are held and transferred in electronic form, typically
with the clearing organization serving as the central depository for
such instruments. Under the terms of some contracts (such as oil or gas
futures) the party with the contractual obligation to make delivery
will physically transfer a tangible commodity to meet its obligations.
In other cases, intangible commodities may be delivered, including
virtual currencies. As noted previously, in the definitions section
(Sec. 190.01), the Commission is dividing the delivery account class
into physical delivery and cash delivery account subclasses to
recognize the differing issues that apply to physical delivery property
versus cash delivery property. The Commission is also recognizing that,
consistent with current practice, physical deliveries \123\ may be
effected in different types of accounts.\124\ For example, when an FCM
has a role in facilitating delivery, deliveries may occur via title
transfer in a futures account, foreign futures account, cleared swaps
account, delivery account, or, if the commodity is a security, in a
securities account. \125\
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\123\ Current Sec. 190.05 applies to the delivery of a physical
commodity, or of documents of title to physical commodities. Section
190.06 applies to any type of commodity that is subject to delivery,
whether tangible or intangible. This is captured in the definition
of physical property. Given the different ways in which delivery may
take place, physical delivery property is not limited to property
that an FCM holds for or on behalf of a customer in a delivery
account. For a discussion of those different ways, see the third and
fourth categories under the definition of physical delivery property
in Sec. 190.01 in section II.A.2 above.
\124\ See also Sec. 1.42.
\125\ See also Sec. 1.42.
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Section 190.06(a) applies to commodity contracts that settle upon
expiration or exercise by making or taking delivery of physical
delivery property, if such commodity contracts are in a delivery
position on the filing date or the trustee is unable to liquidate such
commodity contracts in accordance with Sec. 190.04(c) to prevent them
from moving into a delivery position.\126\ The Commission is
[[Page 19356]]
adopting Sec. 190.06(a)(2) to address delivery made or taken on behalf
of a customer outside of the administration of the debtor's estate,
(i.e., directly between the debtor's customer and the delivery
counterparty assigned by the clearing organization). It replaces
current Sec. 190.05(b). Current Sec. 190.05(b) requires a DCO, DCM,
or SEF to enact rules that permit parties to make or take delivery
under a commodity contract outside the debtor's estate, through
substitution of the customer for the commodity broker. The Commission
believes that deliveries should occur in this manner only where
feasible. Deliveries may not always happen in this manner, as customers
largely rely on their FCMs to hold physical delivery property on their
behalf in electronic form.\127\
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\126\ As discussed above, Sec. 190.04(c) directs the trustee to
use its best efforts to avoid delivery obligations concerning
contracts held through the debtor FCM by transferring or liquidating
such contracts before they move into delivery position.
\127\ The requirement for registered entity rules to be
submitted for approval in accordance with section 5c(c) of the Act
has been deleted for reasons discussed in section II.B.2 above with
respect to Sec. 190.04(e)(1) and (2).
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Section 190.06(a)(2)(i) \128\ directs the trustee to use
``reasonable efforts'' to allow a customer to deliver physical delivery
property that is held directly by the customer in settlement of a
commodity contract, and to allow payment in exchange for such delivery,
to occur outside the debtor's estate, where the rules of the exchange
or clearing organization prescribe a process for delivery that allows
delivery to be fulfilled either (A) in the ordinary course by the
customer, (B) by substitution of the customer for the commodity broker,
or (C) through agreement of the buyer and seller to alternative
delivery procedures. In adopting a ``reasonable efforts'' standard
rather than (as in current Sec. 190.05(a)(1)) ``best efforts,'' the
Commission is recognizing that, in the event that the trustee is unable
to transfer or earlier liquidate the positions, delivery involves a
significant degree of bespoke administration. Moreover, requiring the
trustee's ``best efforts'' for delivery might require the trustee to
spend an inordinate amount of time focusing on the needs of a few
customers and detract from the trustee's ability to manage the short
term challenges of the administration of the estate in the days
immediately following the filing date.
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\128\ The Commission notes that Sec. 190.04(c) directs the
trustee to use its best efforts to avoid delivery obligations
concerning contracts held through the debtor FCM by transferring or
liquidating such contracts before they move into delivery position.
Section 190.06(a)(2) applies where the trustee is unable to do so.
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Section 190.06(a)(2)(ii) addresses the circumstance where, while
the customer makes physical delivery in satisfaction of a commodity
contract using property that is outside the administration of the
estate of the debtor, the customer nonetheless has property held in
connection with that contract at the debtor (i.e., collateral posted in
connection with that contract pre-petition). Consistent with current
Sec. 190.05(b)(2), Sec. 190.06(a)(2)(ii) provides that the property
held at the debtor becomes part of the customer's claim and can only be
distributed pro rata, despite the customer fulfilling the delivery
obligation outside the administration of the debtor's estate.
Section 190.06(a)(3) applies when it is not practicable to effect
delivery outside the estate. Section 190.06(a)(3) clarifies that which
was implied, but was not addressed, in current Sec. 190.05(c)(1)-(2),
by providing additional details for when delivery is made or taken
within the debtor's estate. It contains provisions for the trustee to
deliver physical or cash delivery property on a customer's behalf, or
return such property to the customer so that the customer may fulfill
its delivery obligation. The regulation also includes restrictions
designed to assure that a customer does not receive (or otherwise
benefit from) a distribution of customer property (or other use of such
property that benefits the customer) that exceeds the customer's pro
rata share of the relevant customer property pool.
The Commission is adopting new Sec. 190.06(a)(4) to recognize that
delivery may need to be made in a securities account if an open
commodity contract held in a futures account, foreign futures account,
or cleared swaps account requires the delivery of securities, and
property from any of these accounts is transferred to the securities
account for the purpose of effecting delivery. The value of the
property transferred to the securities account must be limited to the
customer's funded balance for a commodity contract account, and only to
the extent that funded balance exceeds (i.e., the surplus over) the
customer's minimum margin requirements for that account. Such a
transfer may not be made if the customer is undermargined or has a
deficit balance in any other commodity contract accounts.
Section 190.06(a)(5), as proposed, addressed deliveries made or
taken on behalf of ``a house account of the debtor.'' It was derived
from current Sec. 190.05(c)(3), with some clarifying wording.
Consistent with the suggestion from the ABA Subcommittee, as discussed
in section II.A.2 above, the Commission is deleting in this final rule
the definition of house account as it applies to FCMs. The reference in
the provision as proposed to ``a house account of the debtor'' is being
replaced in the final rule with a reference to ``the debtor's own
account or the account of any non-public customer of the debtor.'' No
substantive change vis-[agrave]-vis either the current regulation or
the regulation as proposed is intended.
The Commission is adopting new Sec. 190.06(b) to divide the
delivery account class into separate physical delivery and cash
delivery account subclasses, for purposes of pro rata distributions to
customers in the delivery account class on their net equity claims.
Because claims in each subclass are fixed as of the filing date, Sec.
190.06(b)(1)(i) provides that the physical delivery account class
includes physical delivery property held in delivery accounts as of the
filing date, and the proceeds of any such physical delivery property
received subsequently (i.e., cash received after the filing date, in
exchange for physical delivery property on which delivery was made),
and Sec. 190.06(b)(ii) provides the cash delivery account class
includes cash delivery property in delivery accounts as of the filing
date, along with physical delivery property for which delivery is
subsequently taken (i.e., in exchange for cash delivery property paid
after the filing date) on behalf of a customer in accordance with Sec.
190.06(a)(3).
Section 190.06(b)(2) describes the customer property included in
the cash delivery account class and in the physical delivery account
class. Section 190.06(b)(2) provides that customer property in the cash
delivery account class includes cash or cash equivalents that are held
in an account under a name, or in a manner, that clearly indicates that
the account holds property for the purpose of making payment for taking
delivery of a commodity under commodity contracts. Customer property in
the cash delivery account class also includes any other property that
is (A) not segregated for the benefit of customers in the futures,
foreign futures, or cleared swaps account classes) and (B) traceable
(through, e.g., account statements) as having been received after the
filing date as part of taking delivery.
Section 190.06(b)(2) also provides, conversely, that customer
property in the physical delivery account class includes cash or cash
equivalents that are held in an account under a name, or in a manner,
that clearly indicates that the account holds property received in
payment for making delivery of a commodity under a commodity contract.
Customer property in the
[[Page 19357]]
physical delivery account class also includes any other property that
is (A) not segregated for the benefit of customers in the futures,
foreign futures, or cleared swaps account classes) and (B) traceable
(through, e.g., account statements) as having been held for the purpose
of making delivery of a commodity under a commodity contract, or held
as of the filing date as a result of taking delivery.
The Commission requested comment on all aspects of proposed Sec.
190.06. In particular, the Commission sought comment on the
implications of subdividing the delivery account class into separate
physical delivery and cash delivery account subclasses, including any
additional challenges or benefits that the Commission did not consider.
CME expressed support for specific aspects of proposed Sec. 190.06,
such as: (1) The proposed enhancements to the delivery account class,
including separating the account class into physical and cash delivery
account classes; (2) the additional detail provided to the trustee on
how to facilitate the completion of deliveries including, in
particular, the requirement for the trustee to use reasonable efforts
to allow delivery to occur outside administration of the debtor FCM's
estate when the rules of the relevant exchange or DCO prescribe a
process for allowing deliveries to be accomplished as set forth in the
proposal; and (3) the clarification that cash or cash equivalents held
by the debtor FCM in an account maintained at a bank, DCO, foreign
clearing organization or elsewhere constitutes customer property when
it is held under a name or in a manner clearly indicating the property
in the account relates to deliveries. As to the latter, CME believes
that this will facilitate identifying cash delivery property available
to distribute to customers in the cash delivery account class.\129\
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\129\ CME noted that its support was ``subject to CME's comments
which request changes to the cash delivery property and physical
delivery property definitions.'' Specifically, CME requested that
the Commission adopt more formal requirements with respect to
delivery accounts through a separate rulemaking. That request is
addressed in section II.G below.
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Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.06 as
proposed, with modifications to Sec. 190.06(a)(5) as set forth above.
5. Regulation Sec. 190.07: Transfers
Regulation Sec. 190.07 was proposed to set forth detailed
provisions governing transfers, consistent with the policy preference,
explained in Sec. 190.00(c)(4), for transferring (or ``porting'')
public customer commodity contract positions, as well as all or a
portion of such customers' account equity. It is being adopted as
proposed with modifications to Sec. 190.07(b), (d), and (e), as set
forth below.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.07, and raised particular questions with respect to
the proposed six-month post-transfer period to complete customer
diligence, partial transfers, and estimates of customer claims.
Section 190.07(a) addresses rules that clearing organizations and
SROs may ``adopt, maintain in effect, or enforce'' that may affect
transfers.
In Sec. 190.07, paragraphs (a)(1) and (2) states that these
organizations may not have such rules that, respectively, ``are
inconsistent with the provisions of'' part 190 or that interfere with
the acceptance by their members of commodity contracts and collateral
from FCMs that are required to transfer accounts pursuant to Sec.
1.17(a)(4). These provisions are derived from current Sec.
190.06(a)(1) and (2), with technical changes. No comments were received
with respect to these provisions.
Section 190.07(a)(3) is intended to promote transfers, to the
extent consistent with good risk management. It provides that no
clearing organization or other SRO may adopt, maintain in effect, or
enforce rules that ``interfere with the acceptance by its members of
transfers of commodity contracts, and the property margining or
securing such contracts, from [an FCM that is a debtor] if such
transfers have been approved by the Commission . . .'' Paragraph (a)(3)
includes a proviso, however, that it shall not (i) ``[l]imit the
exercise of any contractual right of a clearing organization or other
registered entity to liquidate or transfer open commodity contracts'';
or (ii) ``[b]e interpreted to limit a clearing organization's ability
adequately to manage risk.''
FIA supported the proviso, and CME ``agree[ed] that transfers
should be made consistent with sound risk management principles, and in
that regard welcome[d] the proposed clarification that the requirements
under the proposed rule do not limit the rights of a DCO (or a DCM or
swap execution facility as ``registered entities'' as defined in the
CEA) to liquidate or transfer open commodity contracts.'' ICE, by
contrast, was concerned that the term ``interfere with'' is overly
broad, and requested that the Commission ``clarify that a clearing
organization is not precluded from managing the risks presented by any
such transfer, including through bona fide changes in margin
requirements and guarantee fund contributions for transferee clearing
members.''
As discussed immediately above, the provision already states that
``this paragraph (a)(3) shall not . . . be interpreted to limit a
clearing organization's ability adequately to manage risk.'' Moreover,
recognizing the different or additional margin requirements or
guarantee fund contribution requirements resulting from the additional
positions carried by a transferee clearing member is not a rule that
interferes with the acceptance of a transfer of commodity
contracts.\130\ Accordingly, the Commission concludes that Sec.
190.07(a)(3) appropriately meets the goal of promoting transfers to the
extent consistent with good risk management.
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\130\ The Commission understands ICE's reference to ``bona fide
changes in margin requirements and guarantee fund contributions'' to
mean changes that are not based on the fact that positions were
acquired by transfer.
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Regulation Sec. 190.07(b) concerns requirements for transferees.
Paragraph (b)(1) clarifies that it is the duty of the transferee--not
of anyone else--to assure that the transfer will not cause the
transferee to be in violation of the minimum financial requirements.
Paragraph (b)(2) notes that the transferee accepts the transfer subject
to any loss arising from deficit balances that cannot be recovered from
the customer, and, in the case of customer accounts, must keep such
counts open for at least one business day (unless the customer fails to
respond to a margin call within a reasonable time) and may not collect
commissions with respect to the transfer.
As stated in the proposal, the Commission understands that customer
diligence processes would have already been required to have been
completed by the debtor FCM with respect to each of its customers as
part of opening their accounts. Regulation Sec. 190.07(b)(3) thus
provides that a transferee may accept open commodity contracts and
property, and may open accounts on its records prior to completing
customer diligence, provided that account opening diligence as required
is performed as soon as practicable but no later than six months after
transfer, unless the time is extended, by the Commission, for a
particular account, transfer, or debtor. This provision is consistent
with past practice in FCM bankruptcies.
CME supported this provision as a ``practical change'' that should
assist in finding willing transferees, while ICI believed that it will
help mitigate or
[[Page 19358]]
eliminate ``speed bumps'' to porting. Vanguard supported the
flexibility advanced by the Commission here, but urged the Commission
to work to harmonize that flexibility across other regulatory regimes
applicable at FCMs, particularly for those dually registered as broker-
dealers.
FIA supported the policy underlying paragraph (b)(3), and noted
that it is essential to realize the policy of favoring porting over
liquidation of customer accounts. FIA also agreed that six months is a
reasonable period of time for this process, subject to the Commission's
authority to grant additional time in particular circumstances. FIA
was, however, of the view that this regulation should ``provide
transferee FCMs more specific relief from applicable law relating to
`customer diligence.' ''
FIA encouraged the Commission to specify the customer diligence
rules from which transferee FCMs will have temporary relief. FIA stated
that
``such rules may include, but not be limited to: (i) rules relating
to anti-money laundering requirements (including rules requiring
FCMs to implement customer identification programs and know your
customer requirements and all corresponding self-regulatory
organization (``SRO'') requirements); (ii) rules relating to risk
and other disclosures (Sec. Sec. 1.55, 30.6, 33.7 and similar SRO
disclosure requirements); (iii) rules relating to capital and
residual interest requirements (Sec. Sec. 1.11, 1.17, 1.22, 1.23,
22.2, 22.17, 30.7 and 41.48 and related SRO requirements); (iv)
rules relating to account statements required under Sec. 1.33 in
the event positions transfer with inadequate contact information
(Sec. 1.33 and related SRO requirements); and [(v)] rules relating
to margin in the event accounts transfer without adequate margin
(Sec. Sec. 1.17, 39.13, 41.42-41.49 and related SRO
requirements).''
The Commission has considered each of the five types of
requirements discussed by FIA:
With respect to anti-money laundering requirements, the Commission
notes that, for purposes of the Customer Identification Program
(``CIP'') requirements applicable to futures commission merchants
pursuant to 31 CFR 1026.220, the term ``account'' is defined to exclude
``[a]n account that the futures commission merchant acquires through
any acquisition, merger, purchase of assets, or assumption of
liabilities.'' 31 CFR 1026.100(a)(2)(i). Thus, transferred accounts are
not subject to the CIP requirements.
However, the Customer Due Diligence (``CDD'') requirements of 31
CFR 1026.210(b)(5) do appear to apply. These include a requirement for
``[a]ppropriate risk-based procedures for conducting ongoing customer
due diligence, to include . . . [u]nderstanding the nature and purpose
of customer relationships for the purpose of developing a customer risk
profile . . . .'' 31 CFR 1026.210(b)(5)(i). The Commission is of the
view that Sec. 190.07(b)(3) would inform the determination of what
constitutes appropriate risk-based procedures in the exigent context of
an FCM accepting a transfer of accounts from an FCM that is a debtor in
bankruptcy.
While FIA appears to request a reference to the account opening
disclosure requirements in Sec. Sec. 1.55, 30.6, and 33.7, these would
appear to be addressed by the bulk transfer provisions of Sec. 1.65.
The Commission is amending Sec. 190.07(b)(3) to include a
parenthetical statement that explicitly refers to ``the risk
disclosures referred to in Sec. 1.65(a)(3).'' This will modify the
sixty-day requirement of that paragraph.
The Commission declines to amend the regulation to extend the time
to comply with capital and residual interest requirements. To do so
would risk permitting a transfer of accounts to result in contagion of
financial weakness. The Commission reiterates the importance of Sec.
190.07(b)(1), which provides that ``it is the duty of each transferee
to assure that it will not accept a transfer that would cause the
transferee to be in violation of the minimum financial requirements set
forth in this chapter.''
However, to the extent that shortfalls in compliance with these
requirements are due to errors or shortfalls in the data received by
the transferee from the transferor FCM, and the transferee acts with
reasonable and appropriate diligence in seeking to detect such errors
or shortfalls in data, and, where detected, in investigating and
correcting them, such shortfalls in compliance would not be considered
violations of such requirements.
Similarly, where account statements required by Sec. 1.33 do not
reach the customer due to errors or shortfalls in the contact
information provided to the transferee, there would be no violation so
long as the transferee takes reasonable steps to detect such errors or
shortfalls (e.g., by reacting promptly to rejected email or returned
postal mail, or to complaints by a transferred customer that they are
not receiving such statements) and to correct the situation once
detected. The proposed regulation does not need to be amended to
achieve this result.
Finally, with respect to FIA's request for relief with respect to
regulations ``relating to margin in the event accounts transfer without
adequate margin,'' the Commission believes that the determination of
whether a transferee FCM is promptly collecting such margin should be
informed by the exigencies of the situation. There is, however, no
basis for a general exemption for transferee accounts from the
requirements of Sec. 39.13(g)(8)(iii), providing that a DCO shall
require that its members do not permit customers to withdraw funds from
their accounts unless the accounts would be fully margined after such
withdrawal. If the transferee FCM is not confident of the information
it has regarding the transferred account, it would seem appropriate to
risk manage with caution. Once the transferee FCM is confident that it
fully understands the situation, the transferee can act in accordance
with its normal procedures.\131\ Similarly, there is no basis to
provide a general exemption from undermargined account capital charges
in accordance with Sec. 1.17.
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\131\ Such normal procedures would include the ``ordinary course
of business'' referred to in Letter 19-17, or any successor letter
or regulation. See CFTC Letter 19-17, https://www.cftc.gov/node/217076.
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In all of these cases, the Commission encourages DCOs and SROs to
take similar approaches.
While the Commission has declined, in many of the above cases, to
provide general relief by regulation, this is without prejudice to the
possibility that more targeted relief may be appropriate in particular
cases. Specifically, any further relief that might be appropriate in a
particular situation could be requested by, e.g., the transferee, in
light of the relevant facts and circumstances.
The Commission observes that its staff have traditionally responded
to requests for relief in emergency situations with great dispatch, and
expects, and thus instructs staff, to continue to do so in this context
in the future.\132\
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\132\ For the avoidance of doubt, the nature of the expectation
and the instruction is that staff will provide a response to such
requests with great dispatch. The nature of the response, whether
affirmative, affirmative in part, or negative, will depend on the
relevant facts and circumstances.
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OCC recommended that ``the Commission adopt a parallel regulation
permitting a DCO to postpone any due diligence the DCO would typically
have to perform on an FCM member accepting transferred positions from a
bankrupt FCM.'' This would include the requirements of, e.g., Sec.
39.12, requiring a DCO to have ``continuing participation requirements
for clearing members of the [DCO] that are objective, publicly
available, and risk-based.''
The Commission does not agree that the situations are parallel: An
FCM is required to perform individualized due
[[Page 19359]]
diligence on each of its customers, which in the case of a transfer
such as was seen in historical situations such as MF Global, would
amount to hundreds or even thousands of customers. By contrast, the
focus of a DCO is on the financial and operational capability of each
of its clearing members that is a transferee to manage, in the
aggregate, the customer portfolios of which it accepts transfer. The
number of transferee FCM clearing members is likely to be no more than
a dozen.
In any event, the Commission expects that a DCO would, and would be
permitted to, conduct its due diligence procedures in a manner
consistent with balancing risk management requirements (see, e.g.,
Sec. 190.07(a)(3)(ii) (restrictions on a DCO interfering with the
acceptance of transfers from a debtor FCM ``shall not be interpreted to
limit a clearing organization's ability adequately to manage risk'')
with the exigencies of the situation.
Section 190.07(b)(4) is designed to clarify what the account
agreement between the transferred customer and the transferee is at and
after the time the transfer becomes effective. This includes situations
where an account is partially transferred. As proposed, it provides
that any account agreements governing a transferred account shall be
deemed assigned to the transferee and shall govern the customer's
relationship unless and until a new agreement is reached. It also
provides that a breach of the agreement prior to a transfer does not
constitute a breach on the part of the transferee. CME, ICI, and
Vanguard supported this provision.
FIA appreciated the need for legal certainty as to the terms of the
relationship between a transferee FCM and each transferred customer,
but was concerned that the transferee FCM might be disadvantaged by
being subject to an account agreement between the transferred customer
and the transferor (debtor) FCM. There are two possible situations with
respect to each customer: Either the customer does, or does not, have a
pre-existing account agreement with the transferee FCM.
FIA noted that many large customers, in particular, may maintain
accounts at more than one FCM, and thus it may be the case that the
customer already has an account agreement in place with the transferee
FCM. FIA asked the Commission to confirm their view that, in this
context, the transferee would not be required to manage the ported
account(s) in accordance with the agreement with the transferor FCM.
The Commission agrees with this view, and is modifying proposed Sec.
190.07(b)(4) to state this explicitly: The proposed text will be
renumbered as Sec. 190.07(b)(4)(i), and paragraph (b)(4)(ii) will be
added to provide that paragraph (b)(4)(i) shall not apply where the
customer has a pre-existing account agreement with the transferee
futures commission merchant. In such a case, the transferred account
will be governed by that pre-existing account agreement.
However, where the transferred customer does not have a pre-
existing account agreement with the transferee FCM, FIA conceded that
``the account agreement [between the transferor and the customer]
should stay in place for a short defined interim period during which
the parties may renegotiate. . . .'' FIA did not specify how long that
``short defined interim period'' should last, nor what should happen at
the end of that period if the parties fail to reach agreement. The
Commission notes that nothing prevents either the transferee FCM or
customer from negotiating at any time to change the (in this case,
assigned) account agreement between them, and that, aside from Sec.
190.07(b)(2)(ii)(A) (requiring the transferee to keep the customer's
commodity contracts open at least one business day after their receipt
unless the customer fails to meet promptly a margin call), nothing in
the Commission's regulations prevents either the transferee or customer
from terminating their relationship if they cannot reach agreement as
to the terms under which that relationship should continue, on what
either party believes is a timely basis. Accordingly, the Commission
declines to modify Sec. 190.07(b)(4) in this context.
Lastly, FIA observed that a customer's account may not always be
able to be physically transferred from the debtor FCM to the transferee
FCM. The Commission notes that the reference in Sec. 190.07(b)(4) to
assignment of account agreements does not refer to the movement of
physical documents.\133\ As requested by FIA, the Commission can thus
confirm that assignment of the agreement does not depend upon such
movement.
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\133\ To be sure, a transfer agreement would likely include
transfers of records or at least copies of records as a matter of
good practice.
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Regulation Sec. 190.07(b)(5) provides that customer instructions
received by the debtor with respect to open commodity contracts or
specifically identifiable property that has been, or will be,
transferred in accordance with section 764(b) of the Bankruptcy Code,
should be transmitted to any transferee, which shall comply therewith
to the extent practicable (if the transferee subsequently enters
insolvency).
Regulation Sec. 190.07(c) addresses eligibility of accounts for
transfer under section 764(b) of the Bankruptcy Code. This provision
states that ``[a]ll commodity contract accounts (including accounts
with no open commodity contract positions) are eligible for transfer. .
. .'' This language recognizes that accounts can be transferred even if
they are intended for trading commodities but do not include any open
commodity contracts at the time of the order for relief.\134\
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\134\ Cf. 11 U.S.C. 761(9)(A)(ii)(II) (customer means, with
respect to an FCM, an entity that holds a claim against the FCM
arising out of ``a deposit or payment of cash, security, or other
property with such [FCM] for the purpose of making or margining [a]
commodity contract'') (emphasis added).
Thus, where a person opens a customer account and deposits
collateral on day 1, intending to trade on day 3 (or some subsequent
day when the customer determines that it is propitious to trade) and
the FCM becomes a debtor on day 2 (or some other day when the
customer has no positions open) such person nonetheless qualifies as
a customer, and their claim would be a customer claim.
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Regulation Sec. 190.07(d) addresses special rules for transfers
under section 764(b) of the Bankruptcy Code. Paragraph (d)(1) instructs
the trustee to ``use its best efforts to effect a transfer to one or
more other commodity brokers of all eligible commodity contract
accounts, open commodity contracts and property held by the debtor for
or on behalf of its customers, based on customer claims of record, no
later than the seventh calendar day after the order for relief.'' The
Commission will correct a typographical error in the proposal, and
refer to ``customer claims of record'' rather than ``customer claims or
record.''
Regulation Sec. 190.07(d)(2) addresses cases of partial transfers
and multiple transferees. It includes a requirement that ``a partial
transfer of contracts and property may be made so long as such transfer
would not result in an increase in the amount of any customer's net
equity claim.'' The added language is intended to caution against
partial transfers that would break netting sets and make the customer
worse off. The Commission has also decided to state that one way to
accomplish a partial transfer is ``by liquidating a portion of the open
commodity contracts held by a customer such that sufficient value is
realized, or margin requirements are reduced to an extent sufficient,
to permit the transfer of some or all of the remaining open commodity
contracts and property.'' This language is intended to clarify that the
liquidation may either crystalize gains or have the effect of reducing
the required margin. Finally, with regards to the transfer of part of a
spread or a straddle,
[[Page 19360]]
Sec. 190.07(d)(2)(ii) states that ``to the extent practicable under
the circumstances,'' each side of the spread or straddle must be
transferred or none of the open commodity contracts comprising the
spread or straddle may be transferred. This language is intended to
clarify that the trustee is required to protect customers holding
spread or straddle positions from the breaking of netting sets, but
only to the extent practicable given the circumstances.
Regulation Sec. 190.07(d)(3) provides details regarding the
treatment and transfer of letters of credit used as margin, consistent
with other proposed provisions related to letters of credit. In
particular, this provision states that a transfer of a letter of credit
cannot be made if it would result in a recovery that exceeds the amount
to which the customer is entitled in Sec. Sec. 190.08 and 190.09. If
the letter of credit cannot be transferred and the customer does not
deliver substitute property, the trustee may draw upon a portion or
upon all of the letter of credit, the proceeds of which will be treated
as customer property in the applicable account class. The Commission
believes a regulation detailing how letters of credit are to be treated
in a transfer will provide more certainty, as there is currently no
such regulation, and that the proposed treatment is both practical and
consistent with the policy of pro rata distribution.\135\
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\135\ See also discussion of treatment of letters of credit in
bankruptcy under Sec. 190.04(d)(3) in section II.B.2.
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Regulation Sec. 190.07(d)(4) requires a trustee to use reasonable
efforts to prevent physical delivery property from being separated from
commodity contract positions under which the property is deliverable.
The Commission is proposing this regulation to clarify its expectations
in such situations, specifically, to promote the delivery process.
Regulation Sec. 190.07(d)(5) is intended to prevent prejudice to
customers generally by prohibiting the trustee from making a transfer
that would result in insufficient customer property being available to
make equivalent percentage distributions to all equity claim holders in
the applicable account class. It clarifies that the trustee should make
determinations in this context based on customer claims reflected in
the FCM's records, and, for customer claims that are not consistent
with those records, should make estimates using reasonable discretion
based in each case on available information as of the calendar day
immediately preceding transfer.
Regulation Sec. 190.07(e) addresses the prohibition on avoidance
of transfers under section 764(b) of the Bankruptcy Code. It explicitly
approves specific types of transfers, unless such transfers are
disapproved by the Commission.
Section 190.07(e)(1) approves (i) transfers that were made before
the order for relief in compliance with Sec. 1.17(a)(4) (FCM fails to
meet capital requirements); (ii) pre-relief transfers, withdrawals or
settlements at the request of public customers, unless the customer
acted in collusion with the debtor to obtain a greater share than it
would otherwise be entitled to; and (iii) pre-relief transfers of
customer accounts or commodity contracts and other related property,
either by a clearing organization or a receiver that has been appointed
for the FCM that is now a debtor. In this context, ``public customers''
would include a lower-level (i.e., downstream) FCM acting on behalf of
its own public customers (e.g., cleared at the debtor on an omnibus
basis).
Regulation Sec. 190.07(e)(2) pertains to post-relief transfers.
Section 764(b) of the bankruptcy code permits the Commission to
approve, and thus protect from avoidance, transfers that occur up to
seven days after the order for relief. Section 190.07(e)(2)(i) approves
transfers of eligible commodity contract accounts or customer property
made by the trustee or any clearing organization. Section
190.07(e)(2)(ii) approves transfers made at the direction of the
Commission upon such terms and conditions as the Commission may deem
appropriate and in the public interest.
Regulation Sec. 190.07(e)(3) was referred to in preamble to the
proposal as derived from current Sec. 190.06(g)(3). It was
inadvertently omitted from the rule text in the proposal.
Section 190.07(e)(3) pertains to pre-relief withdrawals by
customers (in contrast to the transfers dealt with previously in Sec.
190.07(e)(1)(ii)). It states (in terms analogous to Sec.
190.07(e)(1)(ii)) that notwithstanding the provisions of paragraphs (c)
and (d) of this section, the following transfers are approved and may
not be avoided under sections 544, 546, 547, 548, 549 or 724(a) of the
Bankruptcy Code: The withdrawal or settlement of a commodity contract
account by a public customer, including a public customer which is a
commodity broker, prior to the filing date unless: (i) The customer
making the withdrawal or settlement acted in collusion with the debtor
or its principals to obtain a greater share of the bankruptcy estate
than that to which such customer would be entitled in a bankruptcy
distribution; or (ii) The withdrawal or settlement is disapproved by
the Commission.
Regulation Sec. 190.07(f) provides that, notwithstanding the other
provisions of this section (with exceptions discussed below), the
Commission may prohibit the transfer of a particular set or sets of the
commodity contract accounts and customer property, or permit the
transfer of a particular set or sets of commodity contract accounts and
customer property that do not comply with the requirements of the
section. The exceptions are the policy in favor of avoiding the
breaking of netting sets in Sec. 190.07(d)(2)(ii), and the avoidance
of prejudice to other customers in Sec. 190.07(d)(5).
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.07 as
proposed with modifications to Sec. 190.07(b), (d), and (e), as set
forth above.
6. Regulation Sec. 190.08: Calculation of Funded Net Equity
Section 190.08 is being adopted as proposed with a number of
technical modifications, as set forth below.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.08, and raised particular questions with respect to
the revisions to the calculation of the equity balance of a commodity
contract set forth in proposed Sec. 190.08(b)(1), and the
appropriateness of the proposal to determine the value of an open
commodity contract at the end of the last settlement cycle on the day
preceding the transfer rather than at the end of the day of the
transfer, as set forth in Sec. 190.08(d)(1)-(2).
As proposed, Sec. 190.08(a) stated that the ``allowed net equity
claim of a customer shall be equal to the aggregate of the funded
balances of such customer's net equity claim for each account class.''
As discussed above, the ABA Subcommittee urged that there should be
more precise use of the term ``allowed claim.'' \136\ The Commission
agrees with this recommendation. Accordingly, the Commission is
amending the language in the proposal to replace the term ``allowed net
equity'' with the term ``funded net equity'' in the final rule in both
Sec. 190.08(a) and in the title of Sec. 190.08.\137\
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\136\ See discussion of ``funded claim'' in section II.A.2
above.
\137\ Proposed Sec. 190.08(a) is derived from current Sec.
190.07(a), but reflects the fact that, under the revised definition
of the term ``primary liquidation date,'' all commodity contracts
will be liquidated or transferred prior to the primary liquidation
date. Since no (relevant) operations will occur subsequent to the
liquidation date, provisions that address how to deal with commodity
contracts after that time are moot.
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[[Page 19361]]
Section 190.08(b) sets forth the steps for a trustee to follow when
calculating each customer's net equity.\138\ Section 190.08(b)(1),
equity determination, sets forth the steps for a trustee to follow when
calculating the equity balance of each commodity contract account of a
customer. When calculating the customer's claim against the debtor, the
basis for calculating such claim is the data that appears in the
debtor's records. Once the customer's claim based on the debtor's
records is calculated, the customer will have the opportunity to
dispute such claim based on their own records, and the trustee may
adjust the debtor's records if it is persuaded by the customer. There
were no comments directed specifically to this provision.
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\138\ Pursuant to section 20(a)(5) of the CEA, 7 U.S.C.
24(a)(5), the Commission has the power to provide how the net equity
of a customer is to be determined.
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Section 190.08(b)(2), customer determination (aggregation),
provides instructions to the trustee regarding how to aggregate the
credit and debit equity balances of all accounts of the same class held
by a customer. Specifically, the regulation sets forth how to determine
whether accounts are held in the same capacity or in separate
capacities. There were two comments applicable to this provision.
As proposed, Sec. 190.08(b)(2)(ix) referred to the fact that an
omnibus customer accounts is held in a separate capacity from the
``house account.'' As noted above,\139\ the ABA Subcommittee has
suggested the deletion of the term ``house account'' in the context of
FCM bankruptcies, and the Commission has accepted this suggestion.
Consistent with that approach, the Commission is accepting the ABA
Subcommittee's revised drafting for this provision: An omnibus customer
account for public customers of a futures commission merchant
maintained with a debtor shall be deemed to be held in a separate
capacity from any omnibus customer account for non-public customers of
such futures commission merchant and from any account maintained with
the debtor on its own behalf or on behalf of any non-public customer
(emphasis added only for illustration).
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\139\ See section II.A.2 above.
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As proposed, Sec. 190.08(b)(2)(xii) provided that except as
otherwise provided in this section, an account maintained with a debtor
by an agent or nominee for a principal or a beneficial owner shall be
deemed to be an account held in the individual capacity of such
principal or beneficial owner.
SIFMA AMG/MFA urged the Commission to amend this provision to
``treat accounts of the same principal or beneficial owner maintained
by different agents or nominees as separate accounts,'' noting that
this approach would ``reduce the administrative difficulties the
trustee would face in consolidating all accounts of the same principal
or beneficial owner'' and would ``avoid[] any confusion as to the
treatment of separate accounts that could arise with the overlay of the
time-limited relief provided by Letter 19-17.'' \140\ SIFMA AMG/MFA
asserted that this change would be similar to the approach taken by the
Commission in proposed Sec. 190.08(b)(2)(xiv), which provides that
accounts held by a customer in separate capacities shall be deemed to
be accounts of different customers.
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\140\ See CFTC Letter 19-17, https://www.cftc.gov/node/217076.
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The Commission notes that CFTC Letter 19-17 conditioned such relief
on the FCM performing ``stress testing and credit limits . . . on a
combined account basis'' and ``provid[ing] each beneficial owner using
separate accounts with a disclosure that under CFTC [p]art 190 rules
all separate accounts of the beneficial owner will be combined in the
event of an FCM bankruptcy.'' \141\ Thus, treating separate accounts of
the same beneficial owner on a combined basis is entirely consistent
with the approach taken in Letter 19-17. Nor is the situation of
separate accounts for the same beneficial owner analogous to a customer
holding accounts in separate capacities, as referred to in Sec.
190.08(b)(2)(xiv) (e.g., in their personal capacity versus in their
capacity as trustee for X, or in their capacity as trustee for Y versus
their capacity as trustee for Z.). In those latter cases, the same
legal owner is acting for separate beneficial owners. Accordingly, the
Commission is declining to amend Sec. 190.08(b)(2)(xii).
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\141\ Id. at 5 (emphasis supplied).
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Section 190.08(b)(3), setoffs, sets forth instructions regarding
how and when to set off positive and negative equity balances.
Section 190.08(b)(4), correction for distributions, provides that
the value of property that has been transferred or distributed must be
added to the net equity amount calculated for that customer after
performing the steps contained in Sec. 190.08(b)(1) through (3).
Section 190.08(b)(4) also includes a proviso that clarifies that the
calculation of net equity for any late-filed claims (in cases where all
accounts for which there are customer claims of record as of the filing
date are transferred with all of the equity pertaining thereto) will be
based on the allowed amount of such claims.
Section 190.08(b)(5), correction for ongoing events, provides that
the calculation of net equity will be adjusted to correct for
misestimates or errors, including corrections for the liquidation of
claims or specifically identifiable property at a value different from
the estimate value previously used in computing net equity.
As proposed, Sec. 190.08(c) set forth the method for calculation
of a customer's funded balance, i.e., ``a customer's pro rata share of
the customer estate with respect to each account class available for
distribution to customers of the same customer class.'' Section
190.08(c)(1) sets forth instructions for calculating the funded balance
of any customer claim, while Sec. 190.08(c)(2) requires the funded
balance to be adjusted to correct for ongoing events.
One change is being made to paragraph (c)(1), as a result of
addressing a comment that affected a prior section. As proposed, Sec.
190.08(c)(1)(ii) addressed giving customers credit for 100% of margin
payments made after the order for relief.
As discussed above,\142\ a number of commenters (ABA Subcommittee,
CME, CMC), suggested that the definition of cash delivery property be
expanded to address the possibility of post-filing-date payments made
by customers to the FCM to pay for delivery. Such payments should be
credited in full to the customer's funded balance. Indeed, Sec.
190.06(a)(3)(ii)(B)(2) provides that the trustee could issue payment
calls in this context and that ``the full amount of any payment made by
the customer in response to a payment call must be credited to the
funded balance of the particular account for which such payment is
made.''
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\142\ See discussion of cash delivery property in section
II.A.2, above.
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In order to be consistent with the principle that 100% of post-
filing-date payments are credited to a customer's funded balance,
proposed Sec. 190.08(c)(1)(ii) is being amended, with the proposed
language addressing post-filing-date margin payments to be codified as
Sec. 190.08(c)(1)(ii)(A), and the addition of Sec.
190.08(c)(1)(ii)(B) to address post-filing-date payments for
deliveries, to read as follows: ``[then adding 100% of] . . . [f]or
cash delivery property, any cash transferred to the trustee on or after
the filing date for the purpose of paying for delivery.''
Section 190.08(d), valuation, sets forth instructions about how to
value
[[Page 19362]]
commodity contracts and other property for purposes of calculating net
equity as set forth in the rest of Sec. 190.08.
Section 190.08(d)(1) sets forth instructions regarding how to value
commodity contracts, separately addressing: (i) Open commodity
contracts, and (ii) liquidated commodity contracts.
As proposed, Sec. 190.08(d)(1)(i), regarding the valuation of open
commodity contracts, states that ``if an open commodity contract is
transferred to another commodity broker, its value on the debtor's
books and records shall be determined as of the end of the last
settlement cycle on the day preceding such transfer.'' The Commission
noted in the proposal that ``[t]his would allow the value of the open
commodity contract to be known prior to the transfer,'' \143\ and, as
discussed above, specifically sought comments on this issue.
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\143\ 85 FR 36028.
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The Commission received contrasting comments on this provision. ICE
``d[id] not believe that valuation is the right one, particularly
because the market may move significantly on the date of transfer.'' By
contrast, CME ``agree[d]'' with valuation as of the end the last
settlement cycle on the day preceding transfer, because it aligns with
calculations of funded balances under proposed Sec. 190.08(c), and
noted that ``any mark-to-market gains or losses on the date of the
transfer should be reflected by the receiving FCM(s) in the customer
account statements as a result of that day's settlement cycle.'' The
Commission is persuaded by the latter comment, and will adopt the
provision as proposed, both for the reasons stated by the latter
commenter, and because of concerns regarding practicability. Markets
move on a continuous basis so long as they are open and, considering
markets around the world, some markets on which futures, foreign
futures, or cleared swaps are traded are moving at all times other than
over a weekend.
Section 190.08(d)(1)(ii)(A) allows the trustee to use the weighted
average of liquidation prices for identical commodity contracts that
are liquidated within a 24-hour period or business day, but not at the
same price.
Section 190.08(d)(1)(ii)(B) provides instructions on how to value
commodity contracts that are liquidated as part of a bulk auction by a
clearing organization or similarly outside of the open market. As
proposed, this provision would value a commodity contract that is
liquidated as part of a bulk auction at the settlement price calculated
by the clearing organization as of the end of the settlement cycle
during which the commodity contract was liquidated. ICE disagreed with
this approach, stating that ``the price achieved in the auction should
be used.'' However, as the Commission noted in the proposing release,
the units being auctioned will often be a heterogenous (though risk-
related) set of products, tenors (e.g., contract months), and
directions (e.g., long or short). Different auctioned portfolios may
contain the same or similar contracts. In this context, setting the
price of a particular contract based on the auction price for a
portfolio would require considerable interpretation. Accordingly, the
Commission will implement the approach from the proposal.
Section 190.08(d)(2) sets forth the approach for valuing listed
securities, and incorporates the same weighted average concept
discussed above with respect to Sec. 190.08(d)(1)(ii)(A).
Section 190.08(d)(3) sets forth the approach for valuing
commodities held in inventory, directing the trustee to use fair market
value. If such fair market value is not readily ascertainable from
public sources of prices, the trustee is directed to use the approach
in Sec. 190.08(d)(5), discussed below.
Section 190.08(d)(4) addresses the valuation of letters of credit.
The trustee is directed to use the face amount (less amounts, if any,
drawn and outstanding). However, if the trustee makes a determination
in good faith that a draw is unlikely to be honored on either a
temporary or permanent basis, they are directed to use the approach in
paragraph (d)(5).
Section 190.08(d)(5) provides the trustee with pragmatic
flexibility in determining the value of customer property by allowing
the trustee, in their sole discretion, to enlist the use of
professional assistance to value all other customer property.\144\ This
provision further notes that, if such property is sold, its value for
purposes of the calculations required by this part is equal to the
actual value realized on sale of such property (the trustee, of course,
retains discretion to engage professional assistance to allocate such
value among a heterogenous set of items sold as a unit). Finally, the
provision notes that any such sale shall be made in compliance with all
applicable statutes, rules, and orders of any court or governmental
entity with jurisdiction thereover.
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\144\ The trustee's employment of professionals remains subject
to the requirements of section 327 of the Bankruptcy Code.
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Accordingly, after consideration of the comments and for the
reasons stated above, Sec. 190.08 is being adopted as proposed, with
modifications to the title and to Sec. 190.08(a), (b), and (c), as set
forth above.
7. Regulation Sec. 190.09: Allocation of Property and Allowance of
Claims
Section 190.09 is being adopted to set forth rules governing the
scope of customer property, the allocation of customer property between
customer and account classes, and distribution of customer property. It
was derived from current Sec. 190.08. It is being adopted as proposed
with modifications to Sec. 190.09(d)(3), as set forth below.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.09. The Commission also raised particular questions
with respect to: Whether the proposed revisions to Sec. 190.09(a)(1)
would appropriately preserve customer property for the benefit of
customers; whether proposed Sec. 190.09(a)(1)(ii)(G), concerning
property that other regulations require to be placed into segregation,
and Sec. 190.09(a)(1)(ii)(L), concerning remaining shortfalls, are
appropriately crafted; whether it is advisable to permit customers to
post ``substitute customer property'' rather than ``cash'' in proposed
Sec. 190.09(d); and whether it is appropriate to clarify the term
``like-kind securities'' by reference to the concept, derived from
SIPA, of ``securities of the same class and series of an issuer?''
There are three substantive changes in new Sec. 190.09, as
compared to current regulations:
Section 190.09(a)(1)(ii)(G) and (L) are two categories of property
that are defined to be included in customer property in order better to
protect customers from shortfalls in customer property (i.e., cases
where customer property is insufficient to cover claims for customer
property).
Section 190.09(a)(1)(ii)(G) is a new category of property that
constitutes customer property. It includes any cash, securities, or
other property which constitutes current assets of the debtor,
including the debtor's trading or operating accounts and commodities of
the debtor held in inventory, in the greater of (i) the amount of the
debtor's targeted residual interest amount pursuant to Sec. 1.11 with
respect to each account class, or (ii) the debtor's obligations to
cover debit balances or undermargined amounts as provided in Sec. Sec.
1.20, 1.22, 22.2 and, 30.7. Each of the sets of regulations referred to
in proposed Sec. 190.09(a)(1)(ii)(G) requires an FCM to put certain
funds into
[[Page 19363]]
segregation on behalf of customers. To the extent the FCM has failed to
comply with those regulatory requirements prior to the filing of the
bankruptcy, this provision requires the bankruptcy trustee to fulfill
that requirement, and allows the trustee to use the current assets of
the debtor to do that.
CME stated that this new provision is a ``substantial improvement
over the current rule,'' and it was also supported by ICI and Vanguard.
Section 190.09(a)(1)(ii)(L) is the analog to current Sec.
190.08(a)(1)(ii)(J) but with updated cross-references (and a new second
sentence, discussed in the next paragraph). It states that customer
property includes any cash, securities, or other property in the
debtor's estate, but only to the extent that the customer property
under the other definitional elements is insufficient to satisfy in
full all claims of the FCM's public customers.\145\
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\145\ ICE notes that the issues with respect to this provision
may be complicated, and that it may warrant further consideration,
but ultimately expresses no view on it.
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A new second sentence of Sec. 190.09(a)(1)(ii)(L) notes explicitly
that customer property for purposes of these regulations includes any
``customer property,'' as that term is defined in SIPA, that remains
after satisfaction of the provisions in SIPA regarding allocation of
(securities) customer property. SIPA provides that such remaining
customer property would be allocated to the general estate of the
debtor.\146\ Any securities customer property that remains after
satisfaction in full of securities claims provided for in that section
of SIPA proceeding and would accordingly become property of the general
estate should, to the extent otherwise provided in proposed Sec.
190.09(a)(1)(ii)(L), and for the same reasons, become customer property
in the FCM bankruptcy proceeding.
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\146\ See generally SIPA section 8(c)(1), 15 U.S.C. 78fff-
2(c)(1).
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Section 190.09(d) governs the distribution of customer property,
and has its analog in current Sec. 190.08(d). Section 190.09(d)(1)(i)
and (ii) and (d)(2) require customers to deposit ``substitute customer
property,'' to obtain the return or transfer of specifically
identifiable property. ``Substitute customer property'' is defined in
Sec. 190.01 to mean (in relevant part) ``cash or cash equivalents.''
``Cash equivalents,'' in turn, are defined as ``assets, other than
United States dollar cash, that are highly liquid such that they may be
converted into United States dollar cash within one business day
without material discount in value.''
The purpose of requiring customers to, in essence, ``buy back''
specifically identifiable property is to implement the pro rata
distribution principle set forth in section 766(h) of the Bankruptcy
Code, and discussed in Sec. 190.00(d)(5). Permitting customers to
redeem specifically identifiable property with either cash or cash
equivalents, rather than requiring cash, may mitigate the difficulty
(and costs) such customers face in obtaining redemption, but will in
any event fully implement the pro rata distribution principle.
As a technical point, the ABA Subcommittee recommended (consistent
with their recommendation in the definitions section, Sec. 190.01, to
more precisely use the term ``allowed net equity'') that the reference
in proposed Sec. 190.09(d)(3) to the amount distributable on a
customer's claim be amended to add ``[the] funded balance of'' before
the phrase ``such customers allowed net equity claim.'' The Commission
agrees, and is making the change.
The remaining provisions of revised Sec. 190.09 include only
technical changes to the current regulations.
Accordingly, after consideration of the comments, and for the
reasons stated above, Sec. 190.09 will be adopted as proposed, with
the modification to Sec. 190.09(d)(3) referred to above.
8. Regulation Sec. 190.10: Provisions Applicable to Futures Commission
Merchants During Business as Usual
The Commission proposed Sec. 190.10 to contain new and relocated
provisions that set forth an FCM's obligations during business as
usual. The Commission requested comment with respect to all aspects of
proposed Sec. 190.10, and specifically with respect to (1) the impact
of proposed Sec. 190.10(b) regarding the designation of hedging
accounts, (2) the impact of proposed Sec. 190.10(c) regarding the
establishment of delivery accounts during business as usual, (3) the
changes in proposed Sec. 190.10(d) to the business as usual
requirements for acceptance of letters of credit, and in particular (a)
whether its understanding is correct that most letters of credit
currently in use by the industry follow the JAC forms, (b) the impact
of additional requirements concerning letters of credit (as well as any
alternative methods of achieving the goal of treating customers posting
letters of credit consistent with the treatment of other customers),
and (c) whether the proposed one year transition period is reasonable,
and (4) the disclosure statement for non-cash margin set out in
proposed Sec. 190.10(e) (whether the statement is helpful, legally or
practically, whether it should be changed, or whether it should be
deleted).
Section 190.10 will be adopted as proposed with modifications. In
particular, the ABA Subcommittee and CME suggested that the provisions
in proposed Sec. 190.10 be codified in part 1, along with other
regulations that pertain to an FCM's business as usual. The ABA
Subcommittee stated that, while they had originally suggested that
these provisions belong in Sec. 190.10, ``[u]pon further reflection,
the Committee believes that such a rule more logically belongs in the
Commission's Part 1 Regulations, along with other rules that apply to
FCMs during business as usual. Compliance and legal personnel could
inadvertently overlook obligations that are not located in the
Commission rule set where they would expect to find them.''
The Commission agrees with the commenters that transparency would
be fostered by putting the ``business as usual'' requirements proposed
for Sec. 190.10 into part 1 of the Commission's regulations.
Accordingly, as discussed further below, most of the paragraphs of the
regulation that was proposed as Sec. 190.10 are being renumbered and
will be codified in specified places in part 1. The provisions of
proposed Sec. 190.10 will otherwise be adopted as proposed.
The provision proposed as Sec. 190.10(a) notes that an FCM is
required to maintain current records relating to its customer accounts,
pursuant to Sec. Sec. 1.31, 1.35, 1.36, and 1.37, and in a manner that
would permit them to be provided to another FCM in connection with the
transfer of open customer contracts of other customer property. This
provision recognizes that current and accurate records are imperative
in arranging for the transfer of customer contracts and other property,
both for the trustee of the estate of the defaulter and for an FCM that
is accepting the transfer. Nonetheless, it does not add to an FCM's
obligations under the specified regulations, but rather is useful as a
reference for the trustee. Accordingly, this provision will not be
moved to part 1.
No comments were received with respect to the substance of proposed
Sec. 190.10(a). As the remaining paragraphs of proposed Sec. 190.10
will be moved to part 1, this provision will be codified as Sec.
190.10.
The provision proposed as Sec. 190.10(b) concerns the designation
of hedging accounts. It incorporates concepts contained in current
Sec. Sec. 190.04(e) and 190.06(d) and the current Bankruptcy appendix
form 3 instructions. As it sets
[[Page 19364]]
forth obligations for an FCM during business as usual, it will be moved
to part 1. As it does not fit under any existing part 1 regulation, it
will be moved under the miscellaneous heading of part 1, and codified
as Sec. 1.41.
For purposes of Sec. 1.41, a customer will not need to provide,
and an FCM will not be required to judge, evidence of hedging intent
for purposes of bankruptcy treatment. Rather, Sec. 1.41 will permit
the FCM to treat the account as a hedging account for such purposes
based solely upon the written record of the customer's representation.
Hedging treatment for these bankruptcy purposes will not be
determinative for any other purpose.
Section 1.41(a) will require an FCM to provide a customer an
opportunity to designate an account as a hedging account when the
customer first opens the account, rather than when the customer
undertakes its first hedging contract, as specified in current Sec.
190.06(d)(1). This provision will also require that the FCM indicate
prominently in its accounting records for each customer account whether
the account is designated as a hedging account.
Section 1.41(b) will set forth the requirements for an FCM to treat
an account as a hedging account: If, but only if, the FCM obtains the
customer's written representation that the customer's trading in the
account will constitute hedging as defined under any relevant
Commission regulation or rule of a DCO, DCM, SEF, or FBOT. CME
supported this approach, and the clarity it adds.
In order to avoid the significant burden that would be associated
with requiring FCMs to re-obtain hedging instructions for existing
accounts, Sec. 1.41(c) will provide that the requirements of Sec.
1.41(a) and (b) do not apply to commodity contract accounts opened
prior to the effective date of these revisions. Rather, the provision
will recognize expressly that an FCM may continue to designate existing
accounts as hedging accounts based on written hedging instructions
obtained under former Sec. 190.06(d).
Finally, Sec. 1.41(d) will permit an FCM to designate an existing
futures, foreign futures or cleared swaps account of a particular
customer as a hedging account, provided that the FCM obtains the
representation required under Sec. 1.41(b).
The provision proposed as Sec. 190.10(c) addresses the
establishment of delivery accounts during business as usual.\147\ As it
sets forth obligations for an FCM during business as usual, it will be
moved to part 1. As it does not fit under any existing part 1
regulation, it will be moved under the miscellaneous heading, and
codified as Sec. 1.42.
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\147\ See Sec. 190.06 regarding the making and taking of
deliveries during bankruptcy.
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When a commodity contract is in the delivery phase, or when a
customer has taken delivery of commodities that are physically
delivered, associated property may be held in a ``delivery account''
rather than in the segregated accounts pursuant to, e.g., Sec. 1.20 or
Sec. 22.2. Section 1.42 recognizes that when an FCM facilitates
delivery under a customer's physical delivery contract, and such
delivery is effected outside of a futures account, foreign futures
account, or cleared swaps account, it must be effected through (and the
associated property held in) a delivery account. If, however, the
commodity that is subject to delivery is a security, the FCM may effect
delivery through (and the property may be held in) a securities
account. The regulation clarifies that the property must be held in one
of these types of accounts. ICE and CME generally support this
provision.\148\
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\148\ CME again recommended that the Commission consider
adopting customer protection requirements with respect to delivery
accounts via a separate rulemaking.
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The provision proposed as Sec. 190.10(d) addresses letters of
credit that an FCM accepts as collateral. As it sets forth obligations
for an FCM during business as usual, it will be moved to part 1. As it
does not fit under any existing part 1 regulation, it will be moved
under the miscellaneous heading, and codified as Sec. 1.43.
Section 1.43 will prohibit an FCM from accepting a letter of credit
as collateral unless certain conditions (1) are met at the time of
acceptance and (2) remain true through its date of expiration.
First, pursuant to Sec. 1.43(a), the trustee must be able to draw
upon the letter of credit, in full or in part, in the event of a
bankruptcy proceeding, the entry of a protective decree under SIPA, or
the appointment of FDIC as receiver pursuant to Title II of the Dodd-
Frank Act. Second, pursuant to Sec. 1.43(b), if the letter of credit
is permitted to be and is passed through to a clearing organization,
the bankruptcy trustee for such clearing organization or (if
applicable) FDIC must be able to draw upon the letter of credit, in
full or in part, in the event of a bankruptcy proceeding, or where the
FDIC is appointed as receiver pursuant to Title II.
The Commission has considered the impact that implementation of
this regulation would have on FCMs and their customers, since letters
of credit are currently in use by the industry.\149\ The Commission
proposed that, upon the effective date of the regulation, what is now
codified as Sec. 1.43 would apply only to new letters of credit and
customer agreements. In order to mitigate the impact of implementing
this regulation with respect to existing letters of credit and customer
agreements, the Commission proposed a transition period of one year
from the effective date until Sec. 1.43 will apply to existing letters
of credit and customer agreements.
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\149\ The Joint Audit Committee (``JAC'') forms for an
Irrevocable Standby Letter of Credit (both Pass-Through and Non
Pass-Through) appear to be consistent with the requirements of Sec.
1.43.
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CME supported this one-year transition period. By contrast, SIFMA
AMG/MFA urged the Commission to shorten it in the interest of investor
protection. They asked how letters of credit would be treated if an FCM
were to go into bankruptcy during the transition period?
The provisions in this rulemaking regarding letters of credit are
intended to codify the Commission's longstanding policy that
``customers using a letter of credit to meet original margin
obligations [sh]ould be treated no differently than customers
depositing other forms of non-cash margin or customers with excess cash
margin deposits.'' \150\ This is the policy that has been advanced by
the Commission, including in litigation,\151\ under the current rules.
Moreover, this policy is supported by the provision in revised Sec.
190.04(d)(3)(ii) that, for a letter of credit posted as collateral,
``the trustee shall treat any portion that is not drawn upon (less the
value of any substitute customer property delivered by the customer) as
having been distributed to the customer for purposes of calculating
entitlements to distribution or transfer.'' That provision is not
subject to the one-year transition period.
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\150\ See, e.g., 48 FR 8716, 8718 (March 1, 1983) (Adopting
release for part 190); Proposal, 86 FR at 36019 & n. 103.
\151\ See, e.g. Brief of the Commodity Futures Trading
Commission In Support Of The Trustee's Motion To Confirm in
ConocoPhillips v. Giddens, Case No. 1:12-cv-06014-KBF, Document 33.
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While the Commission will decline to shorten the one-year
transition period for existing letters of credit, trustees will be
expected to treat such letters of credit in accordance with the
Commission's policy.
The provision proposed as Sec. 190.10(e) concerns the disclosure
statement for non-cash margin. No comments were received specific to
this provision.
[[Page 19365]]
As it sets forth obligations for an FCM during business as usual,
it will be moved to part 1. This provision does fit under existing
Sec. 1.55 (Public disclosures by futures commission merchants), and
will be added at the end, codified as Sec. 1.55(p).
Accordingly, after consideration of the comments, and for the
reasons stated above, Sec. 190.10 will be adopted as proposed, with
modifications: Proposed Sec. 190.10(a) will be codified as Sec.
190.10, proposed Sec. 190.10(b) will be codified as Sec. 1.41,
proposed Sec. 190.10(c) will be codified as Sec. 1.42, proposed Sec.
190.10(d) will be codified as Sec. 1.43, and proposed Sec. 190.10(e)
will be codified as Sec. 1.55(p).
C. Subpart C--Clearing Organization as Debtor
The Commission is adopting a new subpart C of part 190 (proposed
Sec. Sec. 190.11-190.19), with certain modifications discussed below,
to address the currently unprecedented scenario of a clearing
organization as debtor.\152\
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\152\ After considering comments that were received on the
original Proposal, the Commission subsequently issued a Supplemental
Proposal that withdrew Sec. 190.14(b)(2) and (3), and proposed
other revisions to Sec. 190.14. Bankruptcy Regulations, 85 FR 60110
(Sept. 24, 2020).
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The customers of a clearing organization are its members,
considered separately in two roles: (1) Each member may have a
proprietary (also known as ``house'') account at the clearing
organization, on behalf of itself and its non-public customers (i.e.,
affiliates). The property that the clearing organization holds in
respect of these accounts is referred to as ``member property.'' (2)
Each member may have one or more accounts (e.g., futures, cleared
swaps) for that members' public customers. The property that the
clearing organization holds in respect of these accounts is referred to
as ``customer property other than member property.'' Many clearing
members will have both such types of accounts, although some may have
only one or the other.
1. Regulation Sec. 190.11: Scope and Purpose of Subpart C
The Commission is adopting Sec. 190.11 as proposed, but designated
as new paragraph (a), and adding a new paragraph (b), as set forth
below. The Commission is adopting Sec. 190.11 to establish that
subpart C of part 190 will apply to proceedings under subchapter IV to
chapter 7 of the Bankruptcy Code where the debtor is a clearing
organization.
When originally proposing part 190 in 1981, the Commission proposed
to (and ultimately did) forego providing generally applicable rules for
the bankruptcy of a clearing organization.\153\ The Commission
explained that it had proposed no other rules with respect to the
operation of clearing organization debtors--other than proposing that
all open commodity contracts, even those in a deliverable position, be
liquidated in the event of a clearing organization bankruptcy--because
the Commission viewed it as highly unlikely that an exchange could
maintain a properly functioning futures market in the event of the
collapse of its clearing organization. The Commission noted that, under
section 764(b)(2) of the Bankruptcy Code, it had the power to permit a
distribution of the proceeds of a clearing organization liquidation
free from the avoidance powers of the trustee. The Commission further
explained that it was not proposing a general rule, because the
bankruptcy of a clearing organization would be unique. Instead, the
Commission was inclined to take a case-by-case approach with respect to
clearing organizations, given the potential for market disruption and
disruption of the nation's economy as a whole, in the case of a
clearing organization bankruptcy, as well as the desirability of the
Commission's active participation in developing a means of meeting such
an emergency.\154\
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\153\ At the time, the definition of clearing organization in
section 761(2) of the Bankruptcy Code was an ``organization that
clears commodity contracts on, or subject to the rules of, a
contract market or board of trade.'' See Public Law 95-598 (1978),
92 Stat 2549.
\154\ 46 FR 57535, 57545 (Nov. 24, 1981).
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Much has changed in the intervening 39 years. Markets move much
more quickly, and thus the importance of quick action in respect to the
bankruptcy of a clearing organization has increased. The Commodity
Futures Modernization Act established DCOs as a separate registration
category.\155\ The bankruptcy of a clearing organization would remain
unique--it remains the case that no clearing organization registered
with the Commission has ever entered bankruptcy--and thus the need for
significant flexibility remains, but the balance has shifted towards
establishing ex ante the approach that would be taken.
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\155\ Commodity Futures Modernization Act of 2000 Public Law
106-554 section 1(a)(5); Appendix E, section 112(f).
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Two clearing organizations for which the Commission has been
designated the agency with primary jurisdiction have been designated as
systemically important to the United States financial system pursuant
to Title VIII of Dodd-Frank.\156\ If any clearing organization were to
approach insolvency, it is possible, though not certain, that such an
entity would be resolved pursuant to Title II of Dodd-Frank.\157\
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\156\ See Dodd-Frank section 804 (designation of systemic
importance), section 803(8) (definition of ``supervisory agency''),
12 U.S.C. 5463, 5462(8). These are CME and ICE Clear Credit. A third
clearing organization (Options Clearing Corporation) has also been
so designated, but the SEC is the supervisory agency in that case.
\157\ Resolution under Title II would require a recommendation
concerning factors specified in section 203(a)(2) of Dodd-Frank, 12
U.S.C. 5383(a)(2), by a \2/3\ majority of the members then serving
of each of the Board of Governors of the Federal Reserve System and
of the FDIC, followed by a determination concerning a related set of
factors specified in section 203(b), 12 U.S.C. 5383(b), by the
Secretary of the Treasury in consultation with the President. Thus,
the choice of resolution versus bankruptcy for a DCO that is, in the
terminology of Dodd-Frank, ``in default or in danger of default,''
see Dodd-Frank section 203(c)(4), 12 U.S.C. 5383(c)(4), cannot be
considered certain.
It is, however, clear that Title II applies to clearing
organizations. See, e.g., Dodd-Frank section 210(m), 12 U.S.C.
5390(m) (applying ``the provisions of subchapter IV of chapter 7 of
the bankruptcy code'' to ``member property'' of ``commodity
brokers''). Pursuant to section 761(16) of the Bankruptcy Code,
``member property'' applies only to a debtor that is a ``clearing
organization.'' 11 U.S.C. 761(16).
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Administration of a resolution under Title II of Dodd-Frank
depends, in part, on clarity as to entitlements under chapter 7 of the
Bankruptcy Code. Specifically, section 210(a)(7)(B) of Dodd-Frank \158\
provides with respect to claims against the covered financial agency in
resolution, that ``a creditor shall, in no event, receive less than the
amount that the creditor is entitled to under paragraphs (2) and (3) of
subsection (d), as applicable.'' Tracing to the cross-referenced
subsection, section 210(d)(2) \159\ provides that the maximum liability
of the FDIC to a claimant is the amount that the claimant would have
received if the FDIC had not been appointed receiver, and (instead),
the covered financial company had been liquidated under chapter 7 of
the Bankruptcy Code.\160\ Thus, it is important to have a clear
``counterfactual'' that establishes what creditors would be entitled to
in the case of the liquidation of a clearing
[[Page 19366]]
organization under chapter 7 (subchapter IV) of the Bankruptcy Code.
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\158\ 12 U.S.C. 5390(a)(7)(B).
\159\ 12 U.S.C. 5390(d)(2).
\160\ For the sake of completeness, it should be noted that
section 210(d)(2), 12 U.S.C. 5390(d)(2), provides, as an additional
comparator, ``any similar provision of State insolvency law
applicable to the covered financial company.'' Given Federal
regulation of DCOs, it would appear that this phrase is
inapplicable. Similarly, section 210(d)(3), 12 U.S.C. 5390(d)(3),
which refers to covered financial companies that are brokers or
dealers resolved by SIPC, is also inapplicable here, given the
inconsistency in being both a DCO and a broker-dealer.
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Although the Commission believes that the potential--albeit
unprecedented--scenario of a clearing organization as debtor would
require significant flexibility, the Commission also believes it
necessary and appropriate to establish an ex ante set of regulations
for such a scenario.
The Commission requested comment regarding the proposed scope of
subpart C, as set forth in proposed Sec. 190.11. The Commission also
specifically asked commenters whether they supported or opposed the
establishment of an explicit, bespoke set of regulations for the
bankruptcy of a clearing organization.
The Commission received two comments that raised concerns about how
the proposed subpart C regulations would apply in the case of a debtor
clearing organization that is organized and/or domiciled in a foreign
country. SIFMA AMG/MFA commented that ``Part 190 should include a clear
statement of public policy . . . that if an insolvency proceeding is
commenced in respect of a DCO located outside the United States, such
home country proceeding should take precedence over any case under the
[U.S.] Bankruptcy Code.''
ICE commented that such a clearing organization, if insolvent, ``is
likely to be subject to an insolvency proceeding in its home
jurisdiction.'' ICE also commented that many such DCOs ``have
significant assets (including for this purpose, the assets of clearing
members and their customers.'' In particular, ICE stated that ``a
foreign DCO may have, in addition to the customer account classes
contemplated by the CEA and CFTC regulations (and the Part 190
regulations), one or more classes of customer accounts that are
required to be segregated or separately accounted for under applicable
foreign law, generally for the protection of foreign clearing members
and their customers.'' ICE further commented that, ``[t]o the extent
the Part 190 rules mandate a distribution scheme for property of the
[DCO in bankruptcy] that would be inconsistent with foreign law
applicable to the DCO, and that could disadvantage foreign members or
their customers, significant conflicts may arise . . . .'' ICE
suggested two alternative approaches for the Commission to consider:
(1) The ``Commission could provide that the new Part 190 regulations
would not apply to a foreign DCO;'' or (2) ``[a]lternatively, the
Commission could provide that the new Part 190 regulations, including
the distributional regime, would apply only to the separate customer
account class structure provided for under U.S. law (futures, cleared
swaps and foreign futures), to the extent carried through FCM clearing
members.''
After considering the comments, the Commission is adopting Sec.
190.11 with modifications. With respect to the protection of customer
property in connection with foreign DCOs, the Commission has
traditionally focused its efforts on the protection of the public
customers of FCM members of such foreign DCOs. While protecting public
customers of FCM members of foreign DCOs would not be well served by
disapplying part 190 in the case of foreign DCOs, as suggested in ICE's
first approach, as well as in the comment by SIFMA AMG/MFA, balancing
the goal of protecting public customers of FCM members with the goal of
mitigating conflict with foreign proceedings would appear to be
supported by following ICE's second approach, and limiting the
applicability of part 190, in the case of a foreign DCO subject to a
proceeding in its home jurisdiction, to focus on the contracts and
property of public customers of FCM members.
In order to balance the goal of protecting public customers of FCM
members with the goal of mitigating conflict with foreign proceedings,
the Commission believes it to be appropriate that, in a situation where
a debtor clearing organization is organized outside the United States
and is subject to a foreign bankruptcy proceeding, part 190 should
apply as follows. First, the Commission believes it to be appropriate
that subpart A should apply to such proceedings, given that those
provisions set forth core concepts, definitions and general provisions.
Second, the Commission believes it to be appropriate that Sec. 190.12
should apply to such proceedings, given that the regulation sets forth
requirements for records and reporting, which are critical in such
proceedings. And third, the Commission believes it to be appropriate
that three regulations should be applicable in a limited fashion, to
focus on the contracts and property of public customers of FCM members:
\161\ (1) Sec. 190.13, setting forth the prohibition on avoidance of
transfers, but only with respect to futures and cleared swaps contracts
cleared by FCM clearing members on behalf of their public customers;
(2) Sec. 190.17, setting forth the calculation of net equity; and (3)
Sec. 190.18, setting forth the treatment of property. In such a
scenario, Sec. Sec. 190.13, 190.17, and 190.18 would only apply with
respect to: (1) Claims of FCM clearing members on behalf of their
public customers; and (2) property that is or should have been
segregated for the benefit of FCM clearing members' public customers,
or that has been recovered for the benefit of FCM clearing members'
public customers.
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\161\ As noted above, the Commission has traditionally focused
its efforts on the protection of the public customers of FCM members
of such foreign DCOs. In a DCO bankruptcy, the Commission believes
that the application of these three regulations would be critical to
fulfilling the agency's mission to protect customers.
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Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is: (1) Adopting the language of
Sec. 190.11 as proposed, but designated as new paragraph (a); and (2)
modifying proposed Sec. 190.11 by adding the following as new
paragraph (b): If the debtor clearing organization is organized outside
the United States, and is subject to a foreign proceeding, as defined
in 11 U.S.C. 101(23), in the jurisdiction in which it is organized,
then only the following provisions of part 190 shall apply: (1) Subpart
A; (2) Sec. 190.12; (3) Sec. 190.13, but only with respect to futures
contracts and cleared swaps contracts cleared by FCM clearing members
on behalf of their public customers and the property margining or
securing such contracts; and (4) Sec. Sec. 190.17 and 190.18, but only
with respect to claims of FCM clearing members on behalf of their
public customers, as well as property that is or should have been
segregated for the benefit of FCM clearing members' public customers,
or that has been recovered for the benefit of FCM clearing members'
public customers.''
2. Regulation Sec. 190.12: Required Reports and Records
The Commission is adopting Sec. 190.12 to establish the
recordkeeping and reporting obligations of a debtor clearing
organization and/or trustee in a bankruptcy proceeding under subpart C.
The operations of a clearing organization are extremely time-
sensitive. For example, Sec. 39.14 requires that a clearing
organization complete settlement with each clearing member at least
once every business day. It is thus critical that the Commission
receive notice of a DCO bankruptcy in an extraordinarily rapid manner.
Similarly, the trustee that is appointed (as well as the Commission)
must receive critical documents rapidly, and proper notice should be
provided to the DCO's members.
Regulation Sec. 190.12 sets forth the timing and content of
notices that must be provided to the Commission and the DCO's members,
as well as the timing and content of reports and records that
[[Page 19367]]
must be provided to the Commission and trustee.
Section 190.12(a)(1) is analogous to Sec. 190.03(a), as amended
herein, in that it would provide instructions regarding how to give
notice to the Commission and to a clearing organization's members,
where such notice would be required under subpart C of part 190.\162\
Section 190.12(a)(2) would require the clearing organization to notify
the Commission either in advance of, or at the time of, filing a
petition in bankruptcy (or within three hours of receiving notice of a
filing of an involuntary petition against it).\163\ Notice would need
to include the filing date and the court in which the proceeding has
been or will be filed. While the clearing organization would also need
to provide notice of the docket number, if the docket number is not
immediately assigned, that information would be provided separately as
soon as available.
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\162\ While Sec. 190.03(a)(2), as amended herein, applies to
notice to an FCM's customers, and Sec. 190.12(a)(1)(ii) applies to
notice to a clearing organization's members, the means of giving
notice are identical. For a discussion of how these notice
provisions differ from the prior iteration of part 190, please refer
to the discussion of Sec. 190.03(a) above.
\163\ Commodity broker bankruptcies are rare, and outside the
experience of most chapter 7 trustees, who are chosen from a panel
of private trustees eligible to serve as such for all chapter 7
cases. See generally 11 U.S.C. 701(a)(1), 28 U.S.C. 586(a)(1).
Historically, Commission staff, on being notified of an impending
commodity broker bankruptcy, have worked with the office of the
relevant regional United States Trustee, see generally 28 U.S.C. 581
et seq., to identify, and have then briefed, the chapter 7 trustee
that would then be appointed. This would be even more important in
the context of a clearing organization bankruptcy.
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It is also important to permit the trustee to begin to understand
the business of the clearing organization as soon as practicable, and
within hours. Accordingly, Sec. 190.12(b)(1) requires the clearing
organization to provide to the trustee copies of each of the most
recent reports filed with the Commission under Sec. 39.19(c), which
includes Sec. 39.19(c)(1) (daily reports, including initial margin
required and on deposit by clearing member, daily variation and end-of-
day positions (by member, by house and customer origin), and other
daily cash flows), Sec. 39.19(c)(2) (quarterly reports, including of
financial resources), Sec. 39.19(c)(3) (annual reporting, including
audited financial statements and a report of the chief compliance
officer), Sec. 39.14(c)(4) (event-specific reporting, which would
include the most up-to-date version of any recovery and wind-down plans
the debtor maintained pursuant to Sec. 39.39(b),\164\ and which may
well include events that contributed to the clearing organization's
bankruptcy), and Sec. 39.19(c)(5) (reporting specially requested by
the Commission or, by delegated authority, staff). In order to provide
the trustee with an initial overview of the business and status of the
clearing organization, with respect to quarterly, annual, or event-
specific reports, the clearing organization would be required to
provide any such reports filed during the preceding 12 months. These
reports would need to be provided to the trustee as soon as
practicable, but in any event no later than three hours following the
later of the commencement of the proceeding or the appointment of the
trustee. It is the Commission's expectation that in the event of an
impending bankruptcy event, staff at the DCO would, as soon as
practicable, be preparing these materials for transmission to the
trustee.
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\164\ See Sec. 39.19(c)(4)(xxiv).
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Similarly, Sec. 190.12(b)(2) requires the debtor clearing
organization, in the same time-frame, to provide the trustee and the
Commission with copies of the default management plan and default rules
and procedures maintained by the debtor pursuant to Sec. 39.16 and, as
applicable, Sec. 39.35. While some of this information may have
previously been filed with the Commission pursuant to Sec. 39.19, it
is important that the Commission have readily available what the
clearing organization believes are the most up-to-date versions of
these documents. Moreover, given that these documents must be provided
to the trustee, providing copies to the Commission should impose
minimal additional burden (particularly if the documents are provided
in electronic form).
Regulation Sec. 39.20(a) requires a DCO to maintain records of all
activities related to its business as such, and sets forth a non-
exclusive list of the records that are included in that term. To enable
the trustee and the Commission further to understand the business of
the clearing organization, Sec. 190.12(c) requires the debtor clearing
organization to make copies of such records available to the trustee
and to the Commission no later than the business day after the
commencement of the proceeding. In order to inform the trustee and the
Commission better concerning the enforceability in bankruptcy of the
clearing organization's rules and procedures, the clearing organization
is similarly required to make available any opinions of counsel or
other legal memoranda provided to the debtor, by inside or outside
counsel, in the five years preceding the commencement of the
proceeding, relating to the enforceability of those arrangements in the
event of an insolvency proceeding involving the debtor.\165\
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\165\ The trustee of a corporation in bankruptcy controls the
corporation's attorney-client privilege for pre-bankruptcy
communications. Commodity Futures Trading Comm'n v. Weintraub, 471
U.S. 343 (1985). Production to the Commission pursuant to the
proposed regulation would not waive that privilege (although
voluntary production would). See, e.g., U.S. v. de la Jara, 973 F.2d
746, 749 (9th Cir. 1992) (``a party does not waive the attorney-
client privilege for documents which he is compelled to produce'')
(emphasis in original); Office of Comptroller of the Currency
Interpretative Letter, 1991 WL 338409 (with respect to ``internal
Bank documents'' that are ``subject to the attorney-client
privilege'' and are ``requested by OCC examiners for their use
during examinations of the Bank,'' OCC ``has the power to request
and receive materials from national banks in carrying out its
supervisory duties. It follows that national banks must comply with
such requests. That being the case, it is our position that when
national banks furnish documents to us at our request they are not
acting voluntarily and do not waive any attorney-client privilege
that may attach to such documents.'').
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The Commission requested comment with respect to all aspects of
proposed Sec. 190.12. The Commission raised specific questions as to
whether the reports and records identified in proposed Sec. 190.12 to
be provided to the Commission are useful and appropriate, and whether
additional reports and records should be included. The Commission also
asked if the proposed time deadlines are appropriate.
The Commission received two comments on proposed Sec. 190.12.
CME expressed support for proposed Sec. 190.12, and agreed with
the Commission that ``the reports and records identified in [the
proposed regulation] would be useful for the trustee and the
Commission.'' CME also agreed with the Commission that certain items,
such as the DCO's default rules and recovery and wind-down plans,
should be furnished as soon as possible.
OCC ``generally support[ed] a requirement for a DCO to provide a
trustee and the Commission with information they need for efficient
resolution of the DCO,'' recognizing that ``time would be of the
essence in such a proceeding.'' OCC also noted that, because the
``information is periodically reported to, or filed with, the
Commission,'' OCC did not ``foresee any challenge in identifying and
providing this information without delay.'' However, OCC requested that
proposed Sec. 190.12(b) be amended to require a DCO to provide the
information delineated therein ``as soon as practicable.'' OCC
``believe[d] that a specific deadline of three hours is overly
prescriptive.''
After considering the comments, the Commission is adopting Sec.
190.12 as proposed. As the commenters observed, the information
specified in Sec. 190.12 is
[[Page 19368]]
important for the trustee and the Commission, and time would be of the
essence in a DCO bankruptcy. Moreover, the prescribed task in Sec.
190.12 is to gather and transmit documents that already exist, rather
than to generate new information. The documents to be sent to the
trustee are documents that were recently sent to the Commission, and
the documents to be sent to the trustee and to the Commission are
documents that one would expect, as the commenter noted, to be readily
accessible. In this context, the Commission believes that a deadline of
``as soon as practicable and in any event no later than three hours
following the commencement of the proceeding'' (or, where appropriate,
the appointment of the trustee) is reasonable and will set clear
expectations for relevant parties that will facilitate DCOs'
contingency planning.
Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is adopting Sec. 190.12 as
proposed.
3. Regulation Sec. 190.13: Prohibition on Avoidance of Transfers
The Commission is adopting Sec. 190.13 as proposed, to implement
section 764(b) of the U.S. Bankruptcy Code, protecting certain
transfers from avoidance (sometimes referred to as ``claw-back'') with
respect to a debtor clearing organization. Regulation Sec. 190.13 is
analogous to new Sec. 190.07(e) (and current Sec. 190.06(g)), with
certain changes. Specifically, while Sec. 190.07(e) allows FCM
transfers unless they are explicitly disapproved by the Commission,
Sec. 190.13 requires explicit Commission approval for DCO transfers.
The difference in approach is rooted in the inherent difference between
FCM transfers and DCO transfers: Whereas an FCM is capable of
transferring only a portion of its customer positions, a DCO would be
expected to transfer all of its customer positions (or at least all
positions in a given product set) simultaneously in order to maintain a
balanced book. Given the importance of transferring all open commodity
contracts--and the property margining such contracts--in the event of a
DCO bankruptcy, the Commission believes that any such transfer should
require explicit Commission approval, either before or after such
transfer.
Thus, whereas Sec. 190.07(e)(1) provides that a pre-relief
transfer by a clearing organization cannot be avoided as long as it is
not disapproved by the Commission, Sec. 190.13(a) instead provides
that a pre-relief transfer of open commodity contracts and the property
margining or securing such contracts cannot be avoided as long as it
was approved by the Commission, either before or after such transfer.
Similarly, whereas Sec. 190.07(e)(2)(i) provides (for all commodity
brokers, including clearing organizations) that a post-relief transfer
of a customer account cannot be avoided as long as it is not
disapproved by the Commission, Sec. 190.13(b) instead provides that a
post-relief transfer of open commodity contracts and the property
margining or securing such contracts made to another clearing
organization cannot be avoided as long as it was approved by the
Commission, either before or after such transfer.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.13, and in particular, the Commission asked whether
commenters agreed with the proposed approach of requiring explicit
Commission approval of transfers by debtor DCOs.
The Commission received one comment on proposed Sec. 190.13. CME
expressed support for proposed Sec. 190.13, particularly the allowance
for Commission approval of transfers after such transfers have
occurred. CME noted that porting customer positions to a DCO would be
the preferred course of action in a bankruptcy, and a DCO may need to
act quickly.
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.13 as
proposed.
4. Regulation Sec. 190.14: Operation of the Estate of the Debtor
Subsequent to the Filing Date
The Commission is adopting Sec. 190.14 as proposed, with certain
modifications discussed below.
Section 190.14(a) provides discretion to the trustee to design the
proof of claim form and to specify the information that is required.
The Commission believes that broad discretion is appropriate in this
context, given the bespoke nature of a clearing organization
bankruptcy.
Section 190.14(b) addresses the operation of a debtor clearing
organization in bankruptcy and provides that, after the order for
relief, the DCO shall cease making calls for either variation or
initial margin.
As originally proposed, Sec. 190.14(b) included additional
provisions that were intended to provide a brief opportunity, after the
order for relief, to enable paths alternative to liquidation--that is,
resolution under Title II of the Dodd-Frank Act, or transfer of
clearing operations to another DCO--in cases where a short delay (i.e.,
less than or equal to six days) might facilitate such an alternative
path. Subsequent to the issuance of the Proposal, the Commission
received several comments on proposed Sec. 190.14(b), and based on its
consideration of those comments, the Commission determined it to be
appropriate to issue the Supplemental Proposal. The Supplemental
Proposal modified proposed Sec. 190.14(b) in several respects,
including the withdrawal of proposed Sec. 190.14(b)(2) and (3) and the
new proposal of an alternative approach.\166\ Further discussion of the
Supplemental Proposal, including the Commission's consideration of
comments received in response to the Supplemental Proposal, is set
forth in section II.H below.
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\166\ In withdrawing proposed Sec. 190.14(b)(2) and (3), the
Commission determined, after considering the comments, that those
provisions would not be a practicable and effective way to foster
the transfer of clearing operations--to the extent that such an
opportunity presents itself--at an acceptable cost. The Commission
also endeavored to propose (in the Supplemental Proposal) a more
cost-effective alternative to foster the resolution of a DCO--in
particular, a systemically important DCO--under Title II of the
Dodd-Frank Act. Specifically, as set forth in the Supplemental
Proposal, the Commission proposed ``a limited revision to the
Proposal that would (1) stay the termination of SIDCO contracts for
a brief time after bankruptcy in order to foster the success of a
Title II Resolution, if the FDIC is appointed receiver in such a
Resolution within that time, but (2) do so in a manner that does not
undermine the QMNA status of SIDCO rules.''
The Commission sought comment on the Supplemental Proposal, and
in particular, whether the new approach could reasonably be expected
to achieve the Commission's stated goals, would be feasible, would
be the best design for such a solution, and appropriately reflected
consideration of benefits and costs.
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Section 190.14(c)(1) requires the trustee to liquidate, no later
than seven calendar days after the order for relief, all open commodity
contracts that had not earlier been terminated, liquidated or
transferred. However, in the Proposal, paragraph (c)(1) also provided
that such liquidation would not be required if the Commission (whether
at the request of the trustee or sua sponte) determined that such
liquidation would be inconsistent with the avoidance of systemic risk
\167\ or, in the expert judgment of the Commission, would not be in the
best interests of the debtor clearing organization's estate.\168\ In
such a situation, the trustee would be directed to carry out such
liquidation in accordance with the rules and procedures of the debtor
clearing
[[Page 19369]]
organization, to the extent applicable and practicable.\169\
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\167\ See section 3(b) of the CEA, 7 U.S.C. 5(b) (``It is the
purpose of [the CEA] . . . to ensure . . . the avoidance of systemic
risk . . . .'').
\168\ See section 20(a)(3) of the CEA, 7 U.S.C. 24(a)(3)
(``Notwithstanding title 11 . . . , the Commission may provide, with
respect to a commodity broker that is a debtor . . . [,] the method
by which the business of such commodity broker is to be conducted or
liquidated after the date of the filing of the petition . . . .'').
\169\ As discussed below, Sec. 190.14(c)(1) is being modified
to remove language that commenters stated would raise uncertainties
concerning the enforceability of close-out netting provisions in a
DCO bankruptcy.
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Section 190.14(c)(2) permits the trustee to make distributions to
members in the form of securities that are equivalent (i.e., securities
of the same class and series of an issuer) to those that were
originally delivered to the debtor by the clearing member or such
member's customer, rather than liquidating securities and making
distributions in the form of cash. Section 190.14(c)(2) is analogous to
Sec. 190.09(d)(3), discussed above in section II.B.7.
Section 190.14(d) requires the trustee to use reasonable efforts to
compute the funded balance of each customer account immediately prior
to the distribution of any property in the account, ``which shall be as
accurate as reasonably practicable under the circumstances, including
the reliability and availability of information.'' Section 190.14(d) is
analogous to Sec. 190.05(b), discussed above in section II.B.3, but is
modified for the context of a DCO bankruptcy. Similar to Sec.
190.05(b), the Commission's objective in Sec. 190.14(d) is to provide
the bankruptcy trustee with the latitude to act reasonably, given the
circumstances they are confronted with, recognizing that information
may be more reliable and/or accurate in some insolvency situations than
in others. However, at a minimum, the trustee is required to calculate
each customer's funded balance prior to distributing property, to
achieve an appropriate allocation of property between customers.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.14. The Commission also raised specific questions
regarding Sec. 190.14(b)(2).\170\ The comments received in response to
those specific questions on Sec. 190.14(b)(2) have already been
considered by the Commission in the Supplemental Proposal, wherein the
Commission ultimately withdrew Sec. 190.14(b)(2) and (3). Although
such comments on the Proposal relate to proposed paragraphs that were
withdrawn in the Supplemental Proposal, the comments relating to
proposed Sec. 190.14(b)(2) and (3) nonetheless are noted below.\171\
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\170\ In particular, the Commission asked about the framing of
the concepts of usefulness and practicability in the context of
permitting the trustee to continue to operate a DCO in insolvency,
in accordance with proposed Sec. 190.14(b)(2), in order to
facilitate the transfer of clearing operations to another DCO or
placing the debtor DCO into resolution pursuant to Title II of the
Dodd-Frank Act. The Commission also asked whether there is a better
way to frame either of those terms, and whether it is appropriate to
provide for the possibility that the trustee may be permitted to
delay liquidating contracts.
\171\ For further discussion of the Supplemental Proposal and
the Commission's consideration of comments received thereto, see
section II.H below.
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The Commission received some comments that related to Sec. 190.14
generally. ICI commented in favor of the requirement proposed in Sec.
190.14 that ``any decision to continue operating a DCO in liquidation
must be made with [the Commission's] input and consent.'' ICI asserted,
however, that the Commission should only approve an application from a
trustee to continue operating a DCO in liquidation if the Commission
determines that the trustee ``has the knowledge and experience to
manage such operations.'' Noting that the continued operation of a DCO
has the potential to result in significant continued losses for
customers and exacerbate stress, ICI further asserted that, ``[i]n
considering whether to grant a request to allow a failed DCO to
continue operating, the Commission should consider the potential harm
to customers and should request input from both DCO members and
customers.'' OCC commented that additional considerations should be
considered in determining ``whether continued operation of a DCO in
bankruptcy would be practical.'' Specifically, OCC stated that ``a DCO
may . . . maintain contractual arrangements with various counterparties
. . . that are necessary for the DCO's continued operation,'' such as
contract markets and other trade sources, other DCOs, banking and
liquidity providers, and information technology vendors). OCC asserted
that ``a trustee would need to review the DCO's recovery and wind-down
plan[s] and/or consult with a DCO to determine whether such
arrangements necessary for the DCO's continued operation would--or
could--be terminated [by the counterparties] upon the DCO's entry into
bankruptcy and, if so, determine whether the counterparties . . . would
continue to provide those necessary services for a period of time.''
The Commission also received comments on Sec. 190.14(a). CME
commented in support of paragraph (a). ICE commented that Sec.
190.14(a) did not clearly account for ``non-CFTC-regulated clearing or
other activity occurring at a DCO, including security-based swaps and
other securities, cleared forward contracts or spot contracts to the
extent such instruments are not carried in a CFTC regulated futures or
swap account.'' ICE recommended that while ``such activity may be
outside the scope of the Part 190 regulations, claims of members with
respect to such activity, whether for their proprietary or customer
accounts, need to be properly accounted for in a DCO's bankruptcy and
should not be disadvantaged.''
Several commenters expressed concern that proposed Sec. 190.14(b)
would inadvertently create legal uncertainty with respect to the
enforceability of a DCO's close-out netting rules and related issues,
and requested that the Commission address these concerns in varying
ways.
ICE did not object to proposed Sec. 190.14(b), but believed that
the Commission ``should clarify that the rule does not interfere with
either the automatic termination of contracts upon insolvency or
clearing member rights to terminate contracts upon insolvency.'' Noting
``that clearing member capital and accounting often take into account
the ability of a clearing member to terminate, or the automatic
termination of, its cleared positions in the event of a clearinghouse
insolvency,'' ICE asserted that it would be important that the final
rules ``not upset settled expectations of clearing members'' in this
regard. ICE further noted that ``automatic termination is common,'' and
thus, continuing the operations of a clearinghouse after insolvency
would likely be infeasible, in practice.
CME requested that the Commission add a provision to Sec. 190.14
stating that: ``if the Commission permits the trustee to continue to
operate the DCO, that the action is not in derogation of, and clearing
members fully retain and may exercise, their right under the DCO's
rules and procedures with respect to close-out netting.'' CME stated
that ``[s]ome have expressed concern that proposed Regulation 190.14
creates uncertainty around the enforceability of close-out netting
rules if the trustee is allowed to continue the DCO's operations under
the conditions as drafted.'' CME asserted that it would be ``critical
that any decision to continue to operate the DCO not be contrary to the
DCO's rules or be construed in any way to abrogate clearing members'
close-out netting rights under the rules.'' CME noted that the
enforceability of close-out rights is of ``paramount importance'' to
clearing members as part of their contract with the DCO, and that CME
and other DCOs have obtained detailed legal analyses on the
enforceability of their close-out netting rules and other features of
their default rules to assure clearing members of their rights. CME
commented that it did not believe that
[[Page 19370]]
proposed Sec. 190.14 would create an issue with respect to its own
close-out netting rules or netting opinions, because its own rules
``would compel termination of open contracts upon a CME bankruptcy
event and, thus the conditions of Regulation 190.14(b) would not be
satisfied and the trustee could not continue CME's DCO operations.''
Nonetheless, CME speculated that other DCOs ``could potentially have
rules that permit a clearing member to terminate open positions at
their discretion without compelling termination.''
ISDA supported the provision in proposed Sec. 190.14(b) that would
``prevent the trustee from continuing operation of the DCO subsequent
to the order for relief if the DCO's rules contain closeout netting
provisions.'' However, ISDA also recommended that the Commission modify
proposed Sec. 190.14(c)(1) to delete the second sentence and amend the
first sentence to affirmatively provide that: ``notwithstanding
anything else to the contrary in Subpart C, the trustee shall liquidate
all open contracts in accordance with the close-out needing provisions
in the DCO's rules (or bylaws) and, in any event, no later than seven
calendar days after the entry of the order for relief.'' ISDA commented
that it is ``critical'' that ``all aspects of [the] Part 190
regulations . . . support, and in no event be inconsistent with, . . .
exposure netting.'' ISDA noted that ``[e]nforceable close-out netting
rights provide the legal basis for netting of exposures between
derivative counterparties, which reduces costs, increases market
liquidity and reduces credit and systemic risks.'' ISDA stated that a
``firm's right to terminate outstanding transactions with a
counterparty following an event of default and calculate the net amount
due to one party by another is the primary means of mitigating credit
risks associated with financial contracts.'' ISDA further argued that,
[w]ithout enforceable close-out netting rights, firms would need to
manage their credit risk on a gross basis, dramatically reducing
liquidity and credit capacity.''
OCC commented that ``the Commission should continue to consult with
DCOs and market participants who rely on closeout netting opinions to
ensure that the proposed rules[, including proposed Sec.
190.14(b)(2),] do not raise uncertainty related to the enforceability
of DCOs' closeout netting rules or have other unintended
consequences.''
FIA commented that proposed Sec. 190.14(b)(2) and proposed Sec.
190.14(c) are ``fundamentally flawed and should not be adopted.'' FIA
raised concerns that those provisions may inadvertently create ``an
unacceptable level of legal uncertainty related to the enforcement of
closeout netting provisions'' set out in DCO rulebooks, which all but
four DCOs maintain. FIA asserted that, if proposed Sec.
190.14(b)(2)(ii)(A) ``could be read to provide the trustee some level
of discretion to determine whether or when DCO rules may `compel' the
termination of contracts, such discretion, in turn, may call into
question whether the DCO's rules constitute a `qualifying master
netting agreement' as described in the rules of the several bank
regulatory authorities.'' FIA also commented that the ``continued
operation of a DCO after an order for relief would be ill-advised'' and
impracticable. FIA stated that a trustee with no familiarity or
understanding of central clearing would be highly unlikely to be able
to manage effectively the operation of a bankrupt DCO. In the case of
SIDCOs, FIA noted that ``the prospect of a bankruptcy trustee operating
the DCO for even a brief interim period prior to commencement of Title
II [resolution] proceedings could result in a loss of market confidence
and a destabilizing rush to exit by clearing members and their clients,
[thereby] potentially frustrat[ing] the successful resolution of the
DCO.'' In the case of other DCOs, FIA commented that ``the post-filing
transfer of . . . clearing operations to another DCO would be difficult
at best,'' and ``clearing members and their clients should not be
expected to take the execution risk of being forced to continue
clearing through a bankrupt DCO when successful completion of a
transfer to a new DCO in bankruptcy is not certain.'' FIA also stated
its belief that ``non-defaulting clearing members or their clients
would be [unwilling] to continue to pay margin to the estate of a
bankrupt DCO.''
The ABA Subcommittee requested that the Commission revise proposed
Sec. 190.14(b) ``to clarify that the DCO's close-out netting rules
remain in effect and are enforceable as written, notwithstanding any
decision under [proposed Sec. ] 190.14(b) by the Commission to allow
the trustee to continue making calls for variation settlement and
margin.'' The ABA Subcommittee raised a concern that proposed Sec.
190.14(b) ``may create unintended ambiguity'' regarding the
enforceability of such rules.
After considering the comments, the Commission is adopting Sec.
190.14(a) as proposed. The Commission notes that Sec. 190.14(a)
provides that the trustee shall ``instruct each customer [a term that,
in the context of a debtor DCO, includes members] to file a proof of
claim containing such information as is deemed appropriate by the
trustee.'' To the extent that the DCO is conducting non-CFTC-regulated
activity that is outside the scope of the part 190 regulations, the
proof of claim form should include an opportunity to claim for debts of
the DCO related to activity that is not regulated by the CFTC. These
would be payable from the general estate (outside of customer property)
or, if secured, from the property securing the debts. Thus, such
activity will be properly accounted for in the DCO bankruptcy, and
members will not be disadvantaged. For those reasons, the Commission
does not believe that Sec. 190.14(a) should be modified in the manner
recommended by ICE.
The Commission is adopting Sec. 190.14(b)(1) as proposed, with two
modifications that reflect the Commission's previous withdrawal of
paragraphs (b)(2) and (3) in the Supplemental Proposal: (1) Proposed
paragraph (b)(1) is re-designated as paragraph (b); and (2) new
paragraph (b) is modified to remove the phrase: ``except as otherwise
explicitly provided in this paragraph (b).'' \172\
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\172\ See 85 FR at 60112 n.12 (``The Commission will make
appropriate edits to the language in proposed Sec. 190.14(b)(1) as
part of the process of finalizing the [p]art 190 rule proposal.'').
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Several commenters expressed concern that proposed Sec. 190.14(b)
inadvertently creates legal uncertainty with respect to the
enforceability of a DCO's close-out netting rules and requested that
the Commission address this concern in varying ways.\173\ The
Commission considered those comments in advance of issuing the
Supplemental Proposal, and determined that Sec. 190.14(b)(2) and (3)
would not be a practicable and effective way to foster the transfer of
clearing operations--to the extent that such an opportunity presents
itself--at an acceptable cost. Consequently, the Commission withdrew
Sec. 190.14(b)(2) and (3) in the Supplemental Proposal and instead
proposed an alternative approach. The Supplemental Proposal, including
the Commission's consideration of comments thereto, is discussed below
in section II.H of this adopting release.
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\173\ See comment letters from ICE, CME.
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Commenters' concerns regarding the legal uncertainty of close-out
netting rules in the context of Sec. 190.14(b) also apply to Sec.
190.14(c), as proposed, specifically the language that states that the
trustee shall liquidate all open positions no later than seven calendar
days after the order for relief ``unless the
[[Page 19371]]
Commission determines that liquidation would be inconsistent with the
avoidance of systemic risk or would not be in the best interests of the
debtor's estate'' (the ``Unless Clause''). Some commenters--including
FIA and ISDA--explicitly raised this issue in the context of Sec.
190.14(c), to the extent that the proposed language would afford the
trustee with some level of discretion to determine whether or when a
DCO rule may ``compel'' the termination of contracts. Although the
Commission believes that commenters' concerns were largely addressed in
the Supplemental Proposal through the withdrawal of Sec. 190.14(b)(2)
and (3), the Commission agrees that the Unless Clause raises similar
concerns, in that it suggests that the Commission may decide that a
DCO's contracts should not be terminated in bankruptcy, and accordingly
that paragraph (c)(1) should be modified by removing the Unless Clause.
Thus, after considering the comments, the Commission is adopting Sec.
190.14(c) as proposed, with a modification to paragraph (c)(1) by
deleting the phrase: ``unless the Commission determines that
liquidation would be inconsistent with the avoidance of systemic risk
or would not be in the best interests of the debtor's estate.'' This
modification--when taken in conjunction with the Commission's prior
withdrawal of Sec. 190.14(b)(2) and (3)--should remove any lingering
uncertainties in Sec. 190.14 concerning the enforceability of close-
out netting provisions in a DCO bankruptcy.
The Commission received no specific comments on the proposed
language of Sec. 190.14(d) and, thus, is adopting that paragraph as
proposed.
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.14 as
proposed, with the deletion of paragraphs (b)(2) and (3) and
modifications to paragraphs (b)(1) and (c)(1), as set forth above.\174\
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\174\ The modifications to paragraph (b)(1) include both the
addition of the language described above and the re-designation of
proposed paragraph (b)(1) as new paragraph (b), in light of the
withdrawal of proposed paragraphs (b)(2) and (3) in the Supplemental
Proposal.
For further discussion of the Supplemental Proposal and the
Commission's consideration of comments thereto, see section II.H
below.
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5. Regulation Sec. 190.15: Recovery and Wind-Down Plans; Default Rules
and Procedures
The Commission is adopting Sec. 190.15 substantially as proposed
(with a modification, as discussed below), to favor the implementation
of a debtor clearing organization's default rules and procedures
maintained pursuant to Sec. 39.16 and, as applicable, Sec. 39.35, and
any recovery and wind-down plans maintained by the debtor and filed
with the Commission, pursuant to Sec. Sec. 39.39 and 39.19,
respectively. Section 39.16 requires each DCO to, among other things,
``adopt rules and procedures designed to allow for the efficient, fair,
and safe management of events during which clearing members become
insolvent or default on the obligations of such clearing members to
the'' DCO. In adopting Sec. 39.35, the Commission explained that it
``was designed to protect SIDCOs, [s]ubpart C DCOs, their clearing
members, customers of clearing members, and the financial system more
broadly by requiring SIDCOs and [s]ubpart C DCOs to have plans and
procedures to address credit losses and liquidity shortfalls beyond
their prefunded resources.'' \175\ Similarly, in adopting Sec. 39.39,
the Commission explained that it was ``designed to protect the members
of such DCOs and their customers, as well as the financial system more
broadly, from the consequences of a disorderly failure of such a DCO.''
\176\
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\175\ 78 FR 72476, 72492 (Dec. 2, 2013).
\176\ Id. at 72494.
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Section 190.15(a) states that the trustee shall not avoid or
prohibit any action taken by the debtor DCO that was reasonably within
the scope of, and was provided for, in any recovery and wind-down plans
maintained by the debtor and filed with the Commission, subject to
section 766 of the Bankruptcy Code. The Commission's intent is to
provide finality and legal certainty to actions taken by a DCO to
implement its recovery and wind-down plans, which are developed subject
to Commission regulations.
Section 190.15(b) instructs the trustee to implement, in
consultation with the Commission, the debtor DCO's default rules and
procedures maintained pursuant to Sec. 39.16, and, as applicable,
Sec. 39.35, as well as any termination, close-out and liquidation
provisions included in the rules of the debtor, subject to the
trustee's reasonable discretion and to the extent that implementation
of such default rules and procedures is practicable.
Similarly, Sec. 190.15(c), as proposed, instructs the trustee, in
consultation with the Commission, to take actions in accordance with
any recovery and wind-down plans maintained by the debtor and filed
with the Commission, to the extent reasonable and practicable. The
Commission's intent is to provide the trustee, who will need to take
prompt action to manage the DCO (and any member default), with a
roadmap to manage such action. The Commission further intends that the
roadmap be based on the rules, procedures, and plans that the DCO has
developed in advance, and that are subject to the requirements of the
Commission's regulations.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.15. The Commission also raised specific questions as
to whether it is appropriate to steer the trustee towards
implementation of the debtor DCO's default rules and procedures and
recovery and wind-down plans, and whether the proposed language
concerning discretion, reasonability, and practicability is appropriate
and sufficient.
The Commission received several comments on proposed Sec. 190.15.
CME and ICE generally supported the proposal, although ICE raised
concerns about the discretion afforded to the trustee. In contrast,
Vanguard, FIA, ACLI, SIFMA AMG/MFA, and ICI expressed concerns with the
proposed rule, in whole or in part.
ICE, while generally supporting the proposal, objected to the
language in Sec. 190.15 that a ``trustee's obligation to [follow a
DCO's default rules and recovery and wind-down plans] is `subject to
the reasonable discretion' of the trustee or is limited `to the extent
reasonable and practicable.' '' While ICE acknowledged ``the need for
some degree of flexibility in the conduct of a bankruptcy proceeding,''
it contended that ``the Commission should make clear that the trustee
cannot override the DCO rules . . . [or] deviate from an approved
recovery or wind-down plan.''
Vanguard requested that proposed Sec. 190.15(a) be removed,
arguing that it would be ``imprudent to give deference'' to a DCO's
rules because such rules ``do not set forth a comprehensive roadmap to
dealing with DCO insolvency.'' Vanguard noted that ``DCO rulebooks set
forth a variety of powers the DCO may employ'' (e.g., ``assessments,
variation margin gains haircutting, and tear-ups''), and that such
rules ``lack [the] necessary specificity and detail to provide
certainty to FCMs and customers, or to the trustee,'' with respect to
what would follow in DCO insolvency. Vanguard was concerned that such
uncertainty may ``contribute to further market stresses during a
critical time,'' and that expressly instructing the trustee to
implement a DCO's default rules and procedures ``where practicable,''
permits a DCO to ``override the fundamental customer protections
intended by Part 190.''
[[Page 19372]]
FIA did not support the adoption of proposed Sec. 190.15(b) and
(c), commenting that the proposal's post-bankruptcy implementation of
all DCO default rules and procedures and recovery and wind-down plans
is ``inappropriate.'' FIA was concerned that the proposal's ``concept
of `default rules and procedures' could encompass a number of different
tools or actions, some of which would be inappropriate and risky for a
bankruptcy trustee to attempt to execute.'' In addition, ``to the
extent that the Commission would select some but not other default
rules and procedures for a trustee to implement,'' uncertainty with
respect to possible bankruptcy scenarios would increase. FIA stated
that a DCO's default rules and procedures should not be used ``for any
purpose other than to ensure enforcement of a DCO's closeout netting
provisions,'' and that, ``[b]y their terms, the default rules and
procedures . . . represent contractual arrangements between a DCO and
its members whose purpose is to provide resources and tools to the DCO
to prevent its bankruptcy.'' FIA argued that ``a fundamental term'' of
these arrangements is that ``such resources and tools are only
available prior to bankruptcy,'' and that instructing a trustee in
bankruptcy to implement, with discretion, the DCO's default rules and
procedures would ``undermine the long-standing and settled expectations
of DCOs and their members.'' In the alternative, FIA recommended that
the Commission revise proposed Sec. 190.15(b) ``to confirm that, in
administering a proceeding under Subpart C, the trustee must implement
any termination, close-out and liquidation provisions included in the
rules (or bylaws) of the debtor'' (including loss allocation
provisions). FIA raised further concerns about the treatment of a DCO's
recovery plans in proposed Sec. 190.15. FIA asserted that such plans
are intended to address ``actions to be taken prior to the DCO's
bankruptcy and [are] not relevant post-filing.'' FIA also stated that
such plans ``would provide no meaningful guidance to a trustee''
because they ``do not prescribe a particular course of action.''
Rather, they ``present a menu of options that a DCO might consider.''
FIA asserted that reliance on a DCO's recovery and wind-down plans is
``particularly inappropriate'' because some of them ``have been
developed with no input or opportunity for comment by clearing members
and other market participants.''
ACLI also expressed concern with the deference that a trustee in
bankruptcy would be required to afford a DCO's rules and procedures and
recovery and wind-down plans under proposed Sec. 190.15(a) and (c).
ACLI claimed that ``DCO recovery and wind-down plans include such
drastic measures as Variation Margin Gains Haircutting . . . and
Partial Tear-Up . . . [that] are not subject to routine public input at
the DCO level or at the Commission.'' ACLI identified several
circumstances in which deference to the DCO's rules or recovery and
wind-down plans should be reduced. ACLI asserted that: (a) A trustee
should not be expected to defer to recovery and wind-down measures
unless they were originally adopted with public input at the DCO level
and made public for a reasonable period before the bankruptcy
proceeding; (b) the trustee should ``have discretion to override a
DCO's recovery or wind-down actions if they violate proposed [p]art
190's goal of protecting customer property on no worse than a pro rata
basis''; and (c) consistent with proposed Sec. 190.15(b), the trustee
should be able to avoid or prohibit any DCO action that it determines,
in consultation with the Commission, is not ``reasonable and
practicable.''
SIFMA AMG/MFA commented that requiring a trustee to defer to a
DCO's recovery and wind-down plans as set forth in proposed Sec.
190.15(a) and (c) is ``inadvisable'' and, in some cases,
``unworkable,'' and recommended that the provisions be deleted. SIFMA
AMG/MFA recommend that, if the Commission retains proposed Sec.
190.15(a), the provision be amended to remove the words ``was
reasonably in the scope of'' and replace references to the DCO's
recovery and wind-down plans with references to the DCO's default rules
and procedures. In support of their position, SIFMA AMG/MFA asserted
that recovery and wind-down plans are insufficiently prescriptive, and
that because they tend to be drafted as a menu of options, such plans
are not likely to provide the trustee with clear direction, effectively
causing the trustee to defer to the judgment of the debtor itself.
SIFMA AMG/MFA also asserted that recovery and wind-down plans do not
require Commission approval or reflect significant input from
customers, and because DCOs are not required to make such plans public,
the plans are not a fair reflection of the ex ante expectations of a
DCO's stakeholders. SIFMA AMG/MFA further asserted that ``requiring the
trustee . . . to defer to the debtor's resolution plans would be
inconsistent with other regimes for the resolution of systemically
important financial institutions.'' SIFMA AMG/MFA requested that the
Commission add a new clause to proposed Sec. 190.15 requiring the
trustee and Commission, in implementing Sec. 190.15, to ``consider
whether implementation of the debtor's default rules and procedures
[and recovery and wind-down plans] may undermine the core principles
set forth in Sec. 190.00 or may pose additional systemic risk.'' \177\
If the trustee and Commission determine that such implementation would
have that effect, SIFMA AMG/MFA suggested that the provision permit the
trustee to override the rules, procedures, and plans. SIFMA AMG/MFA
further commented that, in the event that deference to a DCO's default
management rules and procedures and recovery and wind-down plans is
mandated in subpart C of the proposal, the Commission should amend
parts 39 and 40 of the Commission's regulations ``to ensure that
customers have the opportunity to provide meaningful input during the
development and application of such rules, procedures, and plans.''
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\177\ Alteration in original.
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ICI did not support the proposal's deference to a DCO's loss
allocation, recovery, and wind-down rules in a DCO liquidation. ICI
asserted that such rules are neither ``clear'' nor ``well-vetted.'' ICI
stated that DCO rules ``do not provide the level of specificity and
detail that is required to give certainty to market participants,'' but
rather, they ``enumerate a wide variety of tools that a DCO may deploy
to recover losses,'' some of which ``have the capacity to alter the
entitlements of customers'' under part 190 (e.g., ``a customer would
only be entitled to such a pro rata share of customer property to the
extent the DCO rules did not modify the distribution of the DCO's
assets'' through variation margin gains haircutting or partial tear-
up). ICI recommended that, ``[b]efore the Commission gives effect to
any DCO loss allocation, recovery, and wind-down rules in a [p]art 190
proceeding, . . . the Commission should develop and codify minimum
principles that must be reflected in [those rules,] . . . review both
existing DCO rules and proposed rule changes to ensure that they are
consistent with the Commission's minimum principles . . . [, and]
require DCOs to change their governance process for rule changes to
give stakeholders greater opportunity for input.''
As an initial matter, the Commission notes that some commenters,
including ACLI, FIA, ICI, and SIFMA AMG/MFA, objected to the
application of DCO recovery and wind-down plans and rules, in
particular the application of
[[Page 19373]]
variation margin gains haircutting, because they believed that changes
should be made to the process by which parts 39 and 40 permit DCOs to
adopt such plans and rules.
Amendments to parts 39 and 40 are beyond the scope of this
rulemaking, and the Commission does not believe that these concerns
with the content and operation of parts 39 and 40 should inhibit the
use of such plans and rules in the context of part 190. However, the
Commission continues actively to review these issues, in particular
with respect to governance, as they relate to parts 39 and 40.
The Commission also notes that other commenters, including FIA,
believed that default rules and procedures and recovery plans are
designed to avoid bankruptcy, and should not be applied if they fail in
achieving that goal. However, the DCO's rules, procedures, and plans
set forth ex ante the manner in which losses are allocated--that is,
who is exposed to them, and to what extent. In the event that losses
must be borne in bankruptcy, the Commission believes, as was noted in
the preamble to the proposal, that ``allocation of losses should not
depend on the happenstance of when default management or recovery tools
were used--e.g., when assessments were called for, or when such
assessments were met.'' The Commission does not believe that the
comments offer a persuasive reason why the allocation of losses--who
wins, who loses, and how much--should change on the basis of when a
bankruptcy is filed.
The Commission further notes that a number of commenters, including
ACLI and Vanguard, were concerned with the application in bankruptcy of
recovery tools such as variation margin gains haircutting and partial
tear-up. Variation margin gains haircutting, to the extent set forth in
DCO rules, will be applied in bankruptcy, in that it represents the ex
ante manner in which losses are allocated.\178\ By contrast, partial
tear-up of contracts will not be applied; rather, pursuant to Sec.
190.14(c)(1), ``the trustee shall liquidate all open commodity
contracts that have not been terminated, liquidated or transferred no
later than seven calendar days after entry of the order for relief''
(emphasis added).
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\178\ Moreover, as discussed in more detail in section II.C.7
below, there is a limited amount of customer property available. Any
increase in some customers claims (and thus, their distributions)
due to the disapplication of gains-based haircutting would come at
the expense of a reduced share of that limited customer property
(i.e., reduced distributions) to other customers, which could total
less than the amount of their claim arising from initial margin.
---------------------------------------------------------------------------
Turning to SIFMA AMG/MFA's suggestion that ``the trustee and the
Commission should explicitly be required to consider the core concepts
set forth in proposed Sec. 190.00 and systemic risk in implementing a
debtor DCO's rules procedures and plans'': With respect to the core
concepts, Sec. 190.00(c) states that ``the specific requirements in
[part 190] should be interpreted and applied consistently with these
core concepts.'' In short, that requirement is already present.
Moreover, the Commission has added Sec. 190.00(c)(3)(i)(C) to provide
that where a provision in part 190 affords the trustee discretion, that
discretion should be exercised in a manner that the trustee determines
will best achieve the overarching goal of protecting public customers
by enhancing recoveries for, and mitigating disruptions to, public
customers as a class. Thus, in exercising their discretion to determine
what is ``reasonable'' for purposes of Sec. 190.15, the trustee is
already directed to focus on the ``core concepts'' in Sec. 190.00(c),
and, in particular, the ``overarching goal of protecting public
customers.''
However, while a DCO's default rules and procedures are required to
be made public, posted on the DCO's website,\179\ the same is not true
for the DCO's recovery and wind-down plans. Thus, in implementing the
DCO's default rules and procedures, the trustee would be implementing
rules and procedures that, prior to the bankruptcy, were both subject
to the supervision of the Commission and transparently available to
both clearing members and their customers. By contrast, in implementing
the DCO's recovery and wind-down plans, the trustee would be
implementing plans that, prior to the bankruptcy, were subject to the
supervision of the Commission,\180\ but may not have been transparently
available to clearing members or their customers. In light of this
distinction, a more customer-protective approach seems appropriate in
the latter context.
---------------------------------------------------------------------------
\179\ See Sec. 39.21(c)(6).
\180\ Note that Sec. 190.15(c) only applies to recovery and
wind-down plans that were ``filed with the Commission pursuant to
Sec. 39.39 of this chapter.''
---------------------------------------------------------------------------
Accordingly, the Commission is modifying proposed Sec. 190.15(c),
which reads that in administering a proceeding under this subpart, the
trustee shall, in consultation with the Commission, take actions in
accordance with any recovery and wind-down plans maintained by the
debtor and filed with the Commission pursuant to Sec. 39.39, to the
extent reasonable and practicable--to add at the end the qualifier that
these actions should also only be taken to the extent consistent with
the protection of customers.\181\
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\181\ The ``customers'' of a DCO are, as noted at the top of
this section II.C, the clearing members with respect to their public
customers, as well as the clearing members with respect to their
proprietary or ``house'' accounts.
---------------------------------------------------------------------------
With respect to systemic risk, while the Commission, as a
governmental agency, is attentive to considerations of mitigating
systemic risk in all that it does,\182\ it may be difficult for a
trustee to make meaningful determinations as to how to do so. Moreover,
the trustee is the representative of the bankruptcy estate, see 11
U.S.C. 323(a), with fiduciary duties to estate beneficiaries,\183\
rather than to the financial system as a whole. Accordingly, the
Commission does not believe it appropriate to add an explicit
requirement concerning considerations of systemic risk, as suggested by
SIFMA AMG/MFA.
---------------------------------------------------------------------------
\182\ See CEA section 3(b), 7 U.S.C. 5(b) (purposes of the CEA
include ``the avoidance of systemic risk'').
\183\ See U.S. Department of Justice, Executive Office for
United States Trustees, Handbook for Chapter 7 Trustees Section 4.B,
at 4-2.
---------------------------------------------------------------------------
The Commission does not agree that FIA's observation that DCO
recovery and wind-down plans may ``not prescribe a particular course of
action but, rather, present a menu of options that a DCO may consider''
supports FIA's conclusion that ``these plans would appear to provide no
meaningful guidance to a trustee.'' To the contrary, the Commission
believes that providing a ``menu of options'' among which the trustee
may select (and adapt) in a manner that is ``reasonable and
practicable'' would provide the trustee--who would be stepping into a
complex and difficult situation with little preparation--with a helpful
roadmap to determine strategy and tactics, in order to act in a prompt
and cost-effective manner.
The Commission also declines to provide that the trustee cannot
override the DCO's rules or deviate from an approved recovery or wind-
down plan. Even if part 39 were to require that such plans be
``approved''--and it does not--they are designed in the context of
operation of the DCO outside of bankruptcy. Thus, the Commission
believes it to be appropriate for the trustee to apply them with
flexibility to the extent reasonable and practicable.
Accordingly, after consideration of the comments and for the
reasons stated above, the Commission is adopting Sec. 190.15 as
proposed, with the modification to Sec. 190.15(c) discussed above.
[[Page 19374]]
6. Regulation Sec. 190.16: Delivery
The Commission is adopting Sec. 190.16 as proposed with a
modification to paragraph (a), as set forth below.
Regulation Sec. 190.16(a) instructs the trustee to use reasonable
efforts to facilitate and cooperate with completion of delivery in a
manner consistent with Sec. 190.06(a) (which instructs trustees of
FCMs in bankruptcy to foster delivery where a contract has entered
delivery phase before the filing date or where it is not practicable
for the trustee to liquidate a contract moving into delivery position
after the filing date) and the pro rata distribution principle in Sec.
190.00(c)(5). The Commission believes that it is important to address
deliveries to avoid disruption to the cash market for the commodity and
to avoid adverse consequences to parties that may be relying on
delivery taking place in connection with their business operations.
However, given the potential for competing demands on the trustee's
resources, including time, this instruction is limited to requiring
``reasonable efforts.''
Regulation Sec. 190.16(b) carries forward, to the context of a DCO
in bankruptcy, the delineation between the physical delivery property
account class and the cash delivery property account class in Sec.
190.06(b), as discussed above. Specifically, physical delivery property
that is held in delivery accounts for the purpose of making delivery
shall be treated as physical delivery property, as will the proceeds
from any sale of such property. By contrast, cash delivery property
that is held in delivery accounts for the purpose of paying for
delivery shall be treated as cash delivery property, as would any
physical delivery property for which delivery is subsequently taken.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.16. The Commission raised specific questions as to
whether it is appropriate, in the context of a clearing organization
bankruptcy, to separate the physical delivery account class from the
cash delivery account class, and if so, whether the physical delivery
account class should be further sub-divided. The Commission also asked
whether the delivery account class should be treated as a single,
undivided account class.
CME supported the requirement in proposed Sec. 190.16 that the
trustee use reasonable efforts to facilitate deliveries of commodity
contracts that have moved into delivery prior to the date and time of
relief on behalf of a clearing member or customer, but asked that the
Commission ``expand the rule to require the trustee to facilitate
deliveries'' under contracts that move into delivery position after the
filing and that the trustee is unable to liquidate. CME stated that
``[i]t is equally important to protect deliveries under [such]
contracts . . . to protect against disruption to commercial markets and
operations,'' and that the trustee may not be able to terminate them.
The ABA Subcommittee similarly expressed concern that proposed
Sec. 190.16(a) ``does not address contracts that are unable to be
liquidated and that then move into delivery position,'' noting that
``it may be impossible or impracticable for a trustee to liquidate
every'' physical-delivery commodity contract that is open at the date
and time of the order for relief before the contract moves into
delivery position. The ABA Subcommittee recommended that the Commission
``remove the timing limitation in Proposed Rule 190.16(a),'' and add
language stating that ``the trustee should use reasonable efforts to
liquidate open physical delivery commodity contracts before they move
into a delivery position.''
The Commission agrees with comments raised by CME and the ABA
Subcommittee that deliveries should be facilitated after the order for
relief for contracts that are not otherwise terminated, liquidated, or
transferred. The Commission believes that modifying the proposal to
address that scenario is appropriate to avoid disruption to the cash
market and to avoid adverse consequences to parties that may be relying
on delivery taking place in connection with their business operations.
Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is adopting Sec. 190.16 with a
modification to apply paragraph (a) to any contract that ``moves into
delivery after [the date and time of the order for relief], but before
being terminated, liquidated, or transferred.''
7. Regulation Sec. 190.17: Calculation of Net Equity
The Commission is adopting Sec. 190.17 as proposed, with a
modification to Sec. 190.17(b)(2), as discussed below. Section 190.17
establishes net equity calculations to be used in determining the
claims against the debtor DCO (and the allocation of losses) among
members and their accounts.
Section 190.17(a) with respect to net equity is parallel to Sec.
190.18(a) with respect to the treatment of customer property. Section
190.17(a)(1) confirms that a member of a clearing organization may have
claims in separate capacities. Specifically, a member may have claims
on behalf of its public customers (customer account) and claims on
behalf of itself and its non-public customers (i.e., affiliates) (house
account), and, within those separate customer classes, the claims may
be further separated by account class. The member shall be treated as
part of the public customer class with respect to claims based on
commodity customer accounts carried as ``customer accounts'' by the
clearing organization for the benefit of the member's public customers,
and as part of the non-public customer class with respect to claims
based on its house account. Section 190.17(a)(2) directs that net
equity shall be calculated separately with respect to each customer
capacity and, within such customer capacity, by account class.
Section 190.17(b) sets forth how a debtor DCO's pre-existing rules
and procedures governing the allocation of losses--including the
default rules and procedures--should be applied in a DCO bankruptcy.
Section 190.17(b)(1) confirms that the calculation of members' net
equity claims--and, thus, the allocation of losses among members and
their accounts--shall be based on the full application of the debtors'
loss allocation rules and procedures, including the default rules and
procedures referred to in Sec. Sec. 39.16 and 39.35. These pre-
existing loss allocation rules and procedures are the contract between
and among the members and the DCO, and the Commission believes that it
is appropriate to give them effect regardless of the bankruptcy of the
DCO or the timing of any such bankruptcy. In other words, the pre-
existing loss allocation rules and procedures (such as member
assessments) should be given the same effect in a bankruptcy,
regardless of whether default management or recovery tools were fully
applied prior to the order for relief. While certain DCOs may have
discretion, consistent with governance procedures, as to precisely when
they call for members to meet assessment obligations, the Commission
believes that allocation of losses should not depend on the
happenstance of when default management or recovery tools were used--
e.g., when assessments were called for, or when such assessments were
met.
Section 190.17(b) also addresses DCO rules that govern how
recoveries on claims against defaulting members are allocated to non-
defaulting members' accounts,\184\ which effectively ``reverse
[[Page 19375]]
the waterfall'' by allocating recovered assets to member accounts in
reverse order of the allocation of the losses to those member
accounts.\185\ Section 190.17(b)(2) implements such DCO rules in
bankruptcy, thereby adjusting members' net equity claims (and the basis
for distributing any such recoveries) in light of such recoveries. The
provision similarly implements DCO loss allocation rules in other
contexts, for example, (i) rights to portions of mutualized default
resources that are either prefunded or assessed and collected, and, in
either event, not used, as well as (ii) rules that would allocate to
members recoveries against third parties for non-default losses that
are, under the DCO's rules, originally borne by members.
---------------------------------------------------------------------------
\184\ These recoveries might be based on prosecution of such
claims in an insolvency or receivership proceeding, or, in the
reasonable commercial judgment of the DCO, the settlement or sale of
such claims.
\185\ For example, if the DCO rules allocate losses in excess of
the defaulters' available resources first to the DCO's own
contributions, second to the mutualized default fund contributions
of members other than the defaulter, third to assessments, and
fourth to gains-based haircutting (pro rata), all of which tools
were in fact used in a particular case, then recoveries on claims
against the defaulting members would be allocated (to the extent
available) first to those member accounts for which gains were
haircut, pro rata based on the aggregate amount of such haircuts per
member account, until all such haircuts have been reversed, second
to those members who paid assessments, pro rata based on the amount
of such assessments paid, until all such assessments have been
repaid, third to members whose mutualized default-fund contributions
were consumed, pro rata based on such default-fund contributions,
until all such contributions have been repaid, and fourth to the DCO
to the extent of its own contribution.
---------------------------------------------------------------------------
Section 190.17(c) adopts by reference the equity calculations set
forth in proposed Sec. 190.08, to the extent applicable.
Finally, Sec. 190.17(d) implements section 766(i) of the
Bankruptcy Code, which: (1) Allocates a debtor DCO's customer property
(other than member property) to the DCO's customers (i.e., clearing
members) ratably based on the clearing members' net equity claims based
on their (public) customer accounts; and (2) allocates a debtor DCO's
member property to the DCO's clearing members ratably based on the
clearing members' net equity claims based on their proprietary (i.e.,
house) accounts. To implement section 766(i), Sec. 190.17(d) defines
``funded balance'' as a clearing member's pro rata share of member
property (for a clearing member's house accounts) or customer property
other than member property (for accounts for a clearing member's public
customers). The pro rata amount shall be calculated with respect to
each account class available for distribution to customers of the same
customer class. Moreover, given that the calculation of funded balance
for FCMs is an analogous exercise, the Commission intends that such
calculations under Sec. 190.17(d) will be made in the manner provided
in Sec. 190.08(c), to the extent applicable.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.17. The Commission raised a specific question as to
whether it is appropriate to base the calculations proposed Sec.
190.17 on the full application of the debtors' loss allocation rules
and procedures, including the DCO's default rules and procedures.
Commenters addressed the proposed language of paragraph (b), or of
Sec. 190.17 generally, but did not offer specific comments on the
proposed language of paragraph (a), (c), or (d).
CME commented in support of Sec. 190.17(b)(1)'s application of
``the DCO's loss allocation rules and procedures, including the DCO's
default rules and procedures, to the calculation of clearing members'
net equity claims,'' but suggested a clarification to the proposed
rule. Specifically, CME suggested that the Commission ``clarify that
`full application' of the DCO's loss allocation rules and procedures to
the calculation of clearing members' house net equity claims means that
assessments or similar loss allocation arrangements thereunder are part
of the calculation only if and to the extent that the DCO's rules and
procedures provide for post-filing assessments and payments.'' CME
noted that a ``DCO's rules are the contract between and among the
members and the DCO,'' and that, ``[i]f the calculation of net equity
claims deviates from the DCO's loss allocation under its rules,
including determination of amounts owned under close-out netting rules,
that could adversely affect CME's netting opinion as to the
enforceability of its netting rules.'' CME also commented in support of
``giving effect to provisions in the debtor DCO's loss allocation rules
that entitle clearing members to return of guaranty fund deposits or
other mutualized default resources that are not used, or to payments
out of amounts that the DCO recovers on claims against a defaulting
clearing member, through adjustments to clearing member's net equity
claims against member property to reflect their entitlement to such
payments.'' CME also commented in support of Sec. 190.17(b)(2).
The ABA Subcommittee expressed concern with respect to perceived
ambiguity in Sec. 190.17(b)(1) regarding ``how assessments that were
not called for, or that were called for but not paid before the filing
date, would impact the calculation of a clearing member's net equity
claim with respect to its house account.'' The ABA Subcommittee
requested that the Commission modify the proposed regulation to clarify
that ``house account net equity claims would be adjusted to reflect
post-filing obligations only if and to the extent that the DCO's rules
and procedures impose obligations on clearing members to continue
making such payments following the DCO's bankruptcy.'' Specifically,
the ABA Subcommittee suggested that the following phrase be added to
the end of Sec. 190.17(b)(1): If and to the extent that the debtor's
loss allocation rules and procedures impose obligations on clearing
members to make such payments on or after the filing date.
FIA did not support the adoption of Sec. 190.17(b)(1). FIA stated
that it would be ``inappropriate to require a clearing member to reduce
the value of its net equity claim by the amount of an assessment that,
under the rules of the relevant DCO, either may no longer be made or
are not required to be paid.'' FIA asserted that a DCO's default fund
is ``a multilateral indemnification arrangement between the DCO and its
members pursuant to which members' contributions are used to cover the
DCO's losses resulting from member default(s) and thereby prevent the
DCO's bankruptcy.'' FIA stated that a ``DCO has no authority under its
rules to request or to apply these funds for any other purpose, nor do
we believe that a trustee would have any authority under the
[Bankruptcy] Code to do so.'' FIA noted further that, ``by requiring
that a clearing member's net equity claim must include the full
application of the DCO's loss allocation rules and procedures, proposed
Rule 190.17(b)(1) appears to have the effect of reducing a clearing
member's potential recovery, even when the full application of the
DCO's loss allocation rules is not necessary to meet the DCO's
obligations to non-defaulting clearing members,'' thereby impermissibly
benefitting the DCO's general creditors and shareholders to the
detriment of clearing members.
ICE commented that the Commission should refrain from adopting
Sec. 190.17(b) or providing ``specific guidance as to what assumptions
the CFTC would make and how the net equity claim is to be calculated
hypothetically.'' ICE stated that, in determining a clearing member's
net equity claim, it is neither appropriate nor feasible to consider a
potential assessment that could have been called for before a
bankruptcy filing but was not. ICE asserted that a DCO's determination
of whether ``to call
[[Page 19376]]
for an assessment and/or implement other loss allocation arrangements''
accounts for many considerations that would not be appropriate to
revisit in an insolvency. ICE also asserted that calculating the full
application of loss allocation rules, or determining what would have
happened in any full allocation, may not be possible. ICE noted, for
example: (a) Because a DCO is not obligated to impose assessments
against its clearing members, it is unclear how the CFTC or the trustee
would determine how many assessments the DCO should have made; (b) in
the event that ``clearing members have the right to cap their liability
by terminating their membership in a DCO,'' it is unclear how the CFTC
or the trustee would determine whether a clearing member should have
terminated its membership; \186\ and (c) it ``may not be possible to
determine definitively what the [DCO's] losses . . . would have been if
additional loss allocation steps, such as variation margin gains
haircutting or tear-up, had been taken.''
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\186\ But see ICE Clear Credit Rules 806, 807. To mitigate the
risk that their members will ``rush to the exits'' after a default,
DCOs generally hold departing members liable for assessments due to
the defaults that occurred before they withdrew from membership, as
well as during a ``cooling-off'' period that extends past the date
the member gives notice of intent to withdraw. The ICE Clear Credit
rules cited, which include a ``cooling-off period'' of at least 30
days, are examples of this phenomenon. Thus, the possibility that
clearing members would withdraw is not likely to affect their
liability for assessments in this context.
---------------------------------------------------------------------------
SIFMA AMG/MFA commented that Sec. Sec. 190.17 and 190.18(b)(1)
should be modified to explicitly state that any gains that were haircut
during gains-based haircutting will be treated as customer property and
included in the net equity claims of the clearing members and customers
whose gains were haircut. SIFMA AMG/MFA further commented in support of
Sec. 190.17(b) but suggested that the proposal be modified to provide
that, if a debtor DCO either (i) does not have ``reverse the
waterfall'' rules or (ii) has ``reverse the waterfall'' rules that do
not address each level of the debtor DCO's waterfall, the net equity
clams of the debtor DCO's clearing members and customers will be
calculated as though the debtor DCO, in fact, ``has `reverse the
waterfall' rules that address each level of the DCO's waterfall.
Vanguard commented on Sec. 190.17(b)(1)'s requirement that a
trustee's calculation of DCO members' net equity claims include the
full application of DCO loss allocation rules and procedures. Vanguard
expressed concern that the requirement would result in a customer being
entitled to only ``a pro rata share to the extent the DCO rules did not
modify the distribution of the DCO's asset, whether pre- or post-
petition, through measures such as variation margin gains haircutting
or partial tear-up of transactions.'' Vanguard noted the possibility
that, ``as the DCO begins to fail,'' the DCO's rules ``could be changed
without the appropriate vetting by FCMs and customers who presently
bear an inordinate share of the risk.'' Vanguard believed that ``any
application of non-defaulting customer gains haircutting, or any other
margin haircutting, should be prohibited as being fundamentally at odds
with normal insolvency practice and highly counterproductive to
incentivizing customers not to abandon a failing DCO.'' Vanguard
asserted that, if haircutting is to be allowed, customers should
``receive full compensation in the form of a credit or equity claim
against the DCO [that is] superior to that of other creditors.''
Vanguard also suggested that Sec. 190.17(b)(2) be modified in the same
manner as suggested by SIFMA AMG/MFA, with respect to situations in
which a debtor DCO does not have ``reverse the waterfall'' rules, or
has ``reverse the waterfall'' rules that do not address each level of
the debtor DCO's waterfall.
ICI expressed concern that Sec. 190.17(b)(1) would permit a DCO's
loss allocation, recovery, and wind-down rules ``to override the
fundamental customer protections that Part 190 and Subchapter IV [of
the Bankruptcy Code] are meant to safeguard,'' because they would ``no
longer guarantee to a customer a pro rata share of customer property
based on its transactions and margin in accordance with Subchapter
IV.'' In that scenario, ICI commented that ``a customer would only be
entitled to such a pro rata share to the extent the DCO rules did not
modify the distribution of the DCO's assets, whether pre- or post-
petition, through measures such as variation gains haircutting or
partial tear-up of transactions.''
Having received no specific comments on the proposed language of
paragraphs (a), (c), and (d) of Sec. 190.17, the Commission is
adopting those paragraphs as proposed.
As described above, the Commission received several comments on
paragraph (b). After considering the comments, the Commission notes
that DCO default rules and procedures (also referred to as ``default
waterfalls''), as a general matter, first use the resources of the
defaulter (i.e., the defaulter's initial margin and contribution to the
default fund) to cover a shortfall. Should those resources be
insufficient to cover the shortfall, such default waterfalls generally
proceed to use the DCO's own capital contribution, and only after those
resources are extinguished is the remaining shortfall mutualized among
the clearing members: (1) First, through the prefunded default fund
contributions of non-defaulting clearing members; (2) then, through
limited assessment powers against those non-defaulting clearing
members, which are generally set as a multiple of each clearing
member's prior contributions to the default fund; and (3) finally,
through gains-based haircuts that affect both clearing members and
(through customer agreements) the customers of clearing members (i.e.,
public customers).
The Commission notes two important takeaways from the general
structure of default waterfalls. First, each clearing member knows, in
advance of a default, the maximum amount of its exposure to contribute
to mutualized loss through the guarantee fund and the DCO's assessment
powers. Second, should there be any reduction in the amount of funds
collected through such assessments, then any losses in excess of the
waterfall (i.e., up through the assessments) would instead be allocated
to both clearing members and their public customers. In other words, if
the losses are large enough, a reduced allocation of losses to clearing
members would necessarily mean that their public customers would bear
an increased allocation of losses.
The Commission remains of the view that, as discussed in the
proposal, ``[w]hile certain DCOs may have discretion, consistent with
governance procedures, as to precisely when they call for members to
meet assessment obligations, . . . allocation of losses should not
depend on the happenstance of when default management or recovery tools
were used--e.g., when assessments were called for, or when such
assessments were met.'' \187\ As discussed above, the losses in a DCO
bankruptcy ultimately would be allocated between clearing members and
customers, and clearing members' exposure to this allocation of losses
is already capped by the ex ante limits on assessment powers. If the
Commission were to modify the language of paragraph (b) in the manner
suggested by multiple commenters, the modification would effectively
decrease the allocation of losses that would be borne by clearing
members--below the ex ante limits of which they are on
[[Page 19377]]
notice--and correspondingly increase the allocation of losses that
would be borne by customers. In other words, in such a scenario, the
Commission believes that the suggested language could harm customers
and run counter to the Commission's policy that, with respect to
customer property, public customers be favored over non-public
customers. For those reasons, the Commission declines to adopt
commenters' suggestions to modify the net equity calculations in Sec.
190.17(b) by limiting (or eliminating) the allocation of assessments
that were not exercised prior to a bankruptcy filing.
---------------------------------------------------------------------------
\187\ 85 FR at 36038.
---------------------------------------------------------------------------
By contrast, gains-based haircuts are also part of the pre-
bankruptcy arrangements for allocating losses. If that part of the
``waterfall'' is reached, then that ex ante arrangement should be
followed. Moreover, there is a limited amount of customer property
available. Thus, to the extent the application of gains-based haircuts
was to be reversed, and some customers would realize increases in the
allowed amounts of their claims (and thus a greater share of customer
property), other customers would suffer a decreased share of customer
property; indeed, the latter customers may, as a result, receive less
than the amount of their claims for initial margin. This could have the
effect of reducing those customers' recoveries below the initial margin
they have posted. The Commission stands firmly against initial margin
haircutting as inimical to the principles of segregation. Thus, the
Commission declines to adopt the suggestion by SIFMA AMG/MFA and
Vanguard to reverse the application of gains-based haircutting in a DCO
bankruptcy.
FIA's comment letter raised two points that should be further
addressed. First, FIA stated that a DCO, under its rules, lacks the
authority to apply the DCO's default fund for any purpose other than
preventing the DCO's bankruptcy, and a trustee would similarly lack the
authority to do so under the Bankruptcy Code.\188\ FIA further argued
that, as a result of that limitation, the DCO's authority to make new
assessments or otherwise require that members contribute additional
funds to a DCO's default fund would not continue into bankruptcy.
Consequently, FIA argued that a clearing member's net equity claim
should not be reduced in bankruptcy by the amount of an assessment that
would no longer be required to be paid under the DCO's rules. However,
the Commission notes that Sec. 190.17(b)(1) does not instruct the
trustee to call any clearing member to pay in additional funds; rather,
paragraph (b)(1) reduces the clearing member's net equity claim against
the estate of the DCO, to account for uncalled or uncollected
assessments. Pursuant to section 20(a)(5) of the CEA, the Commission
has the power to provide, with respect to a commodity broker in
bankruptcy, ``how the net equity of a customer is to be determined,''
\189\ and the Commission believes that by setting the net equity
calculation as proposed, the rule would appropriately set such
calculations in a manner that does ``not depend on the happenstance of
when default management or recovery tools were used,'' as discussed
more fully above.
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\188\ FIA at 9.
\189\ In the bankruptcy of a clearing organization, clearing
members are a species of customer.
---------------------------------------------------------------------------
Second, FIA noted that, ``by requiring that a clearing member's net
equity claim must include the full application of the DCO's loss
allocation rules and procedures, proposed [Sec. ] 190.17(b)(1) appears
to have the effect of reducing a clearing member's potential recovery,
even when the full application of the DCO's loss allocation rules is
not necessary to meet the DCO's obligations to non-defaulting clearing
members'' and that ``[s]uch a result would impermissibly benefit the
DCO's general creditors and shareholders to the detriment of clearing
members.'' The Commission did not intend for the potential outcome
suggested by FIA; rather, in proposed Sec. 190.17(b)(2)(i), the
Commission intended to provide that, where the full amount of
assessment powers is not needed to cover a default, an appropriate
adjustment shall be made to the net equity claims of clearing members.
The Commission believes that the rule text should be modified in order
to communicate its intent more clearly, and avoid the possibility of
the unintended outcome raised by FIA. Accordingly, the Commission is
modifying Sec. 190.17(b)(1) to clarify that the DCO's ``loss
allocation arrangements shall be applied to the extent necessary to
address losses arising from default by clearing members.''
This modification separates paragraph (b)(1) into two separate
parts. First, paragraph (b)(1)(i) will provide that the calculation of
a clearing member's net equity claim shall include the full application
of the debtor's loss allocation rules and procedures, including the
default rules and procedures referred to in Sec. 39.16 and, if
applicable, Sec. 39.35. Second, paragraph (b)(1)(ii) will provide that
the calculation in paragraph (b)(1)(i) will include, with respect to
the clearing member's house account, any assessments or similar loss
allocation arrangements provided for under those rules and procedures
that were not called for before the filing date, or, if called for,
have not been paid. Such loss allocation arrangements shall be applied
to the extent necessary to address losses arising from default by
clearing members.
The ABA Subcommittee, in its comment letter, was concerned that the
proposed rule is ambiguous on whether assessments or similar loss
allocation arrangements would be included in the calculation where the
clearing organization's rules do not impose obligations on clearing
members to make such payments on or after the filing date. The modified
structure of paragraph (b)(1), as described above, should remove that
ambiguity, albeit not in the direction that the ABA Subcommittee would
prefer: The calculation ``will include, with respect to the clearing
member's house account, any assessments or similar loss allocation
arrangements that were not called for before the filing date . . . to
the extent necessary to address losses arising from default . . .''
(emphasis added).
CME's comment letter also raises a concern that should be
addressed. In particular, CME is concerned that deviating from the
DCO's rules with respect to loss allocation in this context could
adversely affect the DCO's netting opinion as to the enforceability of
its netting rules. The Commission notes that this argument conflates
bank capital charge calculations for cleared transactions with capital
charge calculations for default fund contributions. Pursuant to, e.g.,
12 CFR 217.133(a)(2), a clearing member that is (or is part of) a bank
holding company regulated by the Federal Reserve Board and that uses
the internal ratings and advanced measurement approaches to bank
capital requirements is required to use the methodologies described in
the applicable paragraph of 12 CFR 217.133 to calculate its risk-
weighted assets for a cleared transaction (that is, paragraph (c) of
that section) and the methodologies described in a different paragraph
to calculate its risk-weighted assets for its default fund contribution
to a CCP (that is, paragraph (d) of that section).\190\ Netting
opinions are necessary to treat cleared transactions
[[Page 19378]]
on a net basis,\191\ while assessments are related to default fund
contributions. Thus, the treatment of assessment obligations is
irrelevant to netting opinions for cleared transactions.
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\190\ There are analogous provisions for bank holding companies
regulated by the Federal Reserve Board that use the standardized
approach for calculating bank capital requirements (12 CFR 217.35)
as well as banks regulated by the FDIC and the Office of the
Comptroller of the Currency.
\191\ See 12 CFR 217.3(d).
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The Commission also received comments on proposed Sec.
190.17(b)(2) concerning the treatment of ``reverse the waterfall''
rules in the context of a DCO bankruptcy. After considering the
comments, the Commission continues to believe that it is useful and
appropriate to use ``reverse the waterfall'' rules for recoveries made
by a clearing organization (including a debtor clearing organization).
Some commenters suggested that proposed Sec. 190.17(b)(2) be modified
to address situations where the debtor DCO lacks ``reverse the
waterfall'' rules, or where such rules do not address each level of the
debtor clearing organization's waterfall. Although the commenters did
not provide specific language that could be used to apply to such
situations, the Commission believes that such a complicated
modification is beyond the bounds of what was proposed, and thus, the
Commission declines to make the modification here. Nonetheless, the
commenters' suggestion is well taken, and the Commission may consider
further work on that issue in the future.
Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is: (1) Adopting Sec. 190.17(a),
(b)(1), (c), and (d) as proposed; and (2) adopting Sec. 190.17(b)(2)
with the modification discussed above.
8. Regulation Sec. 190.18: Treatment of Property
The Commission is adopting Sec. 190.18 to establish the allocation
of the debtor DCO's estate in order to satisfy claims of clearing
members, as customers of the debtor. The Commission is adopting Sec.
190.18 as proposed, with the following modifications: (1) Adding new
paragraph (b)(1)(iv), as described below; and (2) removing paragraph
(c)(1) and renumbering the remaining paragraphs of paragraph (c).
Section 190.18(a) with respect to customer property is parallel to
Sec. 190.17(a) with respect to net equity. Paragraph (a) provides that
property of the debtor clearing organization's estate is allocated
between member property, and customer property other than member
property, in order to satisfy claims of clearing members as customers
of the debtor. Such property would constitute a separate estate of the
customer class (i.e., member property, and customer property other than
member property) and the account class to which it is allocated, and
would be designated by reference to such customer class and account
class.
Section 190.18(b) sets out the scope of customer property for a
clearing organization,\192\ and is based in large part on Sec.
190.09(a). Specifically, in Sec. 190.18, paragraphs (b)(1)(i)(A)
through (G) are based on Sec. 190.09(a)(1)(i)(A) through (G). Section
190.18(b)(1)(i) does not include a provision that is parallel to Sec.
190.09(a)(1)(i)(H), because loans of margin are not applicable to DCOs.
In Sec. 190.18, paragraphs (b)(1)(ii)(A) through (D) are based on
Sec. 190.09(a)(1)(ii)(A), (D), (E), and (F), while Sec.
190.18(b)(1)(ii)(E) adopts by reference Sec. 190.09(a)(1)(ii)(H)
through (K) as if the term debtor used therein refers to a clearing
organization as debtor. Section 190.18(b)(1)(ii) does not include
provisions that are parallel to Sec. 190.09(a)(1)(ii)(B), (C), (G),
and (L), because they would not be applicable due to the differences in
business models, structures, and activities of DCOs and FCMs,
respectively. Section 190.18(b)(1)(iii) is unique to clearing
organizations, and includes as customer property any guarantee fund
deposit, assessment, or similar payment or deposit made by a member, to
the extent any remains following administration of the debtor's default
rules and procedures. Section 190.18(b)(1)(iii) also includes any other
property of a member that, pursuant to the debtor's rules and
procedures, is available to satisfy claims made by or on behalf of
public customers of a member. Finally, Sec. 190.18(b)(2), which
identifies property that is not included in customer property, adopts
by reference Sec. 190.09(a)(2) as if the term debtor used therein
refers to a clearing organization as debtor and to the extent relevant
to a clearing organization.
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\192\ This is another provision prescribed pursuant to the
Commission's authority under section 20(a)(1) of the CEA, 7 U.S.C.
24(a)(1).
---------------------------------------------------------------------------
Section 190.18(c) allocates customer property between customer
classes, favoring allocation to customer property other than member
property over allocation to member property, so long as the funded
balance in any account class for members' public customers is less than
one hundred percent of net equity claims. Once all account classes for
customer property other than member property are fully funded (i.e., at
one hundred percent of net equity claims), any excess could be
allocated to member property. Section 190.18(c)(1), as proposed (but
not adopted herein, as discussed below), would allocate any property
referred to in Sec. 190.18(b)(1)(iii) (guarantee deposits,
assessments, etc.) first to customer property other than member
property, to the extent that any account class therein is not fully
funded, and then to member property. In proposing this provision, the
Commission intended such treatment of property to favor public
customers over non-public customers. Section 190.18(c)(2) allocates any
excess funds in any account class for members' house accounts first to
customer property other than member property to the extent that any
account class therein is not fully funded, and then any remaining
excess to house accounts to the extent that any account class therein
is not fully funded. Finally, Sec. 190.18(c)(3) allocates any excess
funds in any account for members' customer accounts first to customer
property other than member property to the extent that any account
class therein is not fully funded, and then any remaining excess to
house accounts, to the extent that any account class therein is not
fully funded.
Section 190.18(d) allocates customer property among account classes
within customer classes. Section 190.18(d)(1) confirms that, where
customer property is tied to a specific account class--that is, where
it is segregated on behalf of, readily traceable on the filing date to,
or recovered by the trustee on behalf of or for the benefit of an
account class within a customer class--the property must be allocated
to the customer estate of that account class (that is, the account
class for which it is segregated, to which it is readily traceable, or
for which it is recovered). Section 190.18(d)(2) provides that customer
property that cannot be allocated in accordance with paragraph (d)(1)
shall be allocated in a manner that promotes equality of percentage
distribution among account classes within a customer class. Thus, in
such a scenario, such property would be allocated first to the account
class for which funded balance--that is, the percentage that each
member's net equity claim is funded--is the lowest. This would continue
until the funded balance percentage of that account class equals the
funded balance percentage of the account class with the next lowest
percentage of funded claims. The remaining customer property would be
allocated to those two account classes so that the funded balance for
each such account class remains equal. This would continue until the
funded balance percentage of those two account classes is equal to the
funded balance of the account class with the next lowest percentage of
funded claims, and so
[[Page 19379]]
forth, until all account classes within the customer class are fully
funded.
Section 190.18(e) confirms, however, that where the debtor DCO has,
prior to the order for relief, kept initial margin for house accounts
in accounts without separation by account class, then member property
will be considered to be in a single account class.
Section 190.18(f) reserves the right of the trustee to assert
claims against any person to recover the shortfall of property
enumerated in Sec. 190.18(b)(1)(i)(E) and (b)(1)(ii) and (iii).
Paragraph (f) is analogous in the DCO context to Sec. 190.09(a)(3) in
the context of FCMs. The purpose of paragraph (f), as with Sec.
190.09(a)(3), is to clarify that any claims that the trustee may have
against a person to recover customer property will not be undermined or
reduced by the fact that the trustee may have been able to satisfy
customer claims by other means.
The Commission requested comment with respect to all aspects of
proposed Sec. 190.18. The Commission raised a specific question about
the comprehensiveness of the scope of customer property for a clearing
organization in proposed Sec. 190.18(b). The Commission also asked
specifically about the appropriateness of the proposed allocation of
customer property between customer classes in proposed Sec. 190.18(c)
and within customer classes in proposed Sec. 190.18(d).
The Commission received several comments on the proposal. Whereas
some commenters supported the proposal, in whole or in part, others
raised concerns particularly with respect to the scope of customer
property in proposed Sec. 190.18(b) and the treatment of guarantee
fund deposits and other payments in proposed Sec. 190.18(c)(1), among
other issues.
ICI commented in support of the proposal and agreed with the
Commission that the proposal is necessary to further the policy in
section 766(h) of the Bankruptcy Code of prioritizing the claims of
public customers over the claims of non-public customers. ICI stated
that public customers need the proposed protections because they
``typically have no direct participation in the DCO's risk management
and no insight into the transactions other customers have with the
DCO.'' ICI also stated that public customers may have less access to
information concerning the DCO's financial health, and may have fewer
tools available to protect themselves against losses, when compared to
DCO members.
The ABA Subcommittee commented that the treatment of clearing
members' guaranty fund deposits and similar payments in proposed Sec.
190.18(c)(1) represents a ``significant policy change'' with
``significant competing policy considerations and complex issues'' that
warrant consideration outside of the Proposal. The ABA Subcommittee
contended, for example, that such payments ``may be exposed to risk in
asset classes in which [the clearing member] does not trade, and which
the clearing member does not expect to assume based on the DCO's
rules.'' Without taking a formal position on the proposal, the ABA
Subcommittee identified issues that it believed warrant further
attention by the Commission and market participants, including whether
the language in paragraph (c)(1): (a) Should be implemented ``through a
Part 190 rule that would have the effect of overruling inconsistent DCO
rules,'' or through an amendment to part 39 to require DCOs ``to have
loss allocation rules that align with [the] policy change''; (b) would
place U.S. DCOs ''at a competitive disadvantage to non-U.S. DCOs''; (c)
would ``discourage firms from becoming or remaining direct clearing
members of a DCO for the purpose of clearing trades solely for their
own account or for non-public customers''; and/or (d) would ``create a
risk that U.S. banking regulators will want to revisit the methodology
for determining the amount of regulatory capital that bank and bank-
affiliated clearing members must hold with respect to cleared
derivatives.'' The ABA Subcommittee therefore recommended that the
Commission maintain the status quo by revising proposed Sec.
190.18(c)(1) ``to confirm that customer property described in Rule
190.09(b)(1) will be allocated to member property after such property
is applied to cover losses in accordance with the DCO's rules . . .
[until] the Commission separately considers the merits of the
[proposed] policy change.''
SIFMA AMG/MFA requested that the Commission amend proposed Sec.
190.18(b)(1) to provide explicitly ``that customer property includes
property a debtor DCO contributes to its default waterfall,'' as
seemingly was intended by proposed Sec. 190.18(b)(1)(ii)(E).
Consistent with its comments on proposed Sec. 190.17(b), FIA
commented that customer property should not include guaranty fund
deposits as set forth in proposed Sec. 190.18(b)(1)(iii) and
recommended that the Commission remove that provision. FIA stated that
a ``default fund represents a multilateral indemnification arrangement
between the DCO and its members pursuant to which members'
contributions are used to cover the DCO's losses resulting from member
default(s) and thereby prevent the DCO's bankruptcy.'' FIA contended
that a DCO has no authority under its rules, and a trustee has no
authority under the Bankruptcy Code, ``to request or to apply these
funds for any other purpose.''
CME commented in support of the decision to set forth the elements
that comprise customer property in proposed Sec. 190.18(b)(1). CME
specifically agreed that the scope of customer property should include
any guaranty fund deposit, assessment or similar deposit made by a
clearing member or recovered by the trustee, to the extent any remains
following administration of the debtor's default rules and procedures,
and any other property of a member available under the debtor's default
rules and procedures to satisfy claims made by or on behalf of pubic
customers of a member. For clarity and transparency, CME encouraged the
Commission to expand the scope of customer property to explicitly
include the amounts that the DCO commits to the financial resources in
the waterfall under its rules, to the extent that those resources have
not already been applied under the DCO's default rules. CME stated,
however, that the Commission should eliminate the requirement set forth
in proposed Sec. 190.18(c)(1) that the payments described in proposed
Sec. 190.18(b)(1) be allocated to customer property other than member
property for use ``to cover a shortfall in the funded balances for
clearing members' customer accounts in any account class'' and,
instead, ``reaffirm that guaranty fund deposits are to be applied to
cover losses in accordance with the DCO's rules, with any remaining
funds allocated to member property.'' In support of its view, CME
stated that such requirement set forth in proposed Sec. 190.18(c)(1):
(1) Would materially change ``the definition of member property in
current Regulation 190.10, under which any guaranty funds remaining
after payments in accordance with the DCO's rules would be returned to
clearing members as member property''; (2) ``may significantly alter
how clearing members assess the risks they have assumed in joining
CME,'' by undermining CME's ``rules limiting use of clearing members'
guaranty fund deposits to cover losses in the relevant product class to
which they have contributed to the guaranty fund and in which they
participate''; and (3) would ``compromise CME's ability under
Regulation 39.27 to `operate pursuant to
[[Page 19380]]
a well-founded, transparent, and enforceable legal framework that
addresses each aspect' of CME's obligations as a DCO, including netting
arrangements and `other significant aspects' of CME's `operations, risk
management procedures, and related requirements' as a DCO.'' \193\ CME
also asserted that: (a) Proposed Sec. 190.18(c)(1) ``is vulnerable to
legal challenge as exceeding the Commission's authority'' in section 20
of the CEA, because such authority is not being exercised consistent
with the Bankruptcy Code and other provisions of the CEA; \194\ (b) the
Commission does not have the authority under the CEA ``to adopt rules
that have the effect of directly rewriting a DCO's rules,'' and that
doing so would be contrary to the reasonable discretion afforded to
DCOs under section 5b of the CEA to comply with DCO core principles and
Commission regulations; (c) the Commission may not alter or supplement
the rules of a registered entity until it satisfies the requirement
under section 8a(7) of the CEA to request that the registered entity
amend its rules and provide the registered entity with notice and an
opportunity for a hearing if it does not do so; (d) amending the
contract between and among clearing members and the DCO through a
Commission regulation ``would call into question . . . the
enforceability of the DCO's rules''; and (e) ``a proposed rule
impacting the manner in which bank or bank-affiliated clearing members'
guaranty fund deposits and assessment obligations can be utilized may
drive subsequent changes to the methodology and resulting amount of
capital such members must hold for those exposures under the Cleared
Transactions Framework in the Regulatory Capital Rules.''
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\193\ Emphasis in original.
\194\ CME commented that the proposal would be contrary to the
Bankruptcy Code's definition of ``member property'' as ``customer
property received, acquired, or held by or for the account of a
debtor that is a clearing organization, from or for the proprietary
account of a customer that is a clearing member of the debtor.''
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ICE agreed with the Commission's approach not to propose ``that
property in an insolvent DCO's general estate can be treated as
customer property where customer property is otherwise insufficient to
pay customer claims.'' ICE suggested that the Commission clarify ``that
any ability to use residual assets should be only to the extent such
assets are not required to be used for any other purpose under other
applicable law (e.g.[,] for other classes of customers or for other
products).'' ICE suggested that ``[t]he definition of customer property
should also respect any express limitations on recourse that have been
implemented under DCO rules.'' ICE did not believe that the
distributional preference for public customers over clearing members
and any non-public customers of clearing members, as established by
proposed Sec. 190.18, is appropriate in the context of a DCO failure,
because it could ``impose losses, or greater losses, on non-defaulting
clearing members in a manner that overrides the negotiated and approved
frameworks in the DCO's rules.'' ICE asserted that this ``change could
require fundamental restructuring of DCO operations,'' and should be
``part of a separate rulemaking that addresses the interaction [of the
proposal] with the Part 39 requirements.'' ICE also noted that the
liability caps that limit the overall amount of a clearing member's
contributions and assessments--and the manner in which they may be used
for a particular default--are important for the clearing members' risk
management and are often necessary under such clearing members' capital
requirements. ICE stated that requiring the use of contributions or
assessments for purposes other than what is set forth in the DCO's
rules ``would render such caps and limitations ineffective.'' ICE
further posited that proposed Sec. 190.18 is ``unworkable for clearing
houses that have separate guaranty funds for separate products, or
other limited recourse provisions in their rulebooks [that are used] to
designate particular default resources for particular products, and to
ring-fence the liability of clearing members from particular products
that they may choose not to clear.'' ICE also raised a concern that
proposed Sec. 190.18's potential subordination of the claims of the
self-clearing members of a defaulting DCO to customers of other
clearing members could serve as a ``significant disincentive'' to self-
clearing, sponsored clearing, or direct clearing. ICE commented that
proposed Sec. 190.18 ``should not be applied to require the use of
clearing member guarantee fund, margin, or other resources in the
context of a non-default loss where the rules of the DCO specifically
do not contemplate (or expressly forbid) the use of such assets for
such purposes.'' On that issue, ICE noted that many DCOs have sought to
address separately the allocation of non-default losses through rules
that ``may allocate certain losses, and not others, to clearing members
and/or to the clearing organization itself, and/or provide for the
sharing of certain losses in certain amounts.''
After considering the comments, the Commission is adopting Sec.
190.18 with modifications, specifically with respect to paragraphs
(b)(1) and (c)(1).
Multiple commenters suggested that the Commission modify Sec.
190.18(b)(1) to make explicit that customer property includes the
amounts of its own funds that a debtor DCO had committed as part of its
loss allocation rules. Given that the DCO's commitment, in DCO rules,
of a specified amount of its own funds to loss allocation sets a
market-wide understanding and expectation that such an amount will be
used for such a purpose, the Commission agrees that this clarification
is warranted. Therefore, the Commission is modifying Sec. 190.18(b)(1)
by adding a new paragraph (b)(1)(iv), which will explicitly include in
customer property: ``Amounts of its own funds that the debtor had
committed as part of its loss allocation rules, to the extent that such
amounts have not already been applied under such rules.''
Multiple commenters addressed proposed Sec. 190.18(c)(1)(i), which
assigned guarantee funds to customer property other than member
property (i.e., to the benefit of members' public customers) if and to
the extent that a shortfall existed in the funded balance for such
customers. The proposal was supported by ICI, but opposed by CME, FIA,
and ICE, while the ABA Subcommittee also noted potential issues.
The Commission separately considered each of the arguments raised
by the commenters in opposition to proposed Sec. 190.18(c)(1). In the
discussion below, the Commission reviews the arguments raised by the
commenters and explains why it is modifying the proposal by not
adopting proposed Sec. 190.18(c)(1), and renumbering the remaining
paragraphs of proposed Sec. 190.18(c).
In response to concerns that the Commission lacks the authority to
implement this provision, the Commission notes that it has the
authority under section 20(a)(1) of the CEA to determine,
``[n]otwithstanding title 11 of the United States Code'' (i.e., the
Bankruptcy Code) both ``(1) that certain . . . property [including,
e.g., guarantee fund deposits] [is] to be included in or excluded from
. . . member property'' and ``(5) how the net equity of a customer is
to be determined.'' Thus, Sec. 190.18(c)(1) is legally sound because
of the ``notwithstanding title 11'' clause in section 20 of the CEA.
Moreover, proposed Sec. 190.18(c)(1) would allocate guarantee fund
deposits to customer property other than member
[[Page 19381]]
property only where the funded balance is less than one hundred percent
of net equity claims for members' public customers in an account class,
i.e., where the DCO had failed to maintain in segregation sufficient
funds to pay members' public customer account balances in full. In
other words, in that scenario, the debtor DCO would be non-compliant
with Commission regulations. This is not a re-writing of the DCO's
rules,\195\ nor a re-writing of the contract between the DCO and its
members, nor an undermining of the DCO's ``well-founded, transparent,
and enforceable legal framework,'' but an allocation of shortfall in a
bankruptcy case where the DCO is non-compliant with Commission
regulations.
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\195\ And, thus, does not require the Commission to invoke or
follow the procedures of CEA section 8(a)(7).
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The use of guarantee funds in the manner specified in proposed
Sec. 190.18(c)(1) would not be an ``unexpected loss'' to non-
defaulting clearing members, given that the regulation would be
transparently available to all. To the extent that the consequences of
the application of the regulation (re-allocation of their default fund
contributions to cover a shortfall in customer property for members'
public customers) would be unexpected by clearing members, and
unpredicted by their risk management systems, it is equally the case
that the public customers of clearing members would be surprised by a
shortfall in customer property, which their risk management systems
would also see as unexpected.\196\ Thus, the choice is not simply
whether to impose an unexpected loss to clearing members or not, but
rather a choice of who should bear that unexpected loss, clearing
members (as a group) or their customers (as a group). To that point, in
addition to the statutory authority that is provided in the CEA, the
Commission agrees with the comment from ICI that Sec. 190.18(c)(1)
would further the policy goal--stated in section 766(h) of the
Bankruptcy Code, but also running throughout the Commission's approach
to part 190--of prioritizing the claims of public customers over the
claims of non-public customers.
---------------------------------------------------------------------------
\196\ Indeed, the risk would be even more unexpected by public
customers: Clearing members are entirely aware that their default
fund contributions are at risk of use to cover a mutualized default.
Their customers, on the other hand, expect that their customer funds
are fully protected by the CEA's and the Commission's segregation
requirements.
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However, despite the foregoing analysis supporting adoption of
Sec. 190.18(c)(1), the Commission is concerned about bank regulators'
potential analysis of Sec. 190.08(c)(1). In particular, the Commission
has considered that bank regulators may conclude that, because Sec.
190.08(c)(1) directs the use of DCO default funds for reasons other
than addressing mutualized member defaults, member contributions to DCO
default funds do not fit within the definition (in bank capital
regulations) of ``default fund contribution,'' see, e.g., 12 CFR 217.2.
Specifically, such member contributions may not constitute ``funds
contributed or commitments made by a clearing member to a CCP's
mutualized loss sharing arrangement,'' see, e.g., id. If this were the
case, members' default fund contributions would be subject to more
onerous capital treatment than they would receive if such contributions
did fit within the definition of ``default fund contributions.'' \197\
That more onerous capital treatment would have a direct, negative
impact on normal day-to-day activities for bank-affiliated clearing
members, and not merely in the uncertain future event of a DCO
bankruptcy. In other words, as discussed further below in section
III.D.8, while the benefits to public customers of Sec. 190.18(c)(1)
in case of bankruptcy would be balanced by the costs to clearing
members, the present-day costs to (bank-affiliated) clearing members of
more onerous capital treatment would not be offset by significant
benefits to public customers.
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\197\ That treatment could be significantly more onerous: For
example, under the FDIC's regulations, the capital requirement for a
clearing member's prefunded default fund contribution to a
qualifying CCP can be as low as 0.16% of that default fund
contribution. See 12 CFR 324.133(d)(4). By contrast, the capital
requirement for a clearing member's prefunded default fund
contribution to a non-qualifying CCP is 100% of that default fund
contribution. See 12 CFR 324.10(a)(1)(iii), (b)(3) (requiring
capital of 8% of risk-weighted asset amount, 324.133(d)(2) (setting
risk-weighted asset amount for default fund contributions to non-
qualifying CCP at 1,250% of the contribution). (1,250% * 8% = 100%).
The Federal Reserve and Office of the Comptroller of the Currency
have similar regulations.
Default fund contributions to DCOs total many billions of
dollars. While not all default fund contributions to DCOs come from
bank-affiliated clearing members, the majority of them do.
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The Commission acknowledges that the decision not to adopt proposed
Sec. 190.18(c)(1) differs from the Commission's approach to Sec.
190.17(b)(1). In Sec. 190.17(b)(1), uncalled or unmet assessments
would be applied to address default losses, with the only difference
being the timing of the bankruptcy relative to the timing of the calls
for, or payment of, the assessments. In short, the Commission concludes
in that context that the default fund contributions would be treated as
such for bank capital purposes, and thus would not be subject to more
onerous capital treatment. In contrast, proposed Sec. 190.18(c)(1)
would apply guarantee funds to cases that are distinct from a member
default. As discussed above, it seems entirely plausible that doing so
would take such contributions outside of the definition (in bank
capital regulations) of ``default fund contribution,'' and thus subject
them to more onerous capital treatment. The Commission believes that
this distinction is significant and forms the basis for the difference
in the Commission's respective approaches to Sec. 190.17(b)(1) and
proposed Sec. 190.18(c)(1).
Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is adopting Sec. 190.18 as
proposed, with the following modifications, as set forth above: (1)
Adding new paragraph (b)(1)(iv), as described above; and (2) by
removing paragraph (c)(1) and renumbering the remaining paragraphs of
paragraph (c).
9. Regulation Sec. 190.19: Support of Daily Settlement
The Commission is adopting Sec. 190.19 as proposed, with a
modification to paragraph (b)(1), as discussed below.
As the Commission noted in proposing Sec. 39.14(b), ``[t]he daily
settlement of financial obligations arising from the addition of new
positions and price changes with respect to all open positions is an
essential element of the clearing process at a DCO.'' \198\ Indeed,
Congress confirmed this by requiring that each DCO complete money
settlements not less frequently than once each business day.\199\
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\198\ 76 FR 3608, 3708 (Jan. 11, 2011).
\199\ See Core Principle E(i), 7 U.S.C. 7a-1(c)(2)(E)(i).
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In the ordinary course of business, variation settlement payments
are, at a set time or times each day,\200\ sent to the DCO from the
customer and proprietary accounts of each clearing member with net
losses in such accounts (since the last point of computation of
settlement obligations for that member), and then sent from the DCO to
the customer and proprietary accounts of each clearing member with net
gains in such accounts over that time period.
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\200\ DCOs are required to effect settlement with each clearing
member at least once each business day. They are additionally
required to have the capability to effect a settlement with each
clearing member on an intraday basis. See Sec. 39.14(b).
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There is no necessary relationship between the aggregate amount of
payments to the DCO from all clearing
[[Page 19382]]
member customer accounts with net losses and the aggregate amount of
payments from the DCO to clearing members' customer accounts with net
gains. On the other hand, it is the case that, for each business day,
the sum of variation settlement payments to the clearinghouse from
clearing members' customer and house accounts with net losses will
equal the sum of variation settlement payments from the clearinghouse
to clearing members' customer and house accounts with net gains.\201\
Those variation settlement payments will be received into the DCO's
accounts at one or more settlement banks from the accounts of the
clearing members with net losses and subsequently be disbursed from the
DCO's accounts at settlement banks to the accounts of the clearing
members with net gains.\202\ Depending on the settlement bank and
operational arrangements of the particular DCO, the variation
settlement funds will remain in the DCO's accounts between receipt and
disbursement for a time period of between several minutes and several
hours.
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\201\ Thus, while (for each settlement cycle), customer account
losses (x) plus house account losses (y) will equal customer account
gains (p) plus house account gains (q) (that is, x + y = p + q), x
would only equal p by random chance.
\202\ In some cases, the DCO will use one settlement bank, and
all settlement funds will flow into and out of that bank. In other
cases, the DCO may use a system of settlement banks, and the DCO
may, after receiving payments from members with payment obligations,
move funds between and among the settlement banks (possibly through
a ``concentration bank'') to match the settlement funds at each bank
to the DCO's settlement obligations to members who are entitled to
settlement payments.
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The Commission believes that it is crucial to the settlement
process that the variation settlement payments that flow into the DCO
from accounts with net losses are available promptly to flow out of the
DCO as variation settlement to accounts with net gains.
The Commission is adopting Sec. 190.19(a), pursuant to section
20(a)(1) of the CEA,\203\ to provide that, upon and after an order for
relief, variation settlement funds shall be included in the customer
property of the DCO, and that they shall be considered traceable to--
and shall promptly be distributed to--member and customer accounts
entitled to payment with respect to the same daily settlement.\204\
This customer property would be allocated to (i) member property and
(ii) customer property other than member property, in proportion to the
ratio of total gains in member accounts with net gains, and total gains
in customer accounts with net gains, respectively.
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\203\ 7 U.S.C. 24(a)(1) (``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 . . . that certain cash,
securities, other property, or commodity contracts are to be
included in or excluded from customer property or member
property.'').
\204\ Because deposits of initial margin described in Sec.
39.14(a)(1)(iii) are separate from the variation settlement process,
they are treated separately in Sec. 190.19(a). Such funds would be
member property to the extent that they are deposited on behalf of
members' house accounts, and customer property other than member
property to the extent that they are deposited on behalf of members'
customer accounts.
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The Commission is adopting Sec. 190.19(b) to address cases where
there is a shortfall in funds received pursuant to paragraph (a) (i.e.,
settlement payments received by the DCO), such as in the case of a
member default. Paragraph (b)(1) sets forth how such a shortfall shall
be supplemented, to the extent necessary, and further states that such
funds shall be allocated in the same proportion as referred to in
paragraph (a). Paragraph (b)(1) provides that four types of property
shall be included as customer property: (i) Initial margin held for the
account of a member that has defaulted on a daily settlement, including
initial margin segregated for the customers of such member; \205\ (ii)
Assets of the debtor to the extent dedicated to such use as part of the
debtor's default rules and procedures, or as part of any recovery and
wind-down plans described in the paragraph (a) (i.e., the debtor DCO's
``skin in the game''); (iii) Prefunded guarantee or default funds
maintained pursuant to the DCO debtor's default rules and procedures;
and (iv) Payments made by members pursuant to assessment powers
maintained pursuant to the debtor DCO's default rules and procedures.
Paragraph (b)(2) provides that, to the extent that the funds that are
included as customer property pursuant to paragraph (a), supplemented
as described in paragraph (b)(1), such funds would be allocated between
(i) member property; and (ii) customer property other than member
property, in proportion to the ratio of total gains in member accounts
with net gains, and total gains in customer accounts with net gains,
respectively.
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\205\ This is restricted to the extent that such margin may only
be used to the extent that such use is permitted pursuant to parts
1, 22, and 30 of the Commission's regulations, which include
provisions restricting the use of customer margin.
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The Commission requested comment with respect to all aspects of
proposed Sec. 190.19.
CME expressed support for proposed Sec. 190.19, commenting that
the provisions in the proposal ``are appropriate to support the daily
settlement cycle when the trustee obtains the Commission's approval to
continue operating the DCO.'' FIA commented that it did not support
proposed Sec. 190.19(b), stating that the provision's reliance on a
debtor DCO's recovery and wind-down plans post-bankruptcy would be
inappropriate.\206\ SIFMA AMG/MFA requested that the Commission modify
proposed Sec. 190.19(b)(1) to clarify the Commission's presumed intent
that ``the debtor's recovery and wind-down plans shall only apply with
respect to proposed Sec. 190.19(b)(1)(ii)--the debtor's ``skin in the
game'' [(i.e., its own capital contributions)]--and not with respect to
the other'' categories of customer property that are enumerated in
Sec. 190.19(b)(1). The Commission agrees that its intent should be
clarified to reflect the comment from SIFMA AMG/MFA,\207\ and is
modifying the language of Sec. 190.19 to reflect that clarification.
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\206\ FIA's concerns with the language in Sec. 190.19(b) are
the same as its concerns with Sec. 190.15(b) and (c), discussed in
greater detail above. See supra section II.C.5. However, for the
reasons noted in section II.C.5, the Commission believes that
providing a ``menu of options'' among which a trustee may select
(and adapt) in a manner that is ``reasonable and practicable'' would
provide the trustee with a helpful roadmap to determine strategy and
tactics, given that the trustee will likely face a complex and
difficult situation with little preparation.
\207\ As SIFMA AMG/MFA correctly suggested, the Commission
intends for the debtor DCO's recovery and wind-down plans to apply
to the property described in Sec. 190.19(b)(1)(ii), and not to the
property described in paragraph (b)(1)(i), (iii) or (iv), in the
manner and to the extent described in paragraph (b)(1). As noted in
the preamble to the proposal, and as found in the regulation itself,
Sec. 190.19(b)(1)(ii) contains an explicit reference to ``recovery
and wind-down plans,'' whereas Sec. 190.19(b)(1)(i), (iii) and (iv)
do not contain such references.
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Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is adopting Sec. 190.19 as
proposed, with a modification to clarify that the reference to the
debtor's recovery and wind-down plans in paragraph (b)(1) applies only
to paragraph (b)(1)(ii), as set forth above.
D. Appendix A Forms
The Commission is deleting forms 1 through 3 contained in appendix
A and is replacing form 4 with a streamlined proof of claim form.
Current forms 1 through 3 contain outdated provisions that require
unnecessary information to be collected. The Commission believes these
changes will provide a trustee with flexibility to act based on the
specific circumstances of the case, while still acting consistently
with the rules.
As noted in Sec. 190.03(f), the trustee will be permitted, but not
required, to use the revised template proof of claim form included as
new appendix A. That
[[Page 19383]]
template is intended to implement Sec. 190.03(e), and includes cross-
references to the detailed paragraphs of that section. Similarly, the
instructions for this template form that are included in appendix A are
also designed to aid customers in providing information and
documentation to the trustee that will enable the trustee to decide
whether, and in what amount, to allow each customer's claim consistent
with part 190.
The Commission received one comment with respect to appendix A,
from CME, which opined that ``the proposed template proof of claim form
included as Appendix A [is a] major improvement[ ] over the current . .
. proof of claim template. CME also support[ed] giving the trustee the
flexibility to tailor the proof of claim form to request information of
customers as appropriate under the circumstances.''
Accordingly, after consideration of this comment, and for the
reasons stated above, appendix A to part 190 will be adopted as
proposed.
E. Appendix B Forms
Appendix B to part 190 contains special bankruptcy distribution
rules. These rules are broken into two frameworks. Framework 1 provides
special rules for distributing customer funds when the debtor FCM
participated in a futures-securities cross-margining program that
refers to that framework. Framework 2 provides special rules for
allocating as shortfall in customer funds to customers when the
shortfall is incurred with respect to funds held in a depository
outside the U.S. or in a foreign currency.
The Commission proposed clarifying changes to framework 1. No
comments were received with respect to framework 1. Accordingly, and
for the reasons stated above, the Commission is adopting appendix B,
framework 1 as proposed.
The Commission proposed to retain framework 2 with some clarifying
changes to the opening paragraph, but without proposing any substantive
change. It proposed to retain the current instructions and examples
following the first paragraph in appendix B, framework 2 entirely
unchanged. It requested comment with respect to framework 2. The
Commission received two comments on framework 2: From the ABA
Subcommittee, and from a number of individual members of that
subcommittee writing on their own behalf.
The ABA Subcommittee expressed the concern that ``[f]ramework 2
creates some ambiguity on when and how the special distribution
framework it prescribes should apply.'' First, the ABA Subcommittee
stated that ``framework 2 could be read to apply whenever there is a
loss resulting from a sovereign action, even if there is sufficient
customer property to otherwise pay all customer net equity claims in
full.'' The ABA Subcommittee suggested that an additional sentence be
added to the opening paragraph of framework 2 clarifying that it
applies only when there is a loss due to sovereign action and there is
insufficient customer property to pay all customer net equity claims in
full. Second, the ABA Subcommittee (in conjunction with a clarifying
comment from the Subcommittee Members) noted that framework 2 uses the
term ``reduction in claims'' in a potentially confusing manner--
framework 2 is intended to reduce distributions allocated to those
customers who are allocated losses due to sovereign risk; those
customers claims are not reduced. If the sovereign action is later
reversed or modified, those customers whose distributions were reduced
will receive increased distributions on their claims.
Third, the existing instructions to framework 2 ``establish the
`Final Net Equity Determination Date' as the date for both converting
customer claims to U.S. dollars and determining the amount of the
Sovereign Loss.'' However, in prior bankruptcies of FCM/commodity
brokers, ``claims stated in foreign currencies were either valued on
the date of transfer (where porting was available), or converted to
U.S. dollars as of either as of the petition date or the date on which
the foreign currency reflected in the customer's account was liquidated
(and thus the customer bore the risk of interim currency
fluctuations).'' Furthermore, ``a sovereign action could take place at
any time after the petition date, and the trustee is required to make
funded balance calculations throughout the course of the bankruptcy
case for purposes of porting and/or making interim distributions.''
The Commission finds the comments on framework 2 of the ABA
Subcommittee, as clarified by the comment of the Subcommittee Members,
persuasive. First, framework 2 is indeed only intended to address cases
where there is insufficient customer property to pay all customer net
equity claims in the relevant account class in full (if there is no
shortfall, then there is no need to allocate losses), and that point
should be made clear. Second, it is correct that framework 2 is
intended to reduce distributions, it is not intended to reduce claims,
and it is indeed appropriate to change the language used in framework 2
to clarify this fact.\208\ Third, the relevant date is the date of the
calculation, not the ``Final Net Equity Determination Date,'' and this
should be clarified as well.
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\208\ The fact that sovereign action reduces distributions
rather than claims means that, if the sovereign action is later
reversed or modified (e.g., by appeal in the foreign courts, or due
to recovery of assets in the foreign insolvency proceeding)
resulting in reduced losses due to sovereign action in a particular
jurisdiction, those customers whose distributions have been reduced
due to sovereign action in that jurisdiction will receive increased
distributions on their claims (with those distributions adjusted to
reflect the revised amount of losses due to sovereign action). Thus,
in this case, the claims remain constant, while the distributions
increase.
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Accordingly, the Commission is:
(1) Modifying the first paragraph of framework 2 to include the
statement that: ``If a futures commission merchant enters into
bankruptcy and maintains futures customer funds or Cleared Swaps
Customer Collateral in a depository outside the U.S. or in a depository
located in the U.S. in a currency other than U.S. dollars, and a
sovereign action of a foreign government or court has occurred that
contributes to shortfalls in the amounts of futures customer funds or
Cleared Swaps Customer Collateral, the trustee shall use the following
allocation procedures'' (emphasis added solely for illustration).
(2) Amending the instructions and examples within the whole of
framework 2 to replace references to ``reduction in claims'' with
references to ``reduction in distributions,'' and with conforming
changes to other text.
(3) Deleting the phrase ``Final Net Equity Determination Date''
from current section II.B.2.b of framework 2, and replacing it with the
phrase ``date of the calculation.''
Accordingly, after consideration of the comments, and for the
reasons stated above, the Commission is adopting appendix B, framework
2 as proposed, with the modifications described above.
F. Technical Corrections to Other Parts
1. Part 1
The Commission is making as proposed several technical corrections
and updates to part 1 in order to update cross-references. These are as
follows:
In Sec. 1.25(a)(2)(ii)(B) the Commission will revise the
cross-reference to specifically identifiable property, since the
definition will be updated in Sec. 190.01.
In Sec. 1.55(d) introductory text and (d)(1) and (2),
references to current Sec. 190.06 will be removed consistent
[[Page 19384]]
with the revisions to new Sec. 1.41 (which was proposed as Sec.
190.10(b) and renumbered).
In Sec. Sec. 1.55(f) and 1.65(a)(3) introductory text and
(a)(3)(iii) the Commission will update references to the customer
acknowledgment in Sec. 1.55(p) (which was proposed as Sec. 190.10(e)
and renumbered).
2. Part 4
In part 4, the Commission is making as proposed minor technical
corrections: In Sec. Sec. 4.5(c)(2)(iii)(A), 4.12(b)(1)(i)(C), and
4.13(a)(3)(ii)(A), the Commission will change the cross-references to
the defined term for ``in-the-money-amount.''
3. Part 41
In part 41, the Commission is making as proposed one technical
correction. In Sec. 41.41(d), the Commission will delete the cross-
reference to the recordkeeping obligations in current Sec. 190.06,
pursuant to the revisions to Sec. 1.41 (which was proposed as Sec.
190.10(b) and renumbered).
No comments were received with any of these technical corrections
and accordingly, for the reasons stated above, they are being adopted
as proposed.
G. Additional Comments
In addition to the comments discussed above, the Commission
received several general comments that addressed matters outside the
scope of the Proposal. The Commission appreciates the additional
feedback. Because these comments do not address proposed changes and
are therefore outside the scope of this rulemaking, the Commission may
take the comments under advisement for future rulemakings.
ISDA encouraged the Commission to continue working on DCO recovery
and resolution issues alongside the Federal Deposit Insurance
Corporation (FDIC) in the United States, and with global standard
setters such as CPMI-IOSCO and the Financial Stability Board and other
CCP supervisors and resolution authorities internationally. The
Commission notes that staff are actively doing each of those things.
ISDA also noted that it would be advisable to engage in workshops
with both market participants (including DCOs, FCMs and other clearing
members and customers) and the FDIC prior to finalizing the Proposal to
develop examples that illustrate both how net equity claims would be
calculated in a hypothetical DCO insolvency under various loss
scenarios and how the claims of creditors and equity would be treated
in a resolution of the DCO under Title II of the Dodd-Frank Act. ISDA
observed that the Proposal's treatment of a DCO's insolvency contains
significant subtleties and nuances that could have implications for the
counterfactual in a DCO resolution. ISDA suggested that further
engagement could help ensure that these subtleties and nuances would
not result in any unintended consequences, and that they are broadly
understood by all entities that could be impacted by a DCO's insolvency
or resolution.
While the Commission is finalizing the Proposal, it agrees that
workshops and similar interactions between staff and other agencies, as
well as with industry participants, are an excellent way to expose
subtleties and nuances, build common understanding, and enhance
planning.
CME and CMC commented on various issues relating to delivery, and
requested that ``the Commission consider, in a separate rulemaking, the
merits of imposing custody requirements or other customer protection
requirements with respect to delivery accounts, along with the
possibility of further subdividing delivery accounts and delivery
account classes by underlying asset class or delivery mechanism, e.g.,
electronic transfer versus physical load-out.'' \209\ CME recommended
that the separate rulemaking consider requirements such as whether FCMs
should hold such property in custody accounts or limitations on how
long cash or cash equivalents should be held in delivery accounts that
are not subject to custody requirements.\210\ CME believed that any
such rules would fit best in the Commission's part 1 regulations and
not in part 190 as parties with delivery obligations may not
necessarily be aware of requirements in the bankruptcy regulations. CME
recommended that the part 190 provisions relating to the delivery
account class should be consistent with any such rules the Commission
may ultimately adopt. Thus, CME believed that the Commission may have
to revisit the delivery account class definition, and any appropriate
subdivisions within the account class, along with the definitions of
cash delivery property and physical delivery property definitions,
based on the outcome of such a rulemaking.
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\209\ See CMC, CME.
\210\ See CME. CME believed that the Commission has authority to
adopt such a rule pursuant to its anti-fraud authority under CEA
section 4b and its plenary authority to regulate commodity options
under CEA section 4c(b).
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As noted above, the Commission recognizes the importance of
addressing deliveries and delivery accounts, in order to protect
customer funds in delivery accounts, to avoid disruptions to cash
markets for delivered commodities, and to avoid adverse consequences to
parties that may be relying on delivery taking place in connection with
their business operations. The Commission notes that there potentially
would be benefits to requiring segregation for delivery accounts, but
there would be corresponding costs as well. The Commission expects to
continue its consideration of such delivery and delivery account issues
in the future.
SIMFA AMG/MFA understood the Commission's decision, due to limited
resources, not to amend certain key definitions and concepts outside
part 190, as proposed by the ABA Subcommittee in its model set of part
190 rules, within this rulemaking. These amendments include, e.g., the
definitions of foreign option and variation margin, as well as
regulations concerning non-swap and non-futures over-the-counter
transactions cleared by a DCO and concerning leverage transaction
merchants. However, SIFMA AMG/MFA recommended that the Commission make
these amendments as soon as possible, given the beneficial impact such
changes will have on the administration of an FCM or DCO insolvency.
The Commission may consider these proposed changes in the future.
ICI and Vanguard encouraged the Commission to work with other
regulators to minimize existing barriers to porting, particularly for
FCMs dually registered as broker-dealers, FCMs within consolidated
groups that are subject to certain due diligence requirements, and FCMs
that are subject to the FDIC's Orderly Liquidation Authority
proceedings. The commenters encouraged the Commission to work with
regulators to permit similar six-month grace periods and remove the
requirement to port ``all or none'' of the positions instead of
allowing partial transfers of customer positions, including those of
separately managed accounts.
ICI also recommended that the Commission engage with SIPC or the
relevant bankruptcy court to ensure that any selected trustee has the
experience and knowledge to act in accordance with the duties contained
in part 190 and Subchapter IV of the Bankruptcy Code.
Commission staff have and will continue to work with staff of other
regulators to minimize barriers to
[[Page 19385]]
porting, and have worked and will, if and when necessary in future,
work with SIPC and the office of the U.S. Trustee, to promote the
appointment of the most knowledgeable trustees available in the context
of SIPA or Chapter 7 proceedings, respectively, involving a commodity
broker.
ICI recommended that the Commission continue its portfolio
margining harmonization efforts with the SEC to further facilitate
portfolio margining, including with respect to security-based swaps and
swaps. The Commission notes that the two Commissions are actively
engaging in such efforts, and, on October 22, 2020, held a joint
meeting during which they jointly approved a ``Request for Comment:
Portfolio Margining of Uncleared Swaps and Non-Cleared Security-Based
Swaps.'' \211\
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\211\ 85 FR 70536 (November 5, 2020).
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ICI and Vanguard recommended that the Commission extend the
``legally segregated operationally commingled'' (``LSOC'') model
applied to cleared swaps contracts (and associated collateral) within
part 22 to also apply to futures, foreign futures, and options thereon
(and associated collateral) to limit non-defaulting customer exposure
to defaulting customers.
ICI also requested that the Commission or Commission staff provide
guidance, such as an interpretive letter, that interprets part 22 to
require that OTC transactions cleared by DCOs and carried in a cleared
swaps account be treated as cleared swaps subject to part 22.\212\
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\212\ Such an interpretation may be superfluous. Previously, the
Commission issued an ``Interpretative Statement Regarding Funds
Related to Cleared-Only Contracts Determined To Be Included in a
Customer's Net Equity.'' 73 FR 57235 (October 2, 2008). At the time,
prior to Dodd-Frank, there were questions as to whether cleared-only
transactions were commodity contracts. The Commission noted that, in
cases where such contracts are held in a futures account at an FCM
and margined as a portfolio with exchange-traded futures, assets
margining that portfolio are likely to be includable within ``net
equity'' even if such contracts were found not to be commodity
contracts: Where the assets in an entity's account collateralize a
portfolio containing both commodity contracts and other contracts,
the entirety of those serves as performance bond for each type of
contracts. See id. at 57236. See also 17 CFR 22.1 (defining
``Cleared Swaps Customer Collateral,'' in relevant part, as all
property that ``[i]s intended to or does margin, guarantee, or
secure a Cleared Swap . . . .'').
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ICI and Vanguard recommended that the Commission prohibit non-
defaulting customer gains haircutting, or any other margin haircutting,
and if such gains haircutting is allowed at all, it should be limited
in scope and duration, overseen by the DCO's resolution authority and/
or the systemic risk authority, and the customer must receive full
compensation in the form of a credit or equity claim against the DCO,
superior to that of other creditors.
ICI and Vanguard also requested that the Commission require DCOs to
increase their ``skin-in-the-game'' as a foundational incentive for the
DCO to set appropriate margin levels and avoid clearing illiquid or
highly volatile products. Vanguard also recommended that a DCO's
capital should be required to backstop clearing risk, should the assets
available for DCO recovery prove inadequate.
FIA requested that the Commission confirm that amendments to part
190, including to appendix B, framework 2, would not prohibit the
Commission from amending Sec. 1.49 at a later date to expand the
definition of ``money center currency.''
The Commission confirms that the amendments to part 190 that are
being made herein will not prohibit the Commission from amending any
other regulation, including Sec. 1.49, in the future. If future
amendments to other parts of the Commission's regulations lead to a
situation where it would be advisable to make conforming changes to
part 190, the Commission will consider such conforming changes along
with those amendments.
H. Supplemental Proposal
In the Supplemental Proposal, the Commission noted a problem to be
solved: There is a possibility that a SIDCO could file for bankruptcy
before the process for placing that SIDCO into Title II resolution is
complete. Due to closeout netting rules adopted by many DCOs, including
the SIDCOs, that filing could have the consequence of terminating all
of the SIDCO's cleared contracts. Terminating those contracts could
undermine the success of any subsequent Title II resolution.
The Supplemental Proposal suggested one approach to solve the
problem, and requested comment, inter alia, on better ways to do so. In
light of concerns raised in the comments received in response to the
Supplemental Proposal, and for reasons discussed below, the Commission
has determined not to finalize the alternative that was proposed in the
Supplemental Proposal.
The process for placing a financial company into Title II
Resolution is deliberate and intricate.\213\ By contrast, a voluntary
petition in bankruptcy commences the case, which in turn constitutes an
order for relief. Accordingly, there exists a possibility that, in the
highly unlikely event that a SIDCO would consider bankruptcy, the SIDCO
could file for bankruptcy before a process to place that SIDCO into a
Title II Resolution would have completed. While the appointment of the
FDIC as receiver under Title II would automatically result in the
dismissal of the prior bankruptcy, if the bankruptcy filing were to
necessarily result in the termination of the SIDCO's derivatives
contracts with its members, that would undermine the potential success
of any subsequent Title II Resolution.
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\213\ In the case of a SIDCO, this would include a written
recommendation by each of the FDIC and the Federal Reserve covering
eight statutory factors. Following that recommendation, the
Secretary of the Treasury would then need to make a determination,
in consultation with the President, that each of seven statutory
factors is met. (The FDIC, Federal Reserve, and Secretary of the
Treasury are often referred to as the ``key turners'' for Title II
resolution). Following such a determination, the board of directors
of the financial company may acquiesce or consent to the appointment
of the FDIC as receiver, or there may be a period of judicial review
which may extend to 24 hours.
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To address the problem, the Commission proposed, in the
Supplemental Proposal, to adopt a provision that would stay the
termination of SIDCO contracts for a brief time after bankruptcy in
order to provide advance notice to the Commission (and, thus, to enable
the Commission to notify the key turners) of the point at which the
SIDCO's contracts could be terminated, in order to foster the success
of a Title II resolution by avoiding that termination, if the FDIC is
appointed receiver in such a Resolution within that time. During this
stay, variation margin would neither be collected nor paid. Due to
concerns raised by commenters to the original Proposal regarding the
effect of any restriction on termination of DCO contracts on treatment,
under the capital regulations of Prudential Regulators of the banks
that many clearing members are affiliated with, of SIDCO rules, the
proposal provided that this provision would become effective only if
the Commission were to find that the Prudential Regulators (i.e., the
Federal Reserve, the FDIC, and the Office of the Comptroller of the
Currency) have taken steps to make such a stay consistent with SIDCO
rules retaining status as QMNAs.\214\
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\214\ Any stay (in bankruptcy) on the termination of the SIDCO's
derivatives contracts would--under the regulations of the Prudential
Regulators of the banks and bank holding companies that SIDCO
clearing members may be affiliated with or part of--be inconsistent
with the status of a DCO's rules as a qualifying master netting
agreement (``QMNA''). Qualification of DCO rules as a QMNA is
necessary in order for the banks and bank holding companies that
clearing members are affiliated with or part of to net the exposures
of their contracts cleared with the DCO in calculating bank capital
requirements. If they cannot net such exposures, there would be
significantly increased bank capital requirements associated with
such contracts. Such an increase in bank capital requirements would
disrupt both proprietary and customer clearing. See generally
Supplemental Proposal, 85 FR 60110, 60112 (Sept. 24, 2020).
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[[Page 19386]]
The Commission requested comment on all aspects of the Supplemental
Proposal, including as to whether the approach proposed ``is the best
design for such a solution.''
The Commission received five comments on the Supplemental Proposal,
each of which was from an entity that commented on the Proposal.\215\
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\215\ Comments on the Supplemental Proposal were submitted by:
CME Group Inc. (``CME (2)''); Futures Industry Association (``FIA
(2)''); Intercontinental Exchange Inc. (``ICE (2)''); Investment
Company Institute (``ICI (2)''), and Securities Industry and
Financial Markets Asset Management Group and Managed Funds
Association (``SIFMA AMG/MFA (2)'').
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Many of the commenters argued that the proposed stay is
unnecessary, because the Commission would inevitably have received
notice of the impending bankruptcy. For instance, ICI (2) commented
that:
Although it may indeed take some time for the relevant agencies
to ``turn the three keys,'' a DCO's recovery tools should give the
agencies more than enough time. DCOs have clearing fund provisions,
operational default provisions, and a variety of other risk
management tools at their disposal. In practice, these tools may not
be completely effective to preclude an insolvency. However, it seems
extraordinarily unlikely that they would be so ineffective as to
fail to give the FDIC, Federal Reserve Board, and Secretary of the
Treasury enough time to decide whether to trigger OLA proceedings.
Similarly, SIFMA AMG/MFA (2) stated that ``the possibility of a
surprise bankruptcy filing [is] implausible given the regulatory
oversight framework.''
FIA (2) agreed, stating that:
A determination with regard to invoking Title II will almost
certainly be made before a SIDCO is subject to an order for relief.
. . . [W]e fully anticipate that the Commission, the FRB, the FDIC,
and the Department of the Treasury will be making an assessment
regarding the necessity and feasibility of recommending that the
President invoke Title II and taking appropriate action before the
SIDCO concludes that it must file a petition for bankruptcy.
CME (2) argued that:
under the CEA oversight framework, including a SIDCO's reporting
obligations, surely it is reasonable to expect that the Commission,
FDIC, FRB and Treasury will be well aware of any circumstances that
could portend a SIDCO's failure, whatever the cause, and will be
closely monitoring the situation. If the relevant parties are
contemplating placing the SIDCO into a Title II resolution
proceeding, and doing so is feasible, it is hard to imagine that a
SIDCO could file a voluntary petition for relief under subchapter IV
of Chapter 7 of the Bankruptcy Code without their prior knowledge.
* * *
In the highly unlike event a SIDCO were to face a decision
whether to file for bankruptcy, it would be one of last resort,
taken only after careful deliberation. The decision to file a
voluntary petition for relief is certainly not one that CME, or any
DCO, would take lightly.
The Commission agrees that, pursuant to the DCO oversight
framework, including a SIDCO's reporting obligations under Sec. 39.19,
the Commission would promptly be notified of a DCO's financial
distress. Upon learning of such distress--whether through notification
by the DCO or by risk surveillance by Commission staff--the Commission
and staff would monitor the situation closely, and, in appropriate
cases, promptly contact and act in coordination with fellow regulators,
including the Federal Reserve and FDIC (and, as appropriate, the
Department of the Treasury). Moreover, DCOs have strong and effective
``clearing fund provisions, operational default provisions, and other
risk management tools at their disposal,'' as noted in the comment
letter from ICI (2). The Commission believes it to be ``extraordinarily
unlikely'' that these tools would fail, let alone fail before the ``key
turners'' have time to act.
It is also true that, given prior experience with discussions with
DCOs concerning defaults of clearing members (none of which resulted in
financial distress to the DCOs), the Commission fully expects that any
DCO that is in financial distress would be in close contact with
Commission staff. The Commission also appreciates the sentiment
expressed by CME and quoted above, implying that ``it is hard to
imagine'' that a SIDCO would not provide the Commission with prior
knowledge of a voluntary bankruptcy filing. Finally, the Commission is
confident that the decision to file a voluntary petition for relief in
bankruptcy is ``not one that . . . any DCO would take lightly.''
Nevertheless, given the destructive impact that termination of the
derivatives contracts of a SIDCO would cause, the Commission remains
concerned about the effects that a bankruptcy filing would have on the
ability to resolve the SIDCO pursuant to Title II successfully. In this
context, it is not enough that such an event is ``implausible,'' ``hard
to imagine,'' or ``extraordinarily unlikely.'' Knowledge of the SIDCO's
financial distress is distinct from knowledge of the timing of a
potential bankruptcy filing. While the Commission would most likely be
aware of the SIDCO's distress, it is at this point not certain that
there would be clear communication of the SIDCO's intention to file for
bankruptcy sufficiently in advance that the key turners would have time
to act.
As noted in the Supplemental Proposal, the destructive impact of a
full tear-up of a SIDCO's contracts would be significant. The FSOC has
found that a significant disruption or failure of either SIDCO could
have a major adverse impact on the U.S. financial markets, the impact
of which would be exacerbated by the limited number of clearing
alternatives currently available for the products cleared by each
SIDCO. A failure or disruption of either SIDCO would likely have a
significant detrimental effect on the liquidity of the futures and
options markets (for CME) or swaps markets (for ICC), and on clearing
members, which include large financial institutions, and other market
participants. These significant effects would, in turn, likely threaten
the stability of the broader U.S. financial system.\216\ For those
reasons, inter alia, the Commission continues to be concerned about
avoiding a circumstance where the derivatives contracts of a SIDCO are
irrevocably terminated because the SIDCO files for bankruptcy before a
process to place that SIDCO into a Title II Resolution.
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\216\ See 2012 FSOC Annual Report, Appendix A, at 163, 178.
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However, the comments expressed strong concerns about achieving
those goals through the use of a bankruptcy stay, especially in light
of the fact that variation margin would neither be collected nor paid
during that period.
The Supplemental Proposal acknowledged that risk levels would
increase during the stay period. Commenters argued that such increase
in risk exposures during the stay period would pose unacceptable risks.
For example, CME (2) stated that ``permitting the accumulation of
uncovered risk for 48 hours during an extremely volatile time would
pose a risk to financial stability.'' Similarly, SIFMA AMG/MFA (2)
warned that the proposed part 190 stay, in conjunction with the Title
II stay, ``would result in extraordinary market exposures to market
participants during highly volatile market conditions. The non-payment
of margin could also result in a multiple day liquidity problem for
[[Page 19387]]
market participants clearing at the SIDCO.''
The Supplemental Proposal also acknowledged that there is a
significant cost to the proposed stay, in that ``[f]or the duration of
the stay period, clearing members and clients will be uncertain whether
their contracts will continue (as part of a Resolution) or be
terminated (and thus would need to be replaced). That uncertainty would
mean that clearing members and clients would be disadvantaged in
determining how best to protect their positions.'' Again, commenters
agreed that this cost would ensue, and argued that it would be
unacceptable. For example, ICI (2) observed that during the stay:
the price of the relevant underlying assets could (and if a SIDCO is
insolvent, likely would) move dramatically. However, customers would
be precluded from entering into risk-reducing or replacement
transactions to stem potential losses, since they will not know
whether their contracts will be terminated or reinstated. Such a
freeze not only threatens to cause public customers significant
losses that they cannot mitigate; it would also create a liquidity
event because customers will need to preserve as much liquidity as
possible during the pendency of the stay in order to meet potential
margin calls.
Commenters also raised issues relating to legal uncertainty. For
instance, FIA (2) acknowledged that section 20 ``authorizes the
Commission to adopt rules `[n]otwithstanding title 11 of the United
States Code' '' (i.e., the Bankruptcy Code). However, FIA observed that
``[w]hether a stay contemplated under the Supplemental Proposal would
conflict with section 404(a) of FDICIA . . . is unclear.''
In light of the persuasive arguments of the commenters, the
Commission concludes that a bankruptcy stay is not an appropriate means
of achieving the goal of fostering the success of a Title II Resolution
by avoiding the possibility that the SIDCO could file for bankruptcy
before a process to place that SIDCO into a Title II Resolution would
have completed with the result that all of the SIDCO's contracts were
terminated. This would be true even if action was taken by the
Prudential Regulators to avoid having such a stay undermine the QMNA
status of SIDCO rules. Thus, while the goal remains important, the
Commission will not adopt such a stay.
A number of the comments answered the Commission's call for a
better way of achieving that goal. SIFMA AMG/MFA(II) stated that ``[a]s
an alternative to the proposed stay, the Commission could require, as
part of its Part 39 or Part 190 rules, that a SIDCO provide a 1 or 2
day notice to the Commission of any bankruptcy petition by a SIDCO. We
believe this notice requirement would achieve the same goal in a
materially less detrimental manner.''
CME (2) suggested the same alternative approach to achieve the same
regulatory goal, in somewhat more detail. CME (2) urged that the
Commission should address the problem:
in a more direct manner, consistent with its rulemaking authority.
For example, the Commission could require a DCO to notify the CFTC
in advance of its plan to file a voluntary petition for relief under
subchapter IV of Chapter 7 of the Code, to allow Treasury time to
determine whether to appoint the FDIC as receiver before the SIDCO
files its petition. We note that before a commodity broker may file
a voluntary petition for relief under subchapter IV, its board of
directors must approve a resolution authorizing the debtor to take
that step.
The Commission agrees that the alternative suggested by the
commenters in response to the Commission's request--providing the
advance notice sought by the Commission, but before a bankruptcy filing
rather than thereafter--is one that, as FIA (2) observed, ``deserves
the Commission's strong consideration.'' It appears that it may achieve
the regulatory goals specified in the Supplemental Proposal while
avoiding the concerns raised by the commenters: By providing advance
notice to the Commission, it appears that it may allow the Commission,
which will be coordinating with the ``key-turners,'' to advise those
agencies of the imminence of a bankruptcy filing, and to provide them
with warning at a time that may be sufficient to enable them to act
with dispatch to complete the process.
Because the alternative approach would not involve a post-
bankruptcy stay, it would appear to avoid affecting the QMNA status of
SIDCO rules (and, thus, would appear not to require any action by the
Prudential Regulators).\217\ Moreover, because this notice would occur
in advance of a bankruptcy filing, the suspension of payments and
collections of variation margin would not occur, and there would appear
to be no ambiguity concerning the status of the cleared contracts of
market participants. By avoiding the mechanism of a bankruptcy stay,
the Commission would also appear to avoid the legal uncertainty issues
raised by the commenters with respect to that mechanism. Instead, this
notice approach would appear to be, as noted by CME, well within the
Commission's rulemaking authority.\218\
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\217\ This also avoids the issue, raised by ICE (2), that action
by the Prudential Regulators with respect to QMNA status may not be
sufficient to address netting issues for non-U.S. clearing members.
\218\ See, e.g., CEA section 5b(c)(2)(J), 7 U.S.C. 7a-1(c)(2)(J)
(reporting core principle); CEA section 3(b), 7 U.S.C. 5(b) (purpose
of the CEA is to ensure the financial integrity of transactions
subject to the CEA and the avoidance of systemic risk); CEA section
8a(5), 7 U.S.C. 12a(5) (general rule-making authority).
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However, in light of the concerns raised with the previous
approaches to addressing this problem, both the one advanced in the
Supplemental Proposal as well as one advanced in the Proposal, the
Commission concludes that, at this point, it should engage in further
analysis and development before proposing this, or any other,
alternative approach. Such further analysis and development might
better enable the Commission to propose, in detail, a solution that is
effective, and that mitigates any attendant costs. Thus, the Commission
will, at present, keep this issue under advisement.
III. Cost-Benefit Considerations
A. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\219\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (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. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors (collectively referred to herein as
``Section 15(a) Factors'') below.
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\219\ CEA section 15(a), 7 U.S.C. 19(a).
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In the Proposal, the Commission endeavored to assess the expected
costs and benefits of the proposed rulemaking in quantitative terms,
including costs related to matters addressed in the Paperwork Reduction
Act \220\ (``PRA-related costs''), where possible. In situations where
the Commission was unable to quantify the costs and benefits, the
Commission identified and considered the costs and benefits of the
applicable proposed rules in qualitative terms. The lack of data and
information to estimate those costs was attributable in part to the
nature of the proposed
[[Page 19388]]
rules. None of the comments identified quantifiable costs or benefits.
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\220\ 44 U.S.C. 3501 et seq.
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In a number of cases, commenters suggested alternative approaches
or modifications to the proposed provisions. The Commission has
carefully considered these alternatives and modifications and in a
number of instances, for reasons discussed in detail above, has adopted
such alternative approaches or modifications where, in the Commission's
judgment, the alternative or modified approach is more appropriate to
accomplish the regulatory objectives. The rationale in these cases was
discussed in detail above.
1. Baseline
The baselines for the Commission's consideration of the costs and
benefits of this rulemaking are: (1) The Commission's current
regulations in part 190, which establish bankruptcy rules in the event
of an FCM bankruptcy; (2) current appendix A to part 190, which
contains four bankruptcy forms (form 1--Operation of the Debtor's
Estate--Schedule of Trustee's Duties; form 2--Request for Instructions
Concerning Non-Cash property Deposited with (Commodity Broker); form
3--Request for Instructions Concerning Transfer of Your Hedging
Contracts Held by (Commodity Broker); and form 4--Proof of Claim); and
(3) current appendix B to part 190, which contains two frameworks
setting forth rules concerning distribution of customer funds or
allocation of shortfall to customer claims in specific circumstances.
2. Overarching Concepts
a. Changes to Structure of Industry
The Commission is making several revisions to part 190 in order to
reflect the changes to the structure of the industry since part 190 was
originally published in 1983. In particular, FCMs and DCOs now operate
in a different world, where matters such as market moves, transactions,
and movements of funds tend to happen much more quickly, in part due to
the advances in technology and the global nature of underlying markets.
These changes include major structural changes in the financial
markets, including regulatory reforms following the 2008 financial
crisis and consequent changes to the structure of the derivatives
markets, changes in the governance of the market utilities, such as
DCOs, from non-profit organizations to public companies, and major
reforms in the banking sector, followed by the creation of large,
publicly held financial holding companies with different attitudes
towards risk.
As a result, several of the changes to part 190 will address these
changed circumstances. The Commission believes that the revisions in
proposed part 190 that address the computerized and fast-paced nature
of the industry will benefit all parties involved in a bankruptcy
proceeding, since the rules would reflect how the industry actually
works today and will avoid unnecessary delay to the administration of a
bankruptcy proceeding.
b. Trustee Discretion
In several places in revised part 190, the Commission provides
additional flexibility and discretion to the bankruptcy trustee in
taking certain actions.\221\ This principles-based approach is in
contrast to the customer notice procedures in current part 190, which
are more prescribed and depend on the type of notice being given.
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\221\ The alternative, to forego providing such flexibility or
discretion, would invert the benefits and costs discussed below.
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The Commission has concluded that, in general, affording more
discretion to the bankruptcy trustee in appropriate circumstances is
beneficial, and indeed necessary, where matters are unique and fast-
paced, as they often are in commodity broker bankruptcy proceedings. In
many areas, it is unlikely that a prescriptive approach can be designed
that will reliably be ``fit for purpose'' in all plausible future
circumstances.
Granting the trustee discretion is expected to decrease, though it
certainly does not eliminate, the number and extent of cases in which
the trustee will petition the bankruptcy court for formal approval of
an action. Each formal approval the trustee is required to obtain--
i.e., each time the trustee moves for an order from the bankruptcy
court authorizing the trustee to take a particular action in a
particular way--takes significant time and involves significant
administrative costs--in particular, the time of professionals such as
attorneys and financial experts to draft legal pleadings and analyses.
These professionals charge significant hourly fees, and thus their time
leads to significant administrative costs. As discussed further below,
administrative costs can be charged against customer property, leading
to reduced recoveries by public customers.
Therefore, increased discretion of the trustee will benefit the
estate by allowing the trustee to make principles-based decisions that
are uniquely tailored to the facts and circumstances of the particular
case, rather than compelling the trustee to follow a procrustean
framework, or requiring the trustee to request formal approval from the
bankruptcy court or the Commission before implementing those decisions.
This approach leads to approaches that are better tailored to the
specifics of the circumstances, reductions in administrative costs
(leaving more funds available for distribution to public customers and/
or other creditors) and faster distributions of customer property (to
the benefit of public customers). It is also intended to mitigate the
negative externalities arising from the distressed circumstances that
tend to result in further reduction in the value of customer
assets.\222\
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\222\ As discussed above, see section II.B.2, while the trustee
has discretion as to how they administer the affairs of the
bankruptcy estate, a DCO of which that FCM is a member retains its
rights to act under its rules.
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The Commission recognizes, however, that with increased discretion
comes a risk of trustee mistake or misfeasance; in other words, a
trustee making decisions that turn out not to be in the best interests
of public customers as a class, or other creditors.\223\ While this is
certainly a potential cost in situations where the trustee is given
increased discretion or flexibility, the Commission believes that this
potential cost will be mitigated by (1) the high degree of informal
(and, where necessary, formal) involvement of Commission staff in FCM
and DCO bankruptcy matters,\224\ and (2) the fact that such discretion
would not be unbounded and would apply only in particular
circumstances, as discussed below.
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\223\ Certain discretionary decisions a trustee may take, for
example, the frequency with which the trustee provides information.
\224\ As a formal matter, the Commission has the right to appear
and be heard on any issue in any such case. See 11 U.S.C. 762(b). As
a practical matter, trustees and their counsel have, in previous
commodity broker bankruptcies, consulted with Commission staff
frequently and on an ongoing basis, particularly in making and
implementing important decisions.
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Moreover, in response to a comment by ICI, and as discussed further
below, the Commission is adding a clarification in Sec. 190.00 that
where a provision in part 190 affords the trustee discretion, that
discretion should be exercised in a manner that the trustee determines
will best achieve the overarching goal of protecting public customers
as a class by enhancing recoveries for, and mitigating disruptions to,
public customers as a class. The Commission is of the view that adding
this principles-based provision will further clarify the duty of
trustees in commodity broker bankruptcy proceedings to act in a
[[Page 19389]]
manner that adds benefits, and reduces costs, to public customers as a
class by, respectively, enhancing their recoveries and mitigating
disruptions to them.
However, channeling the trustee's discretion towards protecting
public customers as a class may well work to the detriment of (and thus
impose costs upon) individual public customers, or classes of public
customers, whose interests differ from that of the class in general.
For example, certain customers may have a particular need for current
and precise information about their account balances and
positions.\225\ It is possible (though unlikely) that the trustee might
determine that it is inordinately costly to do so for a particular
time, looking at the interests of public customers as a class. Such a
decision would not be a mistake or malfeasance, though one would expect
the trustee to endeavor to avoid the necessity for doing so.
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\225\ See ICI at 22 (failure of trustee to provide account
statements or information about funded balances could ``hinder the
ability of a regulated fund to confirm the existence and value of
its transactions and associated margin.'')
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An additional risk related to increased discretion is the
possibility that parties that are dissatisfied with the trustee's
exercise of discretion may challenge it in court, potentially leading
to increased litigation costs. The Commission believes that this risk
is mitigated by (1) the fact that certain of these decisions would be
made in contexts where the trustee would be seeking an order of the
bankruptcy court approving the trustee's approach (and thus the
trustee's discretion would be subject to judicial review within a
proceeding in which interested parties already have an opportunity to
object) and (2) the likelihood that bankruptcy courts would respect the
Commission's rules granting the trustee discretion, rendering such
litigation less likely to succeed, and quicker to resolve. Litigation
that is less likely to succeed is less likely to be brought, and
litigation that is quicker to resolve is likely to cost less. Thus, by
granting the trustee discretion, the Commission mitigates the cost of
such litigation.
Instances where the revisions to proposed part 190 will afford more
flexibility or discretion to the bankruptcy trustee are discussed in
further detail where they appear in each provision below.
c. Cost Effectiveness and Promptness Versus Precision
In revising part 190, the Commission has endeavored to effect a
proper balance between cost effectiveness and promptness, on the one
hand, and precision, on the other hand. Current part 190 favors cost
effectiveness and promptness over precision in certain respects,
particularly with respect to the concept of pro rata treatment. As a
result of the policy choice made by Congress in section 766(h) of the
Bankruptcy Code, part 190 proceeds from the principle that it is more
important to be cost effective and prompt in the distribution of
customer property (i.e., in terms of being able to treat public
customers as part of a class) than it is to value each customer's
entitlements on an individual basis. The revisions to part 190 take
this concept further, recognizing that there are additional
circumstances where cost effectiveness and promptness in the
administration of a bankruptcy proceeding should have higher priority
than precision. However, in response to ICI's comment, the Commission
has clarified that where the trustee is directed to exercise
``reasonable efforts'' to meet a standard, those efforts should only be
less than ``best efforts'' to the extent that the trustee determines
that such an approach would support the goal of protecting public
customers by enhancing recoveries for, and mitigating disruptions to,
public customers as a class.\226\ Thus, the Commission recognizes that
there are limits to the extent to which cost effectiveness and
promptness will be favored over precision as discretion must be
exercised in furtherance of the overarching goal of protecting the
interests of public customers as a class.
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\226\ See comparison of best efforts to reasonable efforts in
section II.A.1 above.
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The Commission believes that these revisions favoring cost
effectiveness and promptness over precision further the policy embodied
in section 766(h) of the Bankruptcy Code and benefit parties involved
in a bankruptcy proceeding overall, in that they will in general lead
to: (1) A faster administration of the proceeding; (2) public customers
receiving their share of the debtor's customer property more quickly;
and (3) a decrease in administrative costs.
There could, however, be corresponding costs to this approach for
some public customers in that they may lose out on being treated
precisely in terms of their individual circumstances (and, for example,
may receive a smaller distribution of customer property than
otherwise).
d. Unique Nature of Bankruptcy Events
The Commission recognizes in revised part 190 that there is no one-
size-fits-all approach to the administration of the bankruptcy of an
FCM or a DCO, and that it is important that the rules allow the
trustee, in conducting that administration, to take into account the
unique nature of each of these events. The revisions to proposed part
190, therefore, address the uniqueness of these bankruptcy events and
allow for the bankruptcy trustee to tailor their approach in the way
that most makes sense given the individual circumstances of the case at
hand.\227\ History has shown that FCM bankruptcies play out in very
different ways, and several of the Commission's revisions to part 190
address that reality. These new provisions reflect the fact that each
FCM and DCO bankruptcy presents individual circumstances, and that the
proof of claim form will likely have to be modified to fit the unique
facts and circumstances of each case. The Commission believes that the
revisions of this type will benefit all parties involved in a
bankruptcy proceeding by better tailoring such a proceeding to the
unique needs of the particular case.
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\227\ Circumstances that may vary include: The accuracy of the
commodity broker's records at the time of bankruptcy; whether the
bulk of an FCM's customer accounts were transferred in the days
after the filing date (or otherwise migrated in the days before);
the number of customer accounts; the existence and extent of a
shortfall in customer funds; and the complexity of the positions
carried by the commodity broker.
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However, by providing for a bespoke tailoring of the approach to
commodity broker bankruptcy, the Commission inherently provides less
transparency, and thus less certainty, of the particulars of the
approach that will be followed.
e. Administrative Costs are Costs to the Estate, and Often to the
Customers
In many instances in this adopting release, the Commission is
noting that a certain provision will impose or reduce administrative
costs, that is, the actual and necessary costs of preserving the
bankruptcy estate and administering the case. In each of these cases,
administrative costs will be a cost to the estate of the debtor, since
administrative expenses that the bankruptcy trustee incurs in
administering the estate (including for the time of the trustee,
accountants, counsel, consultants, etc.) \228\ will be passed onto the
estate
[[Page 19390]]
itself. This means that, in the event of a shortfall, such costs will
ultimately be borne by the public customers of the debtor, who will
receive smaller dividends on their claims as the value of the debtor's
estate decreases.\229\ By a parity of reasoning, reducing such
administrative costs will reduce the shortfall, and increase recoveries
by public customers.
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\228\ Pursuant to section 503(b)(1) of the Code, administrative
costs include the actual, necessary costs and expenses of preserving
the estate; and pursuant to section 330(a)(1)(A) of the Code, the
Court may award ``reasonable compensation for actual, necessary
services rendered by the trustee . . . professional person, or
attorney . . . .'' Factors that are considered in determining
``reasonable compensation'' include the time spent on the services,
the rates charged, the customary compensation charged by comparably
skilled practitioners, and whether the services were necessary to
the administration of the case. See generally 11 U.S.C. 330(a)(3).
\229\ While such costs may in certain cases be borne instead by
general creditors, section 766(h) permits customer property to be
used to meet ``claims of a kind specified in section 507(a)(2)'' of
the Bankruptcy Code (which in turn include claims for the expenses
of administering the estate) ``that are attributable to the
administration of customer property.''
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To be sure, the actions taken to achieve these cost efficiencies
that enhance the value of the estate for public customers as a whole
may impose costs on individual public customers.
f. Preference for Public Customers Over Non-Public Customers and for
Both Over General Creditors
As noted repeatedly above, and consistent with the requirements of
section 766(h) of the Bankruptcy Code and longstanding Commission
policy, many provisions in part 190 favor public customers over non-
public customers, and both over general creditors, whenever there is a
shortfall in customer property in any account class for public
customers (or, with reference to general creditors, for non-public
customers).
The preference for public customers benefits them, and provides
them with incentives to participate in transactions protected by part
190, and to post collateral willingly. However, this preference
correspondingly disfavors non-public customers. Accordingly, it
arguably provides them with incentives to participate less in
transactions protected by part 190--or, perhaps, to clear through
unaffiliated FCMs (and thus, to do so as public customers of those
FCMs).
Similarly, the preference for both public and non-public customers
over general creditors may incentivize general creditors to be less
willing to extend credit to commodity brokers. However, in light of the
fact that commodity brokers are highly regulated entities subject to
stringent capital or resource requirements, this incentive effect with
respect to general creditors is not likely to be strong.
B. Subpart A--General Provisions
1. Regulation Sec. 190.00: Statutory Authority, Organization, Core
Concepts, Scope, and Construction: Consideration of Costs and Benefits
Section 190.00 contains general provisions applicable to all of
part 190. These provisions set forth the concepts that guide the
Commission's bankruptcy regulations. All of Sec. 190.00 is new, in
that current part 190 does not contain an analogous regulation.
However, only certain provisions within Sec. 190.00 have cost-benefit
implications, since the bulk of Sec. 190.00 is designed to explain
concepts that are either (1) not different from those contained in
current part 190, but are simply stated more explicitly in the revised
rules, or (2) new, in that they are not contained in current part 190,
but are concepts that are meant to clarify how revised substantive
provisions operate. In the latter case, cost and benefit considerations
are addressed with respect to the substantive provisions.
The Commission requested comment on all aspects of its cost and
benefit considerations with respect to proposed Sec. 190.00.
There are potential costs associated with Sec. 190.00(c)(4) which
promotes the transfer or porting of the open commodity contract
positions of a bankrupt FCM's public customers rather than the
liquidation of these positions. For example, OCC commented that while
liquidating customer positions may introduce market risk associated
with closing out and reopening positions for certain customers, those
risks should be weighed against the potential drawbacks of porting,
especially if an FCM to accept the transfer is not immediately
identified. Specifically, OCC identified three potential drawbacks with
the proposed Sec. 190.00(c)(4). First, that it could be difficult for
a trustee (or DCO) to identify a transferee to accept the open
positions and collateral, which depending on the market conditions
could be a difficult and time-consuming process. Second, a customer
could face uncertainty as to how its position and associated collateral
will be resolved until a transfer is complete and also may be unable to
exit a position in a timely and efficient manner. Third, a customer
might need to post additional collateral at a new FCM prior to or
immediately after a transfer.
In considering the costs and benefits of the preference for
transfer versus liquidation, the Commission notes first that, as OCC
forthrightly acknowledged, liquidating customer positions may introduce
market risk associated with closing out and reopening positions for
certain customers. Additionally, liquidating a mass of customer
positions may roil the markets, if any, where those positions are
concentrated.
Furthermore, Sec. 190.00(c)(4) establishes a preference for
transfer rather than a mandate. Thus, if after exerting their best
efforts, the trustee finds that the process of transfer is indeed too
``difficult and time-consuming,'' the trustee is not obligated to
implement a transfer. Moreover, as a practical matter, there are narrow
limits to how long a trustee will have to endeavor to transfer before
being compelled to liquidate positions by the DCO at which they are
held, or, if applicable, an FCM through which they are held. (Either
the DCO or the FCM, whichever is applicable, will have the discretion
to liquidate positions that are being cleared/carried for an FCM that
is in bankruptcy).\230\ Pursuant to Sec. 190.04(d), if the trustee is
not successful in transferring an open contract by the seventh calendar
day after the order for relief consistent with Sec. 190.04(a), the
trustee is directed to liquidate such contract promptly and in an
orderly manner. Thus, while a customer could face uncertainty as to how
its position and associated collateral will be resolved until a
transfer is complete (or until the customer's positions are otherwise
liquidated), the time of that uncertainty is both practically and
legally limited. Finally, a customer who does not wish to post
additional collateral at a new FCM would be entitled to have the new
FCM liquidate their positions, and promptly receive any remaining
transferred collateral. In this light, the Commission believes that the
benefits of continuing the preference for transfer remain significant,
while the costs of this preference are mitigated.
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\230\ For example, as noted above in section II.A.1, OCC's own
rules would appear to permit it to liquidate such positions.
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There are potential benefits arising from reduced uncertainty as a
result of clarifications provided in several provisions. For example,
Sec. 190.00(d)(1)(ii), clearly expresses that part 190 applies to a
proceeding commenced under SIPA with respect to a debtor that is
registered as a broker or dealer under the CEA when the debtor also is
an FCM. Similarly, Sec. 190.00(e) clarifies how transactions and
collateral that are portfolio margined are treated as an important
prerequisite to an effective portfolio margining program. Cboe's
comment letter expressed the view that the clarity provided in Sec.
190.00(d)(1)(ii) will be beneficial to the entire
[[Page 19391]]
ecosystem, including customers of FCMs and broker-dealers, as it
furthers the ability of market participants to utilize portfolio
margining and the associated efficiencies. CME also saw benefits to
``remov[ing] any doubt'' that part 190 applies to a SIPA proceeding
involving an FCM that is also registered with the SEC as a broker-
dealer.
Similarly, ICI's comment letter considered that the ``home field''
rule in Sec. 190.00(e) is highly beneficial.
With respect to the remaining provisions within proposed Sec.
190.00, the Commission has not received comment letters that identify
costs or benefits explicitly attributed to these provisions, and does
not believe that there are material cost-benefit implications with
respect to them:
Proposed Sec. 190.00(a), which sets forth the statutory
authority pursuant to which the Commission is proposing to adopt
proposed part 190.
Proposed Sec. 190.00(b), which describes how the proposed
rules are organized into three subparts. While the addition of DCO-
specific rules in this proposal is new, the cost-benefit implications
of the DCO-specific provisions (Sec. Sec. 190.11 through 190.18) are
discussed separately below.
Section 190.00(c)(2), which provides that part 190
establishes four separate account classes, each of which is treated
differently under the regulations. In the Commission's view, this
provision is a mere clarification, as current part 190 also establishes
different account classes for different types of cleared commodity
contracts, and treats each account class differently.
Section 190.00(c)(5), which explains that part 190 applies
the concept of pro rata distribution when it comes to shortfalls of
property in a particular account class. This provision is merely
explanatory.
Section 190.00(d)(1)(i)(A), which provides that the
definition of ``commodity broker'' in proposed part 190 covers both
``futures commission merchants'' and ``foreign futures commission
merchants'' because both are required to register as FCMs under the CEA
and Commission regulations.
Section 190.00(d)(2)(i), which states that the bankruptcy
trustee may not recognize any account class that is not one of the
account classes enumerated in proposed Sec. 190.01.
Section 190.00(d)(3), which sets forth the transactions
that are excluded from the definition of ``commodity contract.'' This
provision explains and carries over concepts that are already embedded
in current part 190.
While the Commission has not received comment letters that identify
costs or benefits explicitly attributed to the following provisions in
Sec. 190.00, it believes that there will be cost-benefit implications
to these provisions:
Section 190.00(c)(1) states that part 190 is limited to a
commodity broker that is (1) an FCM as defined by the CEA and
Commission regulations, or (2) a DCO under the CEA and Commission
regulations. Current part 190 applies to a broader set of ``commodity
brokers,'' including FCMs, clearing organizations, commodity options
dealers, and leverage transaction merchants. This narrowing of the
application of part 190 (by excluding the empty categories of commodity
options dealers and leverage transaction merchants) benefits the
bankruptcy estate, and the customers, by allowing the Commission to
promulgate regulations that are less complex and better tailored to the
narrower, set of commodity brokers that are covered by the revised
regulations.\231\
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\231\ Moreover, prescribing regulations that are intended to be
applicable to entities that, at some unknown point in the future,
enter these empty categories risks poor tailoring due to lack of
data concerning the characteristics of those unknown future
entrants.
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Section 190.00(c)(3) explains the distinction between
``public customers'' and ``non-public customers,'' and the priority
that public customers (and, after them, non-public customers) enjoy
over all other claimants with respect to distributions of customer
property. Both of these concepts exist in current part 190 and are
clarified and explained further in Sec. 190.00(c)(3). In its comment,
ICI urged the Commission to take steps ``to help ensure that the
trustee prioritizes the protection of [public] customers.'' In
response, Commission has added a provision, Sec. 190.00(c)(3)(i)(C),
directing the trustee to exercise its discretion (where it has such
discretion) in a manner that will best achieve the overarching goal of
protecting public customers by enhancing recoveries for, and mitigating
disruptions to, public customers as a class.\232\ This approach has the
benefit of guiding the trustee's discretion in a manner consistent with
the Commission's regulatory and statutory goals. However, it has the
limitation of still leaving the trustee with discretion. As noted above
in section III.A.2 above, with discretion comes a risk of trustee
mistake or misfeasance.
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\232\ As noted above in section III.A.2.vi, the preference for
public customers over non-public customers creates incentives for
both groups.
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Section 190.00(c)(6) addresses the treatment of commodity
contracts that require delivery performance. The revised regulations,
in allowing the trustee more flexibility in how a customer could effect
delivery outside of the debtor's estate, will benefit customers by
allowing for a more bespoke approach to effecting delivery when
customers incur delivery obligations under their open commodity
contracts. There will, however, be costs in acting in such a bespoke
fashion in contrast to following standards established during business
as usual.
Section 190.00(d)(1)(i)(B) notes that while there are
currently no registered leverage transaction merchants or commodity
options dealers, the Commission intends to adopt rules with respect to
leverage transaction merchants or commodity options dealers at such
time as an entity registers as one of those categories of commodity
brokers. This forward-looking flexibility will generate benefits by
fostering bankruptcy rules specifically tailored to leverage
transaction merchants or commodity options dealers when and if an
entity registers as such.
Section 190.00(d)(1)(iii), provides that part 190 shall
serve as guidance as to the distribution of customer property and
member property in a proceeding in which the FDIC is acting as receiver
pursuant to Title II of Dodd-Frank.\233\ This provision has the
benefits associated with transparently providing to FDIC during
business-as-usual the expertise and guidance of the agency with
regulatory and supervisory responsibility for commodity brokers (i.e.,
FCMs and DCOs).\234\
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\233\ Section 210(m)(1)(B) of title II,12 U.S.C. 5390(m)(1)(B),
requires the FDIC, where the covered financial company or bridge
financial company is a commodity broker, to apply the provisions of
subchapter IV as if the financial company were a debtor for purposes
of such subchapter.
\234\ DCOs operate nearly 24-hours a day, between Sunday
afternoon and Friday evening. Moreover, the risks that a DCO is
required to manage are based on market movements and events
(including in OTC markets) that may occur whether or not the DCO is
able to operate. Accordingly, Commission staff (in cooperation with
FDIC staff) have engaged, and will continue to engage, in
significant efforts to plan for the unlikely event that resolution
under Title II would be necessary for a DCO.
Thus, there is a public benefit to facilitating FDIC's efforts
in resolution planning for DCOs by setting forth clear guidance as
to the distribution of customer property and member property in a
DCO resolution proceeding.
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Section 190.00(d)(2)(ii) provides that no property that
would otherwise be included in customer property shall be excluded from
customer property because it is considered to be held in a
constructive, resulting, or other trust that is implied in equity. It
prevents public customers from evading pro rata exposure to shortfalls
in customer property by keeping their collateral in a trust structure.
This provision has the
[[Page 19392]]
benefit of supporting the statutory policy of pro rata distribution for
the pool of customers, by ensuring that all property that properly
belongs in the category of ``customer property'' would be considered
such customer property. It should mitigate costs in cases where
particular customers might structure their relationships with their
FCMs in order to establish such a trust for the purpose of thwarting
their exposure to pro rata distribution, rather than structuring those
relationships in ways that otherwise make sense for their business. It
would also reduce those customers' incentives to do so, and would
mitigate the costs of litigation within the bankruptcy proceeding over
the effectiveness of such structures in achieving that goal. It also
benefits the remaining customers, since if such litigation were
successful, it would spread the pro rata shortfall over a smaller
volume of customer claims.
However, this approach will impose costs on those
customers, if any there be, who would otherwise endeavor to rely on the
trust concept to shield certain of their property from entering the
pool of customer property. Such customers might (despite opposition
from the Commission and the trustee) otherwise be successful in
litigation over the effectiveness of such arrangements, or may obtain
settlements that would benefit their individual claims (albeit to the
detriment of other customers, and to the policy of pro rata
distribution). Such customers may view the inability to protect their
collateral under a trust concept as an incentive to reduce their use of
transactions subject to part 190.
2. Regulation Sec. 190.01: Definitions: Consideration of Costs and
Benefits
Section 190.01 sets forth definitions as they are used for purposes
of part 190. In the Commission's view, only certain of the definitions
in proposed Sec. 190.01 will have cost-benefit implications, and these
are discussed in more detail below, as are any definitions concerning
which there were comments. The remainder of the definitions set forth
in revised Sec. 190.01 do not, in the Commission's view, impose any
costs or benefits, as the changes to the definitions are minor (in the
vein of, for example, updating cross-references or updating language to
reflect the changes in the rest of revised part 190) or merely clarify
the current definition.
Where, in the Commission's view, a definition in revised Sec.
190.01 has cost-benefit implications, and/or where comments have
identified costs or benefits concerning such a definition, those
implications are discussed in more detail below:
``Account class,'' ``cash delivery property,'' and
``physical delivery property'': The definition of the term ``account
class'' is expanded to include definitions of each type of account
class set forth in proposed part 190: Futures account, foreign futures
account, cleared swaps account, and delivery account. The ABA
Subcommittee recommended that the Commission clarify that these types
of account classes apply to non-public customers in addition to public
customers. The Commission agrees that it is appropriate to clarify this
point, and to include a specific definition for each type of account
class. Doing so will benefit all parties involved in a bankruptcy
proceeding by ensuring that all have a common understanding of how
these various types of accounts are defined for purposes of part 190.
Accordingly, the Commission is adopting the ABA Subcommittee's
recommendation.
The definition of ``account class'' also removes the
category in current part 190 of ``leverage account'' because, as noted
above, there are currently no registered leverage transaction
merchants. Rather, the Commission intends to adopt rules with respect
to leverage transaction merchants (and, accordingly, with respect to
leverage accounts) at such time as an entity registers as such. Removal
of the category of ``leverage account'' from the ``account class''
definition benefits market participants by allowing the Commission to
promulgate bankruptcy rules specifically tailored to leverage
transaction merchants (and, accordingly, to leverage accounts) in the
event an entity registers as such.
The definition of ``account class'' also splits ``delivery
accounts'' into separate physical and cash delivery account classes.
Because cash delivery property is, in some cases, more difficult to
trace to specific customers and more vulnerable to loss,\235\ this
separate treatment of physical delivery property and cash delivery
property should benefit customers with physical delivery property by
allowing for more prompt distribution of such physical delivery
property. This separation should also benefit the estate, because the
trustee will not have to wait to distribute physical delivery property
to customers while attempting to trace cash delivery property, which
could result in a more prompt resolution of the bankruptcy as a whole.
However, there may be costs as a result of complications, since the
trustee will have to deal with two delivery account subclasses rather
than one delivery account class. Moreover, in the event of a shortfall,
some customers could ultimately obtain larger recoveries than they
would have if the delivery account had not been split into two
subclasses, while others could obtain smaller recoveries.
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\235\ These reasons for this difficulty and vulnerability are
discussed above in section II.B.4 in the explanation of the changes
to proposed Sec. 190.06(b).
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The ABA Subcommittee and CME suggested changes to the definition of
``cash delivery property.'' Under the current definition, cash falls
within the delivery class if, inter alia, it is received on or after
three calendar days before the first notice date or exercise date. The
definition of cash delivery property in the Proposal continued that
limitation. CME suggested that the three-day limitation should be
removed to address cases where
``a customer will legitimately post cash to its delivery account
sooner than the definition would allow, for example, out of caution
to assure that the necessary funds are available to pay for a
delivery when the first notice date or exercise date immediately
follows a weekend or holiday, or to meet payment deadlines imposed
by the FCM, or based on market convention.''
The comments acknowledged that the Commission's policy objective is
to ``encourage FCMs and their delivery customers to hold cash intended
to pay for delivery in a segregated account until bilateral delivery
obligations are near at hand'' (the segregation obligations that apply
to futures, foreign futures, and cleared swaps accounts do not apply to
delivery accounts), but express some doubt that the limitation is
effective in encouraging the desired behavior, because parties with
delivery obligations may not be aware of it.
Thus, the benefit of retaining the three-calendar day limitation is
mitigating the time during which cash delivery property is held in an
account that is not subject to the protection of segregation
requirements, and in encouraging business models that take that
approach. The cost of doing so is the risk that funds may nonetheless
be transferred earlier into a delivery account, and would then be
denied protection as delivery property in an FCM bankruptcy.\236\
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\236\ The Commission also notes CME's suggestion that it
``consider adopting more formal requirements with respect to
delivery accounts through separate rulemaking.''
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As discussed above,\237\ the Commission has determined to take a
middle-ground approach by expanding the three-calendar day limitation
to a
[[Page 19393]]
seven-calendar day limitation. This approach has the benefit of
addressing fully the possibility that delivery property is transferred
slightly early because of, e.g., a holiday weekend (and especially
cases where FCMs and their customers or contracts span across
jurisdictions with different holidays). By expanding the period by four
days, it should address most of the cases where there are legitimate
reasons to transfer the funds in advance of when they are needed, to
account for the possibility of a failure in the transfer process.\238\
Significantly, it avoids the cost of encouraging the use of the
delivery account (that is not subject to segregation requirements) as a
long-term place to hold cash.
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\237\ See section II.A.2 above.
\238\ The commenters have not identified any legitimate reason
for an FCM to impose a payment deadline of more than seven days
before first notice or exercise date, or any relevant market
convention that would require earlier payment, which in either case
would require that the funds be held in a delivery account.
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Commenters also suggested technical additions to the definitions of
cash delivery property (to address cash provided post-petition to
facilitate taking deliveries in cases where necessary) to physical
delivery property (to address the possibility of a negative final
settlement price), and (in the case of both cash delivery property and
physical delivery property) to provide that, for contracts exchanging
one fiat currency for another, both ends of the transaction would be
considered cash delivery property. The Commission incorporated these
suggestions in the definitions as adopted. The benefit of these
approaches is to deal properly with these scenarios; there are no
discernable material costs.
Pursuant to section 4d of the CEA, certain contracts and
associated collateral that would be associated with one account class
may instead (pursuant to Commission regulation \239\ or order) be
commingled with a different account class.\240\ The purpose of these
arrangements, referred to as portfolio-margining, is to associate such
contracts with an account class in which they are risk-reducing related
to other contracts in that latter account class.
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\239\ See Sec. 39.15(b)(2), which provides a mechanism for
these arrangements to be implemented pursuant to clearing
organization rules.
\240\ Securities positions may also be commingled in an account
class subject to section 4d of the CEA. 7 U.S.C. 6d.
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Paragraph (2) of the definition of account class confirms that
these portfolio-margining arrangements will be respected in bankruptcy,
that is, such contracts and associated collateral will be treated as
being part of the account class into which they are commingled. The
benefit of this treatment in bankruptcy is to foster and incentivize
such risk-reducing (and capital-efficient) arrangements during business
as usual; there should be no associated costs in bankruptcy.
Finally, paragraph (3) of the definition of account class addresses
cases where a commodity broker's account for a customer is non-current,
or otherwise inaccurate. These are situations over which public
customers have, at best, limited control, and thus it is ineffective to
endeavor to create incentives for public customers to police the
behavior of their FCM. Paragraph (3) confirms that a commodity broker
is considered to maintain an account for a customer where it
establishes internal books and records for the customer's contracts and
collateral and related activity, regardless of whether the commodity
broker has kept those internal books or records current or accurate.
The benefit of this treatment will be to treat customers in accordance
with their entitlements, regardless of whether the commodity broker has
maintained its books and records current or accurate.
``Customer,'' ``Customer class,'' ``public customer,'' and
``non-public customer:'' The definitions of the terms ``public
customer'' and ``non-public customer'' are being revised to include
separate definitions of those terms for FCMs and DCOs. This change
reflects the new organization of part 190, which includes separate
provisions for when the debtor is (1) an FCM (subpart B) and (2) a DCO
(subpart C). The ``public customer'' definition for FCMs is also being
revised to define that term with respect to each of the relevant
account classes.\241\
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\241\ CME suggested that the Commission should include non-U.S.
customers of foreign broker clearing members of a DCO within the
public customer definition. As discussed above, the Commission has
determined to consider this suggestion as part of a comprehensive
review of the issues, to be conducted at such time as the model of
admitting foreign brokers as clearing members for U.S. DCOs becomes
empirical.
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These changes will generate benefits as they bring clarity to the
question of who qualifies as a ``public'' versus a ``non-public''
customer, and transparency to the distribution of property to which
each customer is entitled. Furthermore, this clarity and transparency
is likely to reduce the administrative costs to the estate, and the
costs to claimants, associated with the claims allowance process, as
well as the likelihood of litigation by dissatisfied claimants (and
associated costs). These changes could, however, impose costs on
customers for whom, under current part 190, it will not be clear which
category they fall into. The pool of customer property would be
different for public and non-public customers under the new policy
regime. Thus, a hypothetical customer who could have been considered
``public'' under current part 190 but will be categorized as ``non-
public'' under revised part 190 could receive less in the distribution
of customer property (with other customers receiving more).
``Futures, futures contract:'' The Commission is adding a
definition for the terms ``futures'' and ``futures contract'' to
clarify what those terms mean for purposes of part 190. This
clarification will lower administrative costs by providing clarity and
transparency to the types of transactions that are considered
``futures'' for purposes of proposed part 190 and therefore form part
of the futures account or foreign futures account.
``House account:'' The definition of the term ``house
account'' will be revised to include a definition of that term solely
for DCOs. This change will reflect the new organization of part 190,
which is revised to include separate provisions for when the debtor is
(1) an FCM (subpart B) or (2) a DCO (subpart C). CME and the ABA
Subcommittee urged that the term ``house account'' be deleted in the
few cases where it was proposed to be used in subpart B in order to
avoid the implication that the accounts of non-public customers could
not be ported. This change would enhance clarity and transparency (and,
thus, would reduce administrative costs) by (1) avoiding that incorrect
implication, while (2) clarifying what precisely constitutes a house
account for a DCO bankruptcy proceeding.
``Primary liquidation date:'' The definition of the term
``primary liquidation date'' is being revised to delete references to
holding accounts open for later transfer. This is consistent with the
policy of transferring as many open commodity contracts as possible
within seven calendar days after entry of an order for relief or, if
that is not possible, liquidating such commodity contracts. \242\ This
change in policy should benefit some customers, who will more quickly
have clarity as to how their positions and associated collaterals will
be resolved.\243\ There may, however, be costs to customers who might
have preferred having their open commodity contracts held open for
transfer after the primary liquidation
[[Page 19394]]
date. \244\ In the event that a larger number of contracts is
liquidated rather than transferred, there will be costs resulting from
additional downward pressure on prices.
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\242\ See Sec. 190.04(a)(1).
\243\ See discussion of Sec. 190.00(c)(4) in section II.B.1
above for concerns about customers lacking such clarity for an
extended time.
\244\ Given that the clearing organization for such contracts
may not be willing to permit such contracts to be held open for an
extended period of time, the existence of such customers is quite
hypothetical.
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``Specifically identifiable property:'' The Commission is
revising the definition of the term ``specifically identifiable
property'' to clarify and streamline the current definition of that
term. The use of definitions that are clearer should reduce
administrative costs. Of course, increasing clarity may be to the
detriment of those customers for whom such clarity results in
assignment to a category that they view as less favorable.
``Substitute customer property:'' The definition of the
term ``substitute customer property'' is being added to refer to cash
or cash equivalents delivered to the trustee by or on behalf of a
customer in order to redeem specifically identifiable property or a
letter of credit. This provision will benefit customers who, in a
bankruptcy event, seek to redeem their specifically identifiable
property or letters of credit.\245\ Introducing the concept of
substitute customer property may impose administrative costs, however,
because the trustee may have to expend time and resources on tracking
the substitute customer property and ensuring that such property ends
up in the proper pool of customer property once received.
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\245\ Benefits and costs associated with the use of substitute
customer property are addressed further below in connection with
Sec. 190.04(d)(3) in section III.C.2.
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``Swap:'' The Commission is amending the definition of
``cleared swap'' that appears in the current rules in order to clarify
what this term means for purposes of proposed part 190. This
clarification should serve the goals of clarity and transparency (and,
consequently, reducing administrative costs).
3. Regulation Sec. 190.02: General: Consideration of Costs and
Benefits
Section 190.02(a)(1) is revised to provide that the bankruptcy
trustee may, for good cause shown, request from the Commission an
exemption from the requirements of any procedural provision in proposed
part 190. This is in contrast to current Sec. 190.10(b)(1), which
provides only that a bankruptcy trustee may request an exemption from,
or extension of, any time limit prescribed in current part 190. This
expanded mechanism for a trustee to request exemptions should benefit
the estate and customers by allowing the trustee to request an
exemption that lowers administrative costs and increases timeliness.
This change, however, may impose administrative costs if the trustee's
request is ill-founded and the Commission were nonetheless to grant the
request.
The Commission does not believe that there will be any cost-benefit
implications to Sec. 190.02(a)(2) and (3), (b), (c), (d), and (e), as
those provisions largely align with the provisions in current part 190
from which they are derived.
Regulation Sec. 190.02(f) is a new provision which addresses the
context of a receiver for an FCM appointed due to a violation or
imminent violation of the customer property protection requirements of
section 4d of the CEA or of the regulations thereunder, or of the FCM's
minimum capital requirements in Sec. 1.17. In this context, the FCM
has been found to be in precarious financial condition. This provision
will permit the receiver to file a petition for bankruptcy of such an
FCM in appropriate cases. This provision may benefit public customers,
in that a bankruptcy proceeding may be necessary to protect those
customers' interests in customer property from losses in value.
However, this provision may have distributional effects as there may be
some customers who do not receive as much in bankruptcy as they
otherwise would have under the receivership. In addition, there could
be additional administrative costs that result from this provision, as
the bankruptcy trustee would have to spend time and resources
overseeing a bankruptcy proceeding that might not be entered into
absent the power granted to the receiver under this regulation. These
costs could possibly be greater than the costs of continuing to
administer the FCM under receivership.
Indeed, FIA suggested that the Commission should require that the
receiver must receive permission from the Commission before filing a
voluntary petition, given that this action ``would effectively close
the FCM.'' Closing the FCM would impose significant costs on the FCM
and, in a case where the Commission would have denied permission, those
costs could be unnecessary.
In considering the costs (discussed above) of what could be an
unnecessary voluntary filing for bankruptcy in contrast to the benefits
of avoiding delay in filing a necessary filing for bankruptcy, the
Commission determines that the context where this rule would be
applicable--only cases where a receiver has been appointed due to
violation or imminent violation of customer property protection
requirements, or of the FCM's minimum capital requirements--minimizes
the likelihood that a filing would turn out to be unnecessary, and
counsels in favor of avoiding delay.
4. Section 15(a) Factors--Subpart A
No comments were received on the application of the section 15(a)
factors to subpart A.
i. Protection of Market Participants and the Public
Subpart A of the proposed rules should increase the protection of
market participants and the public by clearly setting forth how
customers of FCMs and DCOs will be classified and treated, and how
their accounts will be categorized and treated, in the event of an FCM
or DCO insolvency. The goal of subpart A of the proposed rules is to
promote an orderly and cost-effective resolution of the insolvency of
an FCM or DCO, and to increase transparency to the customers of FCMs
and DCOs as to how their property would be treated in the event of such
an insolvency. However, as noted above, some of the provisions of
subpart A provide discretion to the trustee. While enhanced discretion
for the trustee has the benefit of permitting a more tailored approach,
it also has the cost of increasing the possibility of trustee mistake
or misfeasance.
ii. Efficiency, Competitiveness, and Financial Integrity
Subpart A of the proposed rules should promote efficiency (in the
sense of both cost effectiveness and timeliness) in the administration
of insolvency proceedings of FCMs and DCOs and the financial integrity
of derivatives transactions carried by FCMs and/or cleared by DCOs by
clearly communicating the goals and core concepts involved in such
insolvencies, and by setting forth clear definitions that have been
updated to account for current market practices. These effects should,
in turn, enhance the competitiveness and financial integrity of U.S.
FCMs and DCOs, by enhancing market confidence in the protection of
public customer funds and positions entrusted to U.S. FCMs and DCOs,
even if such an entity were to become insolvent.
iii. Price Discovery
Price discovery is the process of determining the price level for
an asset
[[Page 19395]]
through the interaction of buyers and sellers and based on supply and
demand conditions. To the extent that the revised regulations should
mitigate the need for liquidations in conditions of distress, they will
help avoid negative impacts on price discovery.
iv. Sound Risk Management Practices
Subpart A of the proposed rules should generally promote sound risk
management practices by setting forth the core concepts to which the
bankruptcy trustee must adhere in administering an FCM or DCO
bankruptcy.
v. Other Public Interest Considerations
Some of the FCMs or DCOs that might enter bankruptcy are very large
financial institutions, and some are (or are part of larger groups that
are) considered to be systematically important. A bankruptcy process
that effectively facilitates the proceedings is likely to help to
attenuate the detrimental effects of the bankruptcy on the financial
marketplace and thus benefit the financial system and thus the public
interest.
C. Subpart B--Futures Commission Merchant as Debtor
1. Regulation Sec. 190.03: Notices and Proofs of Claims: Consideration
of Costs and Benefits
Section 190.03(a)(1) replaces the requirement in current Sec.
190.10(a) that all mandatory or discretionary notices be sent to the
Commission via overnight mail with the requirement of sending the
notices by electronic mail.\246\ This change is expected to result in a
benefit to all parties required to provide notices to the Commission
because they will be able to avoid the costs of sending such notice in
hardcopy form via overnight mail. These revisions will also allow the
Commission to receive such notices--and thus, to act--much more
expeditiously.
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\246\ See also Sec. 190.03(d), which is adopting this new
method of providing notice to the Commission for any court filings
filed in a bankruptcy.
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Section 190.03(a)(2) is a new, principles-based provision that
replaces the more specific procedures for providing notice to customers
that appear in current Sec. 190.02(b) by allowing the trustee to
establish and follow procedures ``reasonably designed'' for giving
adequate notice to customers. Paragraph (a)(2) also provides that the
trustee's procedures for providing notice to customers should include
``the use of a prominent website as well as communication to customers'
electronic addresses that are available in the debtor's books and
records.'' A generalized and more modernized approach to notifying
customers will benefit the debtor's estate, as the process allows the
trustee to choose cost effective means of providing notice to customers
within the more flexible bounds of the proposed regulation, resulting
in savings of administrative costs. Similarly, it will benefit parties
interested in the proceedings, by permitting the trustee flexibly to
choose methods of notification that are more prompt and effective. On
the other hand, affording the trustee increased discretion in how to
provide notice to customers will carry the potential cost of trustee
misfeasance and abuse of such discretion, as discussed above in section
III.A.2.ii.
Section 190.03(b)(1) will revise the time in which a commodity
broker must notify the Commission of a bankruptcy filing. These
revisions codify procedures whereby (1) in a voluntary bankruptcy
proceeding, the commodity broker will provide advance notice to the
Commission ahead of the filing to the extent practicable, and (2) in an
involuntary bankruptcy proceeding, the commodity broker will notify the
Commission immediately upon the filing. These revisions will foster the
ability of the Commission and its staff to perform their duties to
protect customers by providing the Commission with notice of any
bankruptcy proceeding as soon as possible.
Section 190.03(b)(2) removes the current deadline of three days
after the order for relief by which the trustee, the relevant DSRO or a
clearing organization must notify the Commission of an intent to
transfer or to apply to transfer open commodity contracts in accordance
with section 764(b) of the Bankruptcy Code. It instead instructs such
parties to give such notice of an intent to transfer ``[a]s soon as
possible.'' To the extent that the three-day deadline was limiting
transfer arrangements, this revision will benefit the estate and some
customers by removing time constraints that could be construed to
prohibit notification after expiration of the deadline (and thus, allow
the trustee to form the intent to transfer after such time).
The revision will also enhance the orderly functioning of the
marketplace at a time of severe market disruption by facilitating
prompt notice of intent to transfer. On the other hand, by giving the
trustee, DSRO, or clearing organization more latitude for providing
notice of an intent to transfer, there will be the potential cost of
misfeasance in waiting an unreasonable amount of time to provide such
notice (or to form such intent), which could ultimately impose
additional costs on customers who would have benefited from an earlier
transfer.\247\
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\247\ See discussion of Sec. 190.00(c)(4) in section III.b.1
above.
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Section 190.03(c)(1) removes the requirement that the trustee must
publish notice to customers with specifically identifiable property in
a newspaper of general circulation serving the location of each branch
office of the debtor prior to liquidating such property and instead
establishes a requirement to notify the customers with specifically
identifiable property in accordance with Sec. 190.03(a)(2). The
Commission believes that this change will result in lower
administrative costs, as the trustee will be relieved of the cost of
identifying, and publishing notice in, such newspapers. Moreover, the
trustee will no longer be required to wait seven days after the second
publication date to commence liquidation of specifically identifiable
property. Rather, the trustee will be free to commence liquidation of
specifically identifiable property starting on the seventh day after
entry of the order for relief. This will benefit the estate, and
potentially the affected customers, by allowing the trustee more
freedom (from the time constraints set forth in the current
regulations) in liquidating the specifically identifiable property,
which, in turn, is expected ultimately to result in a better price.
Moreover, the provisions in Sec. 190.03(a)(2) that describe the
notification of customers with specifically identifiable property will
benefit public customers by allowing them to receive notice on a
``prominent website'' and, more specifically, at their electronic
addresses (to the extent such addresses are in the debtor's books and
records), thereby enhancing their ability to request the return of
their specifically identifiable property within the specified
timeframe.
Section 190.03(c)(2) provides the bankruptcy trustee with authority
to treat open commodity contracts of public customers held in hedging
accounts designated as such in the debtor's records as specifically
identifiable property.\248\ This is a change from the current
framework, under which the trustee treats customers with specifically
identifiable property on a bespoke basis. Specifically, to the extent
the trustee does not receive transfer instructions regarding a
customer's specifically identifiable open commodity contracts, the
trustee will be required to liquidate
[[Page 19396]]
such contracts within a certain time period. To the extent the trustee
exercises the authority derived from revised Sec. 190.03(c)(2), they
will (subject to the revision discussed in the next paragraph) be
required to notify each relevant customer and request instructions
whether to transfer or liquidate the open commodity contracts. To the
extent the trustee would not exercise such authority, the trustee will
treat these open commodity contracts the same as other customer
property and effect a transfer of such contracts. This new framework
should reduce administrative costs and benefit the bankruptcy estate by
allowing the trustee to rely on hedging designations made during
business as usual, thereby allowing the trustee to make swift and cost
effective decisions regarding the treatment of open commodity contracts
during a bankruptcy situation.
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\248\ See proposed Sec. 190.10(b)(2) for the process of
designating an account as a ``hedging account.''
---------------------------------------------------------------------------
ACLI suggested that Sec. 190.03(c)(2) should express a preference
for transfer over liquidation with respect to specifically identifiable
property in the form of positions that are identified as hedging
positions, and consult (on an individual basis) each customer's
expressed preferences. However, Sec. 190.00(c)(4) sets forth a
preference for porting (transfer) of all open commodity contract
positions of public customers. Thus, while treating customers with
hedging positions on a bespoke basis may benefit some of them, it may
be at the cost of effectively transferring a larger group of customer
positions. Some of those may be customers with hedging positions whose
positions are not transferred due to limited time and resources
available to be devoted to bespoke treatment. Indeed, SIFMA AMG/MFA
noted that ``permitting the trustee this flexibility (subject to the
additional customer protections [of consulting existing instructions,
as described immediately below]) serves the interest of customers as a
whole by facilitating a more rapid transfer of customer positions and
property.''
SIFMA AMG/MFA suggested that it would ``further the goal of
expediency'' if the regulation would require the trustee to ``first
consult the instructions (regarding preferences with respect to
transfer or liquidation of open commodity contracts) provided by a
public customer to the debtor at the time of opening the relevant
hedging account, and only if such instructions are missing or unclear,
to then require such customer to provide the trustee with written
instructions as contemplated by proposed Sec. 190.03(c)(2).'' The
Commission agrees, and has made corresponding changes to the
regulation. While there is a cost involved in scanning to determine if
there are instructions, there is a significant benefit in avoiding
duplication, and in avoiding cases where the customer, having already
provided instructions, does not reply to a duplicative request in time
for that reply to be acted upon.
The Commission does not believe that there are any cost-benefit
implications to Sec. 190.03(c)(3) or (4) (other than those discussed
above with respect to the new notice provision referenced in each) or
to Sec. 190.03(d).
Section 190.03(e), sets forth the information required from
customers regarding their claims against the debtor. As revised, Sec.
190.03(e), reorganizes and adds certain information items to those
listed in the current regulation. The Commission anticipates that,
while customers are likely to have this information at their disposal,
there could be costs associated with gathering it all in one place.
However, this additional and more detailed information should benefit
the estate, the bankruptcy court and customers alike by allowing all
parties to have a fuller, more detailed and more transparent picture of
the customer claims against the debtor. It should foster the reduction
of administrative costs and the prompt administration of the estate.
Moreover, the Commission is of the view that clarifying several of the
information items listed in proposed Sec. 190.03(e) and revising the
proof of claim form to match more closely the text of the regulation
should result in benefits to all parties involved in an FCM
bankruptcy--the estate, the bankruptcy court, and the customers--by
making the bankruptcy claims process more prompt and cost effective.
CME sees Sec. 190.03(e) and (f), and the revised proof of claim form,
as ``major improvements over the current rules and proof of claim
template.''
This regulation also provides that the specific items referred to
are to be included ``in the discretion of the trustee.'' This
discretion will permit the trustee to tailor the information requested
to the specifics of the debtor's prior business, as well as the
already-available records. This will permit the trustee to limit or to
increase the information requested, in appropriate cases, with a
corresponding increase in cost effectiveness. To be sure, there may be
corresponding costs (both in administrative expense and time) if the
set of information requested by the trustee in the exercise of their
discretion turns out, in retrospect, to be overly narrow (or broad).
Proposed Sec. 190.03(f) is new and provides the trustee with
flexibility to modify the customer proof of claim form set forth in
appendix A to part 190. Specifically, Sec. 190.03(f) allows the
trustee to modify the proof of claim form to take into account the
particular facts and circumstances of the case. This provision should
benefit the estate because the trustee will be able to modify the proof
of claim form in a way that gathers the information necessary in a
manner that is both effective and cost effective based on the specific
facts of the case, and the trustee no longer will be required to get an
order from the bankruptcy court to make such modifications, thereby
saving time and resources. This new provision should also benefit
customers, who will be able to take advantage of the more streamlined
and tailored proof of claim forms developed by the trustee, and should,
therefore, spend less time filling out such forms. It should also
benefit the estate, which should bear less administrative cost in
evaluating such forms. Again, there may be corresponding administrative
costs if the set of information in a modified proof of claim form turns
out, in retrospect, to be overly narrow (or broad).
2. Regulation Sec. 190.04: Operation of the Debtor's Estate--Customer
Property: Consideration of Costs and Benefits
Regulation Sec. 190.04(a) explicitly provides a policy and a
direction by which the trustee should use best efforts to transfer open
commodity contracts and property held by the failed FCM for or on
behalf of its public customers. This policy and direction is
substantially similar to the policy and direction under current
regulations.\249\ The changes set forth a clear policy for trustees to
follow, which should benefit customers of the failed FCM in a
streamlined description of the transfer process that is consistent with
the core concepts set forth in this part. The costs and benefits of the
preference for transfer are discussed in section III.B.1 above, in the
context of Sec. 190.00(c)(4).
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\249\ See current Sec. 190.02(e).
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In Sec. 190.04(a)(1), the Commission is clarifying language; these
clarifications should benefit customers of the failed FCM by minimizing
the likelihood of future disputes concerning qualification of property
for transfer. The Commission is also changing the direction in current
Sec. 190.02(e) that the trustee ``must immediately use its best
efforts to effect a transfer'' to a direction that the trustee ``shall
promptly use its best efforts to effect a transfer.'' This modest
change in focus will benefit public customers by recognizing that,
[[Page 19397]]
while effecting transfer is an extraordinarily high priority, it is
possible that there may be higher priorities at the inception of the
bankruptcy proceeding, e.g., it may be necessary to preserve some
portion of customer property from an immediate threat.\250\ Once again,
by enhancing the trustee's discretion as to how to manage the
liquidation, there is the cost that the trustee will make a mistake.
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\250\ The Commission is implementing the same change--the
addition of the word ``public'' before ``customers''--to Sec.
190.04(a)(2). The anticipated cost and benefit analysis of the
change is the same as in Sec. 190.04(a)(1).
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Section 190.04(a)(2) directs the FCM (or a trustee, if one has been
appointed) in a case where an involuntary petition for bankruptcy is
filed against the FCM to use best efforts to effect a transfer within
seven calendar days. The current regulation limits the commodity broker
to trading for liquidation unless otherwise directed by the Commission,
by any applicable self-regulatory organization or by the court. Revised
Sec. 190.04(a)(2) removes this limitation. Rather, revised Sec.
190.04(e)(4) more generally covers limitations on the business of an
FCM in bankruptcy. Similarly, any requirement to transfer customer
positions would more properly be addressed by Sec. 1.17(a)(4). The
Commission believes that these changes will benefit the estate and the
public customers by mitigating the administrative costs by removing a
redundant regulation. The Commission does not anticipate any resulting
increase in cost.
In Sec. 190.04(b)(1), the Commission is clarifying and updating
conditions under which the trustee may make payments of variation
settlement and initial margin. In sum, the revisions clarify that
payments can be made prior to pending transfers or liquidation, not
just pending liquidation. The revision should benefit the customers of
the FCM debtor in clarifying that the trustee has two paths in treating
open commodity contracts--transfer, and if transfer is not possible,
liquidation. The changes describe more accurately the types of payments
that the trustee will be permitted to make and account specifically for
the types of entities to which the trustee is permitted to make the
types of payments referred to in this section. The revisions clarify
the current regulatory text, which should benefit stakeholders. The
Commission does not anticipate any increased cost from these changes.
Section 190.04(b)(1)(i) prevents the trustee from making any
payments of behalf of any commodity contract account that is in
deficit, to the extent within the trustee's control. The revised
provision recognizes that certain accounts may be held on an omnibus
basis on behalf of many customers. To the extent the trustee is making
a margin payment with respect to such an omnibus account, it may be out
of the trustee's control to only make payment with respect to those
customer accounts that are not in deficit. The proviso similarly will
clarify that this prohibition on making margin payments on behalf of
accounts in deficit is not intended to prohibit ``upstream'' entities
(e.g., a CCP or an intermediary through which the debtor clears) from
exercising legal rights to margin under applicable law. Due to the
structure of omnibus accounts and the explicit requirement of lack of
trustee control, any payments that are made under the revised provision
would have been made pursuant to Commission authorization under the
current regulation. Thus, neither provision should add any new
regulatory burden and the Commission does not estimate that there will
be any additional cost associated with the proposed changes.
Section 190.04(b)(1)(ii) is a new regulation that adds an explicit
restriction, that the trustee cannot make a margin payment with respect
to a specific customer account that would exceed the funded balance of
that account. ICI agrees that this restriction supports the pro rata
distribution principle, and should benefit the other customers of the
FCM debtor--any payment of customer property in excess of a particular
customer's funded balance is to the detriment of other customers.\251\
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\251\ While there will be a corresponding detriment to the
customers who may have benefited from such excess payments, those
customers would only be losing something that runs counter to the
statutory goal of pro rata distribution. Moreover, there are no
likely incentive effects because, on this issue, customers stand
behind the ``veil of ignorance''--it is difficult to identify, ex
ante, which customers would be in the group of gaining customers (or
in the group of losing customers).
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Section 190.04(b)(1)(iii) is a minor, non-substantive clarification
of current Sec. 190.02(g)(1)(ii), that should not create any changes
from the status quo with regards to costs and benefits.
In Sec. 190.04(b)(1)(iv)-(v), the Commission is clarifying that
margin must only be used (i.e., paid to a clearing organization or
upstream intermediary) consistent with section 4d of the CEA. Section
190.04(b)(1)(vi) states explicitly the conditions under which the
trustee may make payments to meet margin obligations.
Together, these changes protect customers who make payments after
the order for relief by ensuring that they fully benefit from those
payments (and thus incentivize customers to make such payments in
appropriate circumstances). Moreover, more clearly permitting the
trustee, for the purpose of curing customer margin deficiencies, to use
funds in an account class that exceed the sum of all of the net equity
claims for that account class, should facilitate the orderly transfer
of positions and contracts following the default, lessening the
potential for further roiling markets. Finally, these changes taken
together also benefit the broader group of customers of the FCM debtor
by clarifying the treatment of funds in segregated accounts, and thus
mitigating administrative costs.
These changes are designed to clarify the statutory requirements
applicable to funds in the customer account. While there may be
accounting requirements associated with funds in segregated accounts,
substantially all of the costs of such accounting are already incurred
pursuant to the segregation rules. Thus, the Commission does not
anticipate that there should be any material additional costs
associated with this change.
Section 190.04(b)(2) allows the trustee discretion as to whether to
issue margin calls to customers who are undermargined, deleting highly
prescriptive conditions from the current rule. The revision should
benefit public customers of the FCM debtor by giving the trustee the
flexibility to recognize that there may be situations in which issuing
a margin call is impracticable because the trustee is operating the FCM
in ``crisis mode'' and may be pending wholesale transfer of liquidation
of open positions.
It is, however, possible that the trustee would exercise their
discretion poorly, or in a manner that, in retrospect, would be seen to
be to the detriment of the estate, and that the trustee would have
failed to issue a margin call in a situation in which a public customer
would have paid the call (and in which the balance of administrative
cost and amount recovered would mean that, in retrospect, it would have
profited the estate if the call was made). Such failure could result in
a cost to the estate of the FCM debtor to the extent that such funds
are not available.
The balance of the revisions to Sec. 190.04(b) should cause no
change to the related costs and benefits.
Section 190.04(b)(3) retains the concept in current Sec.
190.02(g)(3), with updated cross-references. The Commission does not
anticipate that there will be any costs or benefits to the proposed
minor revisions.
[[Page 19398]]
Section 190.04(b)(4) addresses the trustee's obligation to
liquidate accounts in deficit, or where a mark-to-market calculation
would result in a deficit, or where the customer fails to meet a margin
call within a reasonable time. The revision will clarify the
applicability of current authority to a situation that is already
implicit in the current rule. The regulation does not require the
trustee to make additional calculations but, if a calculation made by
the trustee reveals that the mark-to-market value of the account is a
deficit, the trustee is instructed to liquidate the account as soon as
practicable rather than to wait for the time that payment would be due.
The benefit of this change should be to liquidate accounts in deficit
more promptly (thus mitigating potential further losses); the cost will
be the cost of engaging in such liquidation, as well as the possibility
that, absent prompt liquidation, the deficit would have been mitigated
due to favorable intervening changes in market value (or, potentially,
an intervening deposit of additional collateral by the customer).\252\
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\252\ This change may also provide incentives for a customer
whose account is in, or is approaching, deficit to make such
payments promptly to avoid liquidation of their positions.
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Second, the Commission is adding the concept of ``exigent
circumstances'' as a new exception to the general and long-established
rule that a minimum of one hour is sufficient notice for a trustee to
liquidate an undermargined account.
SIFMA AMG/MFA urged the Commission to curtail the trustee's
discretion in Sec. 190.04(b)(4) in a number of ways: By requiring the
trustee to defer to the margin call timings present in applicable
underlying agreements between the customer and the (pre-bankruptcy)
debtor, and by providing customers with the opportunity to demonstrate
that a margin payment was made even if the FCM's books and records do
not yet reflect its receipt. By contrast, ICI noted that it is vital
that the trustee be required to swiftly crystallize, and therefore cap
the losses resulting from, such deficits by promptly liquidating
accounts in deficit or for which a customer has failed to meet a margin
call. ICI further stated that if the accounts were allowed to remain
open, additional losses on the delinquent customers' transactions would
be borne by the FCM's non-defaulting customers.
The Commission has determined not to make the requested changes.
While making those changes would benefit those customers who are
treated on a more bespoke it would be to the detriment of the FCM's
other customers. Enhancing the trustee's discretion to determine how
long a customer has to meet a margin call, and to rely on the FCM's
books and records in doing--and refusing to curtail that discretion (by
forcing the trustee to defer to margin call timings in pre-bankruptcy
agreements, or to give the customer an opportunity to demonstrate that
the a margin payment was made) as requested by the comment--will
benefit other customers of the debtor FCM by giving the trustee
flexibility to respond to market conditions following an FCM default.
It is important to recognize that in stressed markets or in situations
where communication protocols cannot practicably be followed,
permitting a customer time to post margin in accordance with a pre-
bankruptcy agreement--or, in some cases, even notice of one hour--may
be insufficiently prompt to mitigate appropriately (1) the risk that
such customers would default, (2) the risk that delaying liquidation of
such a customer's positions increases the potential for and likelihood
that they would do so with a debit balance, and (3) the risk that the
size of that debit balance would increase as a result of that delay,
thereby reducing the funded balances of those other customers. However,
customers who are required to make payments more promptly would bear
associated costs, from making such payments in a reduced time frame,
from having to make duplicate payments (while these would ultimately be
returned in full, this would be without interest) or from having
contracts liquidated that would otherwise not have been liquidated if
the customer had more time to make payment.\253\
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\253\ SIFMA AMG and MFA also suggested that the regulation
should be amended to give customers credit for any gains that were
haircut due to gains-based haircutting by a DCO. Any such
haircutting of a customer's gains is due to application of the
customer's agreement with the FCM. Moreover, giving some customers
credit despite such agreements would increase their recovery, but at
the expense of other customers, as discussed in detail in section
II.C.7 above.
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The Commission is adding Sec. 190.04(b)(5) to guide the trustee in
assigning liquidating positions to the FCM debtor's customers when only
a portion of the open contracts are liquidated. The benefit of this new
provision is that it presents a clear and transparent mechanism by
which the trustee is to allocate the positions. This mechanism will
protect the customer account as a whole, by establishing a preference
for assigning liquidating transactions to individual customer accounts
in a risk-reducing manner. The allocation mechanism will, however, be
subject to the trustee's exercise of reasonable business judgement. It
is possible that such judgment could be exercised in a poor manner (or
in a manner that, in retrospect, turns out to be regrettable), with
resultant cost to the FCM debtor estate.
Section 190.04(c) requires the trustee to use its best efforts to
liquidate open commodity contracts that are not settled in cash (i.e.,
those that settle via physical delivery of a commodity) where the
contract would move into delivery position. These clarifications are
likely to reduce administrative costs, to the benefit of the estate
(and, ultimately, customers). CME believed that this provision would
have the benefit of avoiding unnecessary disruptions to the delivery
process by customers that did not intend to participate in making or
taking delivery. There should be no cost associated with the revision
because, while there may be some customers who would prefer to hold
their contracts through delivery, the current regulations, just as the
revised regulations, direct the trustee to liquidate contracts coming
into delivery position.\254\
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\254\ See, e.g., current Sec. 190.03(b)(5).
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Section 190.04(d) will clarify requirements concerning the
liquidation and valuation of open positions. Section 190.04(d)(1) and
(2) clarify requirements for liquidating open commodity contracts and
specifically identifiable property other than commodity contracts.
Section 190.04(d)(3) codifies the Commission's longstanding
policies of pro rata distribution and equitable treatment of customers
in bankruptcy, as described in Sec. 190.00(c)(5) above, as applied to
letters of credit posted as margin. Under the new provision, the
trustee may request that a customer deliver substitute customer
property with respect to any letter of credit received, acquired or
held to margin, guarantee, secure, purchase, or sell a commodity
contract. The amount of the substitute customer property to be posted
may, in the trustee's discretion, be less than the full-face amount of
the letter of the credit, if such lesser amount is sufficient to ensure
pro rata treatment consistent with Sec. Sec. 190.08 and 190.09. If
necessary, the trustee may require the customer to post property equal
to the full-face amount of the letter of credit to ensure pro rata
treatment. Pursuant to paragraph (d)(3)(i), if such a customer fails to
provide substitute customer property within a reasonable time specified
by the trustee, the trustee may draw upon the full amount of the letter
of credit or any portion thereof (if the
[[Page 19399]]
letter of credit has not expired). Under paragraph (d)(3)(ii), the
trustee is instructed to treat any portion of the letter of credit that
is not fully drawn upon as having been distributed to the customer.
However, the amount treated as having been distributed will be reduced
by the value of any substitute customer property delivered by the
customer to the trustee. Any expiration of the letter of credit after
the date of the order for relief would not affect this calculation.
Pursuant to paragraph (d)(3)(iii), letters of credit drawn by the
trustee, or substitute customer property posted by a customer, are to
be considered customer property in the account class applicable to the
original letter of credit.
ICI, SIFMA AMG/MFA, and Vanguard supported Sec. 190.04(d)(3) on
the grounds that it has the benefit of treating customers equitably by
avoiding a more favorable treatment of customers who post letters of
credit than those who post cash and securities.
These proposed new provisions could impose costs on customers who
use letters of credit as collateral for their positions. Such customers
could be considered to have received distributions up to the full
amount of the letter of credit, or the trustee may draw upon a portion
or possibly the full amount of the letter of credit.
Moreover, a number of commenters,\255\ expressed the concern that
requests for substitute customer property in the special context of
delivery letters of credit could cause sudden liquidity needs, and
substantial hardship to customers. For example, CME noted that, while
they support Sec. 190.04(d)(3) outside the context of delivery letters
of credit, they see difficulties in that context, specifically in the
case of deliveries for certain energy contracts, often which take place
over 30 days. The delivery letters of credit for these contracts can
involve hundreds of millions of dollars in face amounts, and CME is of
the view that it would cause substantial liquidity hardship for buyers
to have to substitute cash in such amounts.
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\255\ CMC, CME, FIA.
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While the discussion above represents potentially important costs,
the Commission is noting factors that can alleviate these costs, and is
implementing provisions that it believes substantially mitigate these
costs: First, the Commission is adding a new Sec. 190.04(d)(3)(iv),
which provides that the trustee shall, in exercising their discretion
with regard to addressing letters of credit, including as to the timing
and amount of a request for substitute customer property, endeavor to
mitigate, to the extent practicable, the adverse effects upon customers
that have posted letters of credit, in a manner that achieves pro rata
treatment among customer claims. Second, the Commission notes the
likelihood that requests for substitute customer property may not apply
to the particular delivery letters of credit the commenters have
expressed concerns about: As requested by CME, the Commission confirms
that (1) a delivery letter of credit that is posted directly with the
DCO or with the delivery counterparty, rather than with or through the
FCM, and for which the FCM is not a named beneficiary, is outside the
delivery account class, i.e., it does not constitute cash delivery
property (or property of the debtor's estate), and (2) the provisions
in other parts of the part 190 regulations regarding treatment of
letters of credit posted with or through the debtor FCM do not apply
such a letter of credit.
The Commission's priority in this context is to ensure the
customers using letters of credit to meet margin obligations are
treated in an economically equivalent manner to those who have posted
other types of collateral, so that there is no incentive to use such
letters of credit to circumvent the pro rata distribution of margin
funds as set forth in section 766(h) of the Bankruptcy Code.\256\
Moreover, if there are shortfalls in customer property in a particular
account class, and public customers posting letters of credit are
protected from sharing in those shortfalls, those public customers
would benefit. However, the shortfalls would, inevitably, instead be
allocated to other public customers, who would suffer corresponding
losses. Regulation Sec. 190.04(d)(3) supports the policy of pro rata
treatment of public customers embodied in section 766(h) of the
Bankruptcy Code by clarifying that letters of credit cannot be used to
avoid pro rata distribution of margin funds. It therefore avoids
concentrating losses on those public customers (who are likely to be
smaller customers) that cannot qualify for, or cannot afford the cost
of, letters of credit, or otherwise do not use letters of credit as
collateral. Moreover, by directing the trustee to exercise their
discretion, including with respect to amounts and timing of requests
for customer property, in a manner that mitigates adverse effects on
those customers that have posted letters of credit, it will mitigate
the liquidity costs to such customers.
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\256\ See, e.g., 48 FR at 8718-19.
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Section 190.04(e)(1) concerns liquidation of open commodity
contracts in the market, while paragraph (e)(2) addresses liquidation
by book entry offset. Both of these revised regulations delete the
requirement in the current regulations that a clearing organization
must obtain approval for its rules regarding liquidation of open
commodity contracts, a requirement that is superfluous in light of the
regulatory framework set forth in part 40 of the Commission's
regulations, and in light of the notice-filing regime established by
Congress in section 5c(c) of the CEA.\257\ This has the benefit of
enabling clearing organizations to avoid the cost of filing a request
for rule approval, pursuant to CEA section 5c(c)(4) and Regulation
Sec. 40.5. There are potential costs, in that an ill-conceived rule
could be more readily identified, and addressed, in a rule approval
process. However, Commission staff, as a matter of practice, closely
reviews all notice-filed clearing organization rules.
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\257\ 7 U.S.C. 7a-2(c).
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Section 190.04(e)(3) is new, and confirms that an FCM or foreign
futures intermediary through which a debtor FCM carries open commodity
contracts may exercise any enforceable contractual rights that the FCM
or foreign futures intermediary has to liquidate such commodity
contracts. It provides that the liquidating FCM or foreign futures
intermediary must use ``commercially reasonable efforts'' in the
liquidation and provides the trustee a damages remedy if the FCM or
foreign futures intermediary fails to do so. Damages are the only
remedy; under no circumstance can the liquidation be voided.
This new provision will benefit carrying FCMs by confirming
explicitly that carrying FCMs are allowed to exercise enforceable
contractual rights to liquidate contracts, which reduces ambiguity and
thus will reduce administrative costs. At the same time, clarification
of the availability of the damages remedy will help to protect
creditors of the debtor FCM's estate in the event that the carrying FCM
does not use commercially reasonable efforts in liquidating the open
contracts (and thus will incentivize carrying FCMs to act in a
commercially reasonable manner). Thus, the regulation itself provides
the estate with a potential mitigant for the costs in the form of a
damages remedy.
The remainder of the revisions to Sec. 190.04(e)(4) and (f) are
non-substantive language changes and
[[Page 19400]]
clarifications and updated cross-references and should not have
associated costs or benefits.
3. Regulation Sec. 190.05: Operation of the Debtor's Estate--General:
Consideration of Costs and Benefits
In Sec. 190.05, the Commission is addressing general issues
regarding the operation of the debtor's estate. In both Sec. 190.05(a)
and (b), the Commission is making revisions providing the trustee with
more flexibility to act in a bankruptcy situation. Section 190.05(a),
for example, provides that the trustee ``shall use reasonable efforts''
to comply with the CEA and the Commission's regulations. Section
190.05(b) requires the trustee to ``use reasonable efforts'' to compute
a funded balance for each customer account that contains open commodity
contracts or other property as of the close of business each business
day until such open commodity contracts and other property in such
account have been transferred or liquidated, ``which shall be as
accurate as reasonably practicable under the circumstances, including
the reliability and availability of information.'' These two revisions
will benefit the estate by recognizing that a bankruptcy could be an
emergency event, that perfectly reliable information could be
unavailable or inordinately expensive to obtain, and that therefore the
trustee should be allowed some measure of flexibility to act reasonably
given the particular circumstances of the case. CME noted that Sec.
190.05(b) will have the benefit of allowing the trustee to transfer
more promptly public customers' positions and property than if the
trustee were held to a strict standard of precision. On the other hand,
affording the trustee increased discretion in complying with the CEA
and the Commission's regulations, and in computing a funded balance for
each customer account, may carry the potential cost of trustee mistake,
misfeasance, or abuse of such discretion, as discussed above.
Whereas current Sec. 190.04(b) requires a trustee to compute a
funded balance only for those customer accounts with open commodity
contracts, revised Sec. 190.05(b) expands the scope of customer
accounts for which a trustee is required to compute a funded balance to
those accounts with open commodity contracts or other property
(including, but not limited to, specifically identifiable property).
This expansion of the trustee's duties represents an administrative
cost, as the trustee will have to expend time and resources at the
close of business each business day to compute the funded balance of
all customer accounts. However, this revision should also result in a
benefit to those customers whose accounts hold property but no open
commodity contracts, in the form of enhanced information about their
financial position (including with regard to collateral, the value of
which may change on a daily basis, and with regard to the percentage
distribution currently available). These customers will, under the
revised provision, receive daily computations of the funded balance of
their accounts with the debtor.
However, revised Sec. 190.05(b) also narrows the trustee's duty
compared to current Sec. 190.04(b): While the current provision states
that the trustee ``must compute a funded balance for each customer
account . . . each day,'' the revised provision only requires the
trustee to ``use reasonable efforts'' to do so. Regulation Sec.
190.00(c)(3)(i)(C) provides that ``reasonable efforts'' should only be
less than ``best efforts'' to the extent that this would benefit public
customers as a class. Exercises of discretion by a trustee that, on a
net basis, benefit public customers as a class may, on a net basis,
impose costs on individuals or groups within that class. For example,
there theoretically may be cases where, because the administrative cost
of computing a funded balance would outweigh the benefit of doing so to
public customers as a class, the trustee, in exerting ``reasonable
efforts,'' determines not to do so on a particular day or for a
particular time. As ICI points out in their comment letter, that
decision would harm certain customers, i.e., regulated funds, who have
a particular need to confirm the existence and value of their
transactions and associated margin.
Section 190.05(c) requires the debtor to maintain ``records
required under this chapter to be maintained by the debtor, including
records of the computations required by this part'' ``until such time
as the debtor's case is closed.'' This revision expands the scope of
records that must be maintained, thereby imposing certain
administrative costs, but should benefit the estate, because it will
limit the amount of time the trustee will have to maintain the relevant
records.
Section 190.05(d) requires the bankruptcy trustee to use all
reasonable efforts to continue to issue account statements for customer
accounts that contain open commodity contracts or other property, and
to issue account statements reflecting any liquidation or transfer of
open commodity contracts or other property promptly after such
liquidation or transfer. This provision will likely result in
administrative costs, as the trustee will have to expend time and
resources issuing account statements to customers. It will benefit
customers because it should help them to keep track of their commodity
contracts (and the continued availability of hedges) and the property
in their accounts, including in particular when such contracts and
property are liquidated or transferred, even during a bankruptcy. ICI
noted that this is of particular benefit to regulated funds, providing
them with a basis to confirm the existence and value of their
transactions and associated margin.
Section 190.05(e)(1) allows a bankruptcy trustee to effect
transfers of customer property in accordance with Sec. 190.07, but
requires the trustee to obtain court approval prior to making any other
disbursements to customers. This provision should benefit the estate
and customers by allowing the trustee, without court approval, to port
customers' positions and associated property to a solvent FCM as
quickly as possible in a bankruptcy situation. In the event that too
much customer property (that is, an amount in excess of the ultimate
pro rata share) is transferred for those customers whose positions are
being ported, and cannot be offset or clawed back, it could result in
costs to other customers, for whom less than their pro rata share would
be available.
Section 190.05(e)(2) allows the bankruptcy trustee to invest the
proceeds from the liquidation of commodity contracts or specifically
identifiable property, and any other customer property, in obligations
of or guaranteed by the United States, so long as the obligations are
maintained in depositories located in the United States or its
territories or possessions. The revised regulation expands the scope of
customer property that the trustee is permitted to invest in such a
manner to include ``any other customer property.'' This change should
benefit customers, in that additional customer property could be
invested (in this limited manner).
Section 190.05(f) requires the trustee to apply the residual
interest provisions contained in Sec. 1.11 ``in a manner appropriate
to the context of their responsibilities as a bankruptcy trustee
pursuant to'' the Bankruptcy Code and ``in light of the existence of a
surplus or deficit in customer property available to pay customer
claims.'' This explicit requirement to continue to apply the residual
interest requirements set forth in Sec. 1.11 may result in
administrative costs, since the trustee would require resources to do
so. However, this provision should benefit customers by
[[Page 19401]]
making it more likely that they would receive what they are entitled to
receive from the debtor's estate. Indeed, Vanguard noted that the
residual interest requirement is a valuable buffer to protect
customers.
4. Regulation Sec. 190.06: Making and Taking Delivery Under Commodity
Contracts: Consideration of Costs and Benefits
Section 190.06 addresses the making and taking of deliveries under
commodity contracts.
Specifically, Sec. 190.06(a)(2) requires the trustee to use
``reasonable efforts'' (in contrast to the current ``best efforts'') to
allow a customer to deliver physical delivery property that is held
directly by the customer in settlement of a commodity contract, and to
allow payment in exchange for such delivery, and for both of these to
occur outside the debtor's estate, where the rules of the exchange or
clearing organization prescribe a process for delivery that allows
this.
Management of contracts in the delivery positions involves a
significant degree of tailored administration. Under the best efforts
standard, the trustee may spend more time (and thus incur higher costs)
focusing on the needs of a few customers, which could detract from the
trustee's ability to manage the estate more broadly. Accordingly, the
change from ``best efforts'' to ``reasonable efforts'' should benefit
creditors of the estate (as a whole) as the trustee should not need to
provide a disproportionate amount of individualized treatment to such
contracts.\258\ However, particular customers that would otherwise have
received the trustee's focused treatment under the ``best efforts''
standard could suffer a cost from the change.
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\258\ As discussed above in section II.A.1, the trustee in
exerting best efforts to meet a standard must diligently exert
efforts to meet that standard ``to the extent of its own total
capabilities.'' By contrast, in exerting ``reasonable efforts'' to
meet a standard, the Commission expects that the trustee will work
in good faith to meet the standard, but will also take into account
other considerations, including the impact of the effort necessary
to meet the standard on the overarching goal of protecting public
customers as a class.
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Section 190.06(a)(3) provides guidance to address situations when
the trustee determines that it is not practicable to effect delivery
outside the estate and therefore, delivery is made or taken within the
debtor's estate. The revisions provide the trustee with the flexibility
to act ``as it deems reasonable under the circumstances of the case,''
but set an outer bound to the trustee's discretion in requiring them to
act ``consistent with the pro rata distribution of customer property by
account class.'' This provision again will have the benefits and costs
of enhanced discretion discussed above, but includes an outer bound to
that discretion.
In Sec. 190.06(a)(4), the Commission adds a new provision to
reflect that delivery may need to be made in a securities account.\259\
The new provision should benefit customers who require the delivery of
securities, and the trustee, by permitting those securities to be
delivered to the proper type of account. By setting limits, the
provision should mitigate the risk of transferring too much value out
of the commodity contract account (and creating a risk of an
undermargin or deficit balance).
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\259\ This is only relevant for debtor FCMs that are also
broker-dealers.
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Section 190.06(b) is also new. It creates an account class for
physical delivery property held in delivery accounts and the proceeds
of such physical delivery property. This account class is further be
sub-divided into separate physical delivery and cash delivery account
subclasses. In general, creating the delivery account class should help
protect customers with property in delivery accounts following a
default, because delivery accounts are not subject to the Commission's
segregation requirements. The further sub-division into sub-classes
recognizes that cash is more vulnerable to loss, and more difficult to
trace, as compared to physical delivery property. This will likely
benefit those with physical delivery claims; customers in the cash
delivery sub-class would be likely get a pro rata distribution that is
less. The benefits and costs of creating these sub-classes were
discussed more fully above in reference to the definition of account
class in proposed Sec. 190.01.
5. Regulation Sec. 190.07: Transfers: Consideration of Costs and
Benefits
Section 190.07(a) works to promote transfers of commodity contracts
from a debtor FCM. It does so by prohibiting any clearing organization
or self-regulatory organization from adopting, maintaining in effect,
or enforcing rules that interfere with the acceptance by its members of
transfers of open commodity contracts and the equity margining or
securing of such contracts from FCMs with respect to which a petition
in bankruptcy has been filed, if the transfers have been approved by
the Commission.
The revised regulation includes the provisos that it (1) does not
limit the exercise of any contractual right of a clearing organization
or other registered entity to liquidate or transfer open commodity
contracts, and (2) should not be interpreted to limit a DCO's ability
adequately to manage risk. The revision modifies, in a balanced
fashion, the standard for clearing organization and SRO rules that are
adopted, maintained, in effect, and enforced and where transfers are
approved by the Commission. While clearing organizations and SROs will
need to comply with the revised standard, the compliance cost should
not be different than under the prior standard. The clarification that
the regulations do not limit contractual risk management rights should
provide a benefit to clearing organizations and their members in
clarifying that the regulation will not nullify the contracts in this
regard, and will not have an associated cost.
In Sec. 190.07(b)(1), the Commission clarifies that it is the
transferee FCM itself who has the responsibility to determine whether
it would be in violation of regulatory minimum financial requirements
upon accepting a transfer. It is not the trustee's duty. The Commission
does not anticipate any material cost from this revision.
Section 190.07(b)(3) permits a transferee to accept open commodity
contracts and associated property prior to completing customer
diligence requirements, provided that such diligence is completed as
soon as practicable thereafter, and no later than six months after
transfer. It is intended to incentivize potential transferees to accept
transfers by making it more practicable to do so. It recognizes that
customer diligence processes would have already been required to have
been completed by the debtor FCM with respect to each of its customers
as part of opening their accounts. CME, ICI and Vanguard agree that the
proposal would provide a benefit to customers and transferee clearing
members and trustees, by facilitating the transfer process.\260\ If
such flexibility were not provided, under the current regulations,
transfer might not be accomplished, or may not be accomplished
promptly. The provision recognizes the importance of the account
opening diligence
[[Page 19402]]
requirements and would mitigate the risk from delay by requiring the
diligence to be performed as soon as practicable and setting an outer
limit at six months, unless that time is extended by the Commission.
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\260\ The customer diligence requirements in question focus on
anti-money-laundering requirements and ensuring that risk
disclosures have been provided to customers and acknowledgements of
such disclosures have been received. The corresponding costs would
arise from the possibility that the transferee's diligence would
have revealed problems that had been missed by the debtor FCM's
customer diligence process, or arose subsequent to the time that the
original process was conducted, and that conducting the revised
diligence more promptly would sooner reveal the concerns, thus
permitting them to be addressed more expeditiously.
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FIA has requested that the Commission provide transferee FCMs with
more specific relief from applicable law relating to ``customer
diligence'' and to add specific references to certain rules, in order
to provide certainty, and to mitigate regulatory risk, to a transferee.
FIA requested various points of specific relief under five headings:
(i) Rules relating to anti-money laundering requirements; (ii) rules
relating to risk and other disclosures; (iii) rules relating to capital
and residual interest requirements; (iv) rules relating to account
statements; and (v) rules relating to margin.
As discussed in more detail in Section II.B.5 above, the Commission
has decided that, with respect to certain points of the requested
relief, providing the relief is warranted, and there are no material
associated costs from doing so. Thus, for example, Sec. 190.07(b)(3)
is being amended to refer explicitly to the risk disclosure
requirements in Sec. 1.65(a)(3).
With respect to the other points of requested relief, the comment
requests relief that the Commission has decided carries unacceptable
costs. Thus, the Commission is not providing a general exemption from
undermargined account capital charges in accordance with Sec. 1.17,
nor is the Commission extending the time to comply with capital or
residual interest requirements. While such relief might have the
advantage of further incentivizing FCMs to accept transferred accounts,
it would do so at the cost of potentially causing or accepting
financial weakness at transferee FCMs.
In a third group of points of requested relief, the Commission
notes that interpretations of existing regulations should adequately
address the concerns. Thus, transferred accounts are (based on the
terms of the regulations) excluded from the Customer Identification
Program requirements of 31 CFR 1026.220, while the provisions of Sec.
190.07(b)(3) adequately inform what constitutes ``appropriate risk-
based procedures for conducting ongoing customer due diligence''
(emphasis supplied) in the context of 31 CFR 1026.210(b)(5)(i). While
providing more specific regulatory provisions might enhance regulatory
certainty (and thus redound to the benefit of transferee FCMs, and
potentially incentivize FCMs to accept transferred accounts), it
carries the risk of being under-inclusive or over-inclusive, and thus
failing to achieve the regulatory goals.
Moreover, as to both the second and third categories, there may be
a more tailored approach to achieving the goal: As the Commission
explicitly notes above, any further relief that might be appropriate in
a particular situation can be requested by the transferee in light of
the relevant facts and circumstances. The Commission observed that its
staff have traditionally responded to requests for relief in emergency
situations with great dispatch, and expects, and has instructed staff,
to continue to do so in this context in the future.\261\ While this
approach provides less certainty in advance, it has the benefit of
making tailored relief available (and mitigating the possibility that
relief leads to unintended consequences).
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\261\ See discussion in Section II.B.5 above.
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Section 190.07(b)(4) clarifies that account agreements governing a
transferred account are deemed assigned to the transferee until and
unless a new agreement is reached. At the request of FIA, the
Commission is confirming that if there is a pre-existing account
agreement between a transferred customer and the transferee FCM, that
pre-existing agreement will govern the relationship rather than the
agreement between the customer and the transferor (debtor) FCM. The
provision also confirms that consequences for breaches pre-transfer are
borne by the transferor rather than the transferee. Section
190.07(b)(4) provides important transparency regarding the agreement
between a transferred customer and a transferee FCM pending the
negotiation of a new agreement between them, or, if such negotiation is
unsuccessful, until either party decides to terminate the relationship.
Section 190.07(b)(5) provides that in the event of transfer,
customer instructions that are received by the debtor with respect to
any open commodity contracts or specifically identifiable property
should be transmitted to the transferee, who should comply with such
instructions to the extent practicable. The slight revisions to current
Sec. 190.02(c) are merely clarifications, and there should be no costs
or benefits associated with such revisions.
Section 190.07(c) provides that ``all commodity contract accounts
(including accounts with no open commodity contract positions) are
eligible for transfer. . . .'' This recognizes explicitly that accounts
can be transferred if the accounts are intended for trading
commodities, but do not include any open commodity contracts at the
time of the order for relief. The revision clarifies the current
language and will not change the types of accounts that can be
transferred. Accordingly, the Commission does not anticipate that there
will be material added cost associated with the revision.
Section 190.07(d) revises special rules for transfers under section
764(b) of the Bankruptcy Code. The revision is being made to promote
transfer. Cost and benefit considerations related to transfer are as
discussed above.\262\ The revised regulation permits partial transfers,
but (to the extent practicable) not in cases where netting sets for
spreads or straddles would be broken or where customers' net equity
claims would increase. The revised regulation should provide a benefit
to customers by codifying this limitation. This recognizes that there
may be circumstances where partial transfer is not practicable and
implies that the trustee makes that decision. It is therefore possible
that certain customers holding spread or straddle positions could have
positions liquidated or not transferred under the revised provision, or
could have spreads or straddles broken because of the trustee's
exercise of discretion.
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\262\ See section III.B.1 above.
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The Commission has declined to adopt ICI's suggestion to provide
guidance to the effect that the trustee should not effectuate a
transfer that will result in a separately managed account having a
significant deficit following the porting, in order to avoid a
circumstance where ``the manager of that account would likely need to
liquidate the bulk of the account's portfolio and other positions in
order to eliminate or reduce the deficit.'' While adopting such a
suggestion might benefit the beneficial owner by enabling the account
manager to manage the separate account in accord with the account
manager's investment program, it may instead have the opposite effect,
in that it may prevent any transfer of the customer's positions before
the seventh calendar day after the order for relief, in which event the
trustee will be required to liquidate the entirety of the customer's
account, promptly and in an orderly manner, causing the very
disruptions that the transfer provisions (and ICI's suggestion) are
designed to avoid. Moreover, many FCMs carry hundreds or even thousands
of separately managed accounts. It may well not be practical for a
trustee, in addition to their numerous other responsibilities (and in a
context where they need to learn those responsibilities
[[Page 19403]]
in a compressed timeframe) to take ``due account'' of the particular
circumstances of each of these separately managed accounts in the
hours, or perhaps a small number of days, that the trustee may be
allowed by the clearing organizations carrying the FCMs accounts to
negotiate and effectuate a transfer. Endeavoring to do so might well
have the cost of diverting the trustee and their assistants from
carrying out more pressing tasks.
Section 190.07(d)(3) permits a letter of credit associated with a
commodity contract to be transferred with an eligible commodity
contract account. If the letter of credit cannot be transferred and the
customer does not deliver substitute property, the provision will
permit the trustee to draw upon all or a portion of the letter of
credit and treat the proceeds as customer property in the applicable
account class. The revised regulation ensures that letters of credit
are treated in an economically similar fashion to other types of
collateral and that customers using letters of credit will not receive
any differential economic advantages, thus serving the goal of pro rata
distribution. If the trustee does draw upon the letter of credit, there
may be administrative costs incurred by the estate, as well as costs to
the customer that posted the letter of credit as collateral. These
costs may be mitigated if the customer delivers substitute property, as
set forth in the proposed regulation. Moreover, consistent with Sec.
190.04(d)(3)(iv), the trustee is directed to ``endeavor to achieve pro
rata treatment among customer claims in a manner that mitigates, to the
extent practicable, the adverse effects upon customers that have posted
letters of credit.'' \263\
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\263\ The costs and benefits of allowing the trustee to draw
upon the letter of credit have been discussed above in section
III.C.2 with respect to Sec. 190.04(d)(3).
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Section 190.07(d)(4) will require a trustee to use reasonable
efforts to prevent physical delivery property from being separated from
commodity contract positions under which the property is deliverable.
While this provision will impose an administrative cost on the estate,
it is already a best practice for trustees; keeping delivery property
with the underlying contract positions is necessary for (and thus
should benefit) the delivery process. Therefore, the additional
administrative cost from the revised regulation should be minimal.
In Sec. 190.07(d)(5), the Commission prohibits the trustee from
making a transfer that would result in insufficient remaining customer
property to make an equivalent percentage distribution to all customers
in the applicable account class (taking into account all previous
transfers and distributions). The Commission is further clarifying that
the trustee should make determinations in this context based on
customer claims reflected in the FCM's records, and, for customer
claims that are not consistent with those records, should make
estimates using reasonable discretion based in each case on available
information as of the calendar day immediately preceding transfer. This
will support achieving the statutory policy of pro rata distribution
and give the trustee discretion to make decisions based on the
overarching principle set forth above, valuing cost effectiveness over
precise values of entitlement. However, this is designed to work to the
detriment of any customer who, absent the provision, would otherwise
benefit from a larger distribution. Moreover, in giving the trustee
discretion, it carries the risk of mistake or misfeasance.
Section 190.07(e) will add language to clarify that certain
transfers are approved by the Commission pursuant to the procedure set
forth in the Bankruptcy Code (and thus protected from avoidance) and
will prohibit the trustee from avoiding such transfers, unless the
transfer is disapproved by the Commission. These include a transfer
made by ``a receiver that has been appointed for the FCM that is now a
debtor.'' The new provision is being added in order to respect the
actions of a receiver that is acting to protect the property of the FCM
that has become the debtor in bankruptcy. It will provide certainty to
the actions of such a receiver, whose duties, among others, include
protecting the customer property of the FCM. However, to the extent
that the receiver takes actions that are, considered in retrospect,
mistaken or ill-advised, the revised provision will prevent the
correction of such actions unless the Commission acts affirmatively to
disapprove them.\264\
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\264\ Regulation Sec. 190.02(b)(1) explicitly excepts from the
delegation to the Director of the Division of Clearing and Risk the
authority to disapprove a pre-relief transfer pursuant to Sec.
190.07(e)(1).
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Section 190.07(f) will clarify that the Commission may prohibit the
transfer of a particular set or sets of the commodity contract
accounts, or permit the transfer of a particular set or sets of
commodity contract accounts that do not comply with the requirements of
the section. In addition, the Commission is clarifying that the
transfers of the commodity contract accounts include the associated
customer property. These revisions are clarifications and should not
have any associated costs.
6. Regulation Sec. 190.08: Calculation of Funded Net Equity:
Consideration of Costs and Benefits
In Sec. 190.08, the Commission addresses calculation of funded net
equity. Section 190.08(a) simply states that a customer's funded net
equity claim is equal to the aggregate of such customers funded net
equity claims for each account class.
Section 190.08(b) sets forth the steps for a trustee to follow when
calculating each customer's net equity. SIFMA AMG/MFA requested that
the Commission amend proposed Sec. 190.08(b)(2)(xii) to treat accounts
of the same principal or beneficial owner maintained by different
agents or nominees as separate accounts and not all held in the
individual capacity of such principal or beneficial owner, suggesting
that this would have the benefit of reducing the administrative
difficulties the trustee would face in consolidating all accounts of
the same principal or beneficial owner, and it would have the further
benefit of avoiding any confusion as to treatment of separate accounts
that could arise with the overlay of the time-limited relief provided
by Letter 19-17.
The Commission declined to make this change. The change would not
achieve those benefits and would have associated costs: First, the FCM,
to the extent it does treat such accounts separately pursuant to the
relief set forth in Letter 19-17, will already be consolidating (for
purposes of certain calculations) all accounts of the same principal or
beneficial owner, in that the Letter conditions its relief on the FCM
applying credit limits and stress testing on a combined account
basis.\265\ Second, given that Letter 19-17 also conditions relief on
the FCM disclosing that ``under CFTC [p]art 190 rules all separate
accounts of the beneficial owner will be combined in the event of an
FCM bankruptcy,'' amending Sec. 190.08(b)(2)(xii) to treat them
separately would be inconsistent with that disclosure, and would cause,
rather than relieve, inconsistency with the approach taken under the
Letter.
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\265\ See CFTC Letter 19-17, https://www.cftc.gov/node/217076 at
4.
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While the Commission is making certain revisions in Sec.
190.08(b)(3), (4), and (5), the Commission views such revisions as non-
substantive and merely clarifying the text in the current analogous
provisions. Thus, the Commission does not expect these
[[Page 19404]]
changes to result in any costs or benefits.
Section 190.08(c) sets forth instructions for calculating each
customer's funded balance, while in Sec. 190.08(d), the Commission is
in general implementing changes to provide more flexibility to the
trustee in valuing commodity contracts and other property held by or
for a commodity broker. For instance, in Sec. 190.08(d)(5), the
Commission is deleting the requirement that the trustee seek approval
of the court prior to enlisting professional assistance to value
customer property. These changes should benefit the estate by providing
the trustee with more flexibility to determine how to value certain
customer property, including whether or not to enlist professional
assistance in doing so. Likewise, these revisions should serve the goal
of a pro rata distribution to customers, as the accurate valuation of
customer property can benefit from the input of a professional. On the
other hand, affording the trustee increased discretion in how to value
commodity contracts and other property held by a debtor carries the
potential cost of mistake, misfeasance, or abuse of discretion by the
trustee, as discussed above, or possibly by the professional whose
service is retained.
With respect to commodity contracts that have been transferred,
Sec. 190.08(d)(1)(i) provides that such contracts be valued at the end
of the last settlement cycle on the day preceding such transfer, rather
than at the end of the settlement cycle in which it is transferred.
Again, this revision should benefit both the estate and customers by
making it practical to calculate the value of the transferred commodity
contracts prior to the transfer.
The Commission has declined to accept ICE's suggestion that it
adopt a ``more flexible approach'' because ``the market may move
significantly on the date of the transfer.'' While prices may move
intra-day during the period between opening and the time of auction,
they may also move between the time of auction and closing. Therefore,
there is no ex ante reason to expect that the previous day's price is
less reflective of the price at the time of the auction than the
closing price on the auction day. Moreover, an alternative approach,
using the price set in the auction as the price for individual
contracts, is unlikely to be practicable. Units auctioned will
frequently contain a heterogenous (though risk-related) set of
products, tenors (e.g., contract months), and directions (e.g., long or
short). Thus, it will often be impracticable to translate an auction
price for a portfolio to prices for individual contracts within that
portfolio.
7. Regulation Sec. 190.09: Allocation of Property and Allowance of
Claims: Consideration of Costs and Benefits
In Sec. 190.09, the Commission is addressing allocation of
property and allowance of claims. Section 190.09(a)(1) defines the
scope of ``customer property'' that is available to pay the claims of a
debtor FCM's customers, and Sec. 190.09(a)(1)(i) sets forth the
categories of ``cash, securities, or other property or the proceeds of
such cash, securities, or other property received, acquired, or held by
or for the account of the debtor, from or for the account of a
customer'' that are included in customer property. In Sec.
190.09(a)(1)(i), the Commission is making certain substantive changes
to the categories listed in current Sec. 190.08(a)(1)(i), as discussed
below:
First, Sec. 190.09(a)(1)(i)(D) is new and provides that
customer property includes any property ``received by the debtor as
payment for a commodity to be delivered to fulfill a commodity contract
from or for the commodity customer account of a customer.'' Clarifying
this point explicitly should benefit both the estate and customers by
avoiding confusion or potential litigation.
Second, Sec. 190.09(a)(1)(i)(F) provides that letters of
credit, including proceeds of letters of credit drawn by the trustee,
or substitute customer property, constitute ``customer property.'' This
section is being revised to be consistent with the other letters of
credit provisions that are being added throughout part 190. The
Commission does not anticipate that this provision will result in any
material costs or benefits, as current Sec. 190.08(a)(1)(i) already
includes a provision regarding letters of credit.\266\
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\266\ The costs and benefits of the underlying policy decision
to take steps to ensure that customers posting letters of credit are
treated (with respect to pro rata allocation of losses) in a manner
consistent with the manner in which customers posting other forms of
collateral are treated are discussed in connection with Sec.
190.04(d)(3) in section III.C.2 above.
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Section 190.09(a)(1)(ii) sets forth the categories of ``[a]ll cash,
securities, or other property'' that would be included in customer
property. In Sec. 190.09(a)(1)(ii), the Commission is making certain
substantive changes to the categories listed in current Sec.
190.08(a)(1)(ii), as discussed below:
First, Sec. 190.09(a)(1)(ii)(D) provides that any cash,
securities, or other property that was property received, acquired or
held to margin, guarantee, secure, purchase, or sell a commodity
contract and that is subsequently recovered by the avoidance powers of
the trustee or is otherwise recovered by the trustee on any other claim
or basis constitutes customer property. The current version of this
provision refers only to the trustee's avoidance powers (leaving out
the possibility for recovery other than through avoidance powers). The
Commission's revisions to this section will benefit the estate, by
assuring that any property they recover will be included in the pool of
customer property, rather than going to some other creditor (to be
sure, those other creditors will receive correspondingly less).
Second, Sec. 190.09(a)(1)(ii)(G) is new, and provides
that any current assets of the debtor in the greater of (i) the amount
that the debtor is obligated to be set aside as its targeted residual
interest amount, pursuant to Sec. 1.11, or (ii) the debtor's
obligations to cover debit balances or undermargined amounts, pursuant
to Sec. 1.20, Sec. 1.22, Sec. 22.2, or Sec. 30.7, constitute
customer property. This new provision will result in administrative
costs, because the trustee will need to take the extra step of
determining whether any current assets of the debtor need to be set
aside as customer property and, if so, how much. This provision should
benefit public customers (and serve the policy of protecting customer
collateral), however, because it will mitigate the risk of a shortfall
in customer funds by ensuring that the trustee fulfills the
Commission's regulations that require an FCM to put certain funds into
segregation on behalf of customers. ICI and Vanguard agreed that this
provision will benefit customers, while CME considered it a
``substantial improvement over the current rule.'' This approach will
result in such funds being included in the pool of customer property,
rather than going to some other creditor. It will, to the same extent,
operate to the detriment of general creditors.
Third, Sec. 190.09(a)(1)(ii)(K) is also new, and provides
that any cash, securities, or other property that is payment from an
insurer to the trustee arising from or related to a claim related to
the conversion or misuse of customer property constitutes customer
property. This provision should benefit customers (and, again, the
policy of protecting customer collateral), since any insurance payment
as described in this proposed section will enlarge the pool of customer
property, rather than going
[[Page 19405]]
to general creditors.\267\ It could result in administrative costs,
however, as the trustee will need to spend time and resources in order
to determine whether any such insurance payments exist, and in
prosecuting such insurance claims.
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\267\ It will, again, to the same extent, act to the detriment
of general creditors.
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Fourth, the second sentence of Sec. 190.09(a)(1)(ii)(L)
is new, and will provide that customer property for purposes of these
regulations includes any ``customer property,'' as that term is defined
in SIPA, that remains after satisfaction of the provisions in SIPA
regarding allocation of customer property constitutes customer
property. This provision should benefit commodity customers (and act to
the detriment of general creditors) because any securities customer
property remaining after full allocation to securities customers will
enlarge the pool of commodity customer property. It could result in
administrative costs, however, since the trustee could need to spend
time and resources determining the extent to which such property is
left over after allocation to customers in a SIPA proceeding.\268\
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\268\ The Commission further notes that the first sentence of
Sec. 190.09(a)(1)(ii)(L), which provides that customer property
includes any cash, securities, or other property in the debtor's
estate, but only to the extent that the customer property under the
other definitional elements is insufficient to satisfy in full all
claims of the debtor's public customers, will impose no new costs or
benefits because such provision already appears in current Sec.
190.08, and the only changes to the provision would be non-
substantive updates to cross-references.
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Section 190.09(a)(2) sets forth the categories of property that are
not included in customer property. In Sec. 190.09(a)(2), the
Commission has made certain substantive changes to the categories
listed in current Sec. 190.08(a)(2), as discussed below:
First, in Sec. 190.09(a)(2)(iii), the Commission is
adding explicit language to state that only those forward contracts
that are not cleared by a clearing organization are excluded from the
pool of customer property. This revision will benefit customers (and
act to the detriment of general creditors), since the pool of customer
property would increase by explicitly including any cleared forward
contracts.
Second, Sec. 190.09(a)(2)(v) provides that any property
deposited by a customer with a commodity broker after the entry of an
order for relief that is not necessary to meet the margin requirements
of such customer is not customer property. The deletion of the word
``maintenance'' before ``margin'' will eliminate any distinction
between initial and variation margin; this deletion will benefit
customers by ensuring that any amount deposited by a customer after the
entry of an order for relief that is necessary to meet that customer's
margin requirements will be included in the pool of customer property.
This provision would correspondingly act to the detriment of general
creditors.
Third, Sec. 190.09(a)(2)(viii), which is new, provides
that any money, securities, or other property held in a securities
account to fulfill delivery, under a commodity contract that is a
security futures product, from or for the account of a customer, is
excluded from customer property. This provision avoids conflict with
the resolution, under SIPA, of claims for securities and related
collateral.
Section 190.09(a)(3), which is new, gives the trustee the authority
to assert claims against any person to recover the shortfall of
customer property enumerated in certain paragraphs elsewhere in Sec.
190.09(a). This provision could impose administrative costs, since the
trustee could have to expend time and resources to assert and prosecute
such claims to make up for any shortfall in customer property. The
provision will, however, benefit customers, since it will ensure that
the trustee is in a position to recover any such shortfalls and gives
the trustee authority to act to do so. Moreover, since this provision
makes explicit what is implicit in current part 190, an additional
benefit of this provision may be reduced litigation costs over a
trustee's authority to engage in attempts to recover shortfalls in
customer property.\269\
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\269\ Of course, these recoveries are derived from persons
against whom such claims are successfully asserted. The transfer to
customers from these individuals advances the goal of pro-rata
distribution.
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Section 190.09(b) adds the phrase ``or attributable to'' to the
language that is in current Sec. 190.08(b), when describing how to
treat property segregated on behalf of or attributable to non-public
customers, namely, as part of the public customer estate; the addition
of this phrase, as described above, will clarify that Sec.
190.09(b)(1) applies both to property that is in the debtor's estate at
the time of the bankruptcy filing, as well as property that is later
recovered by the trustee and becomes part of the debtor's estate at the
time of recovery. This additional phrase would benefit public customers
and the statutory policy in favor of them (and correspondingly act to
the detriment of non-public customers and general creditors), since it
could increase the amount of property that is treated as part of the
public customer estate. It could impose administrative costs because it
could take time and resources to properly allocate any property that is
recovered after the time the bankruptcy is filed.\270\
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\270\ Section 190.09(c)(1) will have a similar change in the
addition of the phrase ``or recovered by the trustee on behalf of or
for the benefit of an account class,'' which is meant to clarify
that any property recovered by the trustee on behalf of or for the
benefit of a particular account class after the bankruptcy filing
must be allocated to the customer estate of that account class. This
revision will present similar costs and benefits to those discussed
above.
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Section 190.09(c)(1)(ii) is a new provision that instructs the
trustee, in the event there is property remaining allocated to a
particular account class after payment in full of all allowed customer
claims in that account class, to allocate the excess in accordance with
proposed Sec. 190.09(c)(2), which in turn sets forth the order of
allocation for any customer property that cannot be traced to a
specific customer account class. These provisions will benefit public
customers who would otherwise face shortfalls (and then, non-public
customers who would otherwise face shortfalls). Since these provisions
make explicit what is implicit in current part 190, an additional
benefit of these provisions will result from the increased clarity over
what to do with any excess customer property. However, the provisions
will act to the detriment of non-public customers (relative to public
customers) and general creditors (relative to both) who, under the
current regime, could have been more likely to receive any excess
customer property in the absence of an explicit provision providing
what to do with any such excess customer property.\271\
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\271\ The incentive effects of such preferences are discussed in
section III.A.2.vi, above.
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Section 190.09(d) governs the distribution of customer property.
The only substantive change in Sec. 190.09(d) from its analog in
current Sec. 190.08(d) is in Sec. 190.09(d)(1)(i) and (ii), which
import the concept of ``substitute customer property.'' Whereas current
Sec. 190.08(d)(1)(i) and (ii) require customers to deposit cash in
order to obtain the return of specifically identifiable property, Sec.
190.09(d)(1)(i) and (ii) allow the posting of ``substitute customer
property.'' This term, which is defined in Sec. 190.01, means cash or
cash equivalents. This revision will benefit customers because it makes
it easier for customers to redeem their specifically identifiable
property by no longer limiting customers to only using cash to do so.
It could, however, impose administrative costs in the form of time and
resources of the trustee, who, in the event a customer chooses to post
cash equivalents to redeem their specifically identifiable property,
will be required to
[[Page 19406]]
value (and potentially to liquidate) such cash equivalents. Moreover,
while ``cash equivalents'' are required to be assets ``that are highly
liquid such that they may be converted into United States dollar cash
within one business day without material discount in value,'' it is
possible that such assets could nonetheless decrease in value,
potentially to the detriment of other customers.
8. Regulation Sec. 190.10: Provisions Applicable to Futures Commission
Merchants During Business as Usual: Consideration of Costs and Benefits
As proposed, Sec. 190.10 addresses provisions applicable to FCMs
during business as usual. The ABA Subcommittee and CME recommended that
these ordinary course provisions should be codified in part 1 of the
Commission's regulations, to be more transparent to FCM compliance
personnel. As discussed further below, the Commission has accepted that
suggestion and is adopting in part 1 of its regulations the provisions
that were proposed as Sec. 190.10 (b), (c), (d), and (e).
In the regulation proposed as Sec. 190.10(a), the Commission notes
that an FCM is required to maintain current records related to its
customer accounts, consistent with current Commission regulations, and
in a manner that will permit them to be provided to another FCM in
connection with the transfer of open customer contracts and other
customer property. This regulation does not impose new obligations, but
rather informs the trustee regarding their duties by incorporating
references to the Commission's existing regulations. Thus, this
provision is remaining in part 190, and, as the sole remaining
paragraph, will be codified as Sec. 190.10.
The regulation proposed as Sec. 190.10(b) addresses designation of
accounts as intended for the purpose of hedging. It is being codified
as Sec. 1.41. An FCM will be permitted to rely upon a customer's
written representation of hedging intent regarding the designation of a
hedging account, without being required to look behind that
representation, thus mitigating administrative costs.
Section 1.41(a) requires an FCM to provide a customer an
opportunity to designate an account as a hedging account when the
customer first opens the account, allowing for clear instruction to
FCMs at the outset of the relationship. Clear instruction at the outset
will facilitate the ability properly to account for customer property.
There will be some disclosure and accounting costs associated with this
provision. For those customers that do engage in hedging, it will be
more cost effective to designate the account at opening than to monitor
the transactions for the first qualifying transaction to provide the
opportunity to make the designation, as applicable under the current
regulation. Thus, the regulation should reduce the probability that the
opportunity to designate the account as a hedging account will be
missed.
Section 1.41(b) sets forth the conditions for treating an account
as a hedging account, permitting such treatment upon the customer's
written representation that their trading would constitute hedging as
defined under any relevant Commission rule or the rule of a DCO, DCM,
SEF, or FBOT. There will be record-keeping costs for FCMs and customers
associated with the provision.
Section 1.41(c) provides that the foregoing requirements do not
apply to commodity contract accounts opened prior to the effective date
of this final rulemaking, and that an FCM can continue to designate
such existing accounts as hedging accounts based on written hedging
instructions obtained under current regulations. This provision should
mitigate the impact of the changes to current requirements in Sec.
1.41(a) and (b) by not applying those provisions to already opened
hedging accounts, instead relying upon the information collected and
maintained during the current regulatory framework.
Section 1.41(d) will permit an FCM to designate an existing
customer account as a hedging account for purposes of bankruptcy
treatment, provided that the FCM obtains the necessary customer
representation. This provision will give FCMs and customers flexibility
to apply the proposed regulations to existing accounts where the impact
would not be overly burdensome.
The regulation proposed as Sec. 190.10(c) addresses the
establishment of delivery accounts during business as usual. It is
being codified as Sec. 1.42, and recognizes that when an FCM
facilitates delivery under a customer's physical delivery contract and
such delivery is effected outside of a futures account, foreign futures
account, or cleared swaps account, it must be effected through (and the
associated property held in) a delivery account. While there are costs
associated with the opening and maintenance of delivery accounts, the
Commission views that the use of such accounts is cost effective in
facilitating delivery.\272\ The benefit of using such accounts is
twofold: To protect customer assets during the delivery process, and to
foster the well-functioning of the delivery process.
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\272\ The Commission further understands that it is already
industry practice to use such accounts, therefore, as a practical
matter, the cost associated with mandating the use of such accounts
should be mitigated.
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The regulation proposed as Sec. 190.10(d) addresses letters of
credit, and will prohibit an FCM from accepting a letter of credit as
collateral during business as usual unless certain conditions are met
at the time of acceptance and remain true through the date of
expiration. It is being codified as Sec. 1.43.
The first condition is that the trustee must be able to draw upon
the letter of credit in full or in part in the event of a bankruptcy
proceeding, the entry of a protective decree under SIPA, or the
appointment of FDIC as receiver pursuant to Title II of the Dodd-Frank
Act. Second, if the letter of credit is permitted to be and in fact is
passed through to a clearing organization, the trustee for such
clearing organization (or the FDIC) must be able to draw upon the
letter of credit in full or in part in the event of a bankruptcy
proceeding for such clearing organization (or where the FDIC is
appointed as receiver).
Section 1.43 will ensure that an FCM's treatment and acceptance of
letters of credit during business as usual is consistent with and does
not preclude the trustee's treatment of letters of credit in accordance
with Sec. Sec. 190.00(c)(5) and 190.04(d)(3). The Commission
understands that under industry practice, most existing letter of
credit arrangements are consistent with the Joint Audit Committee Forms
of Irrevocable Standby Letter of Credit, both Pass-Through and Non
Pass-Through,\273\ and that these forms are consistent with these new
requirements. Nevertheless, FCMs will need to review the existing
letters of credit for consistency with the regulation, and it is
plausible that some could need to be re-negotiated to be consistent
therewith.
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\273\ See section II.B.8 above.
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To mitigate the costs of this change, the Commission has considered
the extent of the use of letters of credit in the industry and has
determined that upon the effective date of the regulation, Sec. 1.43
will apply only to new letters of credit and customer agreements. The
Commission further is including a transition period of one year from
the effective date until Sec. 1.43 will apply to existing letters of
credit and customer agreements. The transition period is intended to
give FCMs an adequate opportunity to conduct the necessary review of
existing letters of credit and customer agreements, and to make any
[[Page 19407]]
necessary changes. SIFMA AMG/MFA have urged the Commission to shorten
that one-year transition period, questioning how a (non-conforming)
letter of credit would be treated if an FCM that is holding such a
letter of credit went into bankruptcy during that period. Nonetheless,
the Commission has concluded that the one-year time period
appropriately balances the goals of mitigating burden on FCMs who are
required to conduct such reviews, and make such changes, with the goal
of mitigating the risk that an FCM that has accepted one or more
letters of credit that do not conform to the new requirements becomes a
debtor during that transition period. Even if such a situation occurs,
the risk that the customer who posted that letter of credit would
obtain treatment that is not consistent with (i.e., better than) pro
rata treatment (at the expense of other public customers) is mitigated
by the provision in Sec. 190.04(d)(3)(ii)--which is not subject to the
one-year transition period--that, for a letter of credit posted as
collateral, ``the trustee shall treat any portion that is not drawn
upon (less the value of any substitute customer property delivered by
the customer) as having been distributed to the customer for purposes
of calculating entitlements to distribution or transfer.''
It is possible that some letters of credit could become more
expensive for customers to obtain, as there will be an increased
likelihood that the letter of credit will be drawn upon. (As discussed
above, this appears to not apply to the majority of existing
arrangements). As noted in the discussion of Sec. 190.04(d)(3), the
benefit of the regulation is ensuring that letters of credit are
treated in an economically consistent manner with other types of
collateral, thus promoting the goal of pro rata distribution. However,
it could create incentives for customers who had, or who would prefer
to, post letters of credit that could not be drawn upon unless the
customer defaulted, to reduce their participation in transactions
cleared through FCMs.
The provision proposed as Sec. 190.10(e) concerns the disclosure
statement for non-cash margin, and is being codified as Sec. 1.55(p).
It largely aligns with the provisions in current part 190 from which it
was derived; there will be no additional cost or benefit implications.
9. Section 15(a) Factors--Subpart B
a. Protection of Market Participants and the Public
Subpart B of the revised regulations will increase the protection
of market participants and the public by clarifying certain provisions
(thereby promoting transparency for customers, other claimholders, and
the general public), by providing, in certain other provisions,
discretion to the trustee in determining how best to achieve the goal
of protecting public customers as a class, by fostering transfer (and
therefore mitigating the market risk associated with closing out and
reopening positions for certain customers), by enhancing the likelihood
that customer net equity claims will be fully funded, and by promoting
fairness to customers as a class by achieving pro rata distribution.
b. Efficiency, Competitiveness, and Financial Integrity
Subpart B of the revised regulations will promote efficiency (in
the sense of both cost effectiveness and timeliness) in the
administration of insolvency proceedings of FCMs and the financial
integrity of derivatives transactions carried by FCMs by setting forth
clear and well-thought-out instructions for a bankruptcy trustee to
follow in the event of an FCM insolvency, and by ensuring that these
instructions are and remain consistent with current market practices.
Moreover, subpart B will provide the bankruptcy trustee with
discretion, in certain circumstances, to react flexibly to the
particulars of the insolvency proceeding, guided by the goal of
protecting public customers as a class, thereby promoting cost-
effective administration of the proceeding. These effects will, in
turn, enhance the competitiveness of U.S. FCMs, by enhancing market
confidence in the protection of customer funds and positions entrusted
to U.S. FCMs, even in the case of insolvency.
c. Price Discovery
Price discovery is the process of determining the price level for
an asset through the interaction of buyers and sellers and based on
supply and demand conditions. The revised regulations work to promote
the transfer, rather than liquidation, of customer positions. To the
extent that they therefore mitigate the likelihood of the need for
liquidations of customer positions, particularly in conditions of
market distress, they will mitigate the negative impacts of bankruptcy
proceedings on price discovery.
d. Sound Risk Management Practices
Subpart B of the revised regulations will promote sound risk
management practices by facilitating the bankruptcy trustee' effective
management of the risk of the debtor FCM. Subpart B will accomplish
this by revising the bankruptcy regulations for an FCM insolvency to
reflect current market practices and thereby make it easier for the
trustee to act effectively to protect customer property in the event of
such an insolvency.
e. Other Public Interest Considerations
Subpart B of the revised regulations supports the implementation of
statutory policy such as promoting protection of public customers and
ensuring pro rata distribution of customer funds. Moreover, some of the
FCMs that might enter bankruptcy are very large financial institutions,
and some are (or are part of larger groups that are) considered to be
systematically important. A well-structured and effective bankruptcy
process that efficiently facilitates the proceedings is likely to
benefit the financial system (and thus the public interest), as that
process will help to attenuate the detrimental effects of the
bankruptcy on the financial system and reduce the likelihood that
uncertainty as to the outcome of the insolvency could cause disruption
to financial markets.
D. Subpart C--Clearing Organization as Debtor
Subpart C to part 190 is intended to create a tailored set of
regulations to govern a proceeding under subchapter IV of chapter 7 of
the Bankruptcy Code in which the debtor is a clearing organization. As
discussed further below, while these regulations are fitted to the
context of a commodity broker that is a clearing organization, they are
principles-based rather than prescriptive, and flexible rather than
rigid.
The overarching benefits of this approach include the following.
First, uncertainty will be reduced during business-as-usual (thus
enhancing the ability of both clearing members and their customers
better to understand their exposures to the possible insolvency of a
clearing organization, and to tailor their risk management practices
(and use of clearing services) in light of this enhanced
understanding). This better understanding may well foster greater trust
in the cleared derivatives marketplace, and thus greater participation
therein. To be sure, it is also possible that some market participants,
upon achieving a greater understanding, may decide not to participate.
There are other limitations to these benefits, noted below. Second, by
developing a more detailed, yet flexible, framework and procedures for
the bankruptcy of a DCO, the costs (to the estate, to clearing members,
and to
[[Page 19408]]
public customers) of the case should be reduced.
Third, the resolution regime established under Title II of Dodd-
Frank provides that the maximum liability of FDIC as receiver of a
covered financial company to a claimant is the amount the claimant
would have received if the FDIC had not been appointed receiver and the
covered financial company had been liquidated under chapter 7 of the
Bankruptcy Code. By establishing a clearer counterfactual, subpart C
will: (a) Enhance the ability of FDIC to plan for and to execute its
responsibilities as receiver; (b) enhance the ability of market
participants to predict in advance their exposures in the unlikely
event of the resolution as a DCO; and (c) mitigate the cost of
litigation over the value of such claims. The Commission notes that
there can, to a certain extent, be costs imposed by proposed subpart C,
in that there may be a corresponding reduction in flexibility with the
addition of rules specifically tailored to address a DCO bankruptcy,
but the Commission has drafted these proposed rules with the intent of
maintaining significant flexibility, where warranted.
It is apposite to note an important issue that affects incentives:
A significant group of commenters have expressed strong concerns, both
in comments to this rulemaking \274\ and elsewhere,\275\ that clearing
members and their customers have no meaningful role in DCO risk
governance, and, most relevant here, that DCOs' default rules and
procedures and recovery and wind-down plans are developed without
sufficient input from members and their customers. As discussed in
detail in section II.C above and in this section II.D, subpart C is
based, in large part, on a debtor DCO's ex ante default rules and
procedures and recovery and wind-down plans, though applied flexibly by
the trustee--that is, only to the extent they determine is
``reasonable'' and ``practicable.''
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\274\ See ACLI, FIA, ICI, SIFMA AMG/MFA, and Vanguard.
\275\ See, e.g., A Path Forward for CCP Resilience, Recovery,
and Resolution (published by a group of prominent clearing members
and money managers).
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Most of those concerns transcend the topic of this rulemaking: As a
general matter, risk governance is intended to mitigate the possibility
of default and, where default does occur, to foster the result that it
is the defaulter that pays for all of the losses; skin-in-the-game
provides an additional layer of loss-absorbency that (i) comes before
mutualizing costs to non-defaulters and (ii) creates incentives for
DCOs to engage in successful risk management. Default rules and
procedures are intended to, inter alia, ensure that the DCO can take
timely action to contain losses and liquidity pressures and to continue
meeting its obligations in the event of a clearing member default.
Recovery plans address credit losses that exceed the DCO's available
resources, as well as the manifestation of other risks, as necessary to
maintain the derivatives clearing organization's viability as a going
concern, while wind-down involves the actions of the DCO to effect the
permanent cessation or sale or transfer of one or more services.
Commission regulations require DCOs to: Take steps to ensure their
resilience, have effective rules and procedures to manage defaults,
address fully any individual or combined default loss, and maintain
viable plans for recovery in the event that they suffer a default loss
or any other (non-default) loss.\276\
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\276\ See generally part 39 of the Commission's regulations.
Only SIDCOs, or other DCOs that have elected to become subject to
the provisions of subpart C of part 39, are required to address
fully any default loss, or to maintain recovery and wind-down plans.
However, among DCOs based in the United States, the vast majority of
activity is conducted on DCOs that fall within one of those two
categories.
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DCOs' rules and arrangements for default management and their
recovery plans work to allocate losses that are not covered by the
resources of the defaulter between the DCOs themselves, their clearing
members, and (in some cases such as gains-based haircutting), will have
the effect (along with clearing agreements between FCMs and their
public customers) of allocating certain losses to public customers.
These include default losses that are not covered by margin posted by
the defaulter (or the defaulter's own contribution to mutualized loss
arrangements) or by the DCO's ``skin-in-the-game,'' as well as certain
investment or custody losses. All of this would occur outside of
bankruptcy.\277\
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\277\ Moreover, among U.S. DCOs (and among all DCOs registered
with the Commission), no loss has ever been so large that it was
mutualized.
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Those rules, plans, and arrangements--and the extent to which they
are considered helpful or noxious--thus influence the incentives of
DCOs, their clearing members, and the customers of those clearing
members. Accordingly, the concerns that these clearing members and
money managers have raised with respect to their limited ability to
influence these rules, plans, and arrangements that have effects
outside of bankruptcy are likely to have important incentive effects on
how, and the extent to which, clearing members and their public
customers (including money managers) are willing to and do participate
in cleared markets.
To the extent that subpart C of part 190 applies those rules, plans
and arrangements, even if flexibly, then the incentive effects
described above may be felt more strongly by clearing members and their
public customers, albeit only marginally so.\278\ The level of that
enhanced incentive is difficult to measure, since it depends, in
significant part, on the perception of those entities as to the effect
of referring to those rules, plans, and procedures in bankruptcy under
part 190, subpart C: Those rules, plans, and procedures, which they
dislike, are and will be applicable in cases where the DCO engages in
either default management or recovery outside of bankruptcy. The
references to these rules, plans, and procedures in part 190 increases
the likelihood that they will be used (because bankruptcy represents an
additional circumstance in which they would be applicable). The
incentive effects also depend on the perception of clearing members and
their public customers on the effect of such use in bankruptcy.
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\278\ The effects of those rules on incentives for DCOs is even
more difficult to measure, since a chapter 7 liquidation (the only
bankruptcy available to a commodity broker, see 11 U.S.C. 109(d)) is
highly likely to reduce severely, if it does not eliminate, the
DCO's value to its shareholders.
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A note on terminology: As discussed above in section II.C, the
customers of a clearing organization are its members, considered
separately in two roles: (1) Each member may have a proprietary (also
known as ``house'') account at the clearing organization, on behalf of
itself and its non-public customers (i.e., affiliates). The property
that the clearing organization holds in respect of these accounts is
referred to as ``member property.'' (2) Each member may have an account
for that members' public customers. The property that the clearing
organization holds in respect of these accounts is referred to as
``customer property other than member property.'' Many clearing members
will have both such accounts, although some may have only one or the
other.
1. Regulation Sec. 190.11: Scope and Purpose of Subpart C:
Consideration of Costs and Benefits
Section 190.11(a) will simply state that the new subpart C of part
190 will apply to a proceeding commenced under subchapter IV of chapter
7 of the Bankruptcy Code in which the debtor is a clearing
organization. Therefore, the costs and benefits of Sec. 190.11(a) are
the overarching costs and benefits stated above.
[[Page 19409]]
ICE and SIFMA AMG/MFA noted that, in the case of the bankruptcy of
a DCO organized outside the United States, there may be conflicts with
a bankruptcy proceeding in the home jurisdiction unless the
applicability of part 190 is limited. For example, there may be
differing--and irreconcilable--rules for distributing property. Such
differing rules could incentivize, e.g. a customer of a non-FCM
clearing member to bring litigation seeking to apply part 190's
customer protection rules to what they might describe as the customer
claims of their non-FCM clearing member.\279\
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\279\ As noted immediately below, public customers of FCM
clearing members will benefit from protection under part 190.
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The Commission has determined to adopt a suggestion by ICE and, in
a newly created Sec. 190.11(b), to limit the applicability of part
190, in the case of a foreign DCO subject to a proceeding in its home
jurisdiction, to provisions that (a) focus on the contracts and
property of public customers of FCM members \280\ or (b) general
provisions, and those that provide notice and reports to the Commission
and a U.S. bankruptcy trustee.\281\ By limiting the applicability of
part 190 in this manner, the Commission will foster the goal of
mitigating such conflicts,\282\ while by including those provisions
(rather than disapplying part 190 entirely to the bankruptcy of a
foreign-based clearing organization), the Commission will foster the
goal of protecting customers of U.S. FCM members of such a foreign-
based DCO.
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\280\ I.e., Sec. Sec. 190.13, 190.17, and 190.18, but only with
respect to: (1) Claims of FCM clearing members on behalf of their
public customers; and (2) property that is or should have been
segregated for the benefit of FCM clearing members' public
customers, or that has been recovered for the benefit of FCM
clearing members' public customers.
\281\ I.e., subpart A, and Sec. 190.12.
\282\ The Commission notes that conflicts involving a DCO based
outside the United States with the insolvency law in that DCO's home
jurisdiction as applied to claims of FCM clearing members on behalf
of their public customers should be mitigated by the fact that,
pursuant to Sec. 39.27(c)(3) and Exhibit R to appendix A to part
39, the DCO is required to submit and to keep current a memorandum
demonstrating, inter alia, the basis for the conclusion that the
DCO's arrangements to ring-fence the customer funds of FCM clearing
member are effective under the relevant non-U.S. law in the event of
the insolvency of the DCO, and the basis for the conclusion that a
local court or insolvency official in the DCO's jurisdiction of
domicile would respect the choice of U.S. law in that context, and
the basis for the conclusion that the DCO would be able to comply
with relevant provisions of the Bankruptcy Code and Commission
regulations with respect to pro rata distribution and relevant
orders of a U.S. court regarding the distribution of customer funds.
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2. Regulation Sec. 190.12: Required Reports and Records: Consideration
of Costs and Benefits
Section 190.12(a)(1) is analogous to Sec. 190.03(a), in that it
provides instructions regarding how to give notice to the Commission
and to a clearing organization's members, where such notice is required
under subpart C. For a discussion of the costs and benefits of this
section, please refer to the discussion of the cost and benefit
implications of Sec. 190.03(a).
Section 190.12(a)(2) will revise the time in which a debtor
clearing organization must notify the Commission of a bankruptcy
filing. In particular: (1) In the event of a voluntary bankruptcy
filing, the debtor will be required to notify the Commission at or
before the time of filing, and (2) in the event of an involuntary
bankruptcy filing, the debtor must notify the Commission as soon as
possible, but in any event no later than three hours after the receipt
of the notice of such filing. These revisions codify expectations that
(1) in a voluntary bankruptcy proceeding, the debtor clearing
organization will provide advance notice to the Commission ahead of the
filing to the extent practicable, and (2) in an involuntary bankruptcy
proceeding, the debtor clearing organization will notify the Commission
immediately upon receiving notice of the filing, or within at the most
three hours thereafter.
With respect to a voluntary bankruptcy filing, the Commission
expects that the DCO will have reported its financial distress in the
lead-up to a bankruptcy filing in accordance with the mandatory
reporting requirements in Sec. 39.19(c)(4); the revision in proposed
Sec. 190.12(a) merely codifies the expectation that the clearing
organization will notify the Commission of an intent to file for
bankruptcy protection as soon as practicable before, and in no event
later than, the time of the filing. In addition, Sec. 190.12(a) also
will allow a debtor clearing organization to provide the relevant
docket number of the bankruptcy proceeding to the Commission ``as soon
as available,'' while not delaying notifying the Commission of the
filing itself, to account for the potential for a time lag between the
filing of a proceeding and the assignment by the relevant court of a
docket number. These revisions will enhance the ability of the
Commission to perform its responsibilities to support the interests of
clearing members, customers of clearing members, markets, and the
broader financial system, by providing the Commission with prompt
notice of any DCO bankruptcy proceeding.
Section 190.12(b) and (c) involve the provision of certain reports
and records to the trustee and/or the Commission by the debtor clearing
organization. In particular: Sec. 190.12(b) sets forth the reports and
records that the clearing organization will be required to provide to
the Commission and to the trustee within three hours following the
later of the commencement of the proceeding or the appointment of the
trustee, and Sec. 190.12(c) sets forth the records to be provided to
the Commission and to the trustee no later than the next business day
following commencement of a bankruptcy proceeding. These provisions
will impose administrative costs on the debtor clearing organization
and/or the trustee, which will be obligated to spend time and resources
transmitting copies of the required reports and records to the trustee
and/or Commission. However, these provisions should both benefit the
estate, and enhance the Commission's ability to fulfil its
responsibilities, by providing them with the most current information
about the clearing organization, and by allowing the trustee to begin
to understand the business of the clearing organization as soon as
possible following a bankruptcy filing, which is critically necessary
to the administration of the debtor clearing organization's estate.
This would in turn promote confidence in the clearing system in
particular, and financial markets more broadly.
OCC indicated that, while they ``maintain[ ] this information in a
readily accessible place and do[ ] not foresee any challenge in
identifying and providing this information without delay,'' they
believe that the three hour time period is ``overly prescriptive''
because of the possibility of ``unforeseen delays that could occur on
the day in which a DCO enters bankruptcy.'' The Commission has declined
to modify the proposal, because the Commission believes that setting
this specific deadline will result in significant benefits: Providing
this information to the trustee and the Commission with much-needed
expediency, and facilitating DCOs' contingency planning. By comparison,
the burden of providing the reports, which as the commenter notes, are
already in existence and are readily accessible, appears modest.
3. Regulation Sec. 190.13: Prohibitions on Avoidance of Transfers:
Consideration of Costs and Benefits
Section 190.13 implements section 764(b) of the Bankruptcy Code
with respect to DCOs, and prohibits the
[[Page 19410]]
avoidance of certain transfers made either before or shortly after
entry of the order for relief. While the prohibition of avoidance of
pre- and post-relief transfers in the context of FCM debtors in Sec.
190.07(e) applies so long as the transfer is not disapproved by
Commission, the same prohibition on avoidance of pre- and post-relief
transfers in Sec. 190.13(a) and (b) will require the affirmative
approval of the Commission (though such approval can be given either
before or after the transfer is made). This distinction will impose
administrative costs on the clearing organization or the trustee, who
will have to expend time and resources to seek affirmative approval
from the Commission for such a transfer in the context of administering
a DCO, respectively, either before or after bankruptcy. As noted
above,\283\ a clearing organization is mandated to maintain a
``balanced book.'' Thus, a transferee clearing organization may only
accept transfer of all of the transferor's customer positions (or at
least all positions in a given product set).\284\ Any such transfer
will have significant effects on the markets cleared, and on the
broader financial system. There are important benefits from requiring
the Commission's approval of such a significant transaction, and thus
permitting the administrative agency responsible for oversight of the
derivatives markets to maintain a level of discretion which will help
accomplish the goal of an orderly functioning of the marketplace.
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\283\ See section II.C.3 above.
\284\ If the transferor clearing organization does not have a
balanced book, e.g., because of a member default, it could
nonetheless only transfer a balanced book.
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4. Regulation Sec. 190.14: Operation of the Estate of the Debtor
Subsequent to the Filing Date: Consideration of Costs and Benefits
Section 190.14(a) provides that the trustee may, in their
discretion based upon the facts and circumstances of the case, instruct
each customer to file a proof of claim containing such information as
is deemed appropriate by the trustee. Allowing the bankruptcy trustee
to use their discretion in tailoring the proof of claim form to the
specific facts and circumstances of the case should benefit both the
trustee and customers by limiting the information requested to only
that which is necessary for purposes of administering the debtor's
estate and thereby increasing cost effectiveness, particularly given
the bespoke nature of a clearing organization bankruptcy. Thus, the
Commission has not proposed a prescribed proof of claim form. There
could, however, be corresponding administrative costs to both the
estate and the customers if the set of information requested by the
trustee in the exercise of their discretion turns out in retrospect to
be overly narrow or broad.
ICE believed that the proposal did not clearly take into account
non-CFTC-regulated clearing, and that claims of members with respect to
such activity should be properly accounted for in bankruptcy and should
not be disadvantaged. As the Commission noted above,\285\ to the extent
that the DCO is conducting non-CFTC-regulated activity, the Commission
expects that the proof of claim form will include the opportunity to
claim for debts of the DCO related to activity that is not regulated by
the CFTC. Thus, no change is necessary to address this concern.
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\285\ See section II.C.4.
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Section 190.14(b) provides that a debtor clearing organization will
cease making calls for variation settlement or initial margin.\286\
Under current regulations, it would not be possible to continue the
operations of a debtor clearing organization for any amount of time
after entry of the order for relief, as there is no clear and coherent
mechanism to do so. Thus, Sec. 190.14(b) affirms current legal
requirements and maintains the status quo. Section 190.14(c)(1)
provides that the trustee shall liquidate all open commodity contracts
that have not been terminated, liquidated or transferred no later than
seven calendar days after the entry of the order for relief. This
provision will impose administrative costs in that the trustee will
have a hard deadline for terminating, liquidating or transferring any
open commodity contracts within a certain timeframe, whereas under
current part 190 there was no specified timeframe for such termination,
liquidation or transfer. It could, however, benefit clearing members
and customers, who will have certainty that their open commodity
contracts would be liquidated within a particular timeframe rather than
being held open for an undetermined amount of time. A deadline for
liquidation or transfer of open contracts may benefit the broader
financial markets by mitigating uncertainty.
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\286\ As originally proposed, Sec. 190.14(b) also contained
provisions that were intended to provide a brief opportunity, after
the order for relief, to enable paths alternative to liquidation--
that is, resolution under Title II of the Dodd-Frank Act, or
transfer of clearing operations to another DCO--in cases where a
short delay (i.e., less than or equal to six days) might facilitate
such an alternative path. The Commission subsequently issued the
Supplemental Proposal, which withdrew those proposed provisions--
Sec. 190.14(b)(2) and (3)--and proposed a new alternative to
facilitate the potential resolution of a SIDCO pursuant to Title II
of the Dodd-Frank Act. As discussed in section II.C.4 above, the
Commission is not adopting the Supplemental Proposal.
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Section 190.14(c)(2), which is derived from current Sec.
190.08(d)(3), will provide that the trustee may, at their discretion,
make distributions in the form of securities that are equivalent to the
securities originally delivered to the debtor by a clearing member or
such clearing member's customer, rather than liquidating the securities
and making distributions in cash. Unlike current Sec. 190.08(d)(3),
Sec. 190.14(c)(2) will not allow the customer to request that the
trustee purchase like-kind securities and distribute those instead of
cash, but instead will leave it to the discretion of the trustee
whether to do so. This change could impose costs on customers who would
prefer to have a distribution of equivalent securities rather than
cash, since it will remove their option to request such a distribution.
However, it could benefit the estate by allowing the trustee to use
their discretion as to whether to purchase and distribute equivalent
securities, rather than being obligated to do so at the request of a
customer.
Section 190.14(d) will require the trustee to use reasonable
efforts to compute the funded balance of each customer account
immediately prior to the distribution of any property in the account,
``which shall be as accurate as reasonably practicable under the
circumstances, including the reliability and availability of
information.'' This requirement applies with respect to accounts of the
customers of the clearing organization: That is, its members,
separately in respect of each such member's (1) house account (on
behalf of the member and its non-public customers and (2) customer
account or accounts (on behalf of the member's public customers, one
such account for each account class, to the extent relevant).
This requirement will impose administrative costs due to the time
and effort involved in making such calculations. However, the
regulation gives the trustee a certain amount of discretion, and this
calculation will be necessary to achieve the goal of making
distributions that are consistent with each customer's proportionate
share.
5. Regulation Sec. 190.15: Recovery and Wind-Down Plans; Default Rules
and Procedures: Consideration of Costs and Benefits
Section 190.15 provides that (1) the trustee shall not avoid or
prohibit any
[[Page 19411]]
action taken by a debtor that was within the scope of and was provided
for in the debtor's recovery and wind-down plans; (2) in administering
a DCO bankruptcy, the trustee shall, subject to the reasonable
discretion of the trustee and to the extent practicable, implement the
default rules and procedures maintained by the debtor; and (3) in
administering a DCO bankruptcy, the trustee shall, to the extent
reasonable and practicable, and consistent with the protection of
customers, take actions in accordance with the debtor's recovery and
wind-down plans.
The Commission considered two alternatives to directing the trustee
to implement the debtor's own default rules and procedures and recovery
and wind-down plans: First, continuing to allow a bankruptcy trustee to
develop, in the moment, a plan for liquidating the debtor clearing
organization, and second, prescribing an across-the-board method for
liquidating a debtor clearing organization.
A number of commenters appeared to support the first alternative
approach. Some (e.g., ACLI, FIA, ICI, SIFMA AMG/MFA, Vanguard)
expressed concern that they lack transparency with regard to the DCO
risk management decisions and DCOs' default rules and procedures and
recovery and wind-down plans are developed without sufficient input
from clearing members and their customers. For example, Vanguard argued
that the existing DCO governance regime provides them with no
meaningful voice in critical DCO risk management practices and new
cleared product introductions; and since public customers have only a
very limited ability to mitigate clearing risks contractually, they
``rely heavily on the Commission to protect the interests of [their]
investors in the mandated cleared market.'' Commenters also expressed
the concern that there is a risk that, as a DCO begins to fail,
otherwise prudent DCO rules could be changed without the appropriate
vetting by clearing members and public customers who, given mutualized
allocation of losses, bear the risk of poor risk management choices
undertaken by the DCO.\287\
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\287\ With respect to DCO rules adopted as the DCO is on the
threshold of failure: DCO rules are subject to review by the
Commission. In all cases, they are subject to review for consistency
with the CEA and Commission regulations (see Sec. 40.6). In the
case of SIDCOs, they are additionally subject to review for
consistency with the purposes of the Dodd-Frank Act or any
applicable rules, orders, or standards prescribed under section
805(a) thereof. Moreover, to the extent commenters are concerned
that such late-enacted rules will be unfair to clearing members or
their customers, the Commission expects that such unfairness would
affect the trustee's judgment of the extent to which it is
``reasonable'' to apply those rules.
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The Commission has considered the potential interplay of the
amendments to part 190 with other Commission regulations and applicable
statutes. As noted above, these commenters' concerns predominantly
relate to the economic interests of clearing members and their
customers in contexts outside of bankruptcy.
A DCO's operations and rules outside of bankruptcy are governed by
parts 39 and 40 of the Commission's regulations. The Commission, in
particular through its Division of Clearing and Risk, applies these
regulations and conducts a rigorous program of oversight of DCOs
designed to protect the interests of market participants and of the
financial system, including through careful reviews of their rules
(including default rules) and their recovery and wind-down plans,
through detailed daily and periodic risk surveillance, and through in-
depth remote and on-site examinations addressing a wide spectrum of
risk management issues.
As noted by a commenter above, they ``rely heavily on the
Commission to protect the interests of our investors in the mandated
cleared market.'' Over the years, the Commission has taken seriously
its responsibilities in this regard, through its regulatory,
surveillance, and examinations programs.
As discussed above, there are important costs to addressing, in the
context of part 190, market participants' concerns regarding DCOs'
rules, procedures, and plans for allocating losses that apply outside
of a DCO bankruptcy: Establishing a bankruptcy regime where some market
participants would be allocated a smaller amount of losses in
bankruptcy than outside of bankruptcy would risk creating incentives
for those participants to act in a manner that promotes the likelihood
that the DCO will enter bankruptcy.
In view of these considerations, the Commission believes the
commenters' concerns are effectively mitigated by the existing
provisions of parts 39 and 40 of its regulations and by the
Commission's supervision of DCOs.\288\ Therefore, the adoption of part
190, subpart C, which is applicable to a DCO's potential bankruptcy,
appropriately complements parts 39 and 40 and the Commission's ongoing
supervision, which apply to a DCO's operations and rules outside of
bankruptcy.
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\288\ Nonetheless, the Commission is sensitive to the concerns
raised by commenters with respect to the development and maintenance
of DCO recovery and wind-down plans and default rules and
procedures, and is actively reviewing these issues, in particular
with respect to governance, as they relate to parts 39 and 40.
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Other commenters are concerned with the inclusion in those DCO
rules and plans of ``drastic measures as Variation Margin Gains
Haircutting (VMGH) and Partial Tear-Up (PTU) of open positions.'' Gains
haircutting, however, is part of the ex ante allocation of losses, and
thus is an inherent part of the way in which losses will be allocated
in bankruptcy. Moreover, there is a limited amount of customer property
available. Thus, to the extent the application of VMGH were to be
disallowed, and some customers would realize corresponding benefits
through increases in the allowed amounts of their claims (and thus a
greater share of customer property), other customers would suffer
corresponding costs, through a decreased share of customer property--
indeed, the latter customers may receive less than the amount of their
claims for initial margin.\289\ Accordingly, the Commission concludes
that it is inadvisable to prohibit VMGH, or to mandate that its effects
be reversed, in cases of DCO bankruptcy.
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\289\ Cf. ISDA: Safeguarding Clearing: The Need for a
Comprehensive CCP Recovery and Resolution Framework (2017) at 2
(``Initial margin haircutting should never be permitted.'')
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Partial tear-up, on the other hand, is inapplicable in a clearing
organization bankruptcy: Sec. 190.14(b) prohibits further collection
of variation margin, while Sec. 190.14(c) requires the trustee to
liquidate all open commodity contracts. Together, they effectively
mandate full tear-up of open positions. Thus, the question of whether
partial tear-up should be prohibited is moot.
Other commenters were concerned that these plans do not prescribe a
specific course of action, but rather ``present a menu of options.''
See, e.g., FIA, Vanguard. The Commission is of the view that, given the
complexity of the operations of a DCO, and the need for extremely
prompt action, having the trustee develop an entire plan in the moment
would be likely to turn out to be impracticable. By contrast, being
presented with a ``menu of options'' among which the trustee may select
(and adapt) in a manner that is ``reasonable and practicable'' provides
the benefit of a helpful roadmap to determine strategy and tactics.
The commenters, and potentially other clearing members and public
customers who share the concerns of the commenters, appeared to view
DCO default rules and procedures and recovery and wind-down plans that
they believe have been adopted with
[[Page 19412]]
inadequate input from them as noxious, and thus they may already be
incentivized to reduce their exposure to such DCOs. Those incentives
may be (marginally) increased by the fact that the Commission is
establishing in Sec. 190.15 a model for the trustee that is based on
those rules, procedures, and plans.
Other commenters (CME and ICE) supported the second alternative,
specifically, a requirement that the trustee cannot override the DCO's
default rules or deviate from the DCO's recovery or wind-down plans.
However, given that these rules and plans are designed to operate
outside of bankruptcy, a requirement to follow them in procrustean
fashion would have the cost of compelling the trustee to adopt an
approach that may be poorly tailored to the situation, and the
Commission will accordingly not adopt such a requirement.
Finally, given the differences between DCOs (and potential
bankruptcy situations), a one-size-fits-all approach prescribed by the
Commission is likely to prove too rigid, and thus will not be adopted.
The Commission is accordingly of the view that, relative to these
alternatives, directing a trustee to implement the DCO's own default
rules and procedures, and recovery and wind-down plans, would benefit
the estate by providing the trustee with a menu of purpose-built rules,
procedures and plans to liquidate a DCO, which rules, procedures and
plans the DCO has developed subject to the requirements of the
Commission's regulations and supervision of the Commission. Adding
concepts of reasonability and practicability will give the trustee the
discretion to modify those rules, procedures, and plans where and to
the extent appropriate. Hence, the Commission believes that an approach
whereby the trustee would follow the DCO's own purpose-built default
rules and procedures and recovery and wind-down plans, but have the
discretion to vary them as appropriate, would be the most cost
effective.
6. Regulation Sec. 190.16: Delivery: Consideration of Costs and
Benefits
Regulation Sec. 190.16 addresses delivery in the context of a
clearing organization bankruptcy. Current part 190 does not contain any
regulations specific to delivery in that context.
Section 190.16(a) provides that a bankruptcy trustee is required to
use ``reasonable efforts'' to facilitate and cooperate with the
completion of the delivery on behalf of the clearing organization's
clearing member or the clearing member's customer. This has the benefit
of mitigating disruption to the cash market for the commodity and
mitigating adverse consequences to parties that may be relying on
delivery taking place in connection with their business operations.
While the exertion of such reasonable efforts will necessarily involve
administrative costs (predominantly, time of the trustee or their
agents), the Commission is of the view that this approach has important
benefits relative to the two alternatives. Given the importance of
reliable delivery to physical markets, it would be inappropriate to
relieve the trustee of the obligation to endeavor to facilitate and
cooperate with the members' or members' customers' efforts to
accomplish delivery. On the other hand, mandating that the trustee go
beyond reasonable efforts would risk compelling the trustee to expend
unwarranted amounts of resources in this endeavor.
While proposed Sec. 190.16(a) applied this approach only to
contracts that had moved into delivery position prior to the date and
time of the order for relief, the ABA Subcommittee and CME suggested
that this approach should be extended to contracts that move into
delivery position after that date and time, with CME noting that ``it
is equally important to protect deliveries under [such contracts] to
avoid disruption to commercial markets and operations.'' The Commission
has accepted this suggestion and notes that, if any contracts move into
delivery position after the order for relief, but before being
terminated, liquidated, or transferred, the benefits and costs of this
approach are analogous to those of contracts that move into delivery
position prior to the order for relief.
Section 190.16(b) clarifies which property will be part of the
physical delivery account class and which will be part of the cash
delivery account class. It is analogous to Sec. 190.06(b) in the FCM
context, and carries forward the concepts in that section, but has been
modified for the context of a DCO bankruptcy. Clearly delineating
between the physical delivery account class and the cash delivery
account class will benefit customers because it will increase
transparency in terms of which account class their property belongs in.
Section 190.16(b) will likely impose administrative costs, since
accounting separately for physical delivery property and cash delivery
property will take the trustee's time and resources. As noted
above,\290\ the sub-division of the delivery account class into the
physical and cash delivery account classes will recognize that cash is
more vulnerable to loss, and more difficult to trace, as compared to
physical delivery property. Therefore, this sub-division will likely
benefit those with physical delivery claims. Since cash is more
vulnerable to loss and more difficult to trace, then under this
approach, clearing members and customers with claims in the cash
delivery sub-class will be more likely to get a pro rata distribution
that would be less than those with claims in the physical delivery
property sub-class.\291\
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\290\ See discussion of Sec. 190.06(b) in section II.B.4 above.
\291\ Costs and benefits of the separation of the delivery
account class into physical delivery and cash delivery subclasses
were also addressed in respect to the costs and benefits section
addressing the definition of ``account class'' in Sec. 190.01,
section II.A.2 above.
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7. Regulation Sec. 190.17: Calculation of Net Equity: Consideration of
Costs and Benefits
Section 190.17(a) clarifies that a member of a debtor clearing
organization may have claims against the clearing organization in
separate capacities: On behalf of its public customers (customer
accounts) and on behalf of its non-public customers (house accounts).
It further states that net equity shall be calculated separately for
each customer capacity in which the clearing member has a claim against
the debtor. In the Commission's view, the provisions in Sec. 190.17(a)
are clarifications that reflect customer classifications set forth in
section 766(i) of the Bankruptcy Code, and account classifications that
have long been used in other contexts, and will not impose any costs or
benefits on any parties.
Section 190.17(b)(1) provides that the calculation of a clearing
member's net equity claim in the bankruptcy of a clearing organization
shall include the full application of the debtor's loss allocation
rules and procedures. It also provides that, with respect to a clearing
member's house account, this will include any assessments or similar
loss allocation arrangements provided for under those rules and
procedures that were not called for before the filing date, or, if
called for, have not been paid.
A number of commenters, including the ABA Subcommittee, CME, FIA,
and ICE, objected to including assessments that had not been called for
before the order for relief in the calculation of net equity claims
where the debtor clearing organization's rules provide that assessments
cannot be called for after bankruptcy. Taking these commenters'
preferred approach would benefit the clearing members in circumstances
where there are both uncalled
[[Page 19413]]
assessments, and remaining default losses. As FIA noted in its comment
letter, the inclusion of uncalled assessments ``appears to have the
effect of reducing a clearing member's potential recovery.'' However,
all losses will ultimately be allocated, and if uncalled assessments
are not taken into account, any remaining losses that haven't been
covered by other default resources will be allocated through gains-
based haircutting. Thus, the commenters' preferred approach would be at
the cost of the customers of clearing members, who would bear
additional losses even as the clearing members would benefit.
Relative to the alternative suggested by these commenters, the
direct effect of Sec. 190.17(b)(1) is to ensure that the uncalled
assessment will make up more of the default losses, and conversely that
haircutting of the gains (of both clearing members and customers) will
make up less of that loss. Hence, the rule could harm clearing members,
and correspondingly benefit their customers. In addition, there can be
indirect effects. While the maximum amount of assessments that clearing
members are exposed to will not increase, there is a marginally \292\
increased likelihood that those assessments will be used.\293\ Because
clearing members' potential assessments are more likely to be used,
they will have a marginally increased incentive to reduce their level
of exposure to assessments--for example, by reducing their clearing
activity for themselves or on behalf of their customers. While it is
conceivable that clearing members could work to influence DCOs to
reduce their own assessment powers as a result of these incentives,
there are mitigants in the Commission's regulations.\294\
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\292\ ``Marginal'' because this happens only if (a) there is a
DCO bankruptcy, (b) there is a default loss suffered by the DCO in
connection with the bankruptcy, and (c) not all of the assessments
necessary to address that default loss were called before that
bankruptcy.
\293\ While Sec. 190.17(b)(1) will not result in uncalled
assessments being ``called''--the clearing members will not have to
pay them to the estate--uncalled assessments will be ``used'' to
reduce the clearing member's net equity claim.
\294\ For example, Sec. 39.39(b)(1) requires SIDCOs and Subpart
C DCOs to have viable plans for recovery necessitated by uncovered
credit losses, and the extent of a DCO's assessment power
contributes to the viability of its recovery plan. Moreover, the two
SIDCOs, CME and ICE Clear Credit, already have significant
assessment powers, and any proposed rule change to reduce those
powers would need to withstand review under Sec. 40.10 for
consistency with inter alia, the purposes of the CEA and the Dodd-
Frank Act, which include the mitigation of systemic risk and the
promotion of financial stability.
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Section 190.17(b)(2) provides that where the debtor's loss
allocation rules and procedures provide that clearing members are
entitled to payments due to portions of mutualized default resources
that are either prefunded, or assessed and collected, but in either
case not used, or to the clearing organization's recoveries on claims
against others (including recoveries on claims against defaulting
clearing members), then ``appropriate adjustments shall be made to the
net equity claims of clearing members that are so entitled.'' These
provisions will benefit the estate by providing the trustee with tools
to act promptly and efficiently, with lower administration costs. The
trustee will have a clear roadmap to calculate net equity in the
bankruptcy of a clearing organization and will not be obligated to come
up with an ad hoc methodology for doing so. The provisions would also
benefit clearing members (and, therefore, their customers) by providing
transparency as to how their net equity will be calculated, as well as
facilitating the efficient administration of the estate.\295\
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\295\ See also 17 CFR 39.16 (requiring each DCO to, among other
things, ``adopt rules and procedures designed to allow for the
efficient, fair, and safe management of events during which clearing
members become insolvent or default on the obligations of such
clearing members to the'' DCO).
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In those cases where the debtor has excess mutualized default
funds, or recovers on claims against defaulters, application of the
debtor's ``reverse waterfall'' rules will benefit clearing members
(and, in certain cases, their customers) by increasing the net equity
claims of the entitled clearing members.
In addition to the potential for these transfers between general
creditors and clearing members and their customers, this rule can
create incentives for clearing members and their customers. In
particular, it makes clearing members' contributions to mutualized
resources (and the possibility that gains-based haircutting will affect
clearing members and their customers) less onerous, because they
enhance the possibility that if the clearing member's contribution to
mutualized default resources (or gains-based haircutting affecting
clearing members or their customers) is used to meet a default, it
ultimately will come back to the clearing member or their customers as
it is recovered by the DCO (or the DCO's trustee) from the (bankruptcy)
estate of the defaulter.
Section 190.17(c) adopts by reference the net equity calculations
set forth in proposed Sec. 190.08, to the extent applicable.\296\
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\296\ For a discussion of the cost and benefit considerations
for Sec. 190.08, please see section IV.C.6 above.
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Section 190.17(d) sets forth a definition of the term ``funded
balance'' that is taken directly from the relevant Bankruptcy Code
provisions. Clarifying the meaning of the term ``funded balance'' in
the context of a clearing organization bankruptcy will benefit clearing
members, in that they will know ex ante what is and is not included in
their funded balance and how that amount is calculated. In addition,
Sec. 190.17(d) adopts by reference the methodology for calculating
funded balance that is set forth in Sec. 190.08(c).\297\
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\297\ For a discussion of the cost and benefit considerations
for Sec. 190.08(c), please see section III.C.6 above.
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8. Regulation Sec. 190.18: Treatment of Property: Consideration of
Costs and Benefits
Section 190.18(a) is analogous to Sec. 190.17(a), in that it will
provide that property of the debtor clearing organization's estate will
be allocated between member property and customer property other than
member property in order to satisfy the proprietary and customer
claims, respectively, of clearing members. In the Commission's view,
the provisions in Sec. 190.18(a) are mere clarifications and do not
impose any costs or benefits on any parties.
Section 190.18(b)(1)(i) and (ii) set out the scope of customer
property for a clearing organization, and are largely based on Sec.
190.09(a).\298\
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\298\ For a discussion of the cost and benefit considerations
for Sec. 190.09(a), please see section III.C.7 above.
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Section 190.18(b)(1)(iii) provides that customer property for a
clearing organization includes any guaranty fund deposit, assessment or
similar payment or deposit made by a clearing member or recovered by a
trustee, to the extent any remains following administration of the
debtor's default rules and procedures, and any other property of a
member available under the debtor's rules and procedures to satisfy
claims made by or on behalf of public customers of a member. This
provision supports the goal of making customers of the clearing
organization whole, since it clarifies that any property described in
this section will be included in the scope of customer property, rather
than ultimately going to some other creditor of the debtor. It would
result in corresponding costs to non-customer creditors, and could
result in administrative costs, however, since the trustee could need
to spend time and resources in order to determine whether any such
property exists in order to properly allocate such property to
customers.
[[Page 19414]]
A number of commenters (CME, SIFMA AMG/MFA) have suggested that the
Commission make it explicit that customer property should include the
amounts of its own funds a debtor DCO had committed as part of its loss
allocation rules. The Commission has accepted this suggestion in the
final rule, incorporating this provision in Sec. 190.18(b)(1)(iv).
This will benefit customers, who will have additional funds allocated
to their claims, thereby increasing the payment that they receive on
their claims and/or increasing the likelihood of full payment of their
claims (due to an increase in customer property). However, this benefit
would accrue at the possible expense of general creditors, as there
will be an equivalent reduction in assets in the general estate. An
indirect consequence of this change might be to marginally incentivize
customers to retain open positions in contracts that are cleared by a
potentially-failing DCO, which might marginally contribute to
preserving liquidity in those markets.
Regulation Sec. 190.18(b)(2) adopts by reference, in the context
of a DCO as a debtor, the exclusions from customer property applied in
the context of debtor FCMs in Sec. 190.09(a)(2), as if the term debtor
used therein would refer to a clearing organization as debtor and to
the extent relevant to a clearing organization.\299\
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\299\ For a discussion of the cost and benefit considerations
for proposed Sec. 190.09(a)(2), please see section III.C.7 above.
---------------------------------------------------------------------------
Regulation Sec. 190.18(c) sets forth the allocation of customer
property among customer classes (i.e., allocation between (1) customer
property other than member property, and (2) member property). This
provision, in general, applies the principle, consistent with the
Commission's policy to favor public customers over non-public
customers, that allocation to customer property other than member
property is favored over allocation to member property, so long as the
funded balance in any account class for members' public customers is
less than one hundred percent of net equity claims. This provision
would, in the event and at the time it applied, benefit the public
customers of the debtor's clearing members, since it makes clear that
allocation to such customers is preferred over allocation to the
clearing members' house accounts. It imposes corresponding costs on the
debtor's clearing members and affiliates to the extent that, under the
current regime, there is a possibility that more customer property
would be allocated to their house accounts. Overall, this provision
provides the benefit of ex ante transparency to the estate, the
debtor's clearing members, and their customers, who would know during
business-as-usual how customer property would be allocated in the event
of a bankruptcy.
However, the ABA Subcommittee, CME, FIA, and ICE objected to
proposed Sec. 190.18(c)(1), which would apply the debtor's mutualized
(and, in general, member-funded) default fund to customer property
other than member property, that is, to the customer class for members'
public customers, to the extent the funded balance is less than one
hundred percent for members' public customers in any account class. CME
raised a particularly trenchant point: Devoting member-funded guarantee
funds to purposes other than mutualizing member defaults may result in
more onerous capital treatment for the contributions of bank- or bank-
affiliated-members to such funds, increasing the capital charges for
such exposures manifold.\300\
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\300\ As discussed in detail in a footnote in section II.C.8,
those capital charges could increase by literally hundreds of times,
for a total impact of billions of dollars in increased capital
charges.
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As noted, the costs and benefits discussed above will only accrue
if there is both a clearing organization bankruptcy and a shortfall in
customer funds in one or more of the account classes for members'
public customers for that clearing organization in that bankruptcy. The
costs and benefits at that potential future time would be balanced, in
that the costs to clearing members (whose guarantee funds were devoted
to claims of the clearing members' customers) would be benefits to
those customers. By contrast, less favorable capital treatment would
have a present-day effect, in the form of higher capital costs for
clearing members. Moreover, those higher costs would not create any
direct benefit (present day or otherwise) for, e.g., customers. In
light of these factors, the Commission has decided not to adopt
proposed Sec. 190.18(c)(1) and to renumber the remaining paragraphs of
Sec. 190.18(c).
Section 190.18(d) sets forth the allocation of customer property
among account classes. This provision is similar in concept to Sec.
190.09(c). This provision will benefit clearing members and their
customers, who will have increased transparency, ex ante, into how
customer property will be allocated. Prescribing this allocation will,
however, impose administrative costs, because the trustee will lose
some amount of flexibility in terms of how to allocate customer
property between account classes.
Section 190.18(e) provides that, where the debtor has, prior to the
order for relief, kept initial margin for house accounts in accounts
without separation by account class, then member property will be
considered to be in a single account class.\301\ This provision will
benefit the estate in those cases, because the trustee will not be put
to the considerable task of separating in bankruptcy that which was
treated as a single account during business-as-usual. Paragraph (e)
will also benefit the debtor's clearing members, who will have
increased transparency as to how their member property will be treated.
---------------------------------------------------------------------------
\301\ ``Account class'' is defined in Sec. 190.01 as meaning
one or more of each of the following types of accounts, as described
in greater detail in that provision: (1) Futures account; (2)
foreign futures account; (3) cleared swaps account; and (4) delivery
account.
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Section 190.18(f) gives the trustee the authority to assert claims
against any person to recover the shortfall of customer property
enumerated in certain paragraphs elsewhere in Sec. 190.18, analogous
to Sec. 190.09(a)(3). This provision could impose administrative
costs, since the trustee will need to expend time and resources to
assert claims to make up for any shortfall in customer property. The
provision will, however, benefit customers, since it will support the
trustee's efforts to recover any such shortfalls by giving the trustee
authority to act to do so. Moreover, since this provision will make
explicit what is implicit in current part 190, an additional benefit of
this provision is a reduction in potential litigation costs over a
trustee's attempts to recover shortfalls in customer property.\302\
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\302\ As discussed above in section III.C.7, while the persons
against whom claims are successfully asserted may perceive a
subjective cost, the Commission does not find these costs relevant
to the analysis.
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9. Regulation Sec. 190.19: Support of Daily Settlement: Consideration
of Costs and Benefits
Section 190.19 deals with the treatment of variation settlement in
a clearing organization bankruptcy, and sets forth the approach for the
trustee to follow when there is a shortfall in variation settlement
owed to a debtor clearing organization's clearing members and
customers. Specifically, Sec. 190.19(a) provides that any variation
settlement payments received by the clearing organization after entry
of an order for relief shall be included in customer property, and
shall promptly be distributed to the member and customer accounts
entitled to such payments. Section 190.19(b) deals with a situation
where there is a shortfall in
[[Page 19415]]
variation settlement received by the clearing organization, and
provides that such funds shall be supplemented with four specified
categories of funds (margin, to the extent permissible under parts 1,
22, and 30, assets of the debtor, to the extent dedicated to such
purpose, prefunded guarantee funds, and assessments) in accordance with
the clearing organization's default rules and procedures and (with
respect to assets of the debtor) any recovery and wind-down plans
maintained by the clearing organization.
Section 190.19 will benefit clearing members and their customers
because it will ensure that any variation settlement received by the
clearing organization will be sent to those member and customer
accounts that would be entitled to payment of variation settlement, and
that the trustee would be able to supplement any shortfall in variation
settlement amounts with the property listed in proposed Sec.
190.19(b). This approach will also benefit the financial system more
broadly, by mitigating the effect of the bankruptcy of the debtor on
settlement payments. There will be corresponding costs to general
creditors of the clearing organization since, under current part 190,
it is conceivable that, contrary to the Commission's interpretation of
the current rules, variation settlement received by the clearing
organization could be diverted to the pool of general creditors rather
than becoming customer property (even though such diversion would be
contrary to the expectations of both the Commission and the industry).
In clarifying how variation settlement received by the clearing
organization is to be treated by the bankruptcy trustee, Sec. 190.19
will also benefit clearing members and their customers by providing
enhanced transparency.
10. Section 15(a) Factors--Subpart C
i. Protection of Market Participants and the Public
Subpart C of the part 190 regulations will increase the protection
of market participants and the public by setting forth a bespoke
framework for how the bankruptcy trustee is expected to treat the
property of DCO clearing members and their customers in the event of a
DCO insolvency, thereby promoting ex ante transparency for such
clearing members and customers, and by providing, in certain
provisions, discretion to the trustee in determining how best to
address the bankruptcy of the DCO, and to achieve the goal of
protecting public customers as a class. Moreover, the addition in part
190 of bespoke bankruptcy rules for a DCO bankruptcy will provide
better protections to market participants by accounting for the unique
position of clearing members (and the customers of such clearing
member) of a DCO that is going through an insolvency proceeding.
Finally, provisions such as Sec. 190.18(c), which preferentially
allocate excess property in any account class to the customer class
that benefits public customers, to the extent there is a shortfall in
any account class in that customer class, will further protect public
customers.
ii. Efficiency, Competitiveness, and Financial Integrity
Subpart C of the part 190 regulations will promote efficiency (in
the sense of both cost effectiveness and timeliness) in the
administration of insolvency proceedings of DCOs, and the financial
integrity of transactions cleared by DCOs by setting forth clear
instructions for a bankruptcy trustee to follow in the event of a DCO
insolvency. Moreover, subpart C will provide the bankruptcy trustee
with discretion, in certain circumstances, to react flexibly to the
particulars of the insolvency proceeding, guided by the goal of
protecting public customers as a class, thereby promoting efficiency of
the administration of the proceeding. These effects will, in turn,
enhance the competitiveness of U.S. DCOs and their FCM clearing
members, by enhancing market confidence in the protection of customer
funds and positions entrusted to U.S. DCOs through their clearing
members, even in the case of insolvency.
iii. Price Discovery
Price discovery is the process of determining the price level for
an asset through the interaction of buyers and sellers and based on
supply and demand conditions. Because a DCO bankruptcy inevitably leads
to full close-out of the positions carried at the DCO, the part 190
regulations will not contribute to avoiding the resultant negative
impacts on price discovery.
iv. Sound Risk Management Practices
Subpart C of the part 190 regulations will promote sound risk
management practices by facilitating the bankruptcy trustee's efforts
to manage effectively the risk of the debtor DCO. Subpart C will
accomplish this by adding bankruptcy regulations to part 190 for a DCO
insolvency that reflect current market practices and thereby make it
easier for the trustee to act effectively to protect customer property
in the event of such an insolvency. Moreover, subpart C will promote
sound risk management practices by instructing a bankruptcy trustee to
implement the debtor DCO's default rules and procedures and to take
actions in accordance with the debtor DCO's recovery and wind-down
plans, which rules, procedures and plans are developed and overseen by
the Commission, though subject to the trustee's discretion. Some
portions of subpart C may make additional resources available to the
trustee. On the other hand, some commenters expressed concern about
changes (such as Sec. 190.15) that they believe might lead to
inappropriate risk management choices by DCOs.
v. Other Public Interest Considerations
By favoring the implementation of the clearing organization's
default rules, recovery plans, and procedures established ex ante under
the supervision of the Commission, and by supporting daily settlement,
the part 190 regulations will support financial stability. Moreover,
some of the DCOs that might enter bankruptcy are very large financial
institutions, and some are considered to be systematically important.
An effective bankruptcy process that efficiently facilitates the
proceedings is likely to benefit the financial system (and thus the
public interest), as that process will help to attenuate the
detrimental effects of the bankruptcy on the financial network.
E. Changes to Appendices A and B
The Commission is deleting forms 1 through 3 contained in appendix
A, which contain outdated provisions that require the collection of
unnecessary information, and is replacing form 4 with a streamlined
template proof of claim form, which the trustee can use in a flexible
manner. CME considered the template proof of claim ``a major
improvement'' over the current version. These changes have the benefit
of reducing administrative costs, and there are no obvious increased
costs.
Similarly, the Commission is making clarifying changes to framework
1 of appendix B, and making, consistent with the suggestions of the ABA
Subcommittee and the Subcommittee Members, a significant set of
clarifying changes to framework 2. These changes have the benefit of
having framework 2 work in a more accurate, and less confusing manner,
thus reducing administrative costs, and there are no obvious increased
costs.
F. Technical Corrections to Parts 1, 4, and 41
The Commission is making technical corrections to parts 1, 4, and
41 to
[[Page 19416]]
update cross-references. These corrections are clarifying and do not
have any impact on the substantive obligations related to these
sections. Thus, there are no increased costs associated with these
minor technical updates.
IV. Related Matters
A. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA in issuing any order or adopting any Commission
rule or regulation.\303\
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\303\ Section 15(b) of the CEA, 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. The Commission has
considered this rulemaking to determine whether it might have
anticompetitive effects, and has not identified any effect this
rulemaking, which would apply only in the rare instance of an FCM or
DCO bankruptcy, would have on competition. Accordingly, the Commission
has not identified any less anticompetitive means of achieving the
purposes of the CEA.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\304\ The
regulations being adopted by the Commission affect clearing
organizations, FCMs, bankruptcy trustees, and customers. The Commission
has previously established certain definitions of ``small entities'' to
be used in evaluating the impact of its regulations in accordance with
the RFA.\305\
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\304\ 5 U.S.C. 601 et seq.
\305\ 47 FR 18618 (Apr. 30, 1982).
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The Commission has previously determined that clearing
organizations and FCMs are not small entities for purposes of the
RFA.\306\ In the event of a bankruptcy, a trustee is appointed as
receiver to manage the estate of the insolvent FCM or clearing
organization. Accordingly, since the trustee is representing the estate
of either an FCM or clearing organization, the trustee is not a small
entity for purposes of the RFA. The Commission recognizes that many
customers of an FCM or DCO in bankruptcy could be considered to be
small entities for purposes of the RFA. The Commission believes,
however, that the amendments to part 190 are designed so that they can
be implemented without imposing a significant economic burden on a
substantial number of small entities. These regulations take into
account existing trading practices and the logistical considerations of
implementing the regulations.
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\306\ See 66 FR 45604, 45609 (Aug. 29, 2001); 67 FR 53146, 53171
(Aug. 14, 2002).
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Accordingly, the Commission Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b), that the rule adopted
herein will not have a significant economic impact on a substantial
number of small entities.
C. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \307\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring a collection of
information as defined by the PRA. The regulations adopted herein would
result in such a collection, as discussed below. A person is not
required to respond to a collection of information unless it displays a
currently valid control number issued by the Office of Management and
Budget (OMB). The regulations include a collection of information for
which the Commission has previously received control numbers from OMB.
The title of this collection of information is: OMB Control Number
3038-0021, ``Regulations Governing Bankruptcies of Commodity Brokers.''
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\307\ 44 U.S.C. 3501 et seq.
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Information Collection 3038-0021 \308\ contains the reporting,
recordkeeping and third-party disclosure requirements in the
Commission's bankruptcy regulations for commodity broker liquidations
(17 CFR part 190). These regulations apply to liquidations under
chapter 7, subchapter IV of the Bankruptcy Code.\309\ The Commission
promulgated part 190 pursuant to the authority of 7 U.S.C. 24. The
Commission is amending Information Collection 3038-0021 as a result of
these final regulations to (1) accommodate new information collection
requirements for FCMs and DCOs, and (2) revise the existing information
collection requirements for FCMs and DCOs. The Commission did not
receive any comments regarding its PRA burden analysis in the preamble
to the proposal.
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\308\ There are two information collections associated with OMB
Control No. 3038-0021. The first includes the reporting,
recordkeeping, and third-party disclosure requirements applicable to
a single respondent in a commodity broker liquidation (e.g., a
single FCM, DCO, or trustee) within the relevant time period. This
includes both (1) requirements on a single FCM or a single trustee
in an FCM bankruptcy which correspond to current requirements on a
single FCM or a single trustee in an FCM bankruptcy, as provided for
in Sec. Sec. 190.03(b)(1) and (2) and (c)(1), (2), and (4),
190.05(b) and (d), and 190.07(b)(5); and (2) new requirements on a
single DCO or a single trustee in a DCO bankruptcy as provided for
in Sec. Sec. 190.12(a)(2), (b)(1) and (2), and (c)(1) and (2) and
190.14(a) and (d). The second information collection includes the
third-party disclosure requirements that are applicable during
business as usual to multiple respondents (e.g., multiple FCMs).
These requirements were proposed as Sec. 190.10(b) and (e) (which
are analogs to current Sec. Sec. 190.06(d) and 190.10(c)), as well
as a new third-party disclosure requirement provided for in Sec.
190.10(d) (regarding letters of credit); however, the third-party
disclosure requirements are being adopted as Sec. Sec. 1.41, 1.43,
and 1.55(p).
\309\ 11 U.S.C. 761 et seq.
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1. Reporting Requirements in an FCM Bankruptcy
Regulation Sec. 190.03(b)(1) requires FCMs that file a petition in
bankruptcy to notify the Commission and the relevant DSRO, as soon as
practicable before and in any event no later than the time of such
filing, of the anticipated or actual filing date, the court in which
the proceeding will be or has been filed and, as soon as known, the
docket number assigned to that proceeding. It further requires an FCM
against which an involuntary bankruptcy petition or application for a
protective decree under SIPA is filed to notify the Commission and the
relevant DSRO immediately upon the filing of such petition or
application.
Regulation Sec. 190.03(b)(2) requires the trustee, the relevant
DSRO, or an applicable clearing organization to notify the Commission
if such person intends to transfer or apply to transfer open commodity
contracts or customer property on behalf of the public customers of the
debtor.
Based on its experience, the Commission anticipates that an FCM
bankruptcy would occur once every three years.\310\ The Commission has
estimated the burden hours for the reporting requirements in an FCM
bankruptcy as follows:
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\310\ These estimates express the burdens in terms of those that
would be imposed on one respondent during the three-year period.
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Estimated number of respondents: 1.
Estimated annual number of responses per respondent: 1.\311\
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\311\ The Commission estimates that (1) under Sec.
190.03(b)(1), an FCM would make two notifications per bankruptcy
(one to the Commission and one to its DSRO), and (2) under Sec.
190.03(b)(2), an FCM would make one notification per bankruptcy.
Dividing those numbers by three (since the Commission anticipates an
FCM bankruptcy occurring once every three years) results in 0.67
notifications annually pursuant to Sec. 190.03(b)(1), and 0.33
notifications annually pursuant to Sec. 190.03(b)(2), for a total
of one notification annually per respondent.
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[[Page 19417]]
Estimated total annual number of responses for all respondents: 1.
Estimated annual number of burden hours per respondent: 1.\312\
---------------------------------------------------------------------------
\312\ The Commission estimates that (1) the notifications
required under Sec. 190.03(b)(1) would take 0.5 hours to make, and
(2) the notification required under Sec. 190.03(b)(2) would take 2
hours to make. In terms of burden hours, this amounts to (0.5*0.67
under Sec. 190.03(b)(1)) plus (2*0.33 under Sec. 190.03(b)(2)), or
a total of one burden hour annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 1.
2. Recordkeeping Requirements in an FCM Bankruptcy
Regulation Sec. 190.05(b) requires the trustee to use reasonable
efforts to compute a funded balance for each customer account that
contains open commodity contracts or other property as of the close of
business each business day subsequent to the order for relief until the
date all open commodity contracts and other property in such account
has been transferred or liquidated.
Regulation Sec. 190.05(d) requires the trustee to use reasonable
efforts to continue to issue account statements with respect to any
customer for whose account open commodity contracts or other property
is held that has not been liquidated or transferred.
Based on its experience, the Commission anticipates that an FCM
bankruptcy would occur once every three years.\313\ The Commission has
estimated the burden hours for the recordkeeping requirements in an FCM
bankruptcy as follows:
---------------------------------------------------------------------------
\313\ These estimates express the burdens in terms of those that
would be imposed on one respondent during the three-year period.
---------------------------------------------------------------------------
Estimated number of respondents: 1.
Estimated annual number of responses per respondent:
26,666.67.\314\
---------------------------------------------------------------------------
\314\ The Commission estimates that (1) under Sec. 190.05(b), a
trustee would compute a funded balance for customer accounts 40,000
times; and (2) under Sec. 190.05(d), a trustee would issue 40,000
account statements for customer accounts. Dividing those numbers by
three (since the Commission anticipates an FCM bankruptcy occurring
once every three years) results in 13,333.33 records annually
pursuant to Sec. 190.05(b), and 13,333.33 records annually pursuant
to Sec. 190.05(d), for a total of 26,666.67 records annually per
respondent.
---------------------------------------------------------------------------
Estimated total annual number of responses for all respondents:
26,666.67.
Estimated annual number of burden hours per respondent:
266.67.\315\
---------------------------------------------------------------------------
\315\ The Commission estimates that each record required under
Sec. 190.05(b) and 190.05(d) would take 0.01 hours to prepare. In
terms of burden hours, this amounts to (0.01*13,333.33 under Sec.
190.05(b)) plus (0.01*13,333.33 under Sec. 190.05(d)), or a total
of 266.67 burden hours annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 266.67.
3. Third-Party Disclosure Requirements Applicable to a Single
Respondent in an FCM Bankruptcy
Regulation Sec. 190.03(c)(1) requires the trustee to use all
reasonable efforts to promptly notify any customer whose futures
account, foreign futures account, or cleared swaps account includes
specifically identifiable property, and that such specifically
identifiable property may be liquidated on and after the seventh day
after the order for relief if the customer has not instructed the
trustee in writing before the deadline specified in the notice to
return such property pursuant to the terms for distribution of customer
property contained in part 190.
Regulation Sec. 190.03(c)(2) allows the trustee to treat open
commodity contracts of public customers identified on the books and
records of the debtor has held in an account designated as a hedging
account as specifically identifiable property of such customer.\316\
---------------------------------------------------------------------------
\316\ The Commission no longer assigns burden hours to the
discretionary notice that a trustee may provide to customers in an
involuntary FCM bankruptcy proceeding pursuant to Sec.
190.03(c)(3). There have been no involuntary FCM liquidations and
none are anticipated. Accordingly, continuing to assign burden hours
to this voluntary requirement would inappropriately inflate the
burden hours of this information collection.
---------------------------------------------------------------------------
Regulation Sec. 190.03(c)(4) requires the trustee to promptly
notify each customer that an order for relief has been entered and
instruct each customer to file a proof of customer claim containing the
information specified in Sec. 190.03(e).
Regulation Sec. 190.07(b)(5) requires the trustee, in the event
that specifically identifiable property has been or will be
transferred, to transmit any customer instructions previously received
by the trustee with respect to such specifically identifiable property
to the transferee of such property.
Based on its experience, the Commission anticipates that an FCM
bankruptcy would occur once every three years.\317\ The Commission has
estimated the burden hours for the third-party disclosure requirements
applicable to a single respondent in an FCM bankruptcy as follows:
---------------------------------------------------------------------------
\317\ These estimates express the burdens in terms of those that
would be imposed on one respondent during the three-year period.
---------------------------------------------------------------------------
Estimated number of respondents: 1.
Estimated annual number of responses per respondent:
10,003.32.\318\
---------------------------------------------------------------------------
\318\ The Commission estimates that a trustee would make the
required disclosures under each of Sec. 190.03(c)(1), (2), and (4)
10,000 times per bankruptcy. Dividing those numbers by three (since
the Commission anticipates an FCM bankruptcy occurring once every
three years) results in 3,333.33 disclosures annually pursuant to
each of Sec. 190.03(c)(1), (2), and (4). The Commission further
estimates that a trustee would make the required disclosure under
Sec. 190.07(b)(5) 10 times per bankruptcy. Dividing this number by
three results in 3.33 disclosures annually pursuant to Sec.
190.07(b)(5). This amounts to a total of 10,003.32 disclosures
annually per respondent.
---------------------------------------------------------------------------
Estimated total annual number of responses for all respondents:
10,003.32.
Estimated annual number of burden hours per respondent:
1,336.67.\319\
---------------------------------------------------------------------------
\319\ The Commission estimates that (1) each disclosure required
under Sec. 190.03(c)(1) and (2) and (b) would take 0.1 hours to
prepare; (2) each disclosure required under Sec. 190.03(c)(4) would
take 0.2 hours to prepare; and (3) each disclosure required under
Sec. 190.07(b)(5) would take 1 hour to prepare. In terms of burden
hours, this amounts to (0.1*3,333.33 under Sec. 190.03(c)(1)) plus
(0.1*3,333.33 under Sec. 190.03(c)(2)) plus (0.2*3,333.33 under
Sec. 190.03(c)(4)) plus (1*3.33 under Sec. 190.07(b)(5)), or a
total of 1336.66 burden hours annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 1,336.67.
4. Reporting Requirements in a Derivatives Clearing Organization (DCO)
Bankruptcy
Regulation Sec. 190.12(a)(2) requires a clearing organization that
files a petition in bankruptcy to notify the Commission, at or before
the time of such filing, of the filing date, the court in which the
proceeding will be or has been filed and, as soon as known, the docket
number assigned to that proceeding. It further requires a clearing
organization against which an involuntary bankruptcy petition is filed
to similarly notify the Commission within three hours after the receipt
of notice of such filing.
Regulation Sec. 190.12(b)(1) requires the debtor clearing
organization to provide to the trustee, no later than three hours
following the later of the commencement of a bankruptcy proceeding or
the appointment of the trustee, copies of each of the most recent
reports that the debtor was required to file with the Commission under
Sec. 39.19(c).
Regulation Sec. 190.12(b)(2) requires the debtor clearing
organization to provide to the trustee and the Commission, no later
than three hours following the commencement of a bankruptcy proceeding,
copies of (1) the most recent recovery or wind-down plans of the debtor
maintained pursuant to Sec. 39.39(b), and (2) the most recent version
of the debtor's default management plan and default rules and
procedures maintained pursuant to Sec. 39.16 and, as applicable, Sec.
39.35.
Regulations Sec. 190.12(c)(1) and (2) require the debtor clearing
organization
[[Page 19418]]
to make available to the trustee and the Commission, no later than the
next business day following commencement of a bankruptcy proceeding,
copies of (1) all records maintained by the debtor pursuant to Sec.
39.20(a), and (2) any opinions of counsel or other legal memoranda
provided to the debtor in the five years preceding the bankruptcy
proceeding relating to the enforceability of the rules and procedures
of the debtor in the event of an insolvency proceeding involving the
debtor.
Based on its experience, the Commission anticipates that a clearing
organization bankruptcy would occur once every fifty years.\320\ The
Commission has estimated the burden hours for the reporting
requirements in a DCO bankruptcy as follows:
---------------------------------------------------------------------------
\320\ No U.S. clearing organization has ever been the subject of
a bankruptcy proceeding, and none has come anywhere near insolvency.
While there have been less than a handful of central counterparties
worldwide that became functionally insolvent during the twentieth
century, none of those were subject to modern resiliency
requirements. Accordingly, the Commission believes that an estimate
of one DCO bankruptcy every fifty years is an appropriate estimate.
These burden estimates express the burdens in terms of those that
would be imposed on one respondent during the fifty-year period.
---------------------------------------------------------------------------
Estimated number of respondents: 1.
Estimated annual number of responses per respondent: 2.98.\321\
---------------------------------------------------------------------------
\321\ The Commission estimates that (1) under Sec.
190.12(a)(2), a clearing organization would make two notifications
per bankruptcy; (2) under Sec. 190.12(b)(1), a clearing
organization would provide 40 reports to the trustee; (3) under
Sec. 190.12(b)(2), a clearing organization would provide 5 reports
to the trustee and the Commission; (4) under Sec. 190.12(c)(1), a
clearing organization would provide 100 records to the trustee and
the Commission; and (5) under Sec. 190.12(c)(2), a clearing
organization would provide 2 records to the trustee and the
Commission. Dividing those numbers by 50 (since the Commission
anticipates a clearing organization bankruptcy occurring once every
50 years) results in (1) 0.04 reports annually pursuant to Sec.
190.12(a)(2); (2) 0.8 reports annually pursuant to Sec.
190.12(b)(1); (3) 0.1 reports annually pursuant to Sec.
190.12(b)(2); (4) 2 reports annually pursuant to Sec. 190.12(c)(1);
and (5) 0.04 reports annually pursuant to Sec. 190.12(c)(2), for a
total of 2.98 reports annually per respondent.
---------------------------------------------------------------------------
Estimated total annual number of responses for all respondents:
2.98.
Estimated annual number of burden hours per respondent: 0.61.\322\
---------------------------------------------------------------------------
\322\ The Commission estimates that (1) each notification
required under Sec. 190.12(a)(2) and (d)(2) would take 0.5 hours to
make; (2) gathering the reports required under Sec. 190.12(b)(1)
would take 0.2 hours; (3) gathering the reports required under Sec.
190.12(b)(2) would take 0.2 hours; (4) gathering the reports
required under Sec. 190.12(c)(1) would take 0.2 hours; and (5)
gathering the reports required under Sec. 190.12(c)(2) would take
0.2 hours. In terms of burden hours, this amounts to (0.5*0.04 under
Sec. 190.12(a)(2)) plus (0.2*0.8 under Sec. 190.12(b)(1)) plus
(0.2*0.1 under Sec. 190.12(b)(2)) plus (0.2*2 under Sec.
190.12(c)(1)) plus (0.2*0.04 under Sec. 190.12(c)(2)), or a total
of 0.61 burden hours annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 0.61.
5. Recordkeeping Requirements in a DCO Bankruptcy
Regulation Sec. 190.14(d) requires the trustee to use reasonable
efforts to compute a funded balance for each customer account that
contains open commodity contracts or other property as of the close of
business each business day subsequent to the order for relief on which
liquidation of property within the account has been completed or
immediately prior to any distribution of property within the account.
Based on its experience, the Commission anticipates that a clearing
organization bankruptcy would occur once every fifty years.\323\ The
Commission has estimated the burden hours for the recordkeeping
requirements in a DCO bankruptcy as follows:
---------------------------------------------------------------------------
\323\ These estimates express the burdens in terms of those that
would be imposed on one respondent during the fifty-year period.
---------------------------------------------------------------------------
Estimated number of respondents: 1.
Estimated annual number of responses per respondent: 9.\324\
---------------------------------------------------------------------------
\324\ The Commission estimates that, under Sec. 190.14(d), a
clearing organization would compute a funded balance for customer
accounts 450 times during a bankruptcy. This number is based on an
average of 45 clearing members, each with two accounts (house and
customer). Dividing that number by 50 (since the Commission
anticipates a clearing organization bankruptcy occurring once every
50 years) results in 9 records annually per respondent.
---------------------------------------------------------------------------
Estimated total annual number of responses for all respondents: 9.
Estimated annual number of burden hours per respondent: 0.9.\325\
---------------------------------------------------------------------------
\325\ The Commission estimates that computing the funded balance
of customer accounts pursuant to Sec. 190.14(d) would take 0.1
hours per computation. In terms of burden hours, this amounts to
(0.1*9), or 0.9 burden hours annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 0.9.
6. Third-Party Disclosure Requirements Applicable to a Single
Respondent in a DCO Bankruptcy
Regulation Sec. 190.14(a) allows the trustee, in their discretion
based upon the facts and circumstances of the case, to instruct each
customer to file a proof of claim containing such information as is
deemed appropriate by the trustee, and seek a court order establishing
a bar date for the filing of such proofs of claim.
Based on its experience, the Commission anticipates that a clearing
organization bankruptcy would occur once every fifty years.\326\ The
Commission has estimated the burden hours for the third-party
disclosure requirements applicable to a single respondent in a DCO
bankruptcy as follows:
---------------------------------------------------------------------------
\326\ These estimates express the burdens in terms of those that
would be imposed on one respondent during the fifty-year period.
---------------------------------------------------------------------------
Estimated number of respondents: 1.
Estimated annual number of responses per respondent: 0.9.\327\
---------------------------------------------------------------------------
\327\ The Commission estimates that, under Sec. 190.14(a), a
trustee would make the disclosure 45 times during a bankruptcy. This
number is based on an average of 45 clearing members. Dividing that
number by 50 (since the Commission anticipates a clearing
organization bankruptcy occurring once every 50 years) results in
0.9 records annually per respondent.
---------------------------------------------------------------------------
Estimated total annual number of responses for all respondents:
0.9.
Estimated annual number of burden hours per respondent: 0.18.\328\
---------------------------------------------------------------------------
\328\ The Commission estimates that instructing customers to
file a proof of claim pursuant to Sec. 190.14(a) would take 0.2
hours. In terms of burden hours, this amounts to (0.2*0.9), or 0.18
burden hours annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 0.18.
7. Third-Party Disclosure Requirements Applicable to Multiple
Respondents During Business as Usual
As discussed in Section II.B.8 above, the Commission is codifying
the provisions proposed as Sec. 190.10(b), (d), and (e) in part 1,
along with other regulations that pertain to an FCM's business as
usual. Regulation Sec. 1.41, which was proposed as Sec. 190.10(b),
requires an FCM to provide an opportunity to each of its customers,
upon first opening a futures account or cleared swaps account with such
FCM, to designate such account as a hedging account.
Regulation Sec. 1.43, which was proposed as Sec. 190.10(d),
prohibits an FCM from accepting a letter of credit as collateral unless
such letter of credit may be exercised under certain conditions
specified in the regulation.
Regulation Sec. 1.55(p), which was proposed as Sec. 190.10(e),
requires an FCM to provide any customer with the disclosure statement
set forth in Sec. 1.55(p) prior to accepting property other than cash
from or for the account of a customer to margin, guarantee, or secure a
commodity contract.
The requirements described above are applicable on a regular basis
(i.e., during business as usual) to multiple respondents. The
Commission has estimated the burden hours for the third-party
disclosure requirements applicable to multiple respondents during
business as usual as follows:
Estimated number of respondents: 125.
Estimated annual number of responses per respondent: 3,000.\329\
---------------------------------------------------------------------------
\329\ The Commission estimates that under Sec. Sec. 1.41, 1.43,
and 1.55(p), an FCM would make the required disclosures 1,000 times
per year. This amounts to a total of 3,000 responses annually per
respondent.
---------------------------------------------------------------------------
[[Page 19419]]
Estimated total annual number of responses for all respondents:
375,000.
Estimated annual number of burden hours per respondent: 60.\330\
---------------------------------------------------------------------------
\330\ The Commission estimates that each disclosure required
under Sec. Sec. 1.41, 1.43, and 1.55(p) would take 0.02 hours to
make. In terms of burden hours, this amounts to (0.02*1,000 under
Sec. 1.41) plus (0.02*1,000 under Sec. 1.43 plus (0.02*1,000 under
Sec. 1.55(p)), or 60 burden hours annually per respondent.
---------------------------------------------------------------------------
Estimated total annual burden hours for all respondents: 7,500.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 4
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 41
Brokers, Reporting and recordkeeping requirements, Securities.
17 CFR Part 190
Bankruptcy, Brokers, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24
(2012).
0
2. In Sec. 1.25, revise paragraph (a)(2)(ii)(B) to read as follows:
Sec. 1.25 Investment of customer funds.
(a) * * *
(2) * * *
(ii) * * *
(B) Securities subject to such repurchase agreements must not be
``specifically identifiable property'' as defined in Sec. 190.01 of
this chapter.
* * * * *
0
3. Add Sec. 1.41 to read as follows:
Sec. 1.41 Designation of hedging accounts.
(a) A futures commission merchant must provide an opportunity to
each customer, when it first opens a futures account, foreign futures
account or cleared swaps account with such futures commission merchant,
to designate such account as a hedging account. The futures commission
merchant must indicate prominently in the accounting records in which
it maintains open trade balances whether, for each customer account,
the account is designated as a hedging account.
(b) A futures commission merchant may permit the customer to open
an account as a hedging account only if it obtains the customer's
written representation that the customer's trading of futures or
options on futures, foreign futures or options on foreign futures, or
cleared swaps (as applicable) in the account constitutes hedging as
such term may be defined under any relevant Commission regulation or
rule of any clearing organization, designated contract market, swap
execution facility or foreign board of trade.
(c) The requirements set forth in paragraphs (a) and (b) of this
section do not apply to a futures commission merchant with respect to
any commodity contract account that the futures commission merchant
opened prior to May 13, 2021. The futures commission merchant may
continue to designate as a hedging account any account with respect to
which the futures commission merchant received written hedging
instructions from the customer in accordance with former Sec.
190.06(d) of this chapter.
(d) A futures commission merchant may designate an existing futures
account, foreign futures account or cleared swaps account of a
particular customer as a hedging account, provided that it has obtained
the representation set out in paragraph (b) of this section from such
customer.
0
4. Add Sec. 1.42 to read as follows:
Sec. 1.42 Delivery accounts.
In connection with the making or taking of delivery of a commodity
under a commodity contract whose terms require settlement via physical
delivery, if a futures commission merchant facilitates or effects the
transfer of the physical delivery property and payment therefor on
behalf of the customer, and does so outside the futures account,
foreign futures account or cleared swaps account in which the commodity
contract was held, the futures commission merchant must do so in a
delivery account, provided, however, that when the commodity subject to
delivery is a security, a futures commission merchant may, consistent
with any applicable regulatory requirements, do so in a securities
account.
0
5. Add Sec. 1.43 to read as follows:
Sec. 1.43 Letters of credit as collateral.
A futures commission merchant shall not accept a letter of credit
as collateral unless such letter of credit may be exercised, through
its stated date of expiry, under the following conditions, regardless
of whether the customer posting that letter of credit is in default in
any obligation:
(a) In the event that an order for relief under chapter 7 of the
Bankruptcy Code or a protective decree pursuant to section 5(b)(1) of
SIPA is entered with respect to the futures commission merchant, or if
the FDIC is appointed as receiver for the futures commission merchant
pursuant to 12 U.S.C. 5382(a), the trustee for that futures commission
merchant (or, as applicable, FDIC) may draw upon such letter of credit,
in full or in part, in accordance with Sec. 190.04(d)(3) of this
chapter.
(b) If the letter of credit is passed through to a clearing
organization, then in the event that an order for relief under chapter
7 of the Bankruptcy Code is entered with respect to the clearing
organization, or if the FDIC is appointed as receiver for the clearing
organization pursuant to 12 U.S.C. 5382(a), the trustee for that
clearing organization (or, as applicable, FDIC) may draw upon such
letter of credit, in full or in part, in accordance with Sec.
190.04(d)(3) of this chapter.
(c) A futures commission merchant shall not accept a letter of
credit from a customer as collateral if it has any agreement with the
customer that is inconsistent with this section.
0
6. In Sec. 1.55:
0
a. Revise paragraphs (d) and (f);
0
b. Remove the parenthetical control number sentence and parenthetical
authority citation following paragraph (h);
0
c. Remove the paragraph (k) heading; and
0
d. Add paragraph (p).
The revision and addition read as follows:
Sec. 1.55 Public disclosures by futures commission merchants.
* * * * *
(d) Any futures commission merchant, or (in the case of an
introduced account) any introducing broker, may open a commodity
futures account for a customer without obtaining the separate
acknowledgments of disclosure and elections required by this section
and by Sec. Sec. 1.33(g) and 33.7 of this chapter, provided that:
(1) Prior to the opening of such account, the futures commission
merchant or introducing broker obtains an acknowledgement from the
customer, which may consist of a single signature
[[Page 19420]]
at the end of the futures commission merchant's or introducing broker's
customer account agreement, or on a separate page, of the disclosure
statements, consents, and elections specified in this section and Sec.
1.33(g), and in Sec. Sec. 33.7, 155.3(b)(2), and 155.4(b)(2) of this
chapter, and which may include authorization for the transfer of funds
from a segregated customer account to another account of such customer,
as listed directly above the signature line, provided the customer has
acknowledged by check or other indication next to a description of each
specified disclosure statement, consent, or election that the customer
has received and understood such disclosure statement or made such
consent or election; and
(2) The acknowledgment referred to in paragraph (d)(1) of this
section is accompanied by and executed contemporaneously with delivery
of the disclosures and elective provisions required by this section and
Sec. 1.33(g), and by Sec. 33.7 of this chapter.
* * * * *
(f) A futures commission merchant or, in the case of an introduced
account, an introducing broker, may open a commodity futures account
for an ``institutional customer'' as defined in Sec. 1.3 without
furnishing such institutional customer the disclosure statements or
obtaining the acknowledgments required under paragraph (a) of this
section, or Sec. Sec. 1.33(g), 1.55(p), and 1.65(a)(3), and Sec. Sec.
30.6(a), 33.7(a), 155.3(b)(2), and 155.4(b)(2) of this chapter.
* * * * *
(p)(1) Except as provided in Sec. 1.65, no commodity broker (other
than a clearing organization) may accept property other than cash from
or for the account of a customer, other than a customer specified in
paragraph (f) of this section, to margin, guarantee, or secure a
commodity contract unless the commodity broker first furnishes the
customer with the disclosure statement set forth in paragraph (p)(2) of
this section in boldface print in at least 10 point type which may be
provided as either a separate, written document or incorporated into
the customer agreement, or with another statement approved under
paragraph (c) of this section and set forth in appendix A to this
section which the Commission finds satisfies the requirement of this
paragraph (p)(1).
(2) The disclosure statement required by paragraph (p)(1) of this
section is as follows:
THIS STATEMENT IS FURNISHED TO YOU BECAUSE REGULATION 1.55(p) OF
THE COMMODITY FUTURES TRADING COMMISSION REQUIRES IT FOR REASONS OF
FAIR NOTICE UNRELATED TO THIS COMPANY'S CURRENT FINANCIAL CONDITION.
1. YOU SHOULD KNOW THAT IN THE UNLIKELY EVENT OF THIS COMPANY'S
BANKRUPTCY, PROPERTY, INCLUDING PROPERTY SPECIFICALLY TRACEABLE TO YOU,
WILL BE RETURNED, TRANSFERRED OR DISTRIBUTED TO YOU, OR ON YOUR BEHALF,
ONLY TO THE EXTENT OF YOUR PRO RATA SHARE OF ALL PROPERTY AVAILABLE FOR
DISTRIBUTION TO CUSTOMERS.
2. THE COMMISSION'S REGULATIONS CONCERNING BANKRUPTCIES OF
COMMODITY BROKERS CAN BE FOUND AT 17 CODE OF FEDERAL REGULATIONS PART
190.
(3) The statement contained in paragraph (p)(2) of this section
need be furnished only once to each customer to whom it is required to
be furnished by this section.
0
7. In Sec. 1.65, revise paragraphs (a)(3) introductory text and
(a)(3)(iii) to read as follows:
Sec. 1.65 Notice of bulk transfers and disclosure obligations to
customers.
(a) * * *
(3) Where customer accounts are transferred to a futures commission
merchant or introducing broker, other than at the customer's request,
the transferee introducing broker or futures commission merchant must
provide each customer whose account is transferred with the risk
disclosure statements and acknowledgments required by Sec. 1.55
(domestic futures and foreign futures and options trading) and Sec.
33.7 of this chapter (domestic exchange-traded commodity options) and
receive the required acknowledgments within sixty days of the transfer
of accounts. This paragraph (a)(3) shall not apply:
* * * * *
(iii) If the transfer of accounts is made from one introducing
broker to another introducing broker guaranteed by the same futures
commission merchant pursuant to a guarantee agreement in accordance
with the requirements of Sec. 1.10(j) and such futures commission
merchant maintains the relevant acknowledgments required by Sec. Sec.
1.55(a)(1)(ii) and 33.7(a)(1)(ii) of this chapter and can establish
compliance with Sec. 1.55(p).
* * * * *
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
0
8. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,
and 23.
0
9. In Sec. 4.5, revise paragraph (c)(2)(iii)(A) to read as follows:
Sec. 4.5 Exclusion for certain otherwise regulated persons from the
definition of the term ``commodity pool operator.''
* * * * *
(c) * * *
(2) * * *
(iii) * * *
(A) Will use commodity futures or commodity options contracts, or
swaps solely for bona fide hedging purposes within the meaning and
intent of the definition of bona fide hedging transactions and
positions for excluded commodities in Sec. Sec. 1.3 and 151.5 of this
chapter; Provided however, That, in addition, with respect to positions
in commodity futures or commodity options contracts, or swaps which do
not come within the meaning and intent of the definition of bona fide
hedging transactions and positions for excluded commodities in
Sec. Sec. 1.3 and 151.5 of this chapter, a qualifying entity may
represent that the aggregate initial margin and premiums required to
establish such positions will not exceed five percent of the
liquidation value of the qualifying entity's portfolio, after taking
into account unrealized profits and unrealized losses on any such
contracts it has entered into; and, Provided further, That in the case
of an option that is in-the-money at the time of the purchase, the in-
the-money amount as defined in Sec. 190.01of this chapter may be
excluded in computing such five percent; or
* * * * *
0
10. In Sec. 4.12, revise the section heading and paragraph
(b)(1)(i)(C) to read as follows:
Sec. 4.12 Exemption from provisions of this part.
* * * * *
(b) * * *
(1) * * *
(i) * * *
(C) Will not enter into commodity interest transactions for which
the aggregate initial margin and premiums, and required minimum
security deposit for retail forex transactions (as defined in Sec.
5.1(m) of this chapter) exceed 10 percent of the fair market value of
the pool's assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered
[[Page 19421]]
into; Provided, however, That in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount as defined in
Sec. 190.01 of this chapter may be excluded in computing such 10
percent; and
* * * * *
0
11. In Sec. 4.13, revise paragraph (a)(3)(ii)(A) to read as follows:
Sec. 4.13 Exemption from registration as a commodity pool operator.
* * * * *
(a) * * *
(3) * * *
(ii) * * *
(A) The aggregate initial margin, premiums, and required minimum
security deposit for retail forex transactions (as defined in Sec.
5.1(m) of this chapter) required to establish such positions,
determined at the time the most recent position was established, will
not exceed 5 percent of the liquidation value of the pool's portfolio,
after taking into account unrealized profits and unrealized losses on
any such positions it has entered into; Provided, That in the case of
an option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Sec. 190.01 of this chapter may be excluded
in computing such 5 percent; or
* * * * *
PART 41--SECURITY FUTURES PRODUCTS
0
12. The authority citation for part 41 continues to read as follows:
Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114
Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
0
13. In Sec. 41.41, revise paragraph (d) to read as follows:
Sec. 41.41 Security futures products accounts.
* * * * *
(d) Recordkeeping requirements. The Commission's recordkeeping
rules set forth in Sec. Sec. 1.31, 1.32, 1.35, 1.36, 1.37, 4.23, 4.33,
and 18.05 of this chapter shall apply to security futures product
transactions and positions in a futures account (as that term is
defined in Sec. 1.3 of this chapter). The rules in the preceding
sentence shall not apply to security futures product transactions and
positions in a securities account (as that term is defined in Sec. 1.3
of this chapter); provided, that the SEC's recordkeeping rules apply to
those transactions and positions.
* * * * *
0
14. Revise part 190 to read as follows:
PART 190--BANKRUPTCY RULES
Subpart A--General Provisions
Sec.
190.00 Statutory authority, organization, core concepts, scope, and
construction.
190.01 Definitions.
190.02 General.
Subpart B--Futures Commission Merchant as Debtor
190.03 Notices and proofs of claims.
190.04 Operation of the debtor's estate--customer property.
190.05 Operation of the debtor's estate--general.
190.06 Making and taking delivery under commodity contracts.
190.07 Transfers.
190.08 Calculation of funded net equity.
190.09 Allocation of property and allowance of claims.
190.10 Current records during business as usual.
Subpart C--Clearing Organization as Debtor
190.11 Scope and purpose of this subpart.
190.12 Required reports and records.
190.13 Prohibition on avoidance of transfers.
190.14 Operation of the estate of the debtor subsequent to the
filing date.
190.15 Recovery and wind-down plans; default rules and procedures.
190.16 Delivery.
190.17 Calculation of net equity.
190.18 Treatment of property.
190.19 Support of daily settlement.
Appendix A to Part 190--Customer Proof of Claim Form
Appendix B to Part 190--Special Bankruptcy Distributions
Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a-1, 12, 12a, 19, and
24; 11 U.S.C. 362, 546, 548, 556, and 761-767, unless otherwise
noted.
Subpart A--General Provisions
Sec. 190.00 Statutory authority, organization, core concepts, scope,
and construction.
(a) Statutory authority. The Commission has adopted the regulations
in this part pursuant to its authority under sections 8a(5) and 20 of
the Act. Section 8a(5) provides general rulemaking authority to
effectuate the provisions and accomplish the purposes of the Act.
Section 20 provides that the Commission may, notwithstanding title 11
of the United States Code, adopt certain rules or regulations governing
a proceeding involving a commodity broker that is a debtor under
subchapter IV of chapter 7 of the Bankruptcy Code. Specifically, the
Commission is authorized to adopt rules or regulations specifying:
(1) That certain cash, securities, or other property, or commodity
contracts, are to be included in or excluded from customer property or
member property;
(2) That certain cash, securities, or other property, or commodity
contracts, are to be specifically identifiable to a particular customer
in a particular capacity;
(3) The method by which the business of the commodity broker is to
be conducted or liquidated after the date of the filing of the petition
under chapter 7 of the Bankruptcy Code, including the payment and
allocation of margin with respect to commodity contracts not
specifically identifiable to a particular customer pending their
orderly liquidation;
(4) Any persons to which customer property and commodity contracts
may be transferred under section 766 of the Bankruptcy Code; and
(5) How a customer's net equity is to be determined.
(b) Organization. This part is organized into three subparts. This
subpart contains general provisions applicable in all cases. Subpart B
of this part contains provisions that apply when the debtor is a
futures commission merchant (as that term is defined in the Act or
Commission regulations). This includes acting as a foreign futures
commission merchant, as defined in section 761(12) of the Bankruptcy
Code, but excludes a person that is ``notice-registered'' as a futures
commission merchant pursuant to section 4f(a)(2) of the Act. Subpart C
contains provisions that apply when the debtor is registered as a
derivatives clearing organization under the Act.
(c) Core concepts. The regulations in this part reflect several
core concepts. The descriptions of core concepts in paragraphs (c)(1)
through (6) of this section are subject to the further specific
requirements set forth in this part, and the specific requirements in
this part should be interpreted and applied consistently with these
core concepts.
(1) Commodity brokers. Subchapter IV of chapter 7 of the Bankruptcy
Code applies to a debtor that is a commodity broker, against which a
customer holds a ``net equity'' claim relating to a commodity contract.
This part is limited to a commodity broker that is:
(i) A futures commission merchant; or
(ii) A derivatives clearing organization registered under the Act
and Sec. 39.3 of this chapter.
(2) Account classes. The Act and Commission regulations in parts 1,
22, and 30 of this chapter provide differing treatment and protections
for different types of cleared commodity contracts. This part
establishes three account classes that correspond to the different
types of accounts that futures
[[Page 19422]]
commission merchants and clearing organizations are required to
maintain under the regulations in the preceding sentence, specifically,
the futures account class (including options on futures), the foreign
futures account class (including options on foreign futures), and the
cleared swaps account class (including cleared options other than
options on futures or foreign futures). This part also establishes a
fourth account class, the delivery account class (which may be further
subdivided as provided in this part), for property held in an account
designated within the books and records of the debtor as a delivery
account, for effecting delivery under commodity contracts whose terms
require settlement via delivery when the commodity contract is held to
expiration or, in the case of a cleared option, is exercised.
(3) Public customers and non-public customers; Commission
segregation requirements; member property--(i) Public customers and
non-public customers. This part prescribes separate treatment of
``public customers'' and ``non-public customers'' (as these terms are
defined in Sec. 190.01) within each account class in the event of a
proceeding under this part in which the debtor is a futures commission
merchant. Public customers of a debtor futures commission merchant are
entitled to a priority in the distribution of cash, securities, or
other customer property over non-public customers, and both have
priority over all other claimants (except for claims relating to the
administration of customer property) pursuant to section 766(h) of the
Bankruptcy Code.
(A) The cash, securities, or other property held on behalf of the
public customers of a futures commission merchant in the futures,
foreign futures, or cleared swaps account classes are subject to
special segregation requirements imposed under parts 1, 22, and 30 of
this chapter for each account class. Although such segregation
requirements generally are not applicable to cash, securities, or other
property received from or reflected in the futures, foreign futures, or
cleared swaps accounts of non-public customers of a futures commission
merchant, such transactions and property are customer property within
the scope of this part.
(B) While parts 1, 22, and 30 of this chapter do not impose special
segregation requirements with respect to treatment of cash, securities,
or other property of public customers carried in a delivery account,
such property does constitute customer property. Thus, the distinction
between public and non-public customers is, given the priority for
public customers in section 766(h) of the Bankruptcy Code, relevant for
the purpose of making distributions to delivery account class customers
pursuant to this part.
(C) Where a provision in this part affords the trustee discretion,
that discretion should be exercised in a manner that the trustee
determines will best achieve the overarching goal of protecting public
customers as a class by enhancing recoveries for, and mitigating
disruptions to, public customers as a class. In seeking to achieve that
overarching goal, the trustee has discretion to balance those two sub-
goals when they are in tension. Where the trustee is directed to
exercise ``reasonable efforts'' to meet a standard, those efforts
should only be less than ``best efforts'' to the extent that the
trustee determines that such an approach would support the foregoing
goals.
(ii) Clearing organization bankruptcies: Member property and
customer property other than member property. For a clearing
organization, ``customer property'' is divided into ``member property''
and ``customer property other than member property.'' The term member
property is used to identify the cash, securities, or property
available to pay the net equity claims of clearing members based on
their house account at the clearing organization. Thus, in the event of
a proceeding under this part in which the debtor is a clearing
organization, the classification of customers as public customers or
non-public customers also is relevant, in that each member of the
clearing organization will have separate claims against the clearing
organization (by account class) with respect to:
(A) Commodity contract transactions cleared for its own account or
on behalf of any of its non-public customers (which are cleared in a
``house account'' at the clearing organization); and
(B) Commodity contract transactions cleared on behalf of any public
customers of the clearing member (which are cleared in accounts at the
clearing organization that is separate and distinct from house
accounts).
(iii) Preferential assignment among customer classes and account
classes for clearing organization bankruptcies. Section 190.18 is
designed to support the interests of public customers of members of a
debtor that is a clearing organization.
(A) Certain customer property is preferentially assigned to
``customer property other than member property'' instead of ``member
property'' to the extent that there is a shortfall in funded balances
for members' public customer claims. Moreover, to the extent that there
are excess funded balances for members' claims in any customer class/
account class combination, that excess is also preferentially assigned
to ``customer property other than member property'' to the extent of
any shortfall in funded balances for members' public customer claims.
(B) Where property is assigned to a particular customer class with
more than one account class, it is assigned to the account class for
which the funded balance percentage is the lowest until there are two
account classes with equal funded balance percentages, then to both
such account classes, keeping the funded balance percentage the same,
and so forth following the analogous approach if the debtor has more
than two account classes within the relevant customer class.
(4) Porting of public customer commodity contract positions. In a
proceeding in which the debtor is a futures commission merchant, this
part sets out a policy preference for transferring to another futures
commission merchant, or ``porting,'' open commodity contract positions
of the debtor's public customers along with all or a portion of such
customers' account equity. Porting mitigates risks to both the
customers of the debtor futures commission merchant and to the markets.
To facilitate porting, this part addresses the manner in which the
debtor's business is to be conducted on and after the filing date, with
specific provisions addressing the collection and payment of margin for
open commodity contract positions prior to porting.
(5) Pro rata distribution. (i) The commodity broker provisions of
the Bankruptcy Code, subchapter IV of chapter 7, in particular section
766(h), have long revolved around the principle of pro rata
distribution. If there is a shortfall in the cash, securities or other
property in a particular account class needed to satisfy the net equity
claims of public customers in that account class, the customer property
in that account class will be distributed pro rata to those public
customers (subject to appendix B of this part). Any customer property
not attributable to a specific account class, or that exceeds the
amount needed to pay allowed customer net equity claims in a particular
account class, will be distributed to public customers in other account
classes so long as there is a shortfall in those other classes. Non-
public customers will not receive any distribution of customer property
so long as there is any shortfall, in any account class, of customer
property
[[Page 19423]]
needed to satisfy public customer net equity claims.
(ii) The pro rata distribution principle means that, if there is a
shortfall of customer property in an account class, all customers
within that account class will suffer the same proportional loss
relative to their allowed net equity claims. The principle in this
paragraph (c)(5)(ii) applies to all customers, including those who post
as collateral specifically identifiable property or letters of credit.
The pro rata distribution principle is subject to the special
distribution provisions set forth in framework 1 in appendix B of this
part for cross-margin accounts and framework 2 in appendix B of this
part for funds held outside of the U.S. or held in non-U.S. currency.
(6) Deliveries. (i) Commodity contracts may have terms that require
a customer owning the contract:
(A) To make or take delivery of the underlying commodity if the
customer holds the contract to a delivery position; or
(B) In the case of an option on a commodity:
(1) To make delivery upon exercise (as the buyer of a put option or
seller of a call option); or
(2) To take delivery upon exercise (as seller of a put option or
buyer of a call option).
(ii) Depending upon the circumstances and relevant market, delivery
may be effected via a delivery account, a futures account, a foreign
futures account or a cleared swaps account, or, when the commodity
subject to delivery is a security, in a securities account (in which
case property associated with the delivery held in a securities account
is not part of any customer account class for purposes of this part).
(iii) Although commodity contracts with delivery obligations are
typically offset before reaching the delivery stage (i.e., prior to
triggering bilateral delivery obligations), when delivery obligations
do arise, a delivery default could have a disruptive effect on the cash
market for the commodity and adversely impact the parties to the
transaction. This part therefore sets out special provisions to address
open commodity contracts that are settled by delivery, when those
positions are nearing or have entered into a delivery position at the
time of or after the filing date. The delivery provisions in this part
are intended to allow deliveries to be completed in accordance with the
rules and established practices for the relevant commodity contract
market or clearing organization, as applicable and to the extent
permitted under this part.
(iv) In a proceeding in which the debtor is a futures commission
merchant, the delivery provisions in this part reflect policy
preferences to:
(A) Liquidate commodity contracts that settle via delivery before
they move into a delivery position; and
(B) When such contracts are in a delivery position, to allow
delivery to occur, where practicable, outside administration of the
debtor's estate.
(v) The delivery provisions in this part apply to any commodity
that is subject to delivery under a commodity contract, as the term
commodity is defined in section of 1a(9) of the Act, whether the
commodity itself is tangible or intangible, including agricultural
commodities as defined in Sec. 1.3 of this chapter, other non-
financial commodities (such as metals or energy commodities) covered by
the definition of exempt commodity in section 1a(20) of the Act, and
commodities that are financial in nature (such as foreign currencies)
covered by the definition of excluded commodity in section 1a(19) of
the Act. The delivery provisions also apply to virtual currencies that
are subject to delivery under a commodity contract.
(d) Scope--(1) Proceedings--(i) Certain commodity broker
proceedings under subchapter IV of chapter 7 of the Bankruptcy Code.
(A) Section 101(6) of the Bankruptcy Code recognizes ``futures
commission merchants'' and ``foreign futures commission merchants,'' as
those terms are defined in section 761(12) of the Bankruptcy Code, as
separate categories of commodity broker. The definition of commodity
broker in Sec. 190.01, as it applies to a commodity broker that is a
futures commission merchant under the Act, also covers foreign futures
commission merchants because a foreign futures commission merchant is
required to register as a futures commission merchant under the Act.
(B) Section 101(6) of the Bankruptcy Code recognizes ``commodity
options dealers,'' and ``leverage transaction merchants'' as defined in
sections 761(6) and (13) of the Bankruptcy Code, as separate categories
of commodity brokers. There are no commodity options dealers or
leverage transaction merchants as of December 8, 2020.
Note 1 to paragraph (b)(1)(i)(B). The Commission intends to adopt
rules with respect to commodity options dealers or leverage transaction
merchants, respectively, at such time as an entity registers as such.
(ii) Futures commission merchants subject to a SIPA proceeding.
Pursuant to section 7(b) of SIPA, 15 U.S.C. 78fff-1(b), the trustee in
a SIPA proceeding, where the debtor also is a commodity broker, has the
same duties as a trustee in a proceeding under subchapter IV of chapter
7 of the Bankruptcy Code, to the extent consistent with the provisions
of SIPA or as otherwise ordered by the court. This part therefore also
applies to a proceeding commenced under SIPA with respect to a debtor
that is registered as a broker or dealer under section 15 of the
Securities Exchange Act of 1934 when the debtor also is a futures
commission merchant.
(iii) Commodity brokers subject to an FDIC proceeding. Section
5390(m)(1)(B) of title 12 of the United States Code provides that the
FDIC must apply the provisions of subchapter IV of chapter 7 of the
Bankruptcy Code in respect of the distribution of customer property and
member property in connection with the liquidation of a covered
financial company or a bridge financial company (as those terms are
defined in section 5381(a) of title 12) that is a commodity broker as
if such person were a debtor for purposes of subchapter IV, except as
specifically provided in section 5390 of title 12. This part therefore
shall serve as guidance as to such distribution of property in a
proceeding in which the FDIC is acting as a receiver pursuant to title
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act
with respect to a covered financial company or bridge financial company
that is a commodity broker whose liquidation otherwise would be
administered by a trustee under subchapter IV of chapter 7 of the
Bankruptcy Code.
(2) Account class and implied trust limitations. (i) The trustee
may not recognize any account class that is not one of the account
classes enumerated in Sec. 190.01.
(ii) No property that would otherwise be included in customer
property, as defined in Sec. 190.01, shall be excluded from customer
property because such property is considered to be held in a
constructive, resulting, or other trust that is implied in equity.
(3) Commodity contract exclusions. For purposes of this part, the
following are excluded from the term ``commodity contract'':
(i) Options on commodities (including swaps subject to regulation
under part 32 of this chapter) that are not centrally cleared by a
clearing organization or foreign clearing organization.
(ii) Transactions, contracts or agreements that are classified as
``forward contracts'' under the Act pursuant to the exclusion from the
term ``future delivery'' set out in section 1a(27) of the Act or the
exclusion from the definition of a ``swap'' under section
[[Page 19424]]
1a(47)(B)(ii) of the Act, in each case that are not centrally cleared
by a clearing organization or foreign clearing organization.
(iii) Security futures products as defined in section 1a(45) of the
Act when such products are held in a securities account.
(iv) Any off-exchange retail foreign currency transaction, contract
or agreement described in sections 2(c)(2)(B) or (C) of the Act.
(v) Any security-based swap or other security (as defined in
section 3 of the Exchange Act), but a security futures product or a
mixed swap (as defined in 1a(47)(D) of the Act) that is, in either
case, carried in an account for which there is a corresponding account
class under this part is not so excluded.
(vi) Any off-exchange retail commodity transaction, contract or
agreement described in section 2(c)(2)(D) of the Act, unless such
transaction, contract or agreement is traded on or subject to the rules
of a designated contract market or foreign board of trade as, or as if,
such transaction, contract, or agreement is a futures contract.
(e) Construction. (1) A reference in this part to a specific
section of a Federal statute or specific regulation refers to such
section or regulation as the same may be amended or superseded.
(2) Where they differ, the definitions set forth in Sec. 190.01
shall be used instead of defined terms set forth in section 761 of the
Bankruptcy Code. In many cases, these definitions are based on
definitions in parts 1, 22, and 30 of this chapter. Notwithstanding the
use of different defined terms, the regulations in this part are
intended to be consistent with the provisions and objectives of
subchapter IV of chapter 7 of the Bankruptcy Code.
(3) In the context of portfolio margining and cross margining
programs, commodity contracts and associated collateral will be treated
as part of the account class in which, consistent with part 1, 22, 30,
or 39 of this chapter, or Commission Order, they are held.
(i) Thus, as noted in paragraph (2) of the definition of account
class in Sec. 190.01, where open commodity contracts (and associated
collateral) that would be attributable to one account class are,
instead, commingled with the commodity contracts (and associated
collateral) in a second account class (the ``home field''), then the
trustee must treat all such commodity contracts and collateral as part
of, and consistent with the regulations applicable to, the second
account class.
(ii) The concept in paragraph (e)(3)(i) of this section, that the
rules of the ``home field'' will apply, also pertains to securities
positions that are, pursuant to an approved cross margining program,
held in a commodities account class (in which case the rules of that
commodities account class will apply) and to commodities positions that
are, pursuant to an approved cross-margining program, held in a
securities account (in which case, the rules of the securities account
will apply, consistent with section 16(2)(b)(ii) of SIPA, 15 U.S.C.
78lll(2)(b)(ii)).
Sec. 190.01 Definitions.
For purposes of this part:
Account class:
(1) Means one or more of each of the following types of accounts
maintained by a futures commission merchant or clearing organization
(as applicable), each type of which must be recognized as a separate
account class by the trustee:
(i) Futures account means:
(A) With respect to public customers, the same definition as set
forth in Sec. 1.3 of this chapter.
(B) With respect to non-public customers:
(1) With respect to a futures commission merchant, an account
maintained on the books and records of the futures commission merchant
for the purpose of accounting for a person's transactions in futures or
options on futures contracts executed on or subject to the rules of a
designated contract market registered under the Act (and related cash,
securities, or other property); and
(2) With respect to a clearing organization, an account maintained
on the books and records of the clearing organization for the purpose
of accounting for transactions in futures or options on futures
contracts cleared or settled by the clearing organization for a member
or a member's non-public customers (and related cash, securities, or
other property).
(ii) Foreign futures account means:
(A) With respect to public customers:
(1) With respect to a futures commission merchant, a 30.7 account,
as such term is defined in Sec. 30.1(g) of this chapter; and
(2) With respect to a clearing organization, an account maintained
on the books and records of the clearing organization for the purpose
of accounting for transactions in futures or options on futures
contracts executed on or subject to the rules of a foreign board of
trade, cleared or settled by the clearing organization for a member
that is a futures commission merchant (and related cash, securities or
other property), on behalf of that member's 30.7 customers (as that
latter term is defined in Sec. 30.1(f) of this chapter).
(B) With respect to non-public customers:
(1) With respect to a futures commission merchant, an account
maintained on the books and records of the futures commission merchant
for the purpose of accounting for a person's transactions in futures or
options on futures contracts executed on or subject to the rules of a
foreign board of trade (and related cash, securities, or other
property); and
(2) With respect to a clearing organization, an account maintained
on the books and records of the clearing organization for the purpose
of accounting for transactions in futures or options on futures
contracts executed on or subject to the rules of a foreign board of
trade, cleared or settled by the clearing organization for a member or
a member's non-public customers (and related cash, securities, or other
property).
(iii) Cleared swaps account means:
(A) With respect to public customers, a cleared swaps customer
account, as such term is defined in Sec. 22.1 of this chapter.
(B) With respect to non-public customers:
(1) With respect to a futures commission merchant, an account
maintained on the books and records of the futures commission merchant
for the purpose of accounting for a person's transactions in cleared
swaps (as defined in Sec. 22.1 of this chapter) (and related cash,
securities, or other property); and
(2) With respect to a clearing organization, an account maintained
on the books and records of the clearing organization for the purpose
of accounting for transactions in cleared swaps (as defined in Sec.
22.1 of this chapter) (or in other contracts permitted to be cleared in
the account) cleared or settled by the clearing organization for a
member or a member's non-public customers (including any property
related thereto).
(iv)(A) Delivery account means (for both public and non-public
customers, considered separately):
(1) An account maintained on the books and records of a futures
commission merchant for the purpose of accounting for the making or
taking of delivery under commodity contracts whose terms require
settlement by delivery of a commodity, and which is designated as a
delivery account on the books and records of the futures commission
merchant; and
[[Page 19425]]
(2) An account maintained on the books and records of a clearing
organization for a clearing member (or a customer of a clearing member)
for the purpose of accounting for the making or taking of delivery
under commodity contracts whose terms require settlement by delivery of
a commodity, as well as any account in which the clearing organization
holds physical delivery property represented by electronic title
documents or otherwise existing in an electronic (dematerialized) form
in its capacity as a central depository, in each case where the account
is designated as a delivery account on the books and the records of the
clearing organization.
(B) The delivery account class is further divided into a ``physical
delivery account class'' and a ``cash delivery account class,'' as
provided in Sec. 190.06(b), each of which shall be recognized as a
separate class of account by the trustee.
(2)(i) If open commodity contracts that would otherwise be
attributable to one account class (and any property margining,
guaranteeing, securing or accruing in respect of such commodity
contracts) are, pursuant to a Commission rule, regulation, or order, or
a clearing organization rule approved in accordance with Sec.
39.15(b)(2) of this chapter, held separately from other commodity
contracts and property in that account class and are commingled with
the commodity contracts and property of another account class, then the
trustee must treat the former commodity contracts (and any property
margining, guaranteeing, securing, or accruing in respect of such
commodity contracts), for purposes of this part, as being held in an
account of the latter account class.
(ii) The principle in paragraph (2)(i) of this definition will be
applied to securities positions and associated collateral held in a
commodity account class pursuant to a cross margining program approved
by the Commission (and thus treated as part of that commodity account
class) and to commodity positions and associated collateral held in a
securities account pursuant to a cross margining program approved by
the Commission (and thus treated as part of the securities account).
(3) For the purpose of this definition, a commodity broker is
considered to maintain an account for another person by establishing
internal books and records in which it records the person's commodity
contracts and cash, securities or other property received from or on
behalf of such person or accruing to the credit of such person's
account, and related activity (such as liquidation of commodity
contract positions or adjustments to reflect mark-to-market gains or
losses on commodity contract positions), regardless whether the
commodity broker has kept such books and records current or accurate.
Act means the Commodity Exchange Act.
Bankruptcy Code means, except as the context of the regulations in
this part otherwise requires, those provisions of title 11 of the
United States Code relating to ordinary bankruptcies (chapters 1
through 5) and liquidations (chapter 7 with the exception of
subchapters III and V), together with the Federal Rules of Bankruptcy
Procedure relating thereto.
Business day means weekdays, not including Federal holidays as
established annually by 5 U.S.C. 6103. A business day begins at 8:00
a.m. in Washington, DC, and ends at 7:59:59 a.m. on the next day that
is a business day.
Calendar day means the time from midnight to midnight in
Washington, DC.
Cash delivery account class has the meaning set forth under account
class in this section.
Cash delivery property means any cash or cash equivalents recorded
in a delivery account that is, as of the filing date:
(1) Credited to such account to pay for receipt of delivery of a
commodity under a commodity contract;
(2) Credited to such account to collateralize or guarantee an
obligation to make or take delivery of a commodity under a commodity
contract; or
(3) Has been credited to such account as payment received in
exchange for making delivery of a commodity under a commodity contract.
It also includes property in the form of commodities that have been
delivered after the filing date in exchange for cash or cash
equivalents held in a delivery account as of the filing date. The cash
or cash equivalents must be identified on the books and the records of
the debtor as having been received, from or for the account of a
particular customer, on or after seven calendar days before the
relevant:
(i) First notice date in the case of a futures contract; or
(ii) Exercise date in the case of a (cleared) option.
(4) Cash delivery property also includes any cash transferred by a
customer to the trustee on or after the filing date for the purpose of
paying for delivery, consistent with Sec. 190.06(a)(3)(ii)(B)(1).
(5) In the case of a contract where one fiat currency is exchanged
for another fiat currency, each such currency, to the extent that it is
recorded in a delivery account, will be considered cash delivery
property.
Cash equivalents means assets, other than United States dollar
cash, that are highly liquid such that they may be converted into
United States dollar cash within one business day without material
discount in value.
Cleared swaps account has the meaning set forth under account class
in this section.
Clearing organization means a derivatives clearing organization
that is registered with the Commission as such under the Act.
Commodity broker means any person that is:
(1) A futures commission merchant under the Act, but excludes a
person that is ``notice-registered'' as a futures commission merchant
under section 4f(a)(2) of the Act; or
(2) A clearing organization, in each case with respect to which
there is a ``customer'' as that term is defined in this section.
Commodity contract means:
(1) A futures or options on futures contract executed on or subject
to the rules of a designated contract market;
(2) A futures or option on futures contract executed on or subject
to the rules of a foreign board of trade;
(3) A swap as defined in section 1a(47) of the Act and Sec. 1.3 of
this chapter, that is directly or indirectly submitted to and cleared
by a clearing organization and which is thus a cleared swap as that
term is defined in section 1a(7) of the Act and Sec. 22.1 of this
chapter; or
(4) Any other contract that is a swap for purposes of this part
under the definition in this section and is submitted to and cleared by
a clearing organization.
(5) Notwithstanding paragraphs (1) through (4) of this definition,
a security futures product as defined in section 1a(45) of the Act is
not a commodity contract for purposes of this part when such contract
is held in a securities account. Moreover, a contract, agreement, or
transaction described in Sec. 190.00(d)(3) as excluded from the term
``commodity contract'' is excluded from this definition.
Commodity contract account means:
(1) A futures account, foreign futures account, cleared swaps
account, or delivery account; or
(2) If the debtor is a futures commission merchant, for purposes of
identifying customer property for the foreign futures account class
(subject to Sec. 190.09(a)(1)), an account maintained for the debtor
by a foreign clearing
[[Page 19426]]
organization or a foreign futures intermediary reflecting futures or
options on futures executed on or subject to the rules of a foreign
board of trade, including any account maintained on behalf of the
debtor's public customers.
Court means the court having jurisdiction over the debtor's estate.
Cover has the meaning set forth in Sec. 1.17(j) of this chapter.
Customer means:
(1)(i) With respect to a futures commission merchant as debtor
(including a foreign futures commission merchant as that term is
defined in section 761(12) of the Bankruptcy Code), the meaning set
forth in sections 761(9)(A) and (B) of the Bankruptcy Code.
(ii) With respect to a clearing organization as debtor, the meaning
set forth in section 761(9)(D) of the Bankruptcy Code.
(2) The term customer includes the owner of a portfolio cross-
margining account covering commodity contracts and related positions in
securities (as defined in section 3 of the Exchange Act) that is
carried as a futures account or cleared swaps customer account pursuant
to an appropriate rule, regulation, or order of the Commission.
Customer claim of record means a customer claim that is
determinable solely by reference to the records of the debtor.
Customer class means each of the following two classes of
customers, which must be recognized as separate classes by the trustee:
Public customers and non-public customers; provided, however, that when
the debtor is a clearing organization the references to public
customers and non-public customers are based on the classification of
customers of, and in relation to, the members of the clearing
organization.
Customer property and customer estate are used interchangeably to
mean the property subject to pro rata distribution in a commodity
broker bankruptcy in the priority set forth in sections 766(h) or (i),
as applicable, of the Bankruptcy Code, and includes cash, securities,
and other property as set forth in Sec. 190.09(a).
Debtor means a person with respect to which a proceeding is
commenced under subchapter IV of chapter 7 of the Bankruptcy Code or
under SIPA, or for which the Federal Deposit Insurance Corporation is
appointed as a receiver pursuant to 12 U.S.C. 5382, provided, however,
that this part applies only to such a proceeding if the debtor is a
commodity broker as defined in this section.
Delivery account has the meaning set forth under account class in
this section.
Distribution of property to a customer includes transfer of
property on the customer's behalf, return of property to a customer, as
well as distributions to a customer of valuable property that is
different than the property posted by that customer.
Equity means the amount calculated as equity in accordance with
Sec. 190.08(b)(1).
Exchange Act means the Securities Exchange Act of 1934, as amended,
15 U.S.C. 78a et seq.
FDIC means the Federal Deposit Insurance Corporation.
Filing date means the date a petition under the Bankruptcy Code or
application under SIPA commencing a proceeding is filed or on which the
FDIC is appointed as a receiver pursuant to 12 U.S.C. 5382(a).
Final net equity determination date means the latest of:
(1) The day immediately following the day on which all commodity
contracts held by or for the account of customers of the debtor have
been transferred, liquidated, or satisfied by exercise or delivery;
(2) The day immediately following the day on which all property
other than commodity contracts held for the account of customers has
been transferred, returned or liquidated;
(3) The bar date for filing customer proofs of claim as determined
by rule 3002(c) of the Federal Rules of Bankruptcy Procedure, the
expiration of the six-month period imposed pursuant to section 8(a)(3)
of SIPA, or such other date (whether earlier or later) set by the court
(or, in the case of the FDIC acting as a receiver pursuant to 12 U.S.C.
5382(a), the deadline set by the FDIC pursuant to 12 U.S.C.
5390(a)(2)(B); or
(4) The day following the allowance (by the trustee or by the
bankruptcy court) or disallowance (by the bankruptcy court) of all
disputed customer net equity claims.
Foreign board of trade has the same meaning as set forth in Sec.
1.3 of this chapter.
Foreign clearing organization means a clearing house, clearing
association, clearing corporation or similar entity, facility, or
organization clears and settles transactions in futures or options on
futures executed on or subject to the rules of a foreign board of
trade.
Foreign future shall have the same meaning as that set forth in
section 761(11) of the Bankruptcy Code.
Foreign futures account has the meaning set forth under account
class in this section.
Foreign futures commission merchant shall have the same meaning as
that set forth in section 761(12) of the Bankruptcy Code.
Foreign futures intermediary refers to a foreign futures and
options broker, as such term is defined in Sec. 30.1(e) of this
chapter, acting as an intermediary for foreign futures contracts
between a foreign futures commission merchant and a foreign clearing
organization.
Funded balance means the amount calculated as funded balance in
accordance with Sec. 190.08(c) and, as applicable, Sec. 190.17(d).
Funded net equity means, for purposes of subpart B of this part,
the amount calculated as funded net equity in accordance with Sec.
190.08(a), and for purposes of subpart C of this part, the amount
calculated as funded net equity in accordance with Sec. 190.17(c).
Futures and futures contract are used interchangeably to mean any
contract for the purchase or sale of a commodity (as defined in section
1a(9) of the Act) for future delivery that is executed on or subject to
the rules of a designated contract market or on or subject to the rules
of a foreign board of trade. The term also covers, for purposes of this
part:
(1) Any transaction, contract or agreement described in section
2(c)(2)(D) of the Act and traded on or subject to the rules of a
designated contract market or foreign board of trade, to the extent not
covered by the foregoing definition; and
(2) Any transaction, contract, or agreement that is classified as a
``forward contract'' under the Act pursuant to the exclusion from the
term ``future delivery'' set out in section 1a(27) of the Act or the
exclusion from the definition of a ``swap'' under section 1a(47)(B)(ii)
of the Act, provided that such transaction, contract, or agreement is
traded on or subject to the rules of a designated contract market or
foreign board of trade and is cleared by, respectively, a clearing
organization or foreign clearing organization the same as if it were a
futures contract.
Futures account has the meaning set forth under account class in
this section.
House account means, in the case of a clearing organization, any
commodity contract account of a member at such clearing organization
maintained to reflect trades for the member's own account or for any
non-public customer of such member.
In-the-money means:
(1) With respect to a call option, when the value of the underlying
interest (such as a commodity or futures contract) which is the subject
of the
[[Page 19427]]
option exceeds the strike price of the option; and
(2) With respect to a put option, when the value of the underlying
interest (such as a commodity or futures contract) which is the subject
of the option is exceeded by the strike price of the option.
Joint account means any commodity contract account held by more
than one person.
Member property means, in connection with a clearing organization
bankruptcy, the property which may be used to pay that portion of the
net equity claim of a member which is based on the member's house
account at the clearing organization, including any claims on behalf of
non-public customers of the member.
Net equity means, for purposes of subpart B of this part, the
amount calculated as net equity in accordance with Sec. 190.08(b), and
for purposes of subpart C of this part, the amount calculated as net
equity in accordance with Sec. 190.17(b).
Non-public customer means:
(1) With respect to a futures commission merchant, any customer
that is not a public customer; and
(2) With respect to a clearing organization, any person whose
account carried on the books and records of:
(i) A member of the clearing organization that is a futures
commission merchant, is classified as a proprietary account under Sec.
1.3 of this chapter (in the case of the futures or foreign futures
account class) or as a cleared swaps proprietary account under Sec.
22.1 of this chapter (in the case of the cleared swaps account class);
or
(ii) A member of the clearing organization that is a foreign
broker, is classified or treated as proprietary under and for purposes
of:
(A) The rules of the clearing organization; or
(B) The jurisdiction of incorporation of such member.
Open commodity contract means a commodity contract which has been
established in fact and which has not expired, been redeemed, been
fulfilled by delivery or exercise, or been offset (i.e., liquidated) by
another commodity contract.
Order for relief has the same meaning set forth in section 301 of
the Bankruptcy Code, in the case of the filing of a voluntary
bankruptcy petition, and means the entry of an order granting relief
under section 303 of the Bankruptcy Code in an involuntary case. It
also means, where applicable, the issuance of a protective decree under
section 5(b)(1) of SIPA or the appointment of the FDIC as receiver
pursuant to 12 U.S.C. 5382(a)(1)(A).
Person means any individual, association, partnership, corporation,
trust, or other form of legal entity.
Physical delivery account class has the meaning set forth under
account class in this section.
Physical delivery property means:
(1) In general. A commodity, whether tangible or intangible, held
in a form that can be delivered to meet and fulfill delivery
obligations under a commodity contract that settles via delivery if
held to a delivery position (as described in Sec. 190.06(a)(1)),
including warehouse receipts, other documents of title, or shipping
certificates (including electronic versions of any of the foregoing)
for the commodity, or the commodity itself:
(i) That the debtor holds for the account of a customer for the
purpose of making delivery of such commodity on the customer's behalf,
which as of the filing date or thereafter, can be identified on the
books and records of the debtor as held in a delivery account for the
benefit of such customer. Cash or cash equivalents received after the
filing date in exchange for delivery of such physical delivery property
shall also constitute physical delivery property;
(ii) That the debtor holds for the account of a customer and that
the customer received or acquired by taking delivery under an expired
or exercised commodity contract and which, as of the filing date or
thereafter, can be identified on the books and records of the debtor as
held in a delivery account for the benefit of such customer, regardless
how long such property has been held in such account; or
(iii) Where property that the debtor holds in a futures account,
foreign futures account, or cleared swaps account, or, if the commodity
is a security, in a securities account, would meet the criteria listed
in paragraph (1) or (2) of this definition, but for the fact of being
held in such account rather than a delivery account, such property will
be considered physical delivery property solely for purposes of the
obligations to make or take delivery of physical delivery property
pursuant to Sec. 190.06.
(iv) Commodities or documents of title that are not held by the
debtor and are delivered or received by a customer in accordance with
Sec. 190.06(a)(2) (or in accordance with Sec. 190.06(a)(2) in
conjunction with Sec. 190.16(a) if the debtor is a clearing
organization) to fulfill a customer's delivery obligation under a
commodity contract will be considered physical delivery property solely
for purposes of the obligations to make or take delivery of physical
delivery property pursuant to Sec. 190.06. As this property is held
outside of the debtor's estate, it is not subject to pro rata
distribution.
(2) Special cases. (i) In the case of a contract where one fiat
currency is exchanged for another fiat currency, neither such currency,
to the extent that it is recorded in a delivery account, will be
considered physical delivery property.
(ii) In a case where the final settlement price is negative, i.e.,
where the party obliged to deliver physical delivery property under an
expiring futures contract or an expired options contract is also
obliged to make a cash payment to the buyer, such cash or cash
equivalents constitute physical delivery property.
Primary liquidation date means the first business day immediately
following the day on which all commodity contracts (including any
commodity contracts that are specifically identifiable property) have
been liquidated or transferred.
Public customer means:
(1) With respect to a futures commission merchant and in relation
to:
(i) The futures account class, a futures customer as defined in
Sec. 1.3 of this chapter whose futures account is subject to the
segregation requirements of section 4d(a) of the Act and the
regulations in this chapter that implement section 4d(a), including as
applicable Sec. Sec. 1.20 through 1.30 of this chapter;
(ii) The foreign futures account class, a 30.7 customer as defined
in Sec. 30.1 of this chapter whose foreign futures accounts is subject
to the segregation requirements of Sec. 30.7 of this chapter;
(iii) The cleared swaps account class, a Cleared Swaps Customer as
defined in Sec. 22.1 of this chapter whose cleared swaps account is
subject to the segregation requirements of part 22 of this chapter; and
(iv) The delivery account class, a customer that is or would be
classified as a public customer if the property reflected in the
customer's delivery account had been held in an account described in
paragraph (1)(i), (ii), or (iii) of this definition.
(2) With respect to a clearing organization, any customer of that
clearing organization that is not a non-public customer.
Securities account means, in relation to a futures commission
merchant that is registered as a broker or dealer under the Exchange
Act, an account maintained by such futures commission merchant in
accordance with the requirements of section 15(c)(3) of the
[[Page 19428]]
Exchange Act and Sec. 240.15c3-3 of this title.
Security has the meaning set forth in section 101(49) of the
Bankruptcy Code.
SIPA means the Securities Investor Protection Act of 1970, 15 U.S.C
78aaa et seq.
Specifically identifiable property means:
(1)(i) The following property received, acquired, or held by or for
the account of the debtor from or for the futures account, foreign
futures account, or cleared swaps account of a customer:
(A) Any security which as of the filing date is:
(1)(i) Held for the account of a customer;
(ii) Registered in such customer's name;
(iii) Not transferable by delivery; and
(iv) Has a duration or maturity date of more than 180 days; or
(2)(i) Fully paid;
(ii) Non-exempt; and
(iii) Identified on the books and records of the debtor as held by
the debtor for or on behalf of the commodity contract account of a
particular customer for which, according to such books and records as
of the filing date, no open commodity contracts were held in the same
capacity.
(B) Any warehouse receipt, bill of lading, or other document of
title which as of the filing date:
(1) Can be identified on the books and records of the debtor as
held for the account of a particular customer; and
(2) Is not in bearer form and is not otherwise transferable by
delivery;
(ii) Any open commodity contracts treated as specifically
identifiable property in accordance with Sec. 190.03(c)(2); and
(iii) Any physical delivery property described in paragraphs (1)
through (3) of the definition of physical delivery property in this
section.
(2) Notwithstanding paragraphs (1) and (3) of this definition,
security futures products, and any money, securities, or property held
to margin, guarantee, or secure such products, or accruing as a result
of such products, shall not be considered specifically identifiable
property for the purposes of subchapter IV of the Bankruptcy Code or
this part, if held in a securities account.
(3) No property that is not explicitly included in this definition
may be treated as specifically identifiable property.
Strike price means the price per unit multiplied by the total
number of units at which a person may purchase or sell a futures
contract or a commodity or other interest underlying an option that is
a commodity contract.
Substitute customer property means cash or cash equivalents
delivered to the trustee by or on behalf of a customer in connection
with:
(1) The return of specifically identifiable property by the
trustee; or
(2) The return of, or an agreement not to draw upon, a letter of
credit received, acquired or held to margin, guarantee, secure,
purchase, or sell a commodity contract.
Swap has the meaning set forth in section 1a(47) of the Act and
Sec. 1.3 of this chapter, and, in addition, also means any other
contract, agreement, or transaction that is carried in a cleared swaps
account pursuant to a rule, regulation, or order of the Commission,
provided, in each case, that it is cleared by a clearing organization
as, or the same as if it were, a swap.
Trustee means, as appropriate, the trustee in bankruptcy or in a
SIPA proceeding, appointed to administer the debtor's estate and any
interim or successor trustee, or the FDIC, where it has been appointed
as a receiver pursuant to 12 U.S.C. 5382.
Undermargined means, with respect to a futures account, foreign
futures account, or cleared swaps account carried by the debtor, the
funded balance for such account is below the minimum amount that the
debtor is required to collect and maintain for the open commodity
contracts in such account under the rules of the relevant clearing
organization, foreign clearing organization, designated contract
market, swap execution facility or foreign board of trade. If any such
rules establish both an initial margin requirement and a lower
maintenance margin requirement applicable to any commodity contracts
(or to the entire portfolio of commodity contracts or any subset
thereof) in a particular commodity contract account of the customer,
the trustee will use the lower maintenance margin level to determine
the customer's minimum margin requirement for such account.
Variation settlement means variation margin as defined in Sec. 1.3
of this chapter plus all other daily settlement amounts (such as price
alignment payments) that may be owed or owing on the commodity
contract.
Sec. 190.02 General.
(a) Request for exemption. (1) The trustee (or, in the case of an
involuntary petition pursuant to section 303 of the Bankruptcy Code,
any other person charged with the management of a commodity broker)
may, for good cause shown, request from the Commission an exemption
from the requirements of any procedural provision in this part,
including an extension of any time limit prescribed by this part or an
exemption subject to conditions, provided that the Commission shall not
grant an extension for any time period established by the Bankruptcy
Code.
(2) A request pursuant to paragraph (a)(1) of this section--
(i) May be made ex parte and by any means of communication, written
or oral, provided that the trustee must confirm an oral request in
writing within one business day and such confirmation must contain all
the information required by paragraph (b)(3) of this section. The
request or confirmation of an oral request must be given to the
Commission as provided in paragraph (a) of this section.
(ii) Must state the particular provision of this part with respect
to which the exemption or extension is sought, the reason for the
requested exemption or extension, the amount of time sought if the
request is for an extension, and the reason why such exemption or
extension would not be contrary to the purposes of the Bankruptcy Code
and this part.
(3) The Director of the Division of Clearing and Risk, or members
of the Commission staff designated by the Director, shall grant, deny,
or otherwise respond to a request, on the basis of the information
provided in any such request and after consultation with the Director
of the Market Participants Division or members of the Commission staff
designated by the Director, unless exigent circumstances require
immediate action precluding such prior consultation, and shall
communicate that determination by the most appropriate means to the
person making the request.
(b) Delegation of authority to the Director of the Division of
Clearing and Risk. (1) Until such time as the Commission orders
otherwise, the Commission hereby delegates to the Director of the
Division of Clearing and Risk, and to such members of the Commission's
staff acting under the Director's direction as they may designate,
after consultation with the Director of the Market Participants
Division, or such members of the Commission's staff under the
Director's direction as they may designate, unless exigent
circumstances require immediate action, all the functions of the
Commission set forth in this part, except the authority to disapprove a
pre-relief transfer of a public customer commodity contract account or
customer property pursuant to Sec. 190.07(e)(1).
(2) The Director of the Division of Clearing and Risk may submit to
the
[[Page 19429]]
Commission for its consideration any matter which has been delegated to
the Director pursuant to paragraph (b)(1) of this section.
(3) Nothing in this section shall prohibit the Commission, at its
election, from exercising its authority delegated to the Director of
the Division of Clearing and Risk under paragraph (b)(1) of this
section.
(c) Forward contracts. For purposes of this part, an entity for or
with whom the debtor deals who holds a claim against the debtor solely
on account of a forward contract, that is not cleared by a clearing
organization, will not be deemed to be a customer.
(d) Other. The Bankruptcy Code will not be construed by the
Commission to prohibit a commodity broker from doing business as any
combination of the following: Futures commission merchant, commodity
options dealer, foreign futures commission merchant, or leverage
transaction merchant, nor will the Commission construe the Bankruptcy
Code to permit any operation, trade, or business, or any combination of
the foregoing, otherwise prohibited by the Act or by any of the
Commission's regulations in this chapter, or by any order of the
Commission.
(e) Rule of construction. Contracts in security futures products
held in a securities account shall not be considered to be ``from or
for the commodity futures account'' or ``from or for the commodity
options account'' of such customers, as such terms are used in section
761(9) of the Bankruptcy Code.
(f) Receivers. In the event that a receiver for a futures
commission merchant is appointed due to the violation or imminent
violation of the customer property protection requirements of section
4d of the Act, or of the regulations in part 1, 22, or 30 of this
chapter that implement section 4d or 4(b)(2) of the Act, or of the
futures commission merchant's minimum capital requirements in Sec.
1.17 of this chapter, such receiver may, in an appropriate case, file a
petition for bankruptcy of such futures commission merchant pursuant to
section 301 of the Bankruptcy Code.
(g) Definition of ``allowed.'' The term ``allowed'' in this part
shall have the meaning ascribed to it in the Bankruptcy Code.
Subpart B--Futures Commission Merchant as Debtor
Sec. 190.03 Notices and proofs of claims.
(a) Notices-means of providing--(1) To the Commission. Unless
instructed otherwise by the Commission, all mandatory or discretionary
notices to be given to the Commission under this subpart shall be
directed by electronic mail to [email protected]. For purposes
of this subpart, notice to the Commission shall be deemed to be given
only upon actual receipt.
(2) To Customers. The trustee, after consultation with the
Commission, and unless otherwise instructed by the Commission, will
establish and follow procedures reasonably designed for giving adequate
notice to customers under this subpart and for receiving claims or
other notices from customers. Such procedures should include, absent
good cause otherwise, the use of a prominent website as well as
communication to customers' electronic addresses that are available in
the debtor's books and records.
(b) Notices to the Commission and designated self-regulatory
organizations--(1) Of commencement of a proceeding. Each commodity
broker that is a futures commission merchant and files a petition in
bankruptcy shall as soon as practicable before, and in any event no
later than, the time of such filing, notify the Commission and such
commodity broker's designated self-regulatory organization of the
anticipated or actual filing date, the court in which the proceeding
will be or has been filed and, as soon as known, the docket number
assigned to that proceeding. Each commodity broker that is a futures
commission merchant and against which a bankruptcy petition is filed or
with respect to which an application for a protective decree under SIPA
is filed shall immediately upon the filing of such petition or
application notify the Commission and such commodity broker's
designated self-regulatory organization of the filing date, the court
in which the proceeding has been filed, and, as soon as known, the
docket number assigned to that proceeding.
(2) Of transfers under section 764(b) of the Bankruptcy Code. As
soon as possible, the trustee of a commodity broker that is a futures
commissions merchant, the relevant designated self-regulatory
organization, or the applicable clearing organization must notify the
Commission, and in the case of a futures commission merchant, the
trustee shall also notify its designated self-regulatory organization
and clearing organization(s), if such person intends to transfer or to
apply to transfer open commodity contracts or customer property on
behalf of the public customers of the debtor in accordance with section
764(b) of the Bankruptcy Code and Sec. 190.07(c) or (d).
(c) Notices to customers--(1) Specifically identifiable property
other than open commodity contracts. In any case in which an order for
relief has been entered, the trustee must use all reasonable efforts to
promptly notify, in accordance with paragraph (a)(2) of this section,
any customer whose futures account, foreign futures account, or cleared
swaps account includes specifically identifiable property, other than
open commodity contracts, which has not been liquidated, that such
specifically identifiable property may be liquidated commencing on and
after the seventh day after the order for relief (or such other date as
is specified by the trustee in the notice with the approval of the
Commission or court) if the customer has not instructed the trustee in
writing before the deadline specified in the notice to return such
property pursuant to the terms for distribution of specifically
identifiable property contained in Sec. 190.09(d)(1). Such notice must
describe the specifically identifiable property and specify the terms
upon which that property may be returned, including if applicable and
to the extent practicable any substitute customer property that must be
provided by the customer.
(2) Open commodity contracts carried in hedging accounts. To the
extent reasonably practicable under the circumstances of the case, and
following consultation with the Commission, the trustee may treat open
commodity contracts of public customers identified on the books and
records of the debtor as held in a futures account, foreign futures
account, or cleared swaps account designated as a hedging account in
the debtor's records, as specifically identifiable property of such
customer.
(i) If the trustee does not exercise such authority, such open
commodity contracts do not constitute specifically identifiable
property.
(ii) If the trustee exercises such authority:
(A) The trustee shall use reasonable efforts to promptly notify, in
accordance with paragraph (a)(2) of this section, each relevant public
customer of such determination.
(B)(1) Where, in the judgment of the trustee, the books and records
of the debtor reveal a clear preference by a relevant public customer
with respect to transfer or liquidation of open commodity contracts,
the trustee shall endeavor, to the extent reasonably practicable, to
comply with that preference.
(2) Where, in the judgment of the trustee, the books and records of
the debtor do not reveal a clear preference by a relevant public
customer with
[[Page 19430]]
respect to transfer or liquidation of open commodity contracts, the
trustee will request the customer to provide written instructions
whether to transfer or liquidate such open commodity contracts. Such
notice must specify the manner for providing such instructions and the
deadline by which the customer must provide instructions.
(C) Such notice must also inform the customer that:
(1) (Where instructions have been requested pursuant to paragraph
(c)(2)(ii)(B)(2) of this section), if the customer does not provide
instructions in the prescribed manner and by the prescribed deadline,
the customer's open commodity contracts will not be treated as
specifically identifiable property under this part;
(2) Any transfer of the open commodity contracts is subject to the
terms for distribution contained in Sec. 190.09(d)(2);
(3) Absent compliance with any terms imposed by the trustee or the
court, the trustee may liquidate the open commodity contracts; and
(4) Providing (or having provided) instructions may not prevent the
open commodity contracts from being liquidated.
(3) Involuntary cases. Prior to entry of an order for relief, and
upon leave of the court, a trustee appointed in an involuntary
proceeding pursuant to section 303 of the Bankruptcy Code may notify
customers, in accordance with paragraph (a)(2) of this section, of the
commencement of such proceeding and may request customer instructions
with respect to the return, liquidation, or transfer of specifically
identifiable property.
(4) Notice of bankruptcy and request for proof of customer claim.
The trustee shall promptly notify, in accordance with paragraph (a)(2)
of this section, each customer that an order for relief has been
entered and instruct each customer to file a proof of customer claim
containing the information specified in paragraph (e) of this section.
Such notice may be given separately from any notice provided in
accordance with paragraph (c) of this section. The trustee shall cause
the proof of customer claim form referred to in paragraph (e) of this
section to set forth the bar date for its filing.
(d) Notice of court filings. The trustee shall promptly provide the
Commission with copies of any complaint, motion, or petition filed in a
commodity broker bankruptcy which concerns the disposition of customer
property. Court filings shall be directed to the Commission addressed
as provided in paragraph (a)(1) of this section.
(e) Proof of customer claim. The trustee shall request that
customers provide, to the extent reasonably practicable, information
sufficient to determine a customer's claim in accordance with the
regulations contained in this part, including in the discretion of the
trustee:
(1) The class of commodity contract account upon which each claim
is based (i.e., futures account, foreign futures account, cleared swaps
account, or delivery account (and, in the case of a delivery account,
how much is based on cash delivery property and how much is based on
the value of physical delivery property);
(2) Whether the claimant is a public customer or a non-public
customer;
(3) The number of commodity contract accounts held by each
claimant, and, for each such account:
(i) The account number;
(ii) The name in which the account is held;
(iii) The balance as of the last account statement for the account,
and information regarding any activity in the account from the date of
the last account statement up to and including the filing date that
affected the balance of the account;
(iv) The capacity in which the account is held;
(v) Whether the account is a joint account and, if so, the amount
of the claimant's percentage interest in that account and whether
participants in the joint account are claiming jointly or separately;
(vi) Whether the account is a discretionary account;
(vii) Whether the account is an individual retirement account for
which there is a custodian; and
(viii) Whether the account is a cross-margining account for futures
and securities;
(4) A description of any accounts held by the claimant with the
debtor that are not commodity contract accounts;
(5) A description of all claims against the debtor not based upon a
commodity contract account of the claimant or an account listed in
response to paragraph (e)(4) of this section;
(6) A description of all claims of the debtor against the claimant
not included in the balance of a commodity contract account of the
claimant;
(7) A description of and the value of any open positions,
unliquidated securities, or other unliquidated property held by the
debtor on behalf of the claimant, indicating the portion of such
property, if any, which was included in the information provided in
paragraph (e)(3) of this section, and identifying any such property
which would be specifically identifiable property as defined in Sec.
190.01;
(8) Whether the claimant holds positions in security futures
products, and, if so, whether those positions are held in a futures
account, a foreign futures account, or a securities account;
(9) Whether the claimant wishes to receive payment in kind, to the
extent practicable, for any claim for unliquidated securities or other
unliquidated property; and
(10) Copies of any documents which support the information
contained in the proof of customer claim, including without limitation,
customer confirmations, account statements, and statements of purchase
or sale.
(f) Proof of claim form. A template customer proof of claim form
which may (but is not required to) be used by the trustee is set forth
in appendix A to this part.
(1) If there are no open commodity contracts that are being treated
as specifically identifiable property (e.g., if the customer proof of
claim form was distributed after the primary liquidation date), the
trustee should modify the customer proof of claim form to delete
references to open commodity contracts as specifically identifiable
property.
(2) In the event the trustee determines that the debtor's books and
records reflecting customer transactions are not reasonably reliable,
or account statements are not available from which account balances as
of the date of transfer or liquidation of customer property may be
determined, the proof of claim form used by the trustee should be
modified to take into account the particular facts and circumstances of
the case.
Sec. 190.04 Operation of the debtor's estate--customer property.
(a) Transfers--(1) All cases. The trustee for a commodity broker
shall promptly use its best efforts to effect a transfer in accordance
with Sec. 190.07(c) and (d) no later than the seventh calendar day
after the order for relief of the open commodity contracts and property
held by the commodity broker for or on behalf of its public customers.
(2) Involuntary cases. A commodity broker against which an
involuntary petition in bankruptcy is filed, or the trustee if a
trustee has been appointed in such case, shall use its best efforts to
effect a transfer in accordance with Sec. 190.07(c) and (d) of all
open commodity contracts and property held by the commodity broker for
or on behalf of its public customers and such other property as the
Commission in its discretion may authorize, on or before the seventh
calendar day after the filing
[[Page 19431]]
date, and immediately cease doing business; provided, however, that if
the commodity broker demonstrates to the Commission within such period
that it was in compliance with the segregation and financial
requirements of this chapter on the filing date, and the Commission
determines, in its sole discretion, that such transfer is neither
appropriate nor in the public interest, the commodity broker may
continue in business subject to applicable provisions of the Bankruptcy
Code and of this chapter.
(b) Treatment of open commodity contracts--(1) Payments by the
trustee. Prior to the primary liquidation date, the trustee may make
payments of initial margin and variation settlement to a clearing
organization, commodity broker, foreign clearing organization, or
foreign futures intermediary, carrying the account of the debtor,
pending the transfer, or liquidation of any open commodity contracts,
whether or not such contracts are specifically identifiable property of
a particular customer, provided, that:
(i) To the extent within the trustee's control, the trustee shall
not make any payments on behalf of any commodity contract account on
the books and records of the debtor that is in deficit; provided,
however, that the provision in this paragraph (b)(1) shall not be
construed to prevent a clearing organization, foreign clearing
organization, futures commission merchant, or foreign futures
intermediary carrying an account of the debtor from exercising its
rights to the extent permitted under applicable law;
(ii) Any margin payments made by the trustee with respect to a
specific customer account shall not exceed the funded balance for that
account;
(iii) The trustee shall not make any payments on behalf of non-
public customers of the debtor from funds that are segregated for the
benefit of public customers;
(iv) If the trustee receives payments from a customer in response
to a margin call, then to the extent within the trustee's control, the
trustee must use such payments to make margin payments for the open
commodity contract positions of such customer;
(v) The trustee may not use payments received from one public
customer to meet the margin (or any other) obligations of any other
customer; and
(vi) If funds segregated for the benefit of public customers in a
particular account class exceed the aggregate net equity claims for all
public customers in such account class, the trustee may use such excess
funds to meet the margin obligations for any public customer in such
account class whose account is under-margined (as described in
paragraph (b)(4) of this section) but not in deficit, provided that the
trustee issues a margin call to such customer and provided further that
the trustee shall liquidate such customer's open commodity contracts if
the customer fails to make the margin payment within a reasonable time
as provided in paragraph (b)(4) of this section.
(2) Margin calls. The trustee (or, prior to appointment of the
trustee, the debtor against which an involuntary petition was filed)
may issue a margin call to any public customer whose commodity contract
account contains open commodity contracts if such account is under-
margined.
(3) Margin payments by the customer. The full amount of any margin
payment by a customer in response to a margin call under paragraph
(b)(2) of this section must be credited to the funded balance of the
particular account for which it was made.
(4) Trustee obligation to liquidate certain open commodity
contracts. The trustee shall, as soon as practicable under the
circumstances, liquidate all open commodity contracts in any commodity
contract account that is in deficit, or for which any mark-to-market
calculation would result in a deficit, or for which the customer fails
to meet a margin call made by the trustee within a reasonable time.
Except as otherwise provided in this part, absent exigent
circumstances, a reasonable time for meeting margin calls made by the
trustee shall be deemed to be one hour, or such greater period not to
exceed one business day, as the trustee may determine in its sole
discretion.
(5) Partial liquidation of open commodity contracts by others. In
the event that a clearing organization, foreign clearing organization,
futures commission merchant, foreign futures intermediary, or other
person carrying a commodity customer account for the debtor in the
nature of an omnibus account has liquidated only a portion of open
commodity contracts in such account, the trustee will exercise
reasonable business judgment in assigning the liquidating transactions
to the underlying commodity customer accounts carried by the debtor.
Specifically, the trustee should endeavor to assign the contracts as
follows: First, to liquidate open commodity contracts in a risk-
reducing manner in any accounts that are in deficit; second, to
liquidate open commodity contracts in a risk-reducing manner in any
accounts that are undermargined; third, to liquidate open commodity
contracts in a risk-reducing manner in any other accounts, and finally
to liquidate any remaining open commodity contracts in any accounts. If
more than one commodity contract account reflects open commodity
contracts in a particular account class for which liquidating
transactions have been executed, the trustee shall to the extent
practicable allocate the liquidating transactions to such commodity
contract accounts pro rata based on the number of open commodity
contracts of such commodity contract accounts. For purposes of this
section, the term ``a risk-reducing manner'' is measured by margin
requirements set using the margin methodology and parameters followed
by the derivatives clearing organization at which such contracts are
cleared.
(c) Contracts moving into delivery position. After entry of the
order for relief and subject to paragraph (a) of this section, which
requires the trustee to attempt to make transfers to other commodity
brokers permitted by Sec. 190.07 and section 764(b) of the Bankruptcy
Code, the trustee shall use its best efforts to liquidate any open
commodity contract that settles upon expiration or exercise via the
making or taking of delivery of a commodity:
(1) If such contract is a futures contract or a cleared swaps
contract, before the earlier of the last trading day or the first day
on which notice of intent to deliver may be tendered with respect
thereto, or otherwise before the debtor or its customer incurs an
obligation to make or take delivery of the commodity under such
contract;
(2) If such contract is a long option on a commodity and has value,
before the first date on which the contract could be automatically
exercised or the last date on which the contract could be exercised if
not subject to automatic exercise; or
(3) If such contract is a short option on a commodity that is in-
the-money in favor of the long position holder, before the first date
on which the long option position could be exercised.
(d) Liquidation or offset. After entry of the order for relief and
subject to paragraph (a) of this section, which requires the trustee to
attempt to make transfers to other commodity brokers permitted by Sec.
190.07 and section 764(b) of the Bankruptcy Code, and except as
otherwise set forth in this paragraph (d), the following commodity
contracts and other property held by or for the account of a debtor
must be liquidated in the market in accordance with paragraph (e)(1) of
this section or liquidated via book entry in accordance with paragraph
(e)(2) of this section by
[[Page 19432]]
the trustee promptly and in an orderly manner:
(1) Open commodity contracts. All open commodity contracts, except
for:
(i) Commodity contracts that are specifically identifiable property
(if applicable) and are subject to customer instructions to transfer
(in lieu of liquidating) as provided in Sec. 190.03(c)(2), provided
that the customer is in compliance with the terms of Sec.
190.09(d)(2); and
(ii) Open commodity contract positions that are in a delivery
position, which shall be treated in accordance with the provisions of
Sec. 190.06.
(2) Specifically identifiable property, other than open commodity
contracts or physical delivery property. Specifically identifiable
property, other than open commodity contracts or physical delivery
property, to the extent that:
(i) The fair market value of such property is less than 75% of its
fair market value on the date of entry of the order for relief;
(ii) Failure to liquidate the specifically identifiable property
may result in a deficit balance in the applicable customer account; or
(iii) The trustee has not received instructions to return pursuant
to Sec. 190.03(c)(1), or has not returned such property upon the terms
contained in Sec. 190.09(d)(1).
(3) Letters of credit. The trustee may request that a customer
deliver substitute customer property with respect to any letter of
credit received, acquired, or held to margin, guarantee, secure,
purchase, or sell a commodity contract, whether the letter of credit is
held by the trustee on behalf of the debtor's estate or a derivatives
clearing organization or a foreign intermediary or foreign clearing
organization on a pass-through or other basis, including in cases where
the letter of credit has expired since the date of the order for
relief. The amount of the request may equal the full face amount of the
letter of the credit or any portion thereof, to the extent required or
may be required in the trustee's discretion to ensure pro rata
treatment among customer claims within each account class, consistent
with Sec. Sec. 190.08 and 190.09.
(i) If a customer fails to provide substitute customer property
within a reasonable time specified by the trustee, the trustee may, if
the letter of credit has not expired, draw upon the full amount of the
letter of credit or any portion thereof.
(ii) For any letter of credit referred to in this paragraph (d)(3),
the trustee shall treat any portion that is not drawn upon (less the
value of any substitute customer property delivered by the customer) as
having been distributed to the customer for purposes of calculating
entitlements to distribution or transfer. The expiration of the letter
of credit on or at any time after the date of the order for relief
shall not affect such calculation.
(iii) Any proceeds of a letter of credit drawn by the trustee, or
substitute customer property posted by a customer, shall be considered
customer property in the account class applicable to the original
letter of credit.
(iv) The trustee shall, in exercising their discretion with regard
to addressing letters of credit, including as to the timing and amount
of a request for substitute customer property, endeavor to mitigate, to
the extent practicable, the adverse effects upon customers that have
posted letters of credit, in a manner that achieves pro rata treatment
among customer claims.
(4) All other property. All other property, other than physical
delivery property held for delivery in accordance with the provisions
of Sec. 190.06, which is not required to be transferred or returned
pursuant to customer instructions and which has not been liquidated in
accordance with paragraphs (d)(1) through (3) of this section.
(e) Liquidation of open commodity contracts--(1) By the trustee or
a clearing organization in the market--(i) Debtor as a clearing member.
For open commodity contracts cleared by the debtor as a member of a
clearing organization, the trustee or clearing organization, as
applicable, shall liquidate such open commodity contracts pursuant to
the rules of the clearing organization, a designated contract market,
or a swap execution facility, if and as applicable. Any such rules
providing for liquidation other than on the open market shall be
designed to achieve, to the extent feasible under market conditions at
the time of liquidation, a process for liquidating open commodity
contracts that results in competitive pricing. For open commodity
contracts that are futures or options on futures that were established
on or subject to the rules of a foreign board of trade and cleared by
the debtor as a member of a foreign clearing organization, the trustee
shall liquidate such open commodity contracts pursuant to the rules of
the foreign clearing organization or foreign board of trade or, in the
absence of such rules, in the manner the trustee determines
appropriate.
(ii) Debtor not a clearing member. For open commodity contracts
submitted by the debtor for clearing through one or more accounts
established with a futures commission merchant (as defined in Sec. 1.3
of this chapter) or foreign futures intermediary, the trustee shall use
commercially reasonable efforts to liquidate the open commodity
contracts to achieve competitive pricing, to the extent feasible under
market conditions at the time of liquidation and subject to any rules
or orders of the relevant clearing organization, foreign clearing
organization, designated contract market, swap execution facility, or
foreign board of trade governing the liquidation of open commodity
contracts.
(2) By the trustee or a clearing organization via book entry
offset. Upon application by the trustee or clearing organization, the
Commission may permit open commodity contracts to be liquidated, or
settlement on such contracts to be made, by book entry. Such book entry
shall offset open commodity contracts, whether matched or not matched
on the books of the commodity broker, using the settlement price for
such commodity contracts as determined by the clearing organization in
accordance with its rules. Such rules shall be designed to establish,
to the extent feasible under market conditions at the time of
liquidation, such settlement prices in a competitive manner.
(3) By a futures commission merchant or foreign futures
intermediary. For open commodity contracts cleared by the debtor
through one or more accounts established with a futures commission
merchant or a foreign futures intermediary, such futures commission
merchant or foreign futures intermediary may exercise any enforceable
contractual rights it has to liquidate such commodity contracts,
provided, that it shall use commercially reasonable efforts to
liquidate the open commodity contracts to achieve competitive pricing,
to the extent feasible under market conditions at the time of
liquidation and subject to any rules or orders of the relevant clearing
organization, foreign clearing organization, designated contract
market, swap execution facility, or foreign board of trade governing
its liquidation of such open commodity contracts. If a futures
commission merchant or foreign futures intermediary fails to use
commercially reasonable efforts to liquidate open commodity contracts
to achieve competitive pricing in accordance with this paragraph
(e)(3), the trustee may seek damages reflecting the difference between
the price (or prices) at which the relevant commodity contracts would
have been liquidated using commercially reasonable efforts to
[[Page 19433]]
achieve competitive pricing and the price (or prices) at which the
commodity contracts were liquidated, which shall be the sole remedy
available to the trustee. In no event shall any such liquidation be
voided.
(4) Liquidation only. (i) Nothing in this part shall be interpreted
to permit the trustee to purchase or sell new commodity contracts for
the debtor or its customers except to offset open commodity contracts
or to transfer any transferable notice received by the debtor or the
trustee under any commodity contract; provided, however, that the
trustee may, in its discretion and with approval of the Commission,
cover uncovered inventory or commodity contracts of the debtor which
cannot be liquidated immediately because of price limits or other
market conditions, or may take an offsetting position in a new month or
at a strike price for which limits have not been reached.
(ii) Notwithstanding paragraph (e)(4)(i) of this section, the
trustee may, with the written permission of the Commission, operate the
business of the debtor in the ordinary course, including the purchase
or sale of new commodity contracts on behalf of the customers of the
debtor under appropriate circumstances, as determined by the
Commission.
(f) Long option contracts. Subject to paragraphs (d) and (e) of
this section, the trustee shall use its best efforts to assure that a
commodity contract that is a long option contract with value does not
expire worthless.
Sec. 190.05 Operation of the debtor's estate--general.
(a) Compliance with the Act and regulations in this chapter. Except
as specifically provided otherwise in this part, the trustee shall use
reasonable efforts to comply with all of the provisions of the Act and
of the regulations in this chapter as if it were the debtor.
(b) Computation of funded balance. The trustee shall use reasonable
efforts to compute a funded balance for each customer account that
contains open commodity contracts or other property as of the close of
business each business day subsequent to the order for relief until the
date all open commodity contracts and other property in such account
have been transferred or liquidated, which shall be as accurate as
reasonably practicable under the circumstances, including the
reliability and availability of information.
(c) Records--(1) Maintenance. Except as otherwise ordered by the
court or as permitted by the Commission, records required under this
chapter to be maintained by the debtor, including records of the
computations required by this part, shall be maintained by the trustee
until such time as the debtor's case is closed.
(2) Accessibility. The records required to be maintained by
paragraph (c)(1) of this section shall be available during business
hours to the Commission and the U.S. Department of Justice. The trustee
shall give the Commission and the U.S. Department of Justice access to
all records of the debtor, including records required to be retained in
accordance with Sec. 1.31 of this chapter and all other records of the
commodity broker, whether or not the Act or this chapter would require
such records to be maintained by the commodity broker.
(d) Customer statements. The trustee shall use all reasonable
efforts to continue to issue account statements with respect to any
customer for whose account open commodity contracts or other property
is held that has not been liquidated or transferred. With respect to
such accounts, the trustee must also issue an account statement
reflecting any liquidation or transfer of open commodity contracts or
other property promptly after such liquidation or transfer.
(e) Other matters--(1) Disbursements. With the exception of
transfers of customer property made in accordance with Sec. 190.07,
the trustee shall make no disbursements to customers except with
approval of the court.
(2) Investment. The trustee shall promptly invest the proceeds from
the liquidation of commodity contracts or specifically identifiable
property, and may invest any other customer property, in obligations of
the United States and obligations fully guaranteed as to principal and
interest by the United States, provided that such obligations are
maintained in a depository located in the United States, its
territories or possessions.
(f) Residual interest. The trustee shall apply the residual
interest provisions of Sec. 1.11 of this chapter in a manner
appropriate to the context of their responsibilities as a bankruptcy
trustee pursuant subchapter IV of chapter 7 of the Bankruptcy Code and
this part, and in light of the existence of a surplus or deficit in
customer property available to pay customer claims.
Sec. 190.06 Making and taking delivery under commodity contracts.
(a) Deliveries--(1) General. The provisions of this paragraph (a)
apply to commodity contracts that settle upon expiration or exercise by
making or taking delivery of physical delivery property, if such
commodity contracts are in a delivery position on the filing date, or
the trustee is unable to liquidate such commodity contracts in
accordance with Sec. 190.04(c) to prevent them from moving into a
delivery position, i.e., before the debtor or its customer incurs
bilateral contractual obligations to make or take delivery under such
commodity contracts.
(2) Delivery made or taken on behalf of a customer outside of the
administration of the debtor's estate. (i) The trustee shall use
reasonable efforts to allow a customer to deliver physical delivery
property that is held directly by the customer and not by the debtor
(and thus not recorded in any commodity contract account of the
customer) in settlement of a commodity contract, and to allow payment
in exchange for such delivery, to occur outside the administration of
the debtor's estate, when the rules of the exchange or other market
listing the commodity contract, or the clearing organization or the
foreign clearing organization clearing the commodity contract, as
applicable, prescribe a process for delivery that allows the delivery
to be fulfilled:
(A) In the normal course directly by the customer;
(B) By substitution of the customer for the commodity broker; or
(C) Through agreement of the buyer and seller to alternative
delivery procedures.
(ii) Where a customer delivers physical delivery property in
settlement of a commodity contract outside of the administration of the
debtors' estate in accordance with paragraph (a)(2)(i) of this section,
any property of such customer held at the debtor in connection with
such contract must nonetheless be included in the net equity claim of
that customer, and, as such, can only be distributed pro rata at the
time of, and as part of, any distributions to customers made by the
trustee.
(3) Delivery as part of administration of the debtor's estate. When
the trustee determines that it is not practicable to effect delivery as
provided in paragraph (a)(2) of this section:
(i) To facilitate the making or taking of delivery directly by a
customer, the trustee may, as it determines reasonable under the
circumstances of the case and consistent with the pro rata distribution
of customer property by account class:
(A) When a customer is obligated to make delivery, return any
physical delivery property to the customer that is held by the debtor
for or on behalf of the customer under the terms set forth in Sec.
190.09(d)(1)(ii), to allow the customer to deliver such property to
fulfill its
[[Page 19434]]
delivery obligation under the commodity contract; or
(B) When a customer is obligated to take delivery:
(1) Return any cash delivery property to the customer that is
reflected in the customer's delivery account, provided that cash
delivery property returned under this paragraph (a)(3)(i)(B)(1) shall
not exceed the lesser of:
(i) The amount the customer is required to pay for delivery of the
commodity; or
(ii) The customer's net funded balance for all of the customer's
commodity contract accounts;
(2) Return cash, securities, or other property held in the
customer's non-delivery commodity contract accounts, provided that
property returned under this section shall not exceed the lesser of:
(i) The amount the customer is required to pay for delivery of the
commodity; or
(ii) The net funded balance for all of the customer's commodity
contract accounts reduced by any amount returned to the customer
pursuant to paragraph (a)(3)(i)(B)(1) of this section, and provided
further, however, that the trustee may distribute such property only to
the extent that the customer's funded balance for each such account
exceeds the minimum margin obligations for such account (as described
in Sec. 190.04(b)(2)); and
(C) Impose such conditions on the customer as it considers
appropriate to assure that property returned to the customer is used to
fulfill the customer's delivery obligations.
(ii) If the trustee does not return physical delivery property,
cash delivery property, or other property in the form of cash or cash
equivalents to the customer as provided in paragraph (a)(3)(i) of this
section, subject to paragraph (a)(4) of this section:
(A) To the extent practical, the trustee shall make or take
delivery of physical delivery property in the same manner as if no
bankruptcy had occurred, and when making delivery, the party to which
delivery is made must pay the full price required for taking such
delivery; or
(B) When taking delivery of physical delivery property:
(1) The trustee shall pay for the delivery first using the
customer's cash delivery property or other property, limited to the
amounts set forth in paragraph (a)(3)(i)(B) of this section, along with
any cash transferred by the customer to the trustee on or after the
filing date for the purpose of paying for delivery.
(2) If the value of the cash or cash equivalents that may be used
to pay for deliveries as described in paragraph (a)(3)(i)(B) of this
section is less than the amount required to be paid for taking
delivery, the trustee shall issue a payment call to the customer. The
full amount of any payment made by the customer in response to a
payment call must be credited to the funded balance of the particular
account for which such payment is made.
(3) If the customer fails to meet a call for payment under
paragraph (a)(3)(ii)(B)(2) of this section before payment is made for
delivery, the trustee must convert any physical delivery property
received on behalf of the customer to cash as promptly as possible.
(4) Deliveries in a securities account. If an open commodity
contract held in a futures account, foreign futures account, or cleared
swaps account requires delivery of a security upon expiration or
exercise of such commodity contract, and delivery is not completed
pursuant to paragraph (a)(2) or (a)(3)(i) of this section, the trustee
may make or take delivery in a securities account in a manner
consistent with paragraph (a)(3)(ii) of this section, provided,
however, that the trustee may transfer property from the customer's
commodity contract accounts to the securities account to fulfill the
delivery obligation only to the extent that the customer's funded
balance for such commodity contract account exceeds the customer's
minimum margin obligations for such accounts (as described in Sec.
190.04(b)(2)) and provided further that the customer is not under-
margined or does not have a deficit balance in any other commodity
contract accounts.
(5) Delivery made or taken on behalf of proprietary account. If
delivery of physical delivery property is to be made or taken on behalf
of the debtor's own account or the account of any non-public customer
of the debtor, the trustee shall make or take delivery, as the case may
be, on behalf of the debtor's estate, provided that if the trustee
takes delivery of physical delivery property it must convert such
property to cash as promptly as possible.
(b) Special account class provisions for delivery accounts. (1)
Within the delivery account class, the trustee shall treat--
(i) Physical delivery property held in delivery accounts as of the
filing date, and the proceeds of any such physical delivery property
subsequently received, as part of the physical delivery account class;
and
(ii) Cash delivery property in delivery accounts as of the filing
date, along with any physical delivery property for which delivery is
subsequently taken on behalf of a customer in accordance with paragraph
(a)(3) of this section, as part of a separate cash delivery account
class.
(2)(i) If the debtor holds any cash or cash equivalents in an
account maintained at a bank, clearing organization, foreign clearing
organization, or other person, under a name or in a manner that clearly
indicates that the account holds property for the purpose of making
payment for taking delivery, or receiving payment for making delivery,
of a commodity under commodity contracts, such property shall (subject
to Sec. 190.09) be considered customer property--
(A) In the cash delivery account class if held for making payment
for taking delivery; and
(B) In the physical delivery account class, if held as a result of
receiving such payment for a making delivery after the filing date.
(ii) Any other property (excluding property segregated for the
benefit of customer in the futures, foreign futures or cleared swaps
account class) that is traceable as having been held or received for
the purpose of making delivery, or as having been held or received as a
result of taking delivery, of a commodity under commodity contracts,
shall (subject to Sec. 190.09) be considered customer property--
(A) In the cash delivery account class if received after the filing
date in exchange for taking delivery; and
(B) Otherwise shall be considered customer property in the physical
delivery account class.
Sec. 190.07 Transfers.
(a) Transfer rules. No clearing organization or self-regulatory
organization may adopt, maintain in effect, or enforce rules that:
(1) Are inconsistent with the provisions of this part;
(2) Interfere with the acceptance by its members of transfers of
commodity contracts, and the property margining or securing such
contracts, from futures commission merchants that are required to
transfer accounts pursuant to Sec. 1.17(a)(4) of this chapter; or
(3) Interfere with the acceptance by its members of transfers of
commodity contracts, and the property margining or securing such
contracts, from a futures commission merchant that is a debtor as
defined in Sec. 190.01, if such transfers have been approved by the
Commission,
[[Page 19435]]
provided, however, that this paragraph (a)(3) shall not--
(i) Limit the exercise of any contractual right of a clearing
organization or other registered entity to liquidate or transfer open
commodity contracts; or
(ii) Be interpreted to limit a clearing organization's ability
adequately to manage risk.
(b) Requirements for transferees. (1) It is the duty of each
transferee to assure that it will not accept a transfer that would
cause the transferee to be in violation of the minimum financial
requirements set forth in this chapter.
(2) Any transferee that accepts a transfer of open commodity
contracts from the estate of the debtor--
(i) Accepts the transfer subject to any loss that may arise in the
event the transferee cannot recover from the customer any deficit
balance that may arise related to the transferred open commodity
contracts.
(ii) If the commodity contracts were held for the account of a
customer:
(A) Must keep such commodity contracts open at least one business
day after their receipt, unless the customer for whom the transfer is
made fails to respond within a reasonable time to a margin call for the
difference between the margin transferred with such commodity contracts
and the margin which such transferee would require with respect to a
similar set of commodity contracts held for the account of a customer
in the ordinary course of business; and
(B) May not collect commissions with respect to the transfer of
such commodity contracts.
(3) A transferee may accept open commodity contracts and property,
and open accounts on its records, for customers whose commodity
contracts and property are transferred pursuant to this part prior to
completing customer diligence, provided that account opening diligence
as required by law (including the risk disclosures referred to in Sec.
1.65(a)(3) of this chapter) is performed, and records and information
required by law are obtained, as soon as practicable, but in any event
within six months of the transfer, unless this time is extended for a
particular account, transferee, or debtor by the Commission.
(4)(i) Any account agreements governing a transferred account
(including an account that has been partially transferred) shall be
deemed assigned to the transferee by operation of law and shall govern
the transferee and customer's relationship until such time as the
transferee and customer enter into a new agreement; provided, however,
that any breach of such agreement by the debtor existing at or before
the time of the transfer (including, but not limited to, any failure to
segregate sufficient customer property) shall not constitute a default
or breach of the agreement on the part of the transferee, or constitute
a defense to the enforcement of the agreement by the transferee.
(ii) Paragraph (b)(4)(i) of this section shall not apply where the
customer has a pre-existing account agreement with the transferee
futures commission merchant. In such a case, the transferred account
will be governed by that pre-existing account agreement.
(5) If open commodity contracts or any specifically identifiable
property has been, or is to be, transferred in accordance with section
764(b) of the Bankruptcy Code and this section, customer instructions
previously received by the trustee with respect to open commodity
contracts or with respect to specifically identifiable property, shall
be transmitted to the transferee of property, which shall comply
therewith to the extent practicable.
(c) Eligibility for transfer under section 764(b) of the Bankruptcy
Code--accounts eligible for transfer. All commodity contract accounts
(including accounts with no open commodity contract positions) are
eligible for transfer after the order for relief pursuant to section
764(b) of the Bankruptcy Code, except:
(1) The debtor's own account or the accounts of general partners of
the debtor if the debtor is a partnership; and
(2) Accounts that are in deficit.
(d) Special rules for transfers under section 764(b) of the
Bankruptcy Code--(1) Effecting transfer. The trustee for a commodity
broker shall use its best efforts to effect a transfer to one or more
other commodity brokers of all eligible commodity contract accounts,
open commodity contracts and property held by the debtor for or on
behalf of its customers, based on customer claims or record, no later
than the seventh calendar day after the order for relief.
(2) Partial transfers; multiple transferees--(i) Of the customer
estate. If all eligible commodity contract accounts held by a debtor
cannot be transferred under this section, a partial transfer may
nonetheless be made. The Commission will not disapprove such a transfer
for the sole reason that it was a partial transfer. Commodity contract
accounts may be transferred to one or more transferees, and, subject to
paragraph (d)(4) of this section, may be transferred to different
transferees by account class.
(ii) Of a customer's commodity contract account. If all of a
customer's open commodity contracts and property cannot be transferred
under this section, a partial transfer of contracts and property may be
made so long as such transfer would not result in an increase in the
amount of any customer's net equity claim. One, but not the only, means
to effectuate a partial transfer is by liquidating a portion of the
open commodity contracts held by a customer such that sufficient value
is realized, or margin requirements are reduced to an extent
sufficient, to permit the transfer of some or all of the remaining open
commodity contracts and property. If any open commodity contract to be
transferred in a partial transfer is part of a spread or straddle, to
the extent practicable under the circumstances, each side of such
spread or straddle must be transferred or none of the open commodity
contracts comprising the spread or straddle may be transferred.
(3) Letters of credit. A letter of credit received, acquired, or
held to margin, guarantee, secure, purchase, or sell a commodity
contract may be transferred with an eligible commodity contract account
if it is held by a derivatives clearing organization on a pass-through
or other basis or is transferable by its terms, so long as the transfer
will not result in a recovery which exceeds the amount to which the
customer would be entitled under Sec. Sec. 190.08 and 190.09. If the
letter of credit cannot be transferred as provided for in the foregoing
sentence, and the customer does not deliver substitute customer
property to the trustee in accordance with Sec. 190.04(d)(3), the
trustee may draw upon a portion or all of the letter of credit, the
proceeds of which shall be treated as customer property in the
applicable account class.
(4) Physical delivery property. The trustee shall use reasonable
efforts to prevent physical delivery property held for the purpose of
making delivery on a commodity contract from being transferred separate
and apart from the related commodity contract, or to a different
transferee.
(5) No prejudice to other customers. No transfer shall be made
under this part by the trustee if, after taking into account all
customer property available for distribution to customers in the
applicable account class at the time of the transfer, such transfer
would result in insufficient remaining customer property to make an
equivalent percentage distribution (including all previous transfers
and distributions) to all customers in the applicable account class,
based on--
(i) Customer claims of record; and
[[Page 19436]]
(ii) Estimates of other customer claims made in the trustee's
reasonable discretion based on available information, in each case as
of the calendar day immediately preceding transfer.
(e) Prohibition on avoidance of transfers under section 764(b) of
the Bankruptcy Code--(1) Pre-relief transfers. Notwithstanding the
provisions of paragraphs (c) and (d) of this section, the following
transfers are approved and may not be avoided under sections 544, 546,
547, 548, 549, or 724(a) of the Bankruptcy Code:
(i) The transfer of commodity contract accounts or customer
property prior to the entry of the order for relief in compliance with
Sec. 1.17(a)(4) of this chapter unless such transfer is disapproved by
the Commission;
(ii) The transfer, withdrawal, or settlement, prior to the order
for relief at the request of a public customer, including a transfer,
withdrawal, or settlement at the request of a public customer that is a
commodity broker, of commodity contract accounts or customer property
held from or for the account of such customer by or on behalf of the
debtor unless:
(A) The customer acted in collusion with the debtor or its
principals to obtain a greater share of customer property or the
bankruptcy estate than that to which it would be entitled under this
part; or
(B) The transfer is disapproved by the Commission;
(iii) The transfer prior to the order for relief by a clearing
organization, or by a receiver that has been appointed for the futures
commission merchant (FCM) that is now a debtor, of one or more accounts
held for or on behalf of customers of the debtor, or of commodity
contracts and other customer property held for or on behalf of
customers of the debtor, provided that the transfer is not disapproved
by the Commission.
(2) Post-relief transfers. Notwithstanding the provisions of
paragraphs (c) and (d) of this section, the following transfers are
approved and may not be avoided under sections 544, 546, 547, 548, 549,
or 724(a) of the Bankruptcy Code:
(i) The transfer of a commodity contract account or customer
property eligible to be transferred under paragraphs (c) and (d) of
this section made by the trustee or by any clearing organization on or
before the seventh calendar day after the entry of the order for
relief, as to which the Commission has not disapproved the transfer; or
(ii) The transfer of a commodity contract account or customer
property at the direction of the Commission on or before the seventh
calendar day after the order for relief, upon such terms and conditions
as the Commission may deem appropriate and in the public interest.
(f) Commission action. Notwithstanding any other provision of this
section (other than paragraphs (d)(2)(ii) and (d)(5) of this section),
in appropriate cases and to protect the public interest, the Commission
may:
(1) Prohibit the transfer of a particular set or sets of commodity
contract accounts and customer property; or
(2) Permit transfers of a particular set or sets of commodity
contract accounts and customer property that do not comply with the
requirements of this section.
Sec. 190.08 Calculation of funded net equity.
For purposes of this subpart, funded net equity shall be computed
as follows:
(a) Funded claim. The funded net equity claim of a customer shall
be equal to the aggregate of the funded balances of such customer's net
equity claim for each account class.
(b) Net equity. Net equity means a customer's total customer claim
of record against the estate of the debtor based on the customer
property, including any commodity contracts, held by the debtor for or
on behalf of such customer less any indebtedness of the customer to the
debtor. Net equity shall be calculated as follows:
(1) Step 1-equity determination. (i) Determine the equity balance
of each commodity contract account of a customer by computing, with
respect to such account, the sum of:
(A) The ledger balance;
(B) The open trade balance; and
(C) The realizable market value, determined as of the close of the
market on the last preceding market day, of any securities or other
property held by or for the debtor from or for such account, plus
accrued interest, if any.
(ii) For the purposes of this paragraph (b)(1), the ledger balance
of a customer account shall be calculated by:
(A) Adding:
(1) Cash deposited to purchase, margin, guarantee, secure, or
settle a commodity contract;
(2) Cash proceeds of liquidations of any securities or other
property referred to in paragraph (b)(1)(i)(C) of this section;
(3) Gains realized on trades; and
(4) The face amount of any letter of credit received, acquired or
held to margin, guarantee, secure, purchase or sell a commodity
contract; and
(B) Subtracting from the result:
(1) Losses realized on trades;
(2) Disbursements to or on behalf of the customer (including, for
these purposes, transfers made pursuant to Sec. Sec. 190.04(a) and
190.07); and
(3) The normal costs attributable to the payment of commissions,
brokerage, interest, taxes, storage, transaction fees, insurance, and
other costs and charges lawfully incurred in connection with the
purchase, sale, exercise, or liquidation of any commodity contract in
such account.
(iii) For purposes of this paragraph (b)(1), the open trade balance
of a customer's account shall be computed by subtracting the unrealized
loss in value of the open commodity contracts held by or for such
account from the unrealized gain in value of the open commodity
contracts held by or for such account.
(iv) For purposes of this paragraph (b)(1), in calculating the
ledger balance or open trade balance of any customer, exclude any
security futures products, any gains or losses realized on trades in
such products, any property received to margin, guarantee, or secure
such products (including interest thereon or the proceeds thereof), to
the extent any of the foregoing are held in a securities account, and
any disbursements to or on behalf of such customer in connection with
such products or such property held in a securities account.
(2) Step 2-customer determination (aggregation). Aggregate the
credit and debit equity balances of all accounts of the same class held
by a customer in the same capacity. Paragraphs (b)(2)(i) through (xii)
of this section prescribe which accounts must be treated as being held
in the same capacity and which accounts must be treated as being held
in a separate capacity.
(i) Except as otherwise provided in this paragraph (b)(2), all
accounts that are maintained with a debtor in a person's name and that,
under this paragraph (b)(2), are deemed to be held by that person in
its individual capacity shall be deemed to be held in the same
capacity.
(ii) An account maintained with a debtor by a guardian, custodian,
or conservator for the benefit of a ward, or for the benefit of a minor
under the Uniform Gift to Minors Act, shall be deemed to be held in a
separate capacity from accounts held by such guardian, custodian or
conservator in its individual capacity.
(iii) An account maintained with a debtor in the name of an
executor or administrator of an estate in its capacity as such shall be
deemed to be held in a separate capacity from accounts held by such
executor or administrator in its individual capacity.
[[Page 19437]]
(iv) An account maintained with a debtor in the name of a decedent,
in the name of the decedent's estate, or in the name of the executor or
administrator of such estate in its capacity as such shall be deemed to
be accounts held in the same capacity.
(v) An account maintained with a debtor by a trustee shall be
deemed to be held in the individual capacity of the grantor of the
trust unless the trust is created by a valid written instrument for a
purpose other than avoidance of an offset under the regulations
contained in this part. A trust account which is not deemed to be held
in the individual capacity of its grantor under this paragraph
(b)(2)(v) shall be deemed to be held in a separate capacity from
accounts held in an individual capacity by the trustee, by the grantor
or any successor in interest of the grantor, or by any trust
beneficiary, and from accounts held by any other trust.
(vi) An account maintained with a debtor by a corporation,
partnership, or unincorporated association shall be deemed to be held
in a separate capacity from accounts held by the shareholders, partners
or members of such corporation, partnership, or unincorporated
association, if such entity was created for purposes other than
avoidance of an offset under the regulations contained in this part.
(vii) A hedging account of a person shall be deemed to be held in
the same capacity as a speculative account of such person.
(viii) Subject to paragraphs (b)(2)(ix) and (xiv) of this section,
the futures accounts, foreign futures accounts, delivery accounts, and
cleared swaps 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.
(ix) An omnibus customer account for public customers of a futures
commission merchant maintained with a debtor shall be deemed to be held
in a separate capacity from any omnibus customer account for non-public
customers of such futures commission merchant and from any account
maintained with the debtor on its own behalf or on behalf of any non-
public customer.
(x) A joint account maintained with the debtor shall be deemed to
be held in a separate capacity from any account held in an individual
capacity by the participants in such account, from any account held in
an individual capacity by a commodity pool operator or commodity
trading advisor for such account, and from any other joint account;
provided, however, that if such account is not transferred in
accordance with Sec. Sec. 190.04(a) and 190.07, it shall be deemed to
be held in the same capacity as any other joint account held by
identical participants and a participant's percentage interest therein
shall be deemed to be held in the same capacity as any account held in
an individual capacity by such participant.
(xi) An account maintained with a debtor in the name of a plan that
is subject to the terms of the Employee Retirement Income Security Act
of 1974 and the regulations in 29 CFR chapter XXV, or similar state,
Federal, or foreign laws or regulations applicable to retirement or
pension plans, shall be deemed to be held in a separate capacity from
an account held in an individual capacity by the plan administrator,
any employer, employee, participant, or beneficiary with respect to
such plan.
(xii) Except as otherwise provided in this section, an account
maintained with a debtor by an agent or nominee for a principal or a
beneficial owner shall be deemed to be an account held in the
individual capacity of such principal or beneficial owner.
(xiii) With respect to the cleared swaps account class, each
individual cleared swaps customer account within each cleared swap
omnibus customer account referred to in paragraph (b)(2)(viii) of this
section shall be deemed to be held in a separate capacity from each
other such individual cleared swaps customer account, subject to the
provisions of paragraphs (b)(2)(i) through (xi) of this section.
(xiv) Accounts held by a customer in separate capacities shall be
deemed to be accounts of different customers. The burden of proving
that an account is held in a separate capacity shall be upon the
customer.
(3) Step 3-setoffs. (i) The net equity of one customer account may
not be offset against the net equity of any other customer account.
(ii) Any obligation to the debtor owed by a customer which is not
required to be included in computing the equity of that customer under
paragraph (b)(1) of this section (defined as x), must be deducted from
any obligation to the customer owed by the debtor which is not required
to be included in computing the equity of that customer (defined as y).
If the former amount (x) exceeds the latter (y), the excess (x-y) must
be deducted from the equity balance of the customer obtained after
performing the preceding calculations required by paragraph (b) of this
section, provided, that if the customer owns more than one class of
accounts with a positive equity balance, the excess (again, x-y) must
be allocated and offset against each positive equity balance in the
same proportion as that positive equity balance bears to the total of
all positive equity balances of accounts of different classes held by
such customer.
(iii) A negative equity balance obtained with respect to one
customer account class must be set off against a positive equity
balance in any other account class of such customer held in the same
capacity, provided, that if a customer owns more than one class of
accounts with a positive equity balance, such negative equity balance
must be offset against each positive equity balance in the same
proportion as that positive equity balance bears to the total of all
positive equity balances in accounts of different classes held by such
customer.
(iv) To the extent any indebtedness of the debtor to the customer
which is not required to be included in computing the equity of such
customer under paragraph (b)(1) of this section exceeds such
indebtedness of the customer to the debtor, the customer claim therefor
will constitute a general creditor claim rather than a customer
property claim, and the net equity therefor shall be separately
calculated.
(v) The rules pertaining to separate capacities and permitted
setoffs contained in this section shall only be applied subsequent to
the entry of an order for relief; prior to that date, the provisions of
Sec. 1.22 of this chapter and of sections 4d(a)(2) and 4d(f) of the
Act (and, in each case, the regulations in part 1, 22, or 30 of this
chapter that implement sections 4d(a)(2) and 4d(f)) shall govern what
setoffs are permitted.
(4) Step 4-correction for distributions. The value on the date of
transfer or distribution of any property transferred or distributed
subsequent to the filing date and prior to the primary liquidation date
with respect to each class of account held by a customer must be added
to the equity obtained for that customer for accounts of that class
after performing the steps contained in paragraphs (b)(1) through (3)
of this section: Provided, however, that if all accounts for which
there are customer claims of record and 100% of the equity pertaining
thereto is transferred in accordance with Sec. 190.07 and section
764(b) of the Bankruptcy Code, net equity shall be computed based
solely upon those allowed customer claims, if any, filed subsequent to
the order for relief which are not claims of record on the filing date.
(5) Step 5-correction for ongoing events. Compute any adjustments
to the steps in paragraphs (b)(1) through (4) of this section required
to correct
[[Page 19438]]
misestimates or errors including, without limitation, corrections for
ongoing events such as the liquidation of unliquidated claims or
specifically identifiable property at a value different from the
estimated value previously used in computing net equity.
(c) Calculation of funded balance. Funded balance means a
customer's pro rata share of the customer estate with respect to each
account class available for distribution to customers of the same
customer class.
(1) Funded balance computation. The funded balance of any customer
claim shall be computed (separately by account class and customer
class) by:
(i) Multiplying the ratio of the amount of the net equity claim of
such customer (defined as x) less the amounts referred to in paragraph
(c)(1)(ii) of this section of such customer for any account class
(defined as y) divided by the sum of the net equity claims of all
customers for accounts of that class (defined as p) less the amounts
referred to in paragraph (c)(1)(ii) of this section of all customers
for accounts of that class (defined as q) (thus, ((x-y)/(p-q)) by the
sum of:
(A) The value of letters of credit received, acquired, or held to
margin, guarantee, secure, purchase, or sell a commodity contract
relating to all customer accounts of the same class;
(B) The value of the money, securities, or other property
segregated on behalf of all customer accounts of the same class less
the amounts referred to in paragraph (c)(1)(ii) of this section;
(C) The value of any money, securities, or other property which
must be allocated under Sec. 190.09 to all customer accounts of the
same class; and
(D) The amount of any add-back required under paragraph (b)(4) of
this section; and
(ii) Then adding 100% of--
(A) Any margin payment made between the entry of the order for
relief (or, in an involuntary case, the date on which the petition for
bankruptcy is filed) and the primary liquidation date; provided,
however, that if margin is posted to substitute for a letter of credit,
such margin does not increase the funded balance; and
(B) For cash delivery property, any cash transferred to the trustee
on or after the filing date for the purpose of paying for delivery.
(2) Corrections to funded balance. The funded balance must be
adjusted to correct for ongoing events including, without limitation:
(i) Added claimants;
(ii) Disallowed claims;
(iii) Liquidation of unliquidated claims at a value other than
their estimated value; and
(iv) Recovery of property.
(d) Valuation. In computing net equity, commodity contracts and
other property held by or for a commodity broker must be valued as
provided in this paragraph (d).
(1) Commodity contracts--(i) Open contracts. Unless otherwise
specified in this paragraph (d), the value of an open commodity
contract shall be equal to the settlement price as calculated by the
clearing organization pursuant to its rules; provided, however, that if
an open commodity contract is transferred to another commodity broker,
its value on the debtor's books and records shall be determined as of
the end of the last settlement cycle on the day preceding such
transfer.
(ii) Liquidated contracts. Except as specified in paragraphs
(d)(1)(ii)(A) and (B) of this section, the value of a commodity
contract liquidated on the open market shall equal the actual value
realized on liquidation of the commodity contract.
(A) Weighted average. If identical commodity contracts are
liquidated within a 24-hour period or business day (or such other
period as the bankruptcy court may determine is appropriate) as part of
a general liquidation of commodity contracts, but cannot be liquidated
at the same price, the trustee may use the weighted average of the
liquidation prices in computing the net equity of each customer for
which the debtor held such commodity contracts.
(B) Bulk liquidation. The value of a commodity contract liquidated
as part of a bulk auction, taken into inventory or under management by
a clearing organization, or similarly liquidated outside of the open
market shall be equal to the settlement price calculated by the
clearing organization as of the end of the settlement cycle during
which the commodity contract was liquidated.
(2) Securities. The value of a listed security shall be equal to
the closing price for such security on the exchange upon which it is
traded. The value of all securities not traded on an exchange shall be
equal in the case of a long position, to the average of the bid prices
for long positions, and in the case of a short position, to the average
of the asking prices for the short positions. If liquidated, the value
of such security shall be equal to the actual value realized on
liquidation of the security; provided, however, that if identical
securities are liquidated within a 24-hour period or business day (or
such other period as the bankruptcy court may determine is appropriate)
as part of a general liquidation of securities, but cannot be
liquidated at the same price, the trustee may use the weighted average
of the liquidation prices in computing the net equity of each customer
for which the debtor held such securities. Securities which are not
publicly traded shall be valued by the trustee pursuant to paragraph
(d)(5) of this section.
(3) Commodities held in inventory. Commodities held in inventory,
as collateral or otherwise, shall be valued at their fair market value.
If such fair market value is not readily ascertainable based upon
public sources of prices, the trustee shall value such commodities
pursuant to paragraph (d)(5) of this section.
(4) Letters of credit. The value of any letter of credit received,
acquired or held to margin, guarantee, secure, purchase, or sell a
commodity contract shall be its face amount, less the amount, if any,
drawn and outstanding, provided that, if the trustee makes a
determination in good faith that a draw on a letter of credit is
unlikely to be honored on either a temporary or a permanent basis, the
trustee shall value the letter of credit pursuant to paragraph (d)(5)
of this section.
(5) All other property. Subject to the other provisions of this
paragraph (d), all other property shall be valued by the trustee using
such professional assistance as the trustee deems necessary in its sole
discretion under the circumstances; provided, however, that if such
property is sold, its value for purposes of the calculations required
by this part shall be equal to the actual value realized on the sale of
such property; and, provided further, that the sale shall be made in
compliance with all applicable statutes, rules, and orders of any court
or governmental entity with jurisdiction there over.
Sec. 190.09 Allocation of property and allowance of claims.
The property of the debtor's estate must be allocated among account
classes and between customer classes as provided in this section.
(Property connected with certain cross-margining arrangements is
subject to the provisions of framework 1 in appendix B to this part.)
The property so allocated will constitute a separate estate of the
customer class and the account class to which it is allocated, and will
be designated by reference to such customer class and account class.
(a) Scope of customer property. (1) Customer property includes the
following:
[[Page 19439]]
(i) All cash, securities, or other property or the proceeds of such
cash, securities, or other property received, acquired, or held by or
for the account of the debtor, from or for the account of a customer,
including a non-public customer, which is:
(A) Property received, acquired, or held to margin, guarantee,
secure, purchase or sell a commodity contract;
(B) Open commodity contracts;
(C) Physical delivery property as that term is defined in
paragraphs (1) through (3) in the definition of that term in Sec.
190.01;
(D) Cash delivery property, or other cash, securities, or other
property received by the debtor as payment for a commodity to be
delivered to fulfill a commodity contract from or for the commodity
customer account of a customer;
(E) Profits or contractual rights accruing to a customer as the
result of a commodity contract;
(F) Letters of credit, including any proceeds of a letter of credit
drawn by the trustee, or substitute customer property posted by the
customer, pursuant to Sec. 190.04(d)(3);
(G) Securities held in a portfolio margining account carried as a
futures account or a cleared swaps customer account; or
(H) Property hypothecated under Sec. 1.30 of this chapter to the
extent that the value of such property exceeds the proceeds of any loan
of margin made with respect thereto; and
(ii) All cash, securities, or other property which:
(A) Is segregated for customers on the filing date;
(B) Is a security owned by the debtor to the extent there are
customer claims for securities of the same class and series of an
issuer;
(C) Is specifically identifiable to a customer;
(D) Was property of a type described in paragraph (a)(1)(i)(A) of
this section that is subsequently recovered by the avoidance powers of
the trustee or is otherwise recovered by the trustee on any other claim
or basis;
(E) Represents recovery of any debit balance, margin deficit, or
other claim of the debtor against a customer;
(F) Was unlawfully converted but is part of the debtor's estate;
(G) Constitutes current assets of the debtor (as of the date of the
order for relief) within the meaning of Sec. 1.17(c)(2) of this
chapter, including the debtor's trading or operating accounts and
commodities of the debtor held in inventory, in the greater of--
(1) The amount that the debtor is obligated to set aside as its
targeted residual interest amount pursuant to Sec. 1.11 of this
chapter and the debtor's residual interest policies adopted thereunder,
with respect to each of the futures account class, the foreign futures
account class, and the cleared swaps account class; or
(2) The debtor's obligations to cover debit balances or under-
margined amounts as provided in Sec. Sec. 1.20, 1.22, 22.2, and 30.7
of this chapter;
(H) Is other property of the debtor that any applicable law, rule,
regulation, or order requires to be set aside for the benefit of
customers;
(I) Is property of the debtor's estate recovered by the Commission
in any proceeding brought against the principals, agents, or employees
of the debtor;
(J) Is proceeds from the investment of customer property by the
trustee pending final distribution;
(K) Is a payment from an insurer to the trustee arising from or
related to a claim related to the conversion or misuse of customer
property; or
(L) Is cash, securities, or other property of the debtor's estate,
including the debtor's trading or operating accounts and commodities of
the debtor held in inventory, but only to the extent that the property
enumerated in paragraphs (a)(1)(i)(F) and (a)(1)(ii)(A) through (K) of
this section is insufficient to satisfy in full all claims of public
customers. Such property includes ``customer property,'' as defined in
section 16(4) of SIPA, 15 U.S.C. 78lll(4), that remains after
allocation in accordance with section 8(c)(1)(A)-(D) of SIPA, 15 U.S.C.
78fff-2(c)(1)(A)-(D) and that is allocated to the debtor's general
estate in accordance with section 8(c)(1) of SIPA, 15 U.S.C. 78fff-
2(c)(1).
(2) Customer property will not include:
(i) Claims against the debtor for damages for any wrongdoing of the
debtor, including claims for misrepresentation or fraud, or for any
violation of the Act or of the regulations in this chapter;
(ii) Other claims for property which are not based upon property
received, acquired, or held by or for the account of the debtor, from
or for the account of the customer;
(iii) Forward contracts (unless such contracts are cleared by a
clearing organization or, in the case of forward contracts treated as
foreign futures, a foreign clearing organization);
(iv) Physical delivery property that is not held by the debtor, and
is delivered or received by a customer in accordance with Sec.
190.06(a)(2) or Sec. 190.16(a) to fulfill the customer's delivery
obligation under a commodity contract;
(v) Property deposited by a customer with a commodity broker after
the entry of an order for relief which is not necessary to meet the
margin requirements applicable to the accounts of such customer;
(vi) Property hypothecated pursuant to Sec. 1.30 of this chapter
to the extent of the loan of margin with respect thereto;
(vii) Money, securities, or property held to margin, guarantee or
secure security futures products, or accruing as a result of such
products, if held in a securities account; and
(viii) Money, securities, or property held in a securities account
to fulfill delivery, under a commodity contract from or for the account
of a customer, as described in Sec. 190.06(b)(2).
(3) Nothing contained in this section, including, but not limited
to, the satisfaction of customer claims by operation of this section,
shall prevent a trustee from asserting claims against any person to
recover the shortfall of property enumerated in paragraphs (a)(1)(i)(F)
and (a)(1)(ii)(A) through (L) of this section.
(b) Allocation of customer property between customer classes. No
customer property may be allocated to pay non-public customer claims
until all public customer claims have been satisfied in full. Any
property segregated on behalf of or attributable to non-public
customers must be treated initially as part of the public customer
estate and allocated in accordance with paragraph (c)(2) of this
section.
(c) Allocation of customer property among account classes--(1)
Property identified to an account class--(i) Segregated property.
Subject to paragraph (b) of this section, property held by or for the
account of a customer, which is segregated on behalf of a specific
account class, or readily traceable on the filing date to customers of
such account class, or recovered by the trustee on behalf of or for the
benefit of an account class, must be allocated to the customer estate
of the account class for which it is segregated, to which it is readily
traceable, or for which it is recovered.
(ii) Excess property. If, after payment in full of all allowed
customer claims in a particular account class, any property remains
allocated to that account class, such excess shall be allocated in
accordance with paragraph (c)(2) of this section.
(2) All other property. Money, securities, and property received
from or for the account of customers which cannot be allocated in
accordance with
[[Page 19440]]
paragraph (c)(1)(i) of this section, must be allocated in the following
order:
(i) To the estate of the account class for which, after the
allocation required in paragraph (c)(1) of this section, the percentage
of each public customer net equity claim which is funded is the lowest,
until the funded percentage of net equity claims of such class equals
the percentage of each public customer's net equity claim which is
funded for the account class with the next lowest percentage of the
funded claims; and then
(ii) To the estate of the two account classes referred to in
paragraph (c)(2)(i) of this section so that the percentage of the net
equity claims which are funded for each class remains equal until the
percentage of each public customer net equity claim which is funded
equals the percentage of each public customer net equity claim which is
funded for the account class with the next lowest percentage of funded
claims, and so forth, until the percentage of each public customer net
equity claim which is funded is equal for all classes of accounts; and
then,
(iii) Among account classes in the same proportion as the public
customer net equity claims for each such account class bears to the
total of public customer net equity claims of all account classes until
the public customer claims of each account class are paid in full; and,
thereafter,
(iv) To the non-public customer estate for each account class in
the same order as is prescribed in paragraphs (c)(2)(i) through (iii)
of this section for the allocation of the customer estate among account
classes.
(d) Distribution of customer property--(1) Return or transfer of
specifically identifiable property. Specifically identifiable property
not required to be liquidated under Sec. 190.04(d)(2) may be returned
or transferred on behalf of the customer to which it is identified:
(i) If it is margining an open commodity contract, only if
substitute customer property is first deposited with the trustee with a
value equal to the greater of the full fair market value of such
property on the return date or the balance due on the return date on
any loan by the debtor to the customer for which such property
constitutes security; or
(ii) If it is not margining an open commodity contract, at the
option of the customer, either pursuant to the terms of paragraph
(d)(1)(i) of this section, or pursuant to the following terms: Such
customer first deposits substitute customer property with the trustee
with a value equal to the amount by which the greater of the value of
the specifically identifiable property to be transferred or returned on
the date of such transfer or return or the balance due on the return
date on any loan by the debtor to the customer for which such property
constitutes security, together with any other disbursements made, or to
be made, to such customer, plus a reasonable reserve in the trustee's
sole discretion, exceeds the estimated aggregate of the funded balances
for each class of account of such customer less the value on the date
of its transfer or return of any property transferred or returned prior
to the primary liquidation date with respect to the customer's net
equity claim for such account; provided, however, that adequate
security to assure the recovery of any overpayments by the trustee is
provided to the debtor's estate by the customer.
(2) Transfers of specifically identifiable commodity contracts
under section 766 of the Bankruptcy Code. Any open commodity contract
that is specifically identifiable property and which is not required to
be liquidated under Sec. 190.04(d), and which is not otherwise
liquidated, may be transferred on behalf of a public customer,
provided, however, that such customer must first deposit substitute
customer property with the trustee with a value equal to the amount by
which the equity to be transferred to margin such contract together
with any other transfers or returns of specifically identifiable
property or disbursements made, or to be made, to such customer, plus a
reasonable reserve in the trustee's sole discretion, exceeds the
estimated aggregate of the funded balances for each class of account of
such customer less the value on the date of its transfer or return of
any property transferred or returned prior to the primary liquidation
date with respect to the customer's net equity claim for such account;
and, provided further, that adequate security to assure the recovery of
any overpayments by the trustee is provided to the debtor's estate by
the customer.
(3) Distribution in kind of specifically identifiable securities.
If any securities of a customer are specifically identifiable property
as defined in paragraph (1)(i)(A) of the definition of that term in
Sec. 190.01 of this chapter, but the customer has no open commodity
contracts, the customer may request that the trustee purchase or
otherwise obtain the largest whole number of like-kind securities
(i.e., securities of the same class and series of an issuer), with a
fair market value (inclusive of transaction costs) which does not
exceed that portion of the funded balance of such customer's allowed
net equity claim that constitutes a claim for securities, if like-kind
securities can be purchased in a fair and orderly manner.
(4) Proof of customer claim. No distribution shall be made pursuant
to paragraphs (d)(1) and (3) of this section prior to receipt of a
completed proof of customer claim as described in Sec. 190.03(e) or
(f).
(5) No differential distributions. No further disbursements may be
made to customers with respect to a particular account class for whom
transfers have been made pursuant to Sec. 190.07 and paragraph (d)(2)
of this section, until a percentage of each net equity claim equivalent
to the percentage distributed to such customers is distributed to all
public customers in such account class. Partial distributions, other
than the transfers referred to in Sec. 190.07 and paragraph (d)(2) of
this section, with respect to a particular account class made prior to
the final net equity determination date must be made pursuant to a
preliminary plan of distribution approved by the court, upon notice to
the parties and to all customers, which plan requires adequate security
to the debtor's estate to assure the recovery of any overpayments by
the trustee and distributes an equal percentage of net equity to all
public customers in such account class.
Sec. 190.10 Current records during business as usual.
A person that is a futures commission merchant is required to
maintain current records relating to its customers' accounts, including
copies of all account agreements and related account documentation, and
``know your customer'' materials, pursuant to Sec. Sec. 1.31, 1.35,
1.36, and 1.37 of this chapter, which may be provided to another
futures commission merchant to facilitate the transfer of open
commodity contracts or other customer property held by such person for
or on behalf of its customers to the other futures commission merchant,
in the event an order for relief is entered with respect to such
person.
Subpart C--Clearing Organization as Debtor
Sec. 190.11 Scope and purpose of this subpart.
(a) This subpart applies to a proceeding commenced under subchapter
IV of chapter 7 of the Bankruptcy Code in which the debtor is a
clearing organization.
(b) If the debtor clearing organization is organized outside the
United States,
[[Page 19441]]
and is subject to a foreign proceeding, as defined in 11 U.S.C.
101(23), in the jurisdiction in which it is organized, then only the
following provisions of this part shall apply:
(1) Subpart A.
(2) Section 190.12.
(3) Section 190.13, but only with respect to futures contracts and
cleared swaps contracts cleared by FCM clearing members on behalf of
their public customers and the property margining or securing such
contracts.
(4) Sections 190.17 and 190.18, but only with respect to claims of
FCM clearing members on behalf of their public customers, as well as to
property that is or should have been segregated for the benefit of FCM
clearing members' public customers, or that has been recovered for the
benefit of FCM clearing members' public customers.
Sec. 190.12 Required reports and records.
(a) Notices--(1) Means of providing--(i) To the Commission. Unless
instructed otherwise by the Commission, all mandatory or discretionary
notices to be given to the Commission under this subpart shall be
directed by electronic mail to [email protected]. For purposes
of this subpart, notice to the Commission shall be deemed to be given
only upon actual receipt.
(ii) To members. The trustee, after consultation with the
Commission, and unless otherwise instructed by the Commission, will
establish and follow procedures reasonably designed for giving adequate
notice to members under this subpart and for receiving claims or other
notices from members. Such procedures should include, absent good cause
otherwise, the use of a prominent website as well as communication to
members' electronic addresses that are available in the debtor's books
and records.
(2) Of commencement of a proceeding. A debtor that files a petition
in bankruptcy that is subject to this subpart shall, at or before the
time of such filing, and a debtor against which such a petition is
filed shall, as soon as possible, but in any event no later than three
hours after the receipt of notice of such filing, notify the Commission
of the filing date, the court in which the proceeding has been or will
be filed, and, as soon as available, the docket number assigned to that
proceeding by the court.
(b) Reports and records to be provided to the trustee and the
Commission within three hours. (1) As soon as practicable following the
commencement of a proceeding that is subject to this subpart and in any
event no later than three hours following the later of the commencement
of such proceeding or the appointment of the trustee, the debtor shall
provide to the trustee copies of each of the most recent reports that
the debtor was required to file with the Commission under Sec.
39.19(c) of this chapter, including copies of any reports required
under Sec. 39.19(c)(2), (3), and (4) of this chapter (including the
most up-to-date version of any recovery and wind-down plans of the
debtor maintained pursuant to Sec. 39.39(b) of this chapter) that the
debtor filed with the Commission during the preceding 12 months.
(2) As soon as practicable following the commencement of a
proceeding that is subject to this subpart and in any event no later
than three hours following the commencement of such proceeding (or,
with respect to the trustee, the appointment of the trustee), the
debtor shall provide to the trustee and the Commission copies of the
most up-to-date versions of the default management plan and default
rules and procedures maintained by the debtor pursuant to Sec. 39.16
and, as applicable, Sec. 39.35 of this chapter.
(c) Records to be provided to the trustee and the Commission by the
next business day. As soon as practicable following commencement of a
proceeding that is subject to this subpart and in any event no later
than the next business day, the debtor shall make available to the
trustee and the Commission copies of the following records:
(1) All records maintained by the debtor described in Sec.
39.20(a) of this chapter; and
(2) Any opinions of counsel or other legal memoranda provided to
the debtor (whether by external or internal counsel) in the five years
preceding the commencement of such proceeding relating to the
enforceability of the rules and procedures of the debtor in the event
of an insolvency proceeding involving the debtor.
Sec. 190.13 Prohibition on avoidance of transfers.
The following transfers are approved and may not be avoided under
sections 544, 546, 547, 548, 549, or 724(a) of the Bankruptcy Code:
(a) Pre-relief transfers. Any transfer of open commodity contracts
and the property margining or securing such contracts made to another
clearing organization that was approved by the Commission, either
before or after such transfer, and was made prior to entry of the order
for relief; and
(b) Post-relief transfers. Any transfers of open commodity
contracts and the property margining or securing such contracts made to
another clearing organization on or before the seventh calendar day
after the entry of the order for relief, that was made with the
approval of the Commission, either before or after such transfer.
Sec. 190.14 Operation of the estate of the debtor subsequent to the
filing date.
(a) Proofs of claim. The trustee may, in its discretion based upon
the facts and circumstances of the case, instruct each customer to file
a proof of claim containing such information as is deemed appropriate
by the trustee, and seek a court order establishing a bar date for the
filing of such proofs of claim.
(b) Operation of the derivatives clearing organization. Subsequent
to the order for relief, the derivatives clearing organization shall
cease making calls for variation settlement or initial margin.
(c) Liquidation. (1) The trustee shall liquidate all open commodity
contracts that have not been terminated, liquidated, or transferred no
later than seven calendar days after entry of the order for relief.
Such liquidation of open commodity contracts shall be conducted in
accordance with the rules and procedures of the debtor, to the extent
applicable and practicable.
(2) In lieu of liquidating securities held by the debtor and making
distributions in the form of cash, the trustee may, in its reasonable
discretion, make distributions in the form of securities that are
equivalent (i.e., securities of the same class and series of an issuer)
to the securities originally delivered to the debtor by a clearing
member or such clearing member's customer.
(d) Computation of funded balance. The trustee shall use reasonable
efforts to compute a funded balance for each customer account
immediately prior to any distribution of property within the account,
which shall be as accurate as reasonably practicable under the
circumstances, including the reliability and availability of
information.
Sec. 190.15 Recovery and wind-down plans; default rules and
procedures.
(a) Prohibition on avoidance of actions taken pursuant to recovery
and wind-down plans. Subject to the provisions of section 766 of the
Bankruptcy Code and Sec. Sec. 190.13 and 190.18, the trustee shall not
avoid or prohibit any action taken by a debtor subject to this subpart
that was reasonably within the scope of and was provided for in any
recovery and wind-down plans maintained by the debtor and filed with
the Commission pursuant to Sec. 39.39 of this chapter.
[[Page 19442]]
(b) Implementation of debtor's default rules and procedures. In
administering a proceeding under this subpart, the trustee shall
implement, in consultation with the Commission, the default rules and
procedures maintained by the debtor under Sec. 39.16 and, as
applicable, Sec. 39.35 of this chapter and any termination, close-out
and liquidation provisions included in the rules of the debtor, subject
to the reasonable discretion of the trustee and to the extent that
implementation of such default rules and procedures is practicable.
(c) Implementation of recovery and wind-down plans. In
administering a proceeding under this subpart, the trustee shall, in
consultation with the Commission, take actions in accordance with any
recovery and wind-down plans maintained by the debtor and filed with
the Commission pursuant to Sec. 39.39 of this chapter, to the extent
reasonable and practicable, and consistent with the protection of
customers.
Sec. 190.16 Delivery.
(a) General. In the event that a commodity contract, cleared by the
derivatives clearing organization, that settles upon expiration or
exercise by making or taking delivery of physical delivery property,
has moved into delivery position prior to the date and time of the
order for relief, or moves into delivery position after that date and
time, but before being terminated, liquidated, or transferred, then, in
either such event, the trustee must use reasonable efforts to
facilitate and cooperate with the completion of delivery on behalf of
the clearing member or the clearing member's customer in a manner
consistent with Sec. 190.06(a) and the pro rata distribution principle
addressed in Sec. 190.00(c)(5).
(b) Special provisions for delivery accounts. (1) Consistent with
the separation of the physical delivery property account class and the
cash delivery account class set forth in Sec. 190.06(b), the trustee
shall treat--
(i) Physical delivery property held in delivery accounts as of the
filing date, along with the proceeds from any subsequent sale of such
physical delivery property in accordance with Sec. 190.06(a)(3) to
fulfill a clearing member's or its customer's delivery obligation or
any other subsequent sale of such property, as part of the physical
delivery account class; and
(ii) Cash delivery property in delivery accounts as of the filing
date, along with any physical delivery property for which delivery is
subsequently taken on behalf of a clearing member or its customer in
accordance with Sec. 190.06(a)(3), as part of the separate cash
delivery account class.
(2) If the debtor holds any cash or property in the form of cash
equivalents in an account with a bank or other person under a name or
in a manner that clearly indicates that the account holds property for
the purpose of making payment for taking physical delivery, or
receiving payment for making physical delivery, of a commodity under
any commodity contracts, such property shall (subject to Sec. 190.19)
be considered customer property in the cash delivery account class if
held for making payment for taking delivery, or in the physical
delivery account class, if held for the purpose of receiving such
payment.
Sec. 190.17 Calculation of net equity.
(a) Net equity-separate capacities and calculations. (1) If a
member of the clearing organization clears trades in commodity
contracts through a commodity contract account carried by the debtor as
a customer account for the benefit of the clearing member's public
customers and separately through a house account, the clearing member
shall be treated as having customer claims against the debtor in
separate capacities with respect to the customer account and house
account at the clearing organization, and by account class. A member
shall be treated as part of the public customer class with respect to
claims based on any commodity customer accounts carried as ``customer
accounts'' by the clearing organization for the benefit of the member's
public customers, and as part of the non-public customer class with
respect to claims based on its house account.
(2) Net equity shall be calculated separately for each separate
customer capacity in which the clearing member has a claim against the
debtor, i.e., separately by the member's customer account and house
account and by account class.
(b) Net equity--application of debtor's loss allocation rules and
procedures. (1)(i) The calculation of a clearing member's net equity
claim shall include the full application of the debtor's loss
allocation rules and procedures, including the default rules and
procedures referred to in Sec. 39.16 and, if applicable, Sec. 39.35
of this chapter.
(ii) The calculation in paragraph (b)(1)(i) of this section will
include, with respect to the clearing member's house account, any
assessments or similar loss allocation arrangements provided for under
those rules and procedures that were not called for before the filing
date, or, if called for, have not been paid. Such loss allocation
arrangements shall be applied to the extent necessary to address losses
arising from default by clearing members.
(2) Appropriate adjustments shall be made to the net equity claims
of the clearing members that are so entitled under the following
circumstances: Where the debtor's loss allocation rules and procedures
would entitle clearing members to additional payments of cash or other
property due to--
(i) Portions of mutualized default resources that are prefunded, or
assessed and collected, but in either event not used; or
(ii) The debtor's recoveries on claims against others (including,
but not limited to, recoveries on claims against clearing members who
have defaulted on their obligations to the debtor).
(c) Net equity--general. Subject to paragraph (b) of this section,
net equity shall be calculated in the manner provided in Sec. 190.08,
to the extent applicable.
(d) Calculation of funded balance. Funded balance means a clearing
member's pro rata share of customer property other than member property
(for accounts for a clearing member's customer accounts) or member
property (for a clearing member's house accounts) with respect to each
account class available for distribution to customers of the same
customer class, calculated in the manner provided in Sec. 190.08(c) to
the extent applicable.
Sec. 190.18 Treatment of property.
(a) General. The property of the debtor's estate must be allocated
between member property and customer property other than member
property as provided in this section to satisfy claims of clearing
members, as customers of the debtor. The property so allocated will
constitute a separate estate of the customer class (i.e., member
property, and customer property other than member property) and the
account class to which it is allocated, and will be designated by
reference to such customer class and account class.
(b) Scope of customer property. Customer property is the property
available for distribution within the relevant account class in respect
of claims by clearing members, as customers of the clearing
organization, based on customer accounts carried by the debtor for the
benefit of such members' public customers or, considered separately,
such members' house accounts.
(1) Customer property includes the following:
[[Page 19443]]
(i) All cash, securities, or other property, or the proceeds of
such cash, securities, or other property, that is received, acquired,
or held by or for the account of the debtor, from or for any commodity
contract account of a clearing member carried by the debtor, which is:
(A) Property received, acquired, or held, in order to margin,
guarantee, secure, purchase, or sell a commodity contract;
(B) Open commodity contracts;
(C) Physical delivery property as that term is defined in
paragraphs (1) through (3) of the definition of that term in Sec.
190.01;
(D) Cash, securities or other property received by the debtor as
payment for a commodity to be delivered to fulfill a commodity contract
from or for the commodity customer account of a clearing member or a
customer of a clearing member;
(E) Profits or contractual rights accruing as a result of a
commodity contract;
(F) Letters of credit, including any proceeds of a letter of credit
drawn upon by the trustee, or substitute customer property posted by a
clearing member or a customer of a clearing member, pursuant to Sec.
190.04(d)(3); or
(G) Securities held in a portfolio margining account carried as a
futures account or a cleared swaps customer account;
(ii) All cash, securities, or other property which:
(A) Is segregated by the debtor on the filing date for the benefit
of clearing members' house accounts or clearing members' public
customer accounts;
(B) Was of a type described in paragraph (b)(1)(i)(A) of this
section that is subsequently recovered by the avoidance powers of the
trustee or is otherwise recovered by the trustee on any other claim or
basis;
(C) Represents a recovery of any debit balance, margin deficit or
other claim of the debtor against any commodity contract account
carried for the benefit of a member's house accounts or a member's
public customer accounts;
(D) Was unlawfully converted but is part of the debtor's estate; or
(E) Was of a type described in paragraphs (a)(1)(ii)(H) through (K)
of Sec. 190.09 (as if the term debtor used therein refers to a
clearing organization as debtor);
(iii) Any guaranty fund deposit, assessment, or similar payment or
deposit made by a clearing member, or recovered by the trustee, to the
extent any remains following administration of the debtor's default
rules and procedures, and any other property of a member available
under the debtor's rules and procedures to satisfy claims made by or on
behalf of public customers of a member; and
(iv) Amounts of its own funds that the debtor had committed as part
of its loss allocation rules, to the extent that such amounts have not
already been applied under such rules.
(2) Customer property will not include property of the type
described in Sec. 190.09(a)(2), as if the term debtor used therein
refers to a clearing organization and to the extent relevant to a
clearing organization.
(c) Allocation of customer property between customer classes. (1)
Where the funded balance for members' house accounts is greater than
one hundred percent with respect to any account class:
(i) Any excess should be allocated to customer property other than
member property to the extent that the funded balance is less than one
hundred percent of net equity claims for members' public customers in
any account class; and
(ii) Any remaining excess after the application of paragraph
(c)(1)(i) of this section should be allocated to member property to the
extent that the funded balance is less than one hundred percent of net
equity claims for members' house accounts in any other account class.
(2) Where the funded balance for members' public customers in any
account class is greater than one hundred percent:
(i) Any excess should be allocated to customer property other than
member property to the extent that the funded balance is less than one
hundred percent of net equity claims for members' public customers in
any other account class; and
(ii) Any remaining excess after the application of paragraph
(c)(2)(i) of this section should be allocated to member property to the
extent that the funded balance is less than one hundred percent of net
equity claims for members' house accounts in any account class.
(d) Allocation of customer property among account classes--(1)
Segregated property. Subject to paragraph (b) of this section, property
held by or for the account of a customer, which is segregated on behalf
of a specific account class within a customer class, or readily
traceable on the filing date to customers of such account class within
a customer class, or recovered by the trustee on behalf of or for the
benefit of an account class within a customer class, must be allocated
to the customer estate of the account class for which it is segregated,
to which it is readily traceable, or for which it is recovered.
(2) All other property. Customer property which cannot be allocated
in accordance with paragraph (d)(1) of this section, shall be allocated
within customer classes, but between account classes, in the following
order:
(i) To the estate of the account class for which the percentage of
each members' net equity claim which is funded is the lowest, until the
funded percentage of net equity claims of such account class equals the
percentage of each members' net equity claim which is funded for the
account class with the next lowest percentage of the funded claims; and
then
(ii) To the estate of the two account classes so that the
percentage of the net equity claims which are funded for each such
account class remains equal until the percentage of each net equity
claim which is funded equals the percentage of each net equity claim
which is funded for the account class with the next lowest percentage
of funded claims, and so forth, until all account classes within the
customer class are fully funded.
(e) Accounts without separation by account class. Where the debtor
has, prior to the order for relief, kept initial margin for house
accounts in accounts without separation by account class, then member
property will be considered to be in a single account class.
(f) Assertion of claims by trustee. Nothing in this section,
including, but not limited to, the satisfaction of customer claims by
operation of this section, shall prevent a trustee from asserting
claims against any person to recover the shortfall of property
enumerated in paragraphs (b)(1)(i)(E) and (b)(1)(ii) and (iii) of this
section.
Sec. 190.19 Support of daily settlement.
(a) Notwithstanding any other provision of this part, funds
received (whether from clearing members' house or customer accounts) by
a debtor clearing organization as part of the daily settlement required
pursuant to Sec. 39.14 of this chapter shall, upon and after an order
for relief, be included as customer property that is reserved for and
traceable to, and promptly shall be distributed to, members entitled to
payments of such funds with respect to such members' house and customer
accounts as part of that same daily settlement. Such funds when
received, other than deposits of initial margin described in Sec.
39.14(a)(1)(iii) of this chapter, shall be considered member property
and, separately, customer property other than member property, in
[[Page 19444]]
proportion to the ratio of total gains in member accounts with net
gains, and total gains in clearing members' customer accounts with net
gains, respectively. Deposits of initial margin described in Sec.
39.14(a)(1)(iii) of this chapter shall be considered member property
and, separately, customer property other than member property, to the
extent deposited on behalf of, respectively, clearing members' house
accounts and customer accounts.
(b) To the extent there is a shortfall in funds received pursuant
to paragraph (a) of this section:
(1) Such funds shall be supplemented with the property described in
paragraphs (b)(1)(i) through (iv) of this section, as applicable, to
the extent necessary to meet the shortfall, in accordance with the
derivatives clearing organization's default rules and procedures
adopted pursuant to Sec. 39.16 and, as applicable, Sec. 39.35 of this
chapter, and (with respect to paragraph (b)(1)(ii) of this section) any
recovery and wind-down plans maintained pursuant to Sec. 39.39 of this
chapter and submitted pursuant to Sec. 39.19 of this chapter. Such
funds shall be included as member property and customer property other
than member property in the proportion described in paragraph (a) of
this section, and shall be distributed promptly to members' house
accounts and members' customer accounts which accounts are entitled to
payment of such funds as part of that daily settlement.
(i) Initial margin held for the account of a member, including
initial margin segregated for the customers of such member, that has
defaulted on payments required pursuant to a daily settlement, but only
to the extent that such margin is permitted to be used pursuant to
parts 1, 22, and 30 of this chapter.
(ii) Assets of the debtor, to the extent dedicated to such use as
part of the debtor's default rules and procedures, and any recovery and
wind-down plans, described in this paragraph (b)(1).
(iii) Prefunded guarantee or default funds maintained pursuant to
the debtor's default rules and procedures.
(iv) Payments made by members pursuant to assessment powers
maintained pursuant to the debtor's default rules and procedures.
(2) If the funds that are included as customer property pursuant to
paragraph (a) of this section, supplemented as described in paragraph
(b)(1) of this section, are insufficient to pay in full members
entitled to payment of such funds as part of daily settlement, then
such funds shall be distributed pro rata to such members' house
accounts and customer accounts in proportion to the ratio of total
gains in member accounts with net gains, and total gains in customer
accounts with net gains, respectively.
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Appendix B to Part 190--Special Bankruptcy Distributions
Framework 1--Special Distribution of Customer Funds When the Cross-
Margining Account Is a Futures Account
(a) This framework 1 applies when a debtor futures commission
merchant has participated in a cross-margining (``XM'') program for
futures and securities under which the cross-margined positions of its
futures customers (as defined in Sec. 1.3 of this chapter) and the
property received to margin, secure or guarantee such positions are
held in one or more accounts pursuant to a Commission order that
requires such positions and property to be segregated, pursuant to
section 4d(a) of the Act, from the positions and property of:
(1) The futures commission merchant;
(2) If applicable, any affiliate carrying the securities positions
as a participant in the XM program (``Affiliate''); and
(3) Other futures customers of the futures commission merchant
(such segregated accounts, the ``XM accounts'').
(b) The futures commission merchant may, and any Affiliate that
holds the securities positions in an XM account that it directly
carries will, be registered as a broker-dealer under the Exchange Act.
The Commission order approving the XM program may limit participating
customers to market professionals and will require a participating
customer to sign an agreement, in a form approved by the Commission,
that refers to this distributional rule.
(c) A futures commission merchant is deemed to receive securities
held in an XM account, including securities and other property held by
an Affiliate in an XM account, as ``futures customer funds'' (as
defined in Sec. 1.3 of this chapter) that margin, guarantee or secure
commodity contracts in the XM account (or paired XM accounts at the
futures commission merchant and an Affiliate). Under the agreement
signed by the customer, in the event that the futures commission
merchant (or Affiliate) is the subject of a SIPA proceeding, the
customer agrees that securities in an XM account are excluded from the
securities estate for purposes of SIPA, and that its claim for return
of the securities will not be
[[Page 19455]]
treated as a customer claim under SIPA. These restrictions apply to the
customer only, and should not be read to limit any action that the
trustee may take to seek recovery of property in an XM account carried
by an Affiliate as part of the customer estate of the futures
commission merchant.
(d) XM accounts, and other futures accounts that are subject to
segregation under section 4d(a) of the Act (pursuant to the
Commission's regulations in part 1 of this chapter) (``non-XM
accounts''), are treated as two subclasses of futures account with two
separate pools of segregated futures customer property, an XM pool and
a non-XM pool, each of which constitutes a segregated pool under
section 4d(a) of the Act. If the futures commission merchant has
participated in multiple XM programs, the XM accounts in the different
programs are combined and treated as part of the same XM subclass of
futures accounts. A futures customer could hold both non-XM and XM
accounts.
(e) Customer claims under this part arising out of the XM subclass
of accounts are subordinated to customer claims arising out of the non-
XM subclass of accounts in certain circumstances in which the futures
commission merchant does not meet its segregation requirements. The
segregation requirement is the amount of futures customer funds that
the futures commission merchant is required by the Act and Commission
regulations in part 1 of this chapter or Commission orders to hold on
deposit in segregated accounts on behalf of its futures customers
(exclusive of its targeted residual amount obligations pursuant to
Sec. 1.3 of this chapter).
(f)(1) If there is a shortfall in the non-XM pool and no shortfall
in the XM pool, all customer net equity claims, whether or not they
arise out of the XM subclass of accounts, will be combined and paid pro
rata out of the combined XM and non-XM pools of futures customer
property.
(2) If there is a shortfall in the XM pool and no shortfall in the
non-XM pool, customer net equity claims arising from the XM subclass of
accounts must be satisfied first from the XM pool, and customer net
equity claims arising from the non-XM subclass of accounts must be
satisfied first from the non-XM pool.
(3) If there is a shortfall in both the non-XM and XM pools:
(i) If the non-XM shortfall as a percentage of the segregation
requirement for the non-XM pool is greater than or equal to the XM
shortfall as a percentage of the segregation requirement for the XM
pool, all customer net equity claims will be paid pro rata out of the
combined XM and non-XM pools of futures customer property; and
(ii) If the XM shortfall as a percentage of the segregation
requirement for the XM pool is greater than the non-XM shortfall as a
percentage of the segregation requirement for the non-XM pool, non-XM
customer net equity claims will be paid pro rata out of the available
non-XM pool, and XM customer net equity claims will be paid pro rata
out of the available XM pool.
(4) In this way, non-XM customers will never be adversely affected
by an XM shortfall.
(g) The following examples illustrate the operation of this
framework 1. The examples assume that the FCM has two futures
customers, one with exclusively XM accounts and one with exclusively
non-XM accounts.
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Framework 2--Special Allocation of Shortfall to Customer Claims When
Customer Funds for Futures Contracts and Cleared Swaps Customer
Collateral are Held in a Depository Outside of the United States or in
a Foreign Currency
The Commission has established the following allocation convention
with respect to futures customer funds (as Sec. 1.3 of this chapter
defines such term) and Cleared Swaps Customer Collateral (as Sec. 22.1
of this chapter defines such term) (both of which are customer funds
(as Sec. 1.3 of this chapter defines such term) that are segregated
pursuant to the Act and Commission rules thereunder), which applies in
certain circumstances when futures customer funds or Cleared Swaps
Customer Collateral are held by a futures commission merchant in a
depository outside the United States (``U.S.'') or in a foreign
currency. If a futures commission merchant enters into bankruptcy and
maintains futures customer funds or Cleared Swaps Customer Collateral
in a depository outside the U.S. or in a depository located in the U.S.
in a currency other than U.S. dollars, the trustee shall use the
following allocation procedures to calculate the claim of each public
customer in the futures account class or each public customer in the
cleared swaps account class, as applicable, when a sovereign action of
a foreign government or court has occurred that contributes to
shortfalls in the amounts of futures customer funds or Cleared Swaps
Customer Collateral. In the event a sovereign action creates or
contributes to a shortfall in customer property, applying the
allocation convention will result in a reallocation of distributions of
futures customer funds or Cleared Swaps Collateral to take into account
the impact of the sovereign action. For purposes of this bankruptcy
convention, sovereign action of a foreign government or court would
include, but not be limited to, the application or enforcement of
statutes, rules, regulations, interpretations, advisories, decisions,
or orders, formal or informal, by a Federal, state, or provincial
executive, legislature, judiciary, or government agency. The trustee
should perform the allocation procedures separately with respect to
each public customer in the futures account class or cleared swaps
account class.
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Issued in Washington, DC, on December 17, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Bankruptcy Regulations--Commission Voting Summary,
Chairman's Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner
voted in the negative.
Appendix 2--Statement of Support of Chairman Heath P. Tarbert
When our Commission considered the proposal to amend the CFTC's
bankruptcy rules in Part 190,\1\ I noted that, in his 1926 novel The
Sun Also Rises, Ernest Hemingway offered what is perhaps the best
chronicle of the anatomy of a typical bankruptcy. In the novel, the
character Mike Campbell is asked how he went bankrupt. He answers:
``two ways . . . gradually and then suddenly.'' \2\
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\1\ Bankruptcy Regulations, 85 FR 36000 (June 12, 2020).
\2\ See Statement of Chairman Heath P. Tarbert in Support of
Long-Awaited Updates to the CFTC's Bankruptcy Regime (Apr. 14,
2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement041420.
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As Hemingway's dialogue succinctly describes, bankruptcies often
come on unexpectedly. A business's relatively minor financial or
operational troubles may be exacerbated by a sudden crisis--whether a
firm-level issue, or a national or even global event. Many catalysts
for insolvency are entirely unpredictable. We must therefore be
prepared with a bankruptcy regime that fosters a swift and equitable
resolution to protect customer funds and promote financial stability.
Background on the CFTC's Bankruptcy Regime
Part 190 of the CFTC's rules, addressing commodity broker \3\
bankruptcies, was finalized in 1983. Since that time, the commodity
broker bankruptcy process and the state of the industry have gradually
changed. Yet in the nearly four decades since, Part 190 has never been
comprehensively updated. This regime is intended to protect customer
funds, but having antiquated rules does not help achieve that goal.
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\3\ The term ``commodity broker'' may refer either to a futures
commission merchant (``FCM'') or a derivatives clearing organization
(``DCO''). 11 U.S.C. 101(6).
---------------------------------------------------------------------------
CFTC staff has accordingly embarked on a process of updating Part
190 over the last several years, when a then-healthy economy made
bankruptcies relatively unlikely. Now that we find ourselves in the
midst of the COVID-19 pandemic and its economic ramifications, the
fruits of our investment arguably could have not been better timed. The
good news is that during 2020, U.S. derivatives markets and their
participants have weathered the volatility associated with the
coronavirus pandemic admirably. But as I just noted, we cannot know for
certain what the future holds--for bankruptcy often comes ``gradually
and then
[[Page 19474]]
suddenly.'' We must therefore be prepared for all contingencies.
Accordingly, I am pleased to support today's final rule to update
Part 190 for the 21st century.\4\ The final rule is a product of both
hard work by CFTC staff and Commissioners as well as contributions from
external stakeholders and subject matter experts, including a
subcommittee of the American Bar Association. The final rule promotes
the CFTC's core values in a number of ways, particularly the values of
clarity and forward thinking. It also furthers the agency's strategic
goal of regulating our derivatives markets to promote the interests of
all Americans.\5\
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\4\ After considering comments that were received on the
original proposal, our Commission subsequently issued a Supplemental
Proposal that withdrew Sec. 190.14(b)(2) and (3), and proposed
other revisions to Sec. 190.14. See Bankruptcy Regulations, 85 FR
60110 (Sept. 24, 2020) (``Supplemental Proposal''). However, in
light of comments raised on the Supplemental Proposal, as well as
the original proposal, our Commission concluded that, at this point,
it should engage in further analysis and development before
proposing this, or any other, alternative approach. Such further
analysis and development will better enable the CFTC to propose, in
detail, a solution that is effective, and that mitigates any
attendant concerns.
\5\ See Remarks of CFTC Chairman Heath P. Tarbert to the 35th
Annual FIA Expo 2019 (Oct. 30, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opatarbert2 (outlining the
CFTC's strategic goals).
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Clarity for Customers and Creditors
The final rule serves our core value of clarity by incorporating
key principles and actual practice as they have evolved in commodity
broker bankruptcies and related judicial decisions in the years since
1983.
A new introductory section of the rule enumerates certain ``core
concepts'' of commodity broker bankruptcies. This section is intended
to offer a readily understandable primer on relevant law, policy, and
practical considerations in this area, thereby providing a common
mental framework for brokers, customers, bankruptcy trustees, courts,
and the public. Among other things, this section provides an overview
of the various classes of customer segregated accounts held by a
commodity broker; the priority of public customers over insiders; the
requirement of pro rata distribution; and the preference to transfer
rather than liquidate open positions.
The final rule codifies a number of approaches and practices that
have proven necessary or desirable in commodity broker bankruptcies in
the intervening years since 1983. For example, the final rule
authorizes a bankruptcy trustee to treat a broker's customers in the
aggregate for certain purposes, rather than handling each customer's
account on a bespoke basis. This aggregate treatment has in practice
proven unavoidable in more recent commodity broker bankruptcies, which
have required disposition of hundreds of thousands of derivatives
contracts--on behalf of thousands or tens of thousands of customers--
within days or even hours. By making clear that such aggregate
disposition of accounts is permissible and may even be more likely to
occur than the alternative, the final rule provides greater clarity on
potential outcomes for trustees, brokers, and customers.
For example, the final rule expressly permits the trustee--
following consultation with CFTC staff--to determine whether to treat
open positions of public customers in a designated hedging account as
specifically identifiable property (requiring the trustee to solicit
and comply with individual customer instructions), or instead transfer
or ``port'' all such positions to a solvent commodity broker where
possible. This provision recognizes that requiring the trustee to
identify hedging accounts and provide account holders the opportunity
to give individual instructions is often a resource-intensive endeavor,
which could interfere with the trustee's ability to act in a timely and
effective manner to protect all the broker's customers.\6\
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\6\ The final rule also grants the trustee appropriate
discretion in other respects--for example, by allowing the trustee
to modify the customer proof of claim form as needed for a
particular bankruptcy.
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The final rule also includes explicit rules governing the
bankruptcy of a clearinghouse, otherwise known as a derivatives
clearing organization or DCO. Since its inception, Part 190 has
contemplated only a ``case-by-case'' approach with no corresponding
rules to spell out what would happen in the event of a DCO bankruptcy.
While such a bankruptcy is extremely unlikely, it is important to
provide ex ante clarity to DCO members and customers as to how it would
be handled. The final rule favors following the DCO's existing default
management and recovery and wind-down rules and procedures, but gives
the trustee discretion to apply them reasonably and practicably. This
allows the bankruptcy trustee to take advantage of and adapt an
established ``playbook,'' rather than being forced either to follow a
rigid, ``one-size-fits-all'' framework or to form a resolution plan in
a matter of hours during the onset of a crisis. The final rule also
gives legal certainty to DCO actions taken in accordance with a
recovery and wind-down plan filed with the CFTC by precluding the
trustee from voiding any such action.
I support codifying these and other practices within our rules in
order to provide greater transparency and predictability to brokers,
customers, and other key stakeholders regarding permissible and
expected procedures in a bankruptcy scenario.
Forward Thinking on Future Insolvencies
The final rule updates a number of provisions to reflect changes in
financial technology since Part 190 was enacted 37 years ago. The
enhanced discretion discussed above would in many cases help the
trustee to account for the increase in transaction execution and
processing speed, as well as the potential for large and unpredictable
market moves given the rise of global trading and the 24-hour trading
cycle. In addition, the final rule acknowledges digital assets as a
physically deliverable asset class, in light of the listing of a number
of physically delivered ``virtual currency'' derivatives contracts.
The final rule also reflects advances in communications technology.
For example, under the final rule, notice of a bankruptcy filing and
related filed documents will be provided to the CFTC by electronic
rather than paper means. Furthermore, required customer notice
procedures no longer include publication in a ``newspaper of general
circulation'' in light of the downward trend in newspaper readership.
The final rule similarly recognizes changes from paper-based to
electronic recording of documents of title.
Promoting the Interests of All Americans
Protection of customer funds is the lynchpin of the commodity
broker bankruptcy regime of Part 190. The final rule includes a number
of measures to enhance those protections, including by buttressing
provisions already in place under existing law and regulation. In doing
so, the final rule seeks to ensure that the CFTC's bankruptcy regime
works for the derivatives market participants it was meant to serve--
particularly public brokerage customers, with a special emphasis on
customers using derivatives to hedge their commercial risks.
For example, the final rule reinforces the bankruptcy priority of
public broker customers over ``non-public'' customers (e.g., the
broker's proprietary and affiliate accounts). It also strengthens the
CFTC's longstanding position that shortfalls in segregated customer
assets should be made up from the broker's general estate. As a result,
our final rule
[[Page 19475]]
makes clear that the CFTC's bankruptcy regime is complementary to
relatively recently-enacted customer protection rules for day-to-day
broker operations.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 1.23 (enacted in 2013 and revised in 2014) (requiring
an FCM to contribute its own funds as ``residual interest'' to top
up shortfalls in customer segregated accounts in the ordinary course
of business).
---------------------------------------------------------------------------
The final rule also furthers the preference--consistent with
Subchapter IV of the Bankruptcy Code \8\--for transferring or
``porting'' customer positions to a solvent broker, rather than
liquidating those positions. Porting of positions protects the utility
of customer hedges by avoiding the risk of market moves between
liquidation and re-establishment of the customer's hedging position. It
also mitigates the risk that liquidation itself will cause such market
moves. Among other measures, the grant of trustee discretion as to
whether to treat hedging positions as specifically identifiable
property will serve these objectives by facilitating porting of such
positions en masse, promptly and efficiently, along with other customer
property.
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\8\ Statutory authority for Part 190 includes Subchapter IV of
Chapter 7 of the Bankruptcy Code.
---------------------------------------------------------------------------
Conclusion
While updates to the CFTC's bankruptcy rules have been years in the
making, I believe today's final rule was well worth the wait. The
commodity broker resolution regime of Part 190 is respected throughout
the world for its effectiveness and efficiency. In addition, Part 190
is important to the continued global competitiveness of American
exchanges, clearinghouses, and market intermediaries. The final rule
further enhances these features of our regime. Through its focus on
promoting customer protection, clarity, and forward thinking, I believe
the final rule will position us well for this decade and beyond.
Appendix 3--Statement of Support of Commissioner Brian D. Quintenz
I am pleased to support today's final rule amending the
Commission's regulations governing the bankruptcy proceedings of
commodity brokers.\1\ This rulemaking makes the first comprehensive
change to these regulations since they were first issued in 1983. I
commend both Chairman Tarbert for his leadership in continuing the
Commission's rulemaking agenda and former Chairman Giancarlo for laying
the groundwork for this important rulemaking when he launched the
CFTC's Project KISS initiative.\2\
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\1\ Part 190 of the Commission's regulations (17 CFR part 190).
\2\ CFTC Requests Public Input on Simplifying Rules, https://www.cftc.gov/PressRoom/PressReleases/pr7555-17.
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I am pleased that today's final rule carefully took into
consideration comments from FCMs, DCOs, asset managers and other market
participants. I would like to highlight a few aspects of today's final
rule. The rulemaking reaffirms the special treatment the U.S.
Bankruptcy Code affords to the customer account of an insolvent
commodity broker, so that customers' positions can promptly be
transferred.\3\ The Commission is, for the first time, issuing rules
specific to an insolvent DCO, which are similar to the rules applicable
to an insolvent FCM. Next, taking advantage of the Commission's
experience with a few insolvent FCMs over the past decades, the final
rule provides deference to the trustee that a U.S. Bankruptcy Court
appoints to oversee the proceedings of an insolvent commodity broker.
This increased deference is intended to expedite the transfer of
customer funds. In response to comments from the asset management
community, the final provisions provide additional guidance on how a
trustee should balance various interests in seeking to protect public
customers.\4\ In light of the Commission's experience from the
bankruptcy of MF Global in 2011, the new bankruptcy rules generally
treat letters of credit equivalently to other collateral posted by
customers, so that the pro rata distribution of customer property in
the event of a shortfall in the customer account will apply equally to
all collateral. The final rule also reflects experience from MF Global
by dividing the delivery account into ``physical delivery'' and ``cash
delivery'' account classes. Property other than cash is generally
easier to trace, so it should have the benefit of a separate account
class. Finally, the final rule's revised treatment of the ``delivery
account,'' applicable in the context of physically-settled futures and
cleared swaps, will apply not only to tangible commodities, as is
currently the case, but also to digital assets. This amendment will
provide important legal certainty to the growing exchange-traded market
for cleared, physically-settled, digital asset derivatives.
---------------------------------------------------------------------------
\3\ 11 U.S.C. 761 et seq.
\4\ Sec. 190.00(c)(3)(i)(C).
---------------------------------------------------------------------------
I acknowledge that the asset management community has raised
concerns with certain existing DCO rules that would be recognized in
the bankruptcy of an FCM or DCO. I would support an on-going dialogue
between the DCOs and their members and customers on resolution and
resiliency concerns.
Appendix 4--Statement of Commissioner Rostin Behnam
I respectfully support the Commodity Futures Trading Commission's
(the ``Commission'' or ``CFTC'') final rule amending Part 190 of its
regulations, which governs bankruptcy proceedings of commodity brokers.
First and foremost, I want to thank Commission staff for all of their
hard work on the final rule. This is the first major update of the
CFTC's existing Part 190 since 1983, when it was originally implemented
by the Commission.\1\
---------------------------------------------------------------------------
\1\ Bankruptcy, 48 FR 8716 (March 1, 1983).
---------------------------------------------------------------------------
The final rule is the product of years of staff analysis and
engagement with market participants, including the Part 190
Subcommittee of the Business Law Section of the American Bar
Association, which provided a detailed submission of suggested model
Part 190 rules in response to a prior Commission request for
information.\2\ Several agency Chairs going back many years deserve
recognition and thanks for pushing to update Part 190 and starting this
process. Customer protections are at the heart of the Commodity
Exchange Act, and it is imperative that the Commission have clear rules
that direct how proceedings occur during a commodity broker bankruptcy.
---------------------------------------------------------------------------
\2\ 82 FR 23765 (May 3, 2017). The ABA Submission can be found
at: https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61331&SearchText; the accompanying cover note
(``ABA Cover Note'') can be found at: https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61330&SearchText.
---------------------------------------------------------------------------
The revision is designed to recognize the many changes in our
industry over the past 37 years. Most importantly, it is informed by
the Commission's experience with past bankruptcies. More recently, the
MF Global bankruptcy in 2011 was the eighth largest corporate
bankruptcy in American history.\3\ It gave the Commission first hand
experience with what worked, what did not, and what could be improved.
---------------------------------------------------------------------------
\3\ John Gapper and Isabella Kaminska, Downfall of MF Global,
Financial Times, Nov. 4, 2011, available at https://www.ft.com/content/2882d766-06fb-11e1-90de-00144feabdc0.
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I was a lead advisor during the U.S. Senate's investigation of the
MF Global bankruptcy, and during the Senate investigation, I learned
the intricate contours of Part 190, its relationship to the Bankruptcy
Code, and how the larger puzzle of creditors, customers, and equity
holders, among others, fits
[[Page 19476]]
together. It was during those frenzied days that I truly appreciated
the regulatory principle that customer margin is sacrosanct property.
Because of my experience during those few months, I have made customer
protections an absolute priority in my time as a Commissioner. Having
spoken with many market participants throughout the MF Global
bankruptcy proceedings, including those whose money disappeared in the
days immediately following, customer protection is my most pressing
responsibility.
Just a few months later in early 2012, the bankruptcy of Peregrine
Financial Group (``PFG''), the catastrophic culmination of a fraudulent
scheme by a futures commission merchant (``FCM'') involving over $220M
in customer funds,\4\ further laid bare the strengths and weaknesses of
the Commission's bankruptcy regime. Important lessons have been
learned, both in terms of what works and what does not, and I believe
today's final rule implements the lessons learned in both of those
events, and those that preceded them.
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\4\ See Press Release Number 6300-12, CFTC, CFTC Files Complaint
Against Peregrine Financial Group, Inc. and Russell R. Wasendorf,
Sr., Alleging Fraud, Misappropriation of Customer Funds, Violation
of Customer Fund Segregation Laws, and Making False Statements (July
10, 2012), https://www.cftc.gov/PressRoom/PressReleases/6300-12.
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Many of the changes to Part 190 in today's final rule further
support provisions that have worked in prior bankruptcies. One of the
themes of this refresh is clarity. The goal is to be as clear as
possible about the Commission's intentions regarding Part 190 in order
to enhance the understanding of Designated Clearing Organizations
(``DCOs''), FCMs, their customers, trustees, and the public at large.
Changes in this final rule will foster the longstanding and continuing
policy preference for transferring (as opposed to liquidating) the
positions of public customers--an important customer protection aimed
at preserving the status quo/asset value. Other changes further support
existing requirements including that shortfalls in segregated property
should be shored up from the FCM's general assets, and that public
customers are favored over non-public customers. The new provisions
provide trustees with enhanced discretion based upon prior positive
experience, and codify practice adopted in past bankruptcies by
requiring FCMs to notify the Commission of their intent to file for
voluntary bankruptcy.
Other changes address what has not worked or become outdated. In
light of lessons learned from MF Global, the Commission is enacting
changes to the treatment of letters of credit as collateral, both
during business as usual and during bankruptcy, in order to ensure that
customers who post letters of credit as collateral have the same
proportional loss as customers who post other types of collateral.
The final rule also addresses a number of changes that have
naturally occurred in our markets since the original Part 190
finalization in 1983. The Commission is promulgating a new subpart C to
part 190, specifically governing the bankruptcy of a clearing
organization. As DCOs have grown in importance over time, including
being deemed systemically important by the Financial Stability
Oversight Council following the financial crisis,\5\ the Commission
believes that it is imperative to have a clear plan in place for
exactly how a DCO bankruptcy would be resolved. The final rule also
addresses changes in technology over the past 37 years, and the
movement from paper-based to electronic-based means of communication--a
lesson learned from the PFG bankruptcy.
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\5\ https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm.
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In many ways, this final rule is exactly how the rulemaking process
should work. It looks retrospectively at major relevant events, and
applies important lessons learned regarding what works in the existing
Part 190 rules, what does not, and what can be improved. But it also
looks forward in a sense, recognizing changes in market structure and
thinking ahead to the possibility of the bankruptcy of a clearing
organization. This is a stark contrast to the risk principles final
rule that we consider today. While the bankruptcy final rule looks back
at the Commission's past experiences with MF Global and PFG, the risk
principles final rule seems to ignore past events. While the bankruptcy
final rule looks ahead and plans for the possibility of addressing a
DCO bankruptcy, the risk principles final rule ignores future events
such as climate change.
My only concern regarding the bankruptcy rule, and it is a
relatively small one, is one of timing. The proposal for this rule was
issued this past April.\6\ The comment period just closed on July 13.
The Commission then issued a supplemental notice of proposed rulemaking
in September.\7\ That comment period ended October 26. Particularly for
a rule of this size and intricacy, the time that staff had to review
and analyze the comment letters and draft the final rule and preamble
has been incredibly short. Staff has worked tirelessly on this rule to
get to the finish line. However, I think both the Commission and the
public might well have benefited from more time for review and
reflection before issuing such an important rule.
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\6\ Bankruptcy Regulations, 85 FR 36000 (June 12, 2020). https://www.cftc.gov/LawRegulation/FederalRegister/proposedrules/2020-08482.html.
\7\ Bankruptcy Regulations, 85 FR 60110 (September 24, 2020).
https://www.cftc.gov/LawRegulation/FederalRegister/proposedrules/2020-21005.html.
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On that note, I would like to close by again thanking staff for all
of their hard work in producing this refresh of the Commission's part
190 rules to provide important customer protections.
Appendix 5--Statement of Commissioner Dan M. Berkovitz
I support the final rule amending the Commission's part 190
bankruptcy regulations. The amendments comprehensively update these
regulations to address the increased size and speed of our markets and
incorporate ``lessons learned'' from futures commission merchant (FCM)
bankruptcies that occurred since the regulations were first adopted in
1983. The new derivatives clearing organization (DCO) bankruptcy
regulations provide a framework to help market participants be prepared
for such an event. While FCM bankruptcies are infrequent, and a
registered DCO has never gone bankrupt, any such event could have
significant financial impacts on many market participants, which, in
turn, could have systemic implications. Improving the overall
effectiveness and efficiency of the bankruptcy process fosters systemic
stability and helps to better protect, preserve, and quickly return
customer assets.
The Bankruptcy Code provides express preferences for positions and
property of customers of an FCM or DCO debtor so that the customers and
their counterparties can be assured that those positions and property
will not be included in the debtor's general assets or clawed back
post-filing. As a result, those positions and property (e.g., customer
margin) can be transferred to another FCM or liquidated for value
quickly and returned to customers following the filing of the
bankruptcy. In this way, an FCM bankruptcy can be resolved
expeditiously, greatly reducing any uncertainty as to the treatment of
positions and property held in the name of the debtor.\1\ The
protection of
[[Page 19477]]
customer assets and positions furthers market stability by reducing the
need for customers to rush to liquidate or transfer the positions
themselves prior to the bankruptcy to avoid such assets being entangled
in the debtor's general assets. I am voting for the final rule because
it significantly improves the likelihood of achieving these objectives.
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\1\ The bankruptcy trustee is directed to ``return promptly to a
customer any specifically identifiable security, property, or
commodity contract to which such customer is entitled, or shall
transfer, on such customer's behalf, such security, property, or
commodity contract to a commodity broker that is not a debtor''
subject to CFTC regulations. 11 U.S.C. 766(c). Section 764(a) of the
Bankruptcy Code provides that ``any transfer by the debtor of
property that, but for such transfer, would have been customer
property, may be avoided by the [bankruptcy] trustee . . . .'' 11
U.S.C. 764(a).
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As a general matter, commenters agreed that, overall, the final
rule is a significant improvement. As described in the final rule
release and my statement on the proposed rule, the revised regulations
further solidify and implement important principles such as the
preference for public customers, pro rata distributions within account
classes, and prompt return of assets. The final rule does this not only
through general statements, but also in specific procedures established
in the rule.
Commenters raised a number of specific concerns regarding the final
rule. As would be expected, these concerns were often (though not
always) grouped by the specific interests of different types of market
participants in the event of a bankruptcy of an FCM or DCO.
Bankruptcy occurs because there are not enough assets to cover a
debtor's liabilities. In resolving the claims on the debtor's assets
during a bankruptcy proceeding, the allocation of the shortfall must
entail a balancing of equities that, unfortunately, most often leaves
one or more creditors and other interested parties (e.g., shareholders)
with less than they expected to have if a bankruptcy had not occurred.
As such, different creditor groups may have competing interests in the
preferences and processes established in the Commission's bankruptcy
regulations.
This reality is reflected in the thoughtful comments we received in
response to the proposed rule. The final rule release addresses these
comments in turn, discussing the pros and cons of the changes
requested. In a number of instances, the final rule has been modified
to address concerns raised where such modifications better achieve the
stated principles of the regulations. For other concerns raised, as
explained in the release, the balancing of the equities meant that the
overall outcome of the bankruptcy proceeding would be better served by
maintaining the rule as proposed. Particularly with respect to the
bankruptcy rules, the fact that nobody gets everything they want likely
means that the rule, for the most part, is well-balanced.
I would like to take this opportunity to address two particular
areas of comments. Entities that represent certain ``public customers''
expressed concern regarding the greater ``reasonable'' discretion
provided to bankruptcy trustees, which is intended to facilitate a
speedier resolution and return of value to customers generally. These
commenters are concerned that some customers could receive less than
they could otherwise if the trustee makes poor choices when exercising
its discretion or does not implement specific customer instructions.
This concern is partially addressed with the addition of Sec.
190.00(c)(3)(i)(C) to clarify how a trustee shall exercise its
discretion to ``best achieve the overarching goal of protecting public
customers as a class by enhancing recoveries for, and mitigating
disruptions to, public customers as a class.'' Otherwise, as explained
in the preamble, the discretion granted to the trustee is appropriate
when weighing the benefits of prompt resolution of the bankruptcy with
the other goals of the regulations.
The Commission also received numerous comments on the proposed DCO
bankruptcy regulations. This is not surprising given that these
regulations create, for the first time, a regulatory scheme for DCO
bankruptcies. Many commenters expressed concerns regarding the
direction in Sec. 190.15 to the trustee to, within reasonable
discretion, follow the debtor DCO's recovery and wind-down plans. The
final rule, while largely leaving the proposed provision in place, did
modify the rule text to emphasize that the trustee must act in a manner
``consistent with the protection of customers.'' In addition, the
preamble notes that some of the concerns raised in this context are
part of a broader discussion in the derivatives industry regarding the
involvement of DCO members and customers in the governance, rulemaking,
and structuring of the DCOs, and that the Commission continues to
review these matters. I look forward to engaging in further discussions
on these issues.
I commend the Commission staff, particularly Bob Wasserman, for the
thoughtful effort that has clearly been put into the final rule
release. The Commission staff has done an exemplary job of reviewing
the comments received, addressing those concerns, and drafting the
preamble in very understandable language. I also appreciate Commission
staff's engagement with my office on a number of areas in the final
rule.
The final rule modernizes the Commission's bankruptcy regulations
and furthers the general principles these regulations serve. Public
customers and markets will be better protected in the event of an FCM
or DCO bankruptcy. For these reasons, I support the final rule.
[FR Doc. 2020-28300 Filed 4-12-21; 8:45 am]
BILLING CODE 6351-01-P