[Federal Register Volume 59, Number 71 (Wednesday, April 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8783]


[[Page Unknown]]

[Federal Register: April 13, 1994]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 190

 

Distribution of Property of Bankrupt Futures Commission Merchant 
That Had Participated in a Cross-Margining Program

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission) has 
adopted an additional appendix to its bankruptcy rules to govern the 
distribution of property where the debtor is a futures commission 
merchant (FCM) that holds cross-margin (XM) accounts as well as non-XM 
accounts. This new distributional framework is intended to assure that 
non-XM customers of such an FCM will not be adversely affected by a 
shortfall in the pool of XM funds. The new distributional framework 
will become applicable to each non-proprietary XM program at such time 
as the relevant clearing organizations submit an amended participant 
agreement that makes reference to the new distributional framework and 
such agreement is approved by the Commission.

EFFECTIVE DATE: May 13, 1994.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, or John C. Lawton, Associate Director, Division of Trading and 
Markets, Commodity Futures Trading Commission, 2033 K St. NW., 
Washington, DC 20581. Telephone: (202) 254-8955.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On December 28, 1993, the Commission published a proposed 
additional appendix to its bankruptcy rules that would govern the 
distribution of property where the debtor is an FCM that holds XM 
accounts as well as non-XM accounts and allowed thirty days for comment 
thereon.1 The Commission received one written comment in response 
to the proposal, from the Chicago Board Options Exchange (CBOE), which 
expressed support for the proposal. The Commission has carefully 
considered this comment and, based upon that review and its own 
reconsideration of the issue, has determined to adopt the additional 
appendix to its bankruptcy rules essentially as proposed.
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    \1\58 FR 68580.
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II. Background of XM Programs

    In XM programs, intermarket positions with offsetting risk 
characteristics are margined together as a single portfolio. These 
intermarket positions include stock index futures, options on stock 
index futures and stock index options, as well as foreign currency 
futures, options on foreign currency futures and foreign currency 
options. Because the related intermarket positions are essentially 
offsetting and therefore may effectively serve as margin collateral for 
one another, the margin requirement for the combined position may be 
lower than if each were margined separately.
    Currently, there generally are two types of XM programs--
proprietary and non-proprietary.2 In proprietary programs, XM 
treatment is given to intermarket positions in proprietary (i.e., non-
customer) accounts maintained by participating clearing members. With 
non-proprietary XM programs, XM treatment is given at the clearing 
organization level for intermarket positions maintained by clearing 
members for market professionals.
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    \2\The Commission has approved a number of proprietary XM 
programs between futures clearing organizations and the Options 
Clearing Corporation (OCC), a clearing organization for options 
listed on the American Stock Exchange, Chicago Board Options 
Exchange, New York Stock Exchange, Pacific Stock Exchange and 
Philadelphia Stock Exchange. To date, the Commission has approved 
proprietary XM programs between the OCC and the following futures 
clearing organizations: Intermarket Clearing Corporation (ICC) (June 
1, 1988); Chicago Mercantile Exchange (CME) (September 26, 1989); 
Board of Trade Clearing Corporation (BOTCC) (October 31, 1991); 
Kansas City Board of Trade Clearing Corporation (KCBTCC) (February 
25, 1992); and Comex Clearing Association (September 9, 1992). The 
Commission has also approved trilateral proprietary XM programs 
among the CME, ICC and OCC (June 2, 1993) and among the Commodity 
Clearing Corporation (CCC), ICC and OCC (December 28, 1993).
    Similarly, the Commission has approved non-proprietary XM 
programs between OCC and the following futures clearing 
organizations: CME (November 26, 1991); ICC (November 26, 1991); 
BOTCC (July 21, 1993); and KCBTCC (July 21, 1993). The Commission 
has also approved trilateral non-proprietary XM programs among CME, 
ICC and OCC (June 2, 1993) and among CCC, ICC and OCC (December 28, 
1993).
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III. Previous Bankruptcy Distribution in the Context of XM Programs

    Under the various non-proprietary XM programs, the futures trades 
and securities positions of eligible market professionals are deemed to 
be customer property under section 4d(2) of the Commodity Exchange 
Act3 and any customer net equity claim which a participating 
market professional has in respect of XM property held by a clearing 
firm in a non-proprietary XM account must be treated as a customer net 
equity claim under part 190 of the Commission's rules4 and 
subchapter IV of chapter 7 of the Bankruptcy Code (the commodity broker 
liquidation provisions).5 In the case of an FCM bankruptcy, the 
commodity broker liquidation provisions of the Bankruptcy Code and part 
190 of the Commission's rules provide for a pro rata distribution of 
assets among the section 4d(2) customers whose accounts are carried by 
such FCM. Thus, absent some provision to the contrary, if a 
participating clearing member defaulted due to losses in its non-
proprietary XM account, non-XM customers could be forced to share in 
those losses.6
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    \3\7 U.S.C. 6d(2) (1988).
    \4\17 CFR part 190.
    \5\Without some contrary provision, the assets of a securities 
broker-dealer who cleared the options trades of a cross-margining 
market professional would be distributed in the event of a 
bankruptcy pursuant to subchapter III of chapter 7 of the Bankruptcy 
Code, 11 U.S.C. 741-752 (1988), or the Securities Investors 
Protection Act (SIPA), 15 U.S.C. 78aaa et seq. (1988). In order for 
a securities broker-dealer to participate in a non-proprietary XM 
program, it must elect customer property treatment under part 190 of 
the Commission's rules in lieu of under SIPA, as further discussed 
below.
    \6\11 U.S.C. 761-766 (1988). See, e.g., Commission Order, In the 
Matter of the Chicago Mercantile Exchange Proposal to Expand its 
Cross-Margining Program with the Options Clearing Corporation to 
Include the Cross-Exchange Net Margining of the Positions of Market 
Professionals at 9 (November 26, 1991), reprinted in 56 FR 61404, 
61406 (December 3, 1991), and Commission Order, In the Matter of The 
Intermarket Clearing Corporation Proposal to Expand its Cross-
Margining Program with the Options Clearing Corporation to Include 
the Cross-Exchange Net Margining of the Positions of Market 
Professionals at 9 (November 26, 1991), reprinted in 56 FR 61406, 
61408 (December 3, 1991).
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    In order to avoid this possibility, Commission orders approving 
each of the current non-proprietary XM programs have required 
participating market professionals to execute agreements whereby they 
subordinate their XM-related claims to customer claims based on non-XM 
positions in the event of the clearing member's bankruptcy. The net 
equity claims of non-XM customers thus have been accorded priority over 
the net equity claims of XM customers.
    The relevant Commission orders approving the various cross-margin 
programs and various subordination agreements, as prescribed by 
relevant exchange rules, among market professionals, their clearing 
members and the clearing organizations involved, established the 
previous bankruptcy distribution framework. In the case of the 
bankruptcy of a clearing member participating in a non-proprietary XM 
program, the trustee would marshal all of the assets that were 
available to satisfy customer claims as set forth in Commission Rule 
190.08 (whether such funds derived from XM customers, non-XM customers 
or any other available source and irrespective of whether the shortfall 
in the segregated funds accounts were attributable to XM or non-XM 
customers). The trustee would determine if there were sufficient funds 
to satisfy in full the net equity claims of all non-XM customers 
cleared by the clearing member. If all such net equity claims of non-XM 
customers could be satisfied in full, the trustee would make the 
appropriate distributions and market professionals who participated in 
an XM program would receive any remaining funds to be shared on a pro 
rata basis. If there were not sufficient funds to satisfy non-XM net 
equity claims in full, the trustee would distribute to the non-XM 
customers only whatever funds were available on a pro rata basis and 
market professionals participating in the XM program would receive 
nothing.
    The result of the market professionals' subordination required by 
the Commission orders has been that the market professionals' XM-
related assets would be included within the pool of customer funds 
available to meet the claims of the clearing member's non-XM 
customers.7 Upon satisfaction of these ``regular'' customer 
claims, any excess customer property would be distributed to the 
various market professionals cleared by the defaulting member based 
upon their XM-related claims consistent with the pro rata distribution 
scheme of the Bankruptcy Code and part 190 of the Commission's rules. 
Thus, non-XM customers would never receive less than they would have 
received in the absence of an XM program.8
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    \7\Market professionals also would be included within this group 
of customers to the extent they had non-XM related customer claims.
    \8\Where there is a shortfall in the amount of funds in 
segregation attributable to non-XM customers and there are remaining 
funds in segregation attributable to XM customers, non-XM customers 
could achieve a greater distribution than if there were no XM 
program and subordination agreement.
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IV. New Bankruptcy Distribution in the Context of XM Programs

    When the Commission adopted its part 190 bankruptcy rules,9 it 
included an appendix intended to facilitate a trustee's operation of 
the estate of a bankrupt commodity broker. This appendix includes a 
schedule of trustee's duties, forms concerning customer instructions 
for return of non-cash property and transfer of hedge contracts, and a 
proof of claim form. The Commission has now adopted a new appendix to 
part 190 to provide further guidance to a trustee of a bankrupt FCM 
with respect to the appropriate distribution of property where the FCM 
had been a participant in an XM program that includes non-proprietary 
positions. As described above, such programs are now numerous and 
include non-proprietary positions in certain instances and where they 
do so, participating market professionals have been required by 
Commission order, among other things, to execute agreements whereby 
they subordinate their XM-related claims to the claims of non-XM 
customers in the event of bankruptcy in all instances.
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    \9\48 FR 8716 (March 1, 1983).
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    The new bankruptcy appendix will continue the concept of 
subordination for purposes of assuring treatment of the market 
professionals' securities included in an XM account as part of the 
commodity estate, but will modify the method for distribution of 
property of a bankrupt FCM which had participated in an XM program that 
includes non-proprietary positions such that the subordination to 
futures customers in the event of bankruptcy is more limited. However, 
the Commission orders and the clearing organization rules will continue 
to require each market professional participating in an XM program to 
agree that all of his XM assets carried by his clearing member, 
including securities options, will not be deemed to be ``customer 
property'' under SIPA and will be treated pursuant to the commodity 
broker liquidation provisions of the Bankruptcy Code. Thus, the market 
professional will remain removed from the class of customers whose 
claims will be disposed of pursuant to SIPA10 and, accordingly, 
the market professional's XM assets carried by a securities broker-
dealer would continue to be considered as other than SIPA customer 
property, since such property is defined to include only cash or 
securities held for the account of a SIPA customer.11
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    \1\0Specifically, SIPA excludes a person from the definition of 
a SIPA customer ``to the extent that such person has a claim for 
cash or securities which by contract, agreement, or understanding, 
or by operation of law * * * is subordinated to the claims of any or 
all creditors of the debtor * * *.'' 15 U.S.C. 78lll(2)(B)(1988).
    \1\115 U.S.C. 78lll(4); Securities Exchange Act Release No. 34-
29991, 56 FR 61458 (December 3, 1991); Securities Exchange Act 
Release No. 34-30041, 56 FR 64824 (December 12, 1991). See also 
Memorandum Recommending Approval of the Chicago Mercantile 
Exchange's and the Intermarket Clearing Corporation's Proposals to 
Expand Their Respective Cross-Margining Programs with the Options 
Clearing Corporation to Include the Cross-Exchange Net Margining of 
the Positions of Certain Market Professionals at 68-69, reprinted in 
[1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,190 at 
38,504-38,505 (November 21, 1991).
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    The guiding principles of the new appendix to part 190 are to 
assure that there is generally pro rata distribution to customers of 
the customer funds in the bankrupt FCM's commodity interest estate and 
that non-XM customers of such an FCM are not adversely affected by a 
shortfall in the pool of XM funds. The new appendix preserves the 
principle that non-XM customers will never receive less than they would 
have received in the absence of an XM program, but the distributional 
rule will not require market professionals participating in XM programs 
to subordinate claims they may make for customer property in all 
instances.
    Under the new appendix, a bankruptcy trustee handling the commodity 
interest estate of a bankrupt FCM with XM customer funds must first 
determine the respective shortfalls, if any, in the pools of XM 
customer and non-XM customer segregated funds. The trustee then would 
calculate the shortfall in each pool as a percentage of the segregation 
requirement for the pool. If there were no shortfall in either of the 
two pools; if there were an equal percentage shortfall in the two 
pools; if there were a shortfall in the non-XM pool only; or if the 
percentage of shortfall were greater in the non-XM pool than in the XM 
pool, the two pools of segregated funds would be combined and XM 
customers and non-XM customers would share pro rata in the combined 
pool.12 However, if there were a shortfall in the XM pool only, or 
if the percentage of shortfall were greater in the XM pool than in the 
non-XM pool, the two pools of segregated funds would not be 
combined.13 Rather, XM customers would share pro rata in the pool 
of XM segregated funds, while non-XM customers would share pro rata in 
the pool of non-XM segregated funds. To facilitate this distributional 
framework, subclasses of customer accounts, an XM account and a non-XM 
account, would be recognized.14
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    \1\2See Examples 1, 6, 2 and 5 of appendix B to part 190, 
Framework 1.
    \1\3See Examples 3 and 4 of appendix B to part 190, Framework 1.
    \1\4As noted above, CBOE filed the only written comment on the 
Commission's proposal, expressing support. However, CBOE also stated 
its belief that the two pools of segregated funds should be treated 
separately in all instances, which would result in more favorable 
treatment of XM customers in Examples 2 and 5.
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    As with the previous distribution system for a bankrupt FCM with 
XM-related claims, the new appendix ensures that non-XM customers will 
never receive less than they would have received in the absence of an 
XM program. Of course, without the specific subordination of XM 
customer claims to non-XM customer claims in all cases by market 
professionals participating in XM programs, non-XM customers will, 
depending upon the circumstances, receive either equivalent or less 
favorable distributions under the approach of the new appendix than 
they would have received under the Commission's previous bankruptcy 
distribution for FCMs participating in an XM program. In those cases 
where there is no shortfall in the non-XM pool (see Examples 1 and 3), 
the distribution to non-XM customers will be the same under the new 
appendix as it has been previously. However, in those cases where there 
is a shortfall in the non-XM pool, the pro rata distribution across the 
combined XM and non-XM pools (see Examples 2, 5 and 6) or the separate 
treatment of the XM and non-XM pools and the XM and non-XM account 
subclasses (see Example 4) will generally mean a less favorable 
distribution to the non-XM customers than has been previously 
required.15 This is the result because there will no longer be a 
marshalling of all assets available from segregated funds, including 
those attributable to XM customers, to satisfy all claims from non-XM 
customers before any claim of an XM customer can be satisfied. The 
Commission believes these outcomes are fair to all parties involved and 
consistent with general bankruptcy principles, and that they eliminate 
the need for execution of a separate subordination agreement to comply 
with section 4d(2) of the Commodity Exchange Act once participating 
market professionals elect ``commodity'' customer treatment for the XM 
account.
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    \1\5Of course, if there were no segregated funds available at 
all attributable to XM customers, which could be the case in extreme 
circumstances under Examples 4 or 6, there would also be no 
difference in the distribution to non-XM customers as a result of 
the new appendix.
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    In order for the participants in a particular non-proprietary XM 
program to be covered by the new bankruptcy distributional rule, the 
clearing organizations operating the program must submit an amended 
form of participant agreement deleting the provision requiring that a 
customer net equity claim of a participating market professional be 
subordinated to the customer net equity claims of ``public customers'' 
that do not relate to XM property and substituting a reference to the 
distributional rule set forth in the new appendix B. As the Commission 
indicated when it proposed the new appendix, it is prepared to modify 
its orders relating to non-proprietary XM programs accordingly upon 
receipt from the relevant clearing organizations of such amended 
participant agreements. The Commission believes the procedure requiring 
approval of amended participant agreements is necessary to eliminate 
any possible confusion for a trustee as to which distributional rule to 
follow in the unlikely event of a bankruptcy of an FCM participating in 
a non-proprietary XM program after the effective date of the new 
appendix B but before an amended participant agreement is approved by 
Commission order.
    The Commission has consulted with the Securities and Exchange 
Commission (SEC) and the Securities Investor Protection Corporation and 
believes that this change will not adversely affect continued treatment 
of XM funds under the commodity broker, rather than the securities 
broker-dealer, liquidation provisions of the Bankruptcy Code. The 
Commission also understands that the OCC will submit conforming rule 
changes to the SEC to eliminate the subordination to public customer 
requirement from its approval order.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. These rules will affect distributees 
of a bankrupt FCM's estate where the FCM had participated in an XM 
program. Previously, market professionals with an XM account were 
required to subordinate their claims in a bankruptcy to those of non-XM 
customers in all instances, so the new rules which modify the 
subordination requirement should not adversely impact such market 
professionals. Further, the distributional framework is intended to 
assure that non-XM customers of such FCM will not be adversely affected 
by a shortfall in the pool of XM funds and thus there should not be a 
significant economic impact on such customers as a result of the 
adoption of these rules. Therefore, the action taken herein will not 
have a significant economic impact on a substantial number of small 
entities. When the Commission published its proposal, it invited 
comments from any person or entity which believed that the proposal 
would have a significant impact on its operations. No comments on this 
issue were filed.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq., 
imposes certain requirements on federal agencies (including the 
Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the PRA. In compliance with the 
PRA, the Commission submitted these rules in proposed form and their 
associated information collection requirements to the Office of 
Management and Budget. While these rules have no burden, the group of 
rules of which these rules are a part has the following burden:

Rules 190.06 and 190.10 (3038-0021):
Average Burden Hours Per Response
  .35
Number of Respondents
  802
Frequency of Response
  occasionally

    Copies of the OMB approved information collection package 
associated with these rules may be obtained from Gary Waxman, Office of 
Management and Budget, room 3228, NEOB, Washington, DC 20503, (202) 
395-7340. Copies of the information collection submission to OMB are 
available from Joe F. Mink, CFTC Clearance Officer, 2033 K St. NW., 
Washington, DC 20581, (202) 254-9735.

List of Subjects in 17 CFR Part 190

    Bankruptcy.

    Accordingly, the Commission, pursuant to the authority contained in 
the Commodity Exchange Act and, in particular, Sections 1a, 2(a), 4c, 
4d, 4g, 5, e, 8a, 15, 19 and 20 thereof, 7 U.S.C. 1a, 2 and 4a, 6c, 6d, 
6g, 7, 7a, 12a, 19, 23 and 24 (1988 & Supp. IV 1992), and in the 
Bankruptcy Code and, in particular, Sections 362, 546, 548, 556 and 
761-766 thereof, 11 U.S.C. 362, 546, 548, 556 and 761-766 (1988), 
hereby amends part 190 of chapter I of title 17 of the Code of Federal 
Regulations as follows: 
PART 190--BANKRUPTCY 
    1. The authority citation for part 190 continues to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23 and 
24 and 11 U.S.C. 362, 546, 548, 556 and 761-766.

    2. Section 190.08 is amended by revising the introductory text to 
read as follows:


Sec. 190.08  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, 
except for special distributions required under 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.
* * * * *
    3. Part 190 is amended by designating appendix to part 190 as 
appendix A to part 190 and revising the heading and by adding appendix 
B to part 190 to read as follows:

Appendix A to Part 190--Bankruptcy Forms

* * * * *

Appendix B to Part 190--Special Bankruptcy Distributions

Framework 1--Special Distribution of Customer Funds When FCM 
Participated in Cross-Margining

    The Commission has established the following distributional 
convention with respect to customer funds held by a futures commission 
merchant (FCM) that participated in a cross-margining (XM) program 
which shall apply if participating market professionals sign an 
agreement that makes reference to this distributional rule and the form 
of such agreement has been approved by the Commission by rule, 
regulation or order:
    All customer funds held in respect of XM accounts, regardless of 
the product that customers holding such accounts are trading, are 
required by Commission order to be segregated separately from all other 
customer segregated funds. For purposes of this distributional rule, XM 
accounts will be deemed to be commodity interest accounts and 
securities held in XM accounts will be deemed to be received by the FCM 
to margin, guarantee or secure commodity interest contracts. The 
maintenance of property in an XM account will result in subordination 
of the claim for such property to certain non-XM customer claims and 
thereby will operate to cause such XM claim not to be treated as a 
customer claim for purposes of the Securities Investors Protection Act 
and the XM securities to be excluded from the securities estate. This 
creates subclasses of customer accounts, an XM account and a non-XM 
account (a person could hold each type of account), and results in two 
pools of customer segregated funds: An XM pool and a non-XM pool. In 
the event that there is a shortfall in the non-XM pool of customer 
class segregated funds and there is no shortfall in the XM pool of 
customer segregated funds, all customer net equity claims, whether or 
not they arise out of the XM subclass of accounts, will be combined and 
will be paid pro rata out of the total pool of available XM and non-XM 
customer funds. In the event that there is a shortfall in the XM pool 
of customer segregated funds and there is no shortfall in the non-XM 
pool of customer segregated funds, then customer net equity claims 
arising from the XM subclass of accounts shall be satisfied first from 
the XM pool of customer segregated funds, and customer net equity 
claims arising from the non-XM subclass of accounts shall be satisfied 
first from the non-XM customer segregated funds. Furthermore, in the 
event that there is a shortfall in both the non-XM and XM pools of 
customer segregated funds: (1) If the non-XM shortfall as a percentage 
of the segregation requirement in the non-XM pool is greater than or 
equal to the XM shortfall as a percentage of the segregation 
requirement in the XM pool, all customer net equity claims will be paid 
pro rata; and (2) if the XM shortfall as a percentage of the 
segregation requirement in the XM pool is greater than the non-XM 
shortfall as a percentage of the segregation requirement of the non-XM 
pool, non-XM customer net equity claims will be paid pro rata out of 
the available non-XM segregated funds, and XM customer net equity 
claims will be paid pro rata out of the available XM segregated funds. 
In this way, non-XM customers will never be adversely affected by an XM 
shortfall.
    The following examples illustrate the operation of this convention. 
The examples assume that the FCM has two customers, one with 
exclusively XM accounts and one with exclusively non-XM accounts. 
However, the examples would apply equally if there were only one 
customer, with both an XM account and a non-XM account.
    1. Sufficient Funds to Meet Non-XM and XM Customer Claims: 

------------------------------------------------------------------------
                             Non-XM               XM            Total   
------------------------------------------------------------------------
Funds in segregation.                150                150          300
Segregation                                                             
 requirement.........                150                150          300
Shortfall (dollars)..                  0                  0  ...........
Shortfall (percent)..                  0                  0  ...........
Distribution.........                150                150         300 
------------------------------------------------------------------------

There are adequate funds available and both the non-XM and the XM 
customer claims will be paid in full.
    2. Shortfall in Non-XM Only:

------------------------------------------------------------------------
                            Non-XM               XM             Total   
------------------------------------------------------------------------
Funds in segregation.                100                150          250
Segregation                                                             
 requirement.........                150                150          300
Shortfall (dollars)..                 50                  0  ...........
Shortfall (percent)..        50/150=33.3                  0  ...........
Pro rata (percent)...         150/300=50         150/300=50  ...........
Pro rata (dollars)...                125                125  ...........
Distribution.........                125                125          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. Shortfall in XM Only:

------------------------------------------------------------------------
                            Non-XM               XM             Total   
------------------------------------------------------------------------
Funds in segregation.                150                100          250
Segregation                                                             
 requirement.........                150                150          300
Shortfall (dollars)..                  0                 50  ...........
Shortfall (percent)..                  0        50/150=33.3  ...........
Pro rata (percent)...         150/300=50         150/300=50  ...........
Pro rata (dollars)...                125                125  ...........
Distribution.........                150                100          250
------------------------------------------------------------------------

Due to the XM account, there are insufficient funds available to meet 
both the non-XM 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 in Both, With XM Shortfall Exceeding Non-XM Shortfall:

------------------------------------------------------------------------
                            Non-XM               XM             Total   
------------------------------------------------------------------------
Funds in segregation.                125                100          225
Segregation                                                             
 requirement.........                150                150          300
Shortfall (dollars)..                 25                 50  ...........
Shortfall (percent)..        25/150=16.7        50/150=33.3  ...........
Pro rata (percent)...         150/300=50         150/300=50  ...........
Pro rata (dollars)...             112.50             112.50  ...........
Distribution.........                125                100          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 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. Shortfall in Both, With Non-XM Shortfall Exceeding XM Shortfall:

------------------------------------------------------------------------
                            Non-XM               XM             Total   
------------------------------------------------------------------------
Funds in segregation.                100                125          225
Segregation                                                             
 requirement.........                150                150          300
Shortfall (dollars)..                 50                 25  ...........
Shortfall (percent)..        50/150=33.3        25/150=16.7  ...........
Pro rata (percent)...         150/300=50         150/300=50  ...........
Pro rata (dollars)...             112.50             112.50  ...........
Distribution.........             112.50             112.50          225
------------------------------------------------------------------------

There are insufficient funds available to meet both the non-XM and the 
XM customer claims in full, and the non-XM shortfall exceeds the XM 
shortfall. Each customer will receive 50% of the $225 available, or 
$112.50.
    6. Shortfall in Both, Non-XM Shortfall = XM Shortfall: 

------------------------------------------------------------------------
                            Non-XM               XM             Total   
------------------------------------------------------------------------
Funds in segregation.                100                100          200
Segregation                                                             
 requirement.........                150                150          300
Shortfall (dollars)..                 50                 50  ...........
Shortfall (percent)..        50/150=33.3        50/150=33.3  ...........
Pro rata (percent)...         150/300=50         150/300=50  ...........
Pro rata (dollars)...                100                100  ...........
Distribution.........                100                100          200
------------------------------------------------------------------------

    There are insufficient funds available to meet both the non-XM and 
the XM customer claims in full, and the non-XM shortfall equals the XM 
shortfall. Each customer will receive 50% of the $200 available, or 
$100.
    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 non-XM 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.

    Issued in Washington, DC on April 7, 1994 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-8783 Filed 4-12-94; 8:45 am]
BILLING CODE 6351-01-P