[Federal Register Volume 66, Number 49 (Tuesday, March 13, 2001)]
[Proposed Rules]
[Pages 14507-14512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6181]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 190


Opting Out of Segregation

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

-----------------------------------------------------------------------

SUMMARY: Pursuant to section 111 of the Commodity Futures Modernization 
Act of 2000, the Commodity Futures Trading Commission (``Commission'' 
or ``CFTC'') is proposing to adopt a new rule allowing futures 
commission merchants to offer certain customers the right to elect not 
to have funds, that are being carried by the futures commission 
merchant for purposes of margining, guaranteeing or securing the 
customers' trades on or through a registered derivatives transaction 
execution facility, separately accounted for and segregated. This is 
sometimes referred to as ``opting out'' of segregation. The CFTC is 
also proposing amendments to certain existing rules, which would, among 
other things, govern the bankruptcy treatment of a customer that opts 
out of segregation.

DATES: Comments on the proposed rule changes must be received by April 
12, 2001.

ADDRESSES: Comments on the proposed rule should be sent to Jean A. 
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 418-5528, or by e-mail to 
[email protected]. Reference should be made to ``Commission Rule 
1.68.''

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, or Michael A. Piracci, Attorney-Advisor, Division of Trading 
and Markets, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 
418-5430.

[[Page 14508]]


SUPPLEMENTARY INFORMATION:

I. Background

    The Commodity Futures Modernization Act of 2000 (``CFMA''),\1\ 
enacted on December 21, 2000, adopted section 5a of the Commodity 
Exchange Act (the ``Act'') \2\ to permit a board of trade, subject to 
certain conditions, to elect to operate as a registered derivatives 
transaction execution facility (``DTF'') in lieu of seeking designation 
as a contract market.\3\ In order to operate as a registered DTF, the 
board of trade must meet certain requirements as to the underlying 
commodities traded \4\ and must restrict access to certain eligible 
traders. In order to be eligible to trade on a registered DTF, a person 
must either be an eligible contract participant or trade through a 
futures commission merchant (``FCM'') that: (i) is registered with the 
Commission; (ii) is a member of a futures industry self-regulatory 
organization (or, if the person is only trading security futures 
products, a registered national securities association); (iii) is a 
clearing member of a derivatives clearing organization; and (iv) has 
net capital of at least $20 million. Generally, eligible contract 
participants are institutional traders and individual traders who meet 
substantial asset requirements, trading for their own accounts.\5\ 
Accordingly, trading on a DTF is limited generally either to (1) 
institutional or commercial traders, or (2) ``retail'' customers 
conducting their trading through a well-capitalized FCM. The newly-
adopted section 5a(f) of the Act provides that a registered DTF may 
authorize an FCM to offer its customers that are eligible contract 
participants the right not to have their funds that are carried by the 
FCM for purposes of trading on the registered DTF, separately accounted 
for and segregated. Opting out of segregation is not available to a 
customer who is not also an eligible contract participant.
---------------------------------------------------------------------------

    \1\ Commodity Futures Modernization Act of 2000, Pub. L. No. 
106-554, 114 Stat. 2763 (to be codified as amended in scattered 
sections of 7 U.S.C.).
    \2\ 7 U.S.C. 1 et seq. (1994), as amended by Pub. L. 106-554, 
114 Stat. 2763.
    \3\ Commission rules concerning DTFs will be included in a new 
Part 37, which was published for comment on March 9, 2001.
    \4\ The requirements for the underlying commodities traded are: 
(1) The commodity has a nearly inexhaustible deliverable supply; (2) 
the commodity has a deliverable supply sufficiently large so that 
the contract is highly unlikely to be susceptible to manipulation; 
(3) the commodity has no cash market; (4) the contract is a security 
futures product and the DTF is a registered national securities 
exchange; (5) the Commission determines that futures trading is 
unlikely to be susceptible to the threat of manipulation; or (6) the 
commodity is not an agricultural commodity enumerated in section 
1a(4) of the Act and trading is limited to eligible commercial 
entities trading for their own account. A registered DTF may also 
trade excluded or exempt commodities that are otherwise excluded 
pursuant sections 2(c), 2(d), or 2(g) of the Act, or exempt under 
section 2(h) of the Act.
    \5\ See Section 1a(12) of the newly-amended Act for the 
definition of ``eligible contract participant.''
---------------------------------------------------------------------------

II. The Proposed Rule and Amendments to Existing Rules

A. Proposed Rule 1.68

    The Commission is proposing to add new Rule 1.68 to implement the 
newly-adopted section 5a(f) of the Act. The new rule will provide that 
an FCM shall not segregate a customer's funds where: (i) the customer 
is an eligible contract participant; (ii) the funds are deposited with 
the FCM for purposes of trading on a registered DTF; (iii) the DTF has 
authorized the FCM to permit eligible contract participants to elect 
not to have such funds segregated; and (iv) there is a written 
agreement signed by the customer in which the customer elects to opt 
out of segregation and acknowledges that it is aware of the 
consequences of not having its funds segregated. In particular, the 
agreement must explain that, to the extent a customer has a claim 
against the estate of a bankrupt FCM in connection with trades for 
which it has opted out of segregation, the customer would not be 
entitled to the usual customer priority in bankruptcy.\6\ The FCM would 
be required to keep this agreement on file and open to inspection in 
accordance with Rule 1.31, the Commission's general recordkeeping 
rule.\7\ This proposed rule is similar to the ``opt-out'' provisions 
that have been instituted by the Financial Services Authority 
(``FSA''), the regulatory agency in the United Kingdom.\8\
---------------------------------------------------------------------------

    \6\ Normally, in the event of an FCM's bankruptcy, customer 
claims have priority with respect to customer property over all 
other claims, except claims ``attributable to the administration of 
customer property.'' See 11 U.S.C. 766(h); see also 17 CFR Part 190. 
To the extent that the customer has claims against the bankrupt 
FCM's estate for trades to which segregation applies, e.g., trades 
on or subject to the rules of contract markets, or of DTFs for which 
opting out of segregation is not permitted, the customer would be 
eligible for the customer priority. Thus, the same customer may have 
two different kinds of claims against the estate of a bankrupt FCM. 
See 48 FR 8716 (March 1, 1983).
    \7\ Commission rules referred to herein are found at 17 CFR Ch. 
1 (2000).
    \8\ See Securities and Futures Authority (``SFA'') Rule 4-52. In 
2002, SFA Rule 4-52 will be replaced by FSA Conduct Of Business 
Rules 9.3.8 to 9.3.14.
---------------------------------------------------------------------------

    Section 4d(2) of the Act generally provides that an FCM must keep 
funds received from customers separate from the funds of the FCM. The 
segregation of customer funds serves one of the most important purposes 
of the Act and the regulatory framework under the Act, the protection 
of customer funds. The Commission recognizes that eligible contract 
participants are sophisticated customers and as such may not require 
the same level of protection as retail customers. The Commission 
believes, however, that it is necessary for customers of an FCM, 
regardless of sophistication, to demonstrate affirmatively that they 
have elected not to have their funds segregated and that they are aware 
of the consequences of not having their funds segregated from the funds 
of the FCM.
    An FCM may offer benefits to customers who elect not to have their 
funds segregated. In making any such offer, however, an FCM may not 
make any misleading claims or disclosures. For purposes of satisfying 
the requirement that the customer sign the opt-out agreement, an 
electronic signature will be acceptable provided it satisfies the 
elements of Rule 1.4.
    To minimize paperwork burdens on FCMs and customers, if a customer 
opts out of segregation in accordance with proposed Rule 1.68, the FCM 
could provide the customer a single monthly account statement with a 
notation of trades for which segregation does not apply. Similarly, the 
FCM's records must clearly distinguish those positions subject to the 
opt-out agreement and those that remain subject to segregation. In no 
event, however, may customer funds related to DTF ``opt-out'' trades be 
commingled with customer funds segregated pursuant to Section 4d of the 
Act and the Commission rules thereunder.
    To ease the burden on FCMs, the required agreement with a customer 
to opt out of segregation may provide that it covers all DTFs that have 
authorized FCMs to offer such treatment of customer funds. A customer 
may revoke its election to opt out of segregation by notifying the FCM 
in writing. To avoid undue disruption of the FCM's business, however, 
the revocation of the election to opt out of segregation would only be 
effective for trades entered into after the FCM received such notice 
from the customer.\9\
---------------------------------------------------------------------------

    \9\ As with the agreement electing to opt out of segregation, 
the FCM is required to keep the notice to cancel such an election on 
file and open to inspection in accordance with Rule 1.31.
---------------------------------------------------------------------------

    The proposed rule would also provide that a customer who chose to 
opt out of segregation would not be permitted to establish a ``third-
party custodial account,'' sometimes also referred to as a 
``safekeeping account.'' In Financial and Segregation Interpretation 
No. 10 (``Interpretation No. 10''), the Commission's Division of 
Trading and Markets (the ``Division'') set forth

[[Page 14509]]

guidelines for these types of accounts.\10\ In Interpretation No. 10, 
the Division noted that, if the account is set up in accordance with 
the guidelines, a third-party custodial account will be deemed to be a 
separate segregated account. The purpose of the proposed rule is to 
permit customers the opportunity to opt out of segregation. The 
Commission believes that it would be inconsistent for a customer to opt 
out of segregation with respect to DTF trades and at the same time 
maintain a third-party custodial account, to hold funds related to DTF 
trades, because such an account is deemed to be a separate segregated 
account. The Commission is also proposing that a customer who opts out 
of segregation as to funds held for trading on a DTF not be permitted 
to obtain a security interest in such funds, so as to gain a priority 
over other creditors of the FCM.
---------------------------------------------------------------------------

    \10\ Financial and Segregation Interpretation No. 10, 1 Comm. 
Fut. L. Rep. (CCH) para. 7120 (May 23, 1984).
---------------------------------------------------------------------------

B. Amendments to Rules 1.3(gg), 1.3(uu), 1.17(a)(1)(i)(B), and 
190.07(b)

    Rule 1.3(gg) defines the term ``customer funds.'' The Commission 
proposes to amend that rule to make clear that the funds of an opt-out 
customer would not be deemed ``customer funds.'' The Commission 
proposes to add Rule 1.3(uu) to define the term ``opt-out customer.'' 
An opt-out customer is a customer who is an eligible contract 
participant and elects not to have funds carried by an FCM for purposes 
of trading on a DTF separately accounted for and segregated, in 
accordance with proposed Rule 1.68.
    Rule 1.17(a)(1)(i) provides the standards for determining the 
minimum adjusted net capital that must be maintained by each person 
registered as an FCM. The Commission proposes to amend Rule 
1.17(a)(1)(i)(B), which contains the volume of business element of 
these standards, to make clear that the funds of an opt-out customer 
are to be included in the computation of the FCM's minimum adjusted net 
capital requirement. Persons who opt out of segregation are still 
customers of the FCM and carrying the positions of these customers 
still poses a risk to the FCM. The Commission believes the amendment to 
the rule is important to ensure that opt-out customers, by opting out 
of segregation, do not have an impact on the financial condition of the 
FCM, thereby increasing the risk to the other customers of the FCM or 
to the marketplace. The Commission notes that industry self-regulatory 
organizations have implemented risk-based capital requirements that 
take into account both positions subject to segregation and those not 
subject to segregation. Additionally, the Commission notes that by 
including the funds of the opt-out customer for purposes of calculating 
the minimum adjusted net capital, there is no effect on the current 
minimum capital requirements for registered FCMs.\11\
---------------------------------------------------------------------------

    \11\ Several other provisions of Rule 1.17 include calculations 
for determining the adjusted net capital required of an FCM in order 
to undertake various actions, such as prepaying subordinated debt. 
The Commission is proposing to amend these rules to make clear that 
the funds of an opt-out customer are to be included in calculating 
the FCM's required adjusted net capital in these situations. See 
Rules 1.17(e)(1)(ii), 1.17(h)(2)(vi)(C)(2), 1.17(h)(2)(vii)(A)(2), 
1.17(h)(2)(vii)(B)(2), 1.17(h)(2)(viii)(A)(2), 1.17(h)(3)(ii)(B), 
and 1.17(h)(3)(v)(B); see also Rule 1.12(b)(2) (determining the 
``early warning'' level of adjusted net capital).
---------------------------------------------------------------------------

    Rule 1.37(a) currently requires an FCM, for each account that it 
carries, to keep a permanent record that shows the name, address, and 
occupation of the person for whom the account is being carried, as well 
as any person guaranteeing the account or exercising trading control 
with respect to the account. The Commission proposes to maintain this 
requirement and to redesignate paragraph ``(a)'' as paragraph 
``(a)(1).'' The Commission further proposes to add paragraph 
``(a)(2),'' to require FCMs to keep a permanent record showing a 
customer's election pursuant to proposed Rule 1.68. The FCM would be 
permitted to indicate such a customer's election on the record it is 
required to keep under redesignated paragraph (a)(1).
    Rule 190.07(b) defines the term ``net equity'' for purposes of 
calculating the allowed net equity claim of a customer in the event of 
an FCM bankruptcy. The Commission proposes to amend the rule to make 
clear that the net equity of an opt-out customer shall not include 
funds the customer has chosen not to have segregated and separately 
accounted for pursuant to proposed Rule 1.68. As noted above, the 
Commission's intention in this area is that, to the extent that a 
customer has a claim against the estate of a bankrupt FCM in connection 
with trades for which it has opted out of segregation, the customer 
would not be entitled to the normal customer priority in bankruptcy and 
would be treated as a general creditor.\12\
---------------------------------------------------------------------------

    \12\ Of course, to the extent this customer has claims against 
the bankrupt FCM 's estate for trades for which funds have been 
segregated, it would be eligible for the customer priority.
---------------------------------------------------------------------------

C. DTF Rules

    A DTF that wishes to permit FCMs to offer eligible contract 
participants the right to opt out of segregation must notify the 
Commission of its intent to institute a rule to that effect at least 
one day before its implementation, in accordance with Commission Rule 
37.7(b). The DTF should also make any such rule publicly available, so 
that FCMs and eligible contract participants will be aware of the rule.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \13\ requires that 
agencies, in proposing rules, consider the impact of those rules on 
small businesses. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\14\ The Commission has previously determined that FCMs are not 
small entities for the purpose of the RFA.\15\ Additionally, eligible 
contract participants, as defined in the newly-amended Act, by the 
nature of the definition, should not be considered small entities. 
Further, eligible contract participants have the choice as to whether 
or not to exercise the right not to have certain funds segregated from 
the FCM's funds. Accordingly, the Acting Chairman, on behalf of the 
Commission, certifies pursuant to section 3(a) of the RFA \16\ that the 
proposed rules will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \13\ 5 U.S.C. 601 et seq.
    \14\ 47 FR 18618 (April 30, 1982).
    \15\ 47 FR at 18619.
    \16\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \17\ 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. The Commission has submitted a copy 
of this part to the Office of Management and Budget (``OMB'') for its 
review.
---------------------------------------------------------------------------

    \17\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

Collection of Information
    Customer Election to Opt Out of Segregation, OMB Control Number 
3038-0024.
    The Burden associated with the proposed new rule is estimated to be 
600 hours, which will result from new recordkeeping requirements for 
FCMs

[[Page 14510]]

who offer eligible customers the right to opt out of segregation.
    The estimated burden of the proposed new rule was calculated as 
follows:
    Estimated number of respondents: 120.
    Reports annually by each respondent: 250.
    Total annual Responses: 30,000.
    Estimated average Number of Hours Per Response: .02.
    Estimated Total Number of Hours of Annual Burden in Fiscal Year: 
600.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235 New Executive 
Building, Washington, DC 20503, Attention: Desk Officer for the 
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the Commission's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. A 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the 
deadline for the public to comment to the Commission on the proposed 
regulations.
    Copies of the information collection submission to OMB are 
available from the CFTC Clearance Officer, 1155 21st Street, NW, 
Washington, DC 20581, (202) 418-5160.

C. Comment Period

    Section 111 of the CFMA provides that a registered DTF may 
authorize an FCM to offer eligible contract participants the right to 
opt out of segregation with respect to trades on the DTF ``not later 
than 180 days after the date of enactment of the [CFMA], consistent 
with regulations adopted by the Commission.'' The time frame provided 
for in the statute will be reached on or about June 19, 2001. 
Accordingly, the Commission is providing for only a 30-day comment 
period on the proposed new rule and rule amendments to implement the 
statutory requirements.

D. Cost-Benefit Analysis

    Section 119 of the CFMA amended section 15 of the Act to require 
that the Commission, before promulgating a regulation under the Act or 
issuing an order, consider the costs and benefits of the Commission's 
action in light of five criteria.\18\ The main consideration relevant 
to the proposed new rule is the first one set forth in the Act, 
``protection of market participants and the public.'' The Commission 
believes that those market participants eligible to opt out of 
segregation are sophisticated persons that can properly evaluate for 
themselves, in light of the required disclosure by, and agreement with, 
an FCM, whether to opt out of segregation. Additionally, FCMs are also 
able to evaluate whether offering such an election to their customers 
who are eligible contract participants is appropriate and consistent 
with sound risk management practices. The general public and retail 
customers should also be protected because any eligible contract 
participant who opts out of segregation would be treated as a general 
creditor, with respect to those trades for which it has elected to opt 
out of segregation, in the event of the FCM's bankruptcy. The 
Commission further notes that opting out of segregation is not required 
of anyone and would have to be a voluntary election of the registered 
DTF, FCM, and eligible contract participant. The Commission also notes 
that the CFMA specifically mandates that the Commission adopt rules to 
facilitate this election.
---------------------------------------------------------------------------

    \18\ These considerations include: (A) protection of market 
participants and the public; (B) efficiency, competitiveness, and 
financial integrity of futures markets; (C) price discovery; (D) 
sound risk management practices; and (E) other public interest 
considerations.
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 1

    Consumer protection, Definitions, Reporting and recordkeeping 
requirements.

17 CFR Part 190

    Bankruptcy, Definitions.
    In consideration of the foregoing and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, sections 
2(a)(1)(A), 4d, 5a(f), and 8a(5) 7 U.S.C. 2(i), 6d, 7a(f), and 12a(5), 
and 11 U.S.C. 362, 546, 548, 556 and 761-766, the Commission hereby 
proposes to amend Chapter I of Title 17 of the Code of Federal 
Regulations 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, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.

    2. Section 1.3 is amended by adding paragraphs (gg)(3) and (uu) to 
read as follows:


Sec. 1.3  Definitions.

* * * * *
    (gg) * * *
* * * * *
    (3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the 
term customer funds shall exclude money, securities or property 
received to margin, guarantee or secure the trades or contracts of opt-
out customers, and all money accruing to opt-out customers as the 
result of such trades or contracts, to the extent that such trades or 
contracts are made on or subject to the rules of any registered 
derivatives transaction execution facility that has authorized opting 
out in accordance with Sec. 37.7 of this chapter.
* * * * *
    (uu) Opt-out customer. This term means a customer that is an 
eligible contract participant, as defined in section 1a(12) of the Act, 
that has elected, in accordance with Sec. 1.68, not to have funds that 
are being carried for purposes of trading on or through the facilities 
of a registered derivatives transaction execution facility, separately 
accounted for and segregated by the futures commission merchant.
* * * * *
    3. Section 1.12 is amended by revising paragraph (b)(2) to read as 
follows:


Sec. 1.12  Maintenance of minimum financial requirements by futures 
commission merchants and introducing brokers.

* * * * *
    (b) * * *
    (2) Six percent of the following amount: The customer funds 
required to

[[Page 14511]]

be segregated pursuant to the Act and the regulations in this part, 
plus the funds of opt-out customers that, but for the election to opt 
out pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market 
value of commodity options purchased by such customers on or subject to 
the rules of a contract market or a foreign board of trade for which 
the full premiums have been paid: Provided, however, that the deduction 
for each such customer shall be limited to the amount of customer funds 
in such customer's account(s) and foreign futures and foreign options 
secured amounts;
* * * * *
    4. Section 1.17 is amended as follows:
    a. By revising paragraph (a)(1)(i)(B), and
    b. By revising paragraphs (e)(1)(ii), (h)(2)(vi)(C)(2), 
(h)(2)(vii)(A)(2) (h)(2)(vii)(B)(2), (h)(2)(viii)(A)(2), (h)(3)(ii)(B), 
and (h)(3)(v)(B) by removing the second instance of the word ``and'' 
and adding in its place the words ``, plus the funds of opt-out 
customers that, but for the election to opt out pursuant to Sec. 1.68, 
would be required to be segregated, plus'', to read as follows:


Sec. 1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

    (a) * * *
    (1) * * *
    (i) * * *
    (B) Four percent of the following amount: The customer funds 
required to be segregated pursuant to the Act and the regulations in 
this part, plus the funds of opt-out customers that, but for the 
election to opt out pursuant to Sec. 1.68, would be required to be 
segregated, plus the foreign futures or foreign options secured amount, 
less the market value of commodity options purchased by customers on or 
subject to the rules of a contract market or a foreign board of trade 
for which the full premiums have been paid: Provided, however, that the 
deduction for each customer shall be limited to the amount of 
segregated customer funds in such customer's account(s) and foreign 
futures and foreign options secured accounts;
* * * * *
    5. Section 1.37 is amended by redesignating paragraph (a) as 
paragraph (a)(1) and by adding paragraph (a)(2) to read as follows:


Sec. 1.37  Customer's or option customer's name, address, and 
occupation recorded; record of guarantor or controller of account.

    (a) * * *
    (2) Each futures commission merchant who receives a customer's 
election not to have the customer's funds separately accounted for and 
segregated, in accordance with Sec. 1.68, shall keep a record in 
permanent form that indicates such customer's election. The record of 
such a customer election may be indicated on the record required by 
paragraph (a)(1) of this section.
* * * * *
    6. Section 1.68 is added to read as follows:


Sec. 1.68  Customer election not to have funds, carried by a futures 
commission merchant for trading on a registered derivatives transaction 
execution facility, separately accounted for and segregated.

    (a) A futures commission merchant shall not separately account for 
and segregate as belonging to commodity or options customers, funds 
received from a customer if:
    (1) The customer is an eligible contract participant as defined in 
section 1a(12) of the Act;
    (2) The customer's funds are being carried by the futures 
commission merchant for the purpose of trading on or through the 
facilities of a derivatives transaction execution facility registered 
under section 5a(c) of the Act;
    (3) The registered derivatives transaction execution facility has 
authorized, in accordance with Sec. 37.7 of this chapter, futures 
commission merchants to offer eligible contract participants the right 
to elect not to have funds that are being carried for purposes of 
trading on or through the facilities of the registered derivatives 
transaction execution facility, separately accounted for and segregated 
by the futures commission merchant; and
    (4) The futures commission merchant and the customer have entered 
into a written agreement, signed by the customer, in which the customer 
acknowledges that:
    (i) The customer is an eligible contract participant as defined in 
section 1a(12) of the Act;
    (ii) The customer elects not to have its funds separately accounted 
for and segregated with respect to agreements, contracts or 
transactions traded on or subject to the rules of any registered 
derivatives transaction execution facility that has authorized such 
treatment in accordance with Sec. 37.7 of this chapter;
    (iii) The customer has been informed that, by making this election:
    (A) The customer's funds, related to agreements, contracts or 
transactions on any registered derivatives transaction execution 
facility that authorizes the opting out of segregation will not be 
segregated from the funds of the futures commission merchant;
    (B) Such funds may be used by the futures commission merchant in 
the course of the futures commission merchant's business; and
    (C) In the event the futures commission merchant files, or has a 
petition filed against it, for bankruptcy, the customer, as to those 
funds that the customer has elected not to have separately accounted 
for and segregated by the futures commission merchant, in accordance 
with this section, will not be entitled to the priority for customer 
claims provided for under the Bankruptcy Code and Part 190 of this 
chapter, and may be treated as a general creditor of the futures 
commission merchant; and
    (iv) The agreement shall remain in effect unless and until the 
customer revokes the agreement in accordance with paragraph (c) of this 
section.
    (b) In no event may money, securities or property representing 
those funds that customers have elected not to have separately 
accounted for and segregated by the futures commission merchant, in 
accordance with this section, be held or commingled and deposited with 
customer funds in the same account or accounts required to be 
separately accounted for and segregated pursuant to section 4d of the 
Act and rules thereunder.
    (c) A customer that has entered into an agreement in accordance 
with paragraph (a)(4) of this section may abrogate that agreement by so 
informing the futures commission merchant in writing. The customer's 
statement, indicating its intent to abrogate the agreement, must be 
signed by a person with the authority to bind the customer and will be 
effective with respect to any agreements, contracts or transactions 
entered into by the customer on or subject to the rules of a 
derivatives transaction execution facility after the customer's written 
statement is received by the futures commission merchant.
    (d) Each futures commission merchant shall maintain any agreements 
entered into with customers pursuant to paragraph (a) of this section 
and any cancellations of such agreements, made pursuant to paragraph 
(c) of this section, in accordance with Sec. 1.31.
    (e) A customer who elects not to have its funds separately 
accounted for and segregated, in accordance with this section, may not 
establish a third-party custodial account for those funds, as

[[Page 14512]]

described in the Commission's Division of Trading and Markets Financial 
and Segregation Interpretation No. 10, 1 Comm. Fut. L. Rep. (CCH) para. 
7120 (May 23, 1984), and may not obtain a security interest in such 
funds.

PART 190--BANKRUPTCY RULES

    7. 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, unless 
otherwise noted.

    8. Section 190.07 is amended by revising paragraph (b) introductory 
text to read as follows:


Sec. 190.07  Calculation of allowed net equity.

* * * * *
    (b) Net equity. Net equity means the total claim of a customer 
against the estate of the debtor based on the commodity contracts held 
by the debtor for or on behalf of such customer less any indebtedness 
of the customer to the debtor. Net equity for any opt-out customer 
shall exclude any claim based on any commodity contracts traded on or 
subject to the rules of any registered derivatives transaction 
execution facility that has authorized opting out in accordance with 
Sec. 37.7 of this chapter. Net equity shall be calculated as follows:
* * * * *

    Issued in Washington, DC on March 8, 2001, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-6181 Filed 3-12-01; 8:45 am]
BILLING CODE 6351-01-P