[Federal Register Volume 69, Number 229 (Tuesday, November 30, 2004)]
[Rules and Regulations]
[Pages 69510-69511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26386]


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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 190


Interpretative Statement Regarding Funds Determined To Be Held in 
the Futures Account Type of Customer Account Class

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretative statement.

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

SUMMARY: This interpretation by the Commodity Futures Trading 
Commission is issued to clarify the appropriate means by which to 
allocate customer funds held by an insolvent Futures Commission 
Merchant (FCM) to account classes (as such term is defined in section 
190.01(a) of the Commission's Regulations (17 CFR 190.01(a)) in cases 
where money, securities or other property margining, guaranteeing or 
securing futures contracts traded on non-domestic boards of trade has 
been deposited, pursuant to a Commission Order, in a segregated account 
established pursuant to Regulation 1.20 (17 CFR 1.20).

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, Division of Clearing and Intermediary Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581. Telephone: (202) 418-5092; e-mail 
[email protected].
* * * * *
    Section 20 of the Commodity Exchange Act \1\ empowers the 
Commission to provide by rule or regulation how the net equity of a 
customer is to be determined:
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 24.

``* * * 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--(1) that certain cash, 
securities, other property, or commodity contracts are to be 
included in or excluded from customer property or member property; * 
---------------------------------------------------------------------------
* * and (5) how the net equity of a customer is to be determined.''

Subchapter IV of the Bankruptcy Code (concerning Commodity Brokers) has 
the same effect, explicitly subjecting its definition of ``net equity'' 
to ``such rules and regulations as the Commission promulgates under the 
[Commodity Exchange ] Act.'' \2\
---------------------------------------------------------------------------

    \2\ 11 U.S.C. 761(17).
---------------------------------------------------------------------------

    The Commission has exercised this power in promulgating Part 190. 
In particular, Net Equity is defined in Regulation 190.07. This 
definition includes the concept of ``account classes.'' For example, 
Sec.  190.07(b)(2) directs that one of the steps in calculating a 
customer's net equity is to ``[a]ggregate the credit and debit equity 
balances of all accounts of the same class held by a customer in the 
same capacity.'' Similarly, Sec.  190.07(c) defines the ``funded 
balance'' as ``a customer's pro rata share of the customer estate 
account class available as of the primary liquidation date for 
distribution to customers of the same class.'' Commission Regulation 
190.01(a) defines account class as follows:

each of the following types of customer accounts which must be 
recognized as a separate class of account by the trustee: futures 
accounts, foreign futures accounts, leverage accounts, commodity 
option accounts, and delivery accounts as defined in Sec.  
190.05(a)(2): Provided, however, That to the extent that the equity 
balance, as defined in Sec.  190.07, of a customer in a commodity 
option, as defined in Sec.  1.3(hh) of this chapter, may be 
commingled with the equity balance of such customer in any domestic 
commodity futures contract pursuant to regulations under the Act, 
the aggregate shall be treated for purposes of this part as being 
held in a futures account.

    There is a potential ambiguity in how this provision should be 
applied in two related contexts. First, where a customer account holds 
foreign futures contracts, and/or property margining, guaranteeing, or 
securing such contracts, but where the collateral has, pursuant to a 
Commission order, been segregated in accordance with Commission 
Regulation 1.20 in the

[[Page 69511]]

manner of a domestic futures account, the appropriate ``type of 
account'' is ambiguous. One can distinguish between a ``foreign 
future'' which is characterized by the place in which it is executed, 
and a ``foreign futures account'' which may be characterized by the 
calculation of the applicable segregation requirements. A ``futures 
account'' is also characterized by the calculation of the applicable 
segregation requirement. If the Commission grants Section 4d relief to 
permit funds supporting foreign futures to be deposited in a ``futures 
account'' calculated pursuant to Section 4d and Commission Regulation 
1.20, then it would appear apposite to treat claims on those funds as 
belonging to the futures account class of accounts.
    Second, where a customer account contains both foreign futures 
contracts and domestic futures contracts, with those positions margined 
on a portfolio basis, such that the same property margins, guarantees, 
or secures both types of contracts in one account, the appropriate 
allocation of claims on the collateral between ``futures contracts'' 
and ``foreign futures contracts'' is, again, ambiguous.
    As the Commission noted in the proposing release for Commission 
Regulation 190.01,

``The allocation provisions are intended to prefer customers for 
which segregation is undertaken over * * * customers holding 
accounts of a class for which segregation is not required * * * The 
reason for identifying classes of customer accounts is to permit the 
implementation of the principle of pro rata distribution so that the 
differing segregation requirements with respect to different classes 
of accounts benefit customer claimants based on the class of account 
for which they were imposed.'' 46 FR 57535, 57536 (November 24, 
1981).

    Thus, the Commission intended the customers who contribute to a 
segregated pool to benefit from that pool. Later in that release the 
Commission explained that the distinction in treatment between account 
classes sprang from the contrast in segregation requirements:

all property segregated on behalf of a particular class would be 
allocated to the class on behalf of which it is segregated. This 
approach is consistent with the fact that differing segregation 
requirements exist for different classes of accounts. Obviously, 
much of the benefit of segregation would be lost if property 
segregated on behalf of a particular account class could be 
allocated to pay the claims of customers of a different account for 
which less stringent segregation provisions were in effect. 46 FR at 
57554.

    Again, the Commission contemplated that customers would benefit 
from the stringency of the segregation regime to which their funds were 
subject. To the extent that, subject to a Commission order, customer 
margin supporting non-domestic trades is subject to the full stringency 
of segregation under Commission Regulation 1.20 rather than the less 
stringent Commission Regulation 30.7 secured amount calculation, it is 
consistent with the Commission's intentions in adopting the Part 190 
scheme that the property in the accounts of these customers be treated 
as futures accounts. Conversely, it would be inconsistent with the 
Commission's intentions to deny customers who had contributed property 
that was, in accordance with Commission Orders, deposited into accounts 
segregated pursuant to Commission Regulation 1.20, any participation in 
those accounts based on those contributions.
    Thus, the Commission intended that the customers who contribute to 
a segregated pool benefit from that pool. If customers do not 
contribute to a pool, they should not benefit from that pool. The 
Commission's intent to tie distribution of funds to the contribution of 
those funds, and the ambiguity of how to allocate claims on collateral 
that supports both futures and foreign futures positions placed in 
domestic segregation, both support the interpretation that, in the 
event of an insolvency, collateral supporting foreign futures placed in 
domestic segregation pursuant to Commission Order should be treated as 
in a futures account, not a foreign futures account, for purposes of 
Part 190. Thus, in a situation where by Commission order or direction, 
customers are required or allowed to contribute to a Commission 
Regulation 1.20 segregated account, those customers also should benefit 
from the distribution of that account proportionately to their 
contributions in the event of an insolvency. Such claims should be 
treated as encompassed within the futures account class as opposed to 
the foreign futures account class or an other account class.
* * * * *

    Issued in Washington, DC, on October 21, 2004, by the Commodity 
Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-26386 Filed 11-29-04; 8:45 am]
BILLING CODE 6351-01-M