[Federal Register Volume 85, Number 114 (Friday, June 12, 2020)]
[Proposed Rules]
[Pages 36000-36133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08482]



[[Page 35999]]

Vol. 85

Friday,

No. 114

June 12, 2020

Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 4, 41, et al.





Bankruptcy Regulations; Proposed Rule

  Federal Register / Vol. 85 , No. 114 / Friday, June 12, 2020 / 
Proposed Rules  

[[Page 36000]]


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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: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'') 
is proposing amendments to its regulations governing bankruptcy 
proceedings of commodity brokers. The proposed amendments are meant to 
comprehensively update those regulations to reflect current market 
practices and lessons learned from past commodity broker bankruptcies.

DATES: Comments must be received on or before July 13, 2020.

ADDRESSES: You may submit comments, identified by ``Part 190 Bankruptcy 
Regulations'' and RIN 3038-AE67, by any of the following methods:

     CFTC Comments Portal: https:// comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.

    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (FOIA), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to in this 
release are found at 17 CFR chapter I (2019), and are accessible on 
the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel and 
Senior Advisor, 202-418-5092, [email protected] or Kirsten Robbins, 
Associate Director, 202-418-5313, [email protected], Division of 
Clearing and Risk; Andree Goldsmith, Special Counsel, 202-418-6624, 
[email protected] or Carmen Moncada-Terry, Special Counsel, 202-418-
5795, [email protected], Division of Swap Dealer and Intermediary 
Oversight, in each case at the Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. The Part 190 Subcommittee Proposal
    B. Background of the NPRM
II. Proposed 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 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 Allowed 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
III. Revisions Proposed by the ABA Committee That Have Not Been 
Proposed by the Commission
IV. Cost-Benefit Considerations
    A. Introduction
    B. Baseline
    C. Overarching Concepts
    1. Changes to Structure of Industry
    2. Trustee Discretion
    3. Cost Effectiveness and Promptness Versus Precision
    4. Unique Nature of Bankruptcy Events
    5. Administrative Costs Are Costs to the Estate, and Often to 
the Customers
    6. Request for Comment
    D. 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
    4. Section 15(a) Factors--Subpart A
    E. Subpart B--Futures Commission Merchant 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 Allowed 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
    9. Section 15(a) Factors--Subpart B
    F. 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: Prohibitions 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

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    9. Regulation Sec.  190.19: Support of Daily Settlement
    10. Section 15(a) Factors--Subpart C
    G. Technical Corrections to Parts 1, 4, and 41
    H. Antitrust Considerations
V. Related Matters
    A. Regulatory Flexibility Act
    B. 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 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 NPRM

    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. While there have been a number of 
rulemakings that have amended part 190 in light of specific issues or 
statutory changes, this is the first comprehensive revision of part 
190. The Commission is proposing to revise part 190 comprehensively in 
light of several major changes to the industry over the past 37 years, 
including the exponential growth in the speed of transactions and trade 
processing. In addition, important lessons have been learned over prior 
bankruptcies, including the need for administrative arrangements that 
are specific to the circumstances of the individual bankruptcy and the 
success of an approach, consistent with applicable statutes, that 
prioritizes cost effectiveness and promptness over precision.\2\ 
Finally, derivatives clearing organizations (``DCOs'') have become 
increasingly important to the financial system.
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    \2\ The concept of prioritizing cost effectiveness and 
promptness over precision is discussed in detail in overarching 
concept three in the cost-benefit considerations, section IV.C.3 
below.
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    In proposing 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.\3\
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    \3\ See CEA section 20(a), 7 U.S.C. 24(a).
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    In developing this rulemaking, the Commission benefited from 
outside contributions.
    On September 29, 2017, the Part 190 Subcommittee of the Business 
Law Section of the American Bar Association (``ABA Committee'') 
submitted a model set of part 190 rules (the ``ABA Submission'') in 
response to the Commission's Project KISS (``Request for 
Information'').\4\
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    \4\ 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 ABA Cover 
Note cautions that ``[t]he views expressed in this letter, and the 
proposed Model Part 190 Rules, are presented on behalf of the [ABA] 
Committee. 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.''
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    As the ABA Committee noted,

    The [part 190 regulations] have generally served the industry, 
bankruptcy professionals and customers well. That said, the [ABA] 
Committee believes there is a need to update [p]art 190 in a 
comprehensive manner, as the markets--and how they are regulated--
have changed dramatically in the intervening decades. At the same 
time, it is important to stay true to the sound conceptual elements 
of the existing rules with respect to account class distinctions, 
porting of customer positions, and pro rata distribution of customer 
property by account class, with priority given to public customers. 
The Committee was also spurred to act by the MF Global and Peregrine 
Financial Group bankruptcies, and the lessons they revealed on the 
challenges of liquidating a large [futures commission merchant 
(``FCM'')] that is severely under-segregated.\5\
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    \5\ ABA Cover Note at 2.

    The ABA Committee started its work in 2015, conducting a review of 
the Commission's part 190 regulations to identify potential areas for 
improvement, with the plan to draft comprehensive revisions in the form 
of model rules that the Commission could consider for potential agency 
rulemaking. The ABA Committee included participants who represented a 
broad cross-section of interested parties, in particular attorneys who 
work extensively in the areas of derivatives law, bankruptcy law, or 
both, including at law firms, futures commission merchants, clearing 
houses and exchanges, government agencies,\6\ and industry 
associations. The ABA Committee also included attorneys for the 
trustees in the commodity broker bankruptcy cases of MF Global and 
Peregrine Financial Group, as well as attorneys who were formerly staff 
at the Commission, including one of the drafters of the original 
rules.\7\ Each of the members devoted significant amounts of time to 
this project.
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    \6\ The Committee members included staff at government agencies 
other than the Commission. Current Commission staff participated in 
a few meetings of the Committee (in the form of ``brainstorming 
exercises'') to discuss their understanding of the current 
regulations. Commission staff ``expressly conveyed that they did not 
want to direct the Committee's deliberations, and they were careful 
not to offer comments that could be construed as trying to persuade 
the Committee to any particular viewpoint on any particular issue. 
They were also clear that their comments did not represent the views 
of the Commission, or of anyone other than the person expressing 
them.'' ABA Cover Note at 3 n. 5.
    \7\ See generally id. at 3.
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    The resulting ABA Submission represents a consensus across this 
broad range of interests, thoughtfully and comprehensively addressing 
the issues presented in part 190, and assisting the Commission in 
developing a deeper understanding of the practical issues involved in 
commodity broker bankruptcy proceedings. This notice of proposed 
rulemaking (``NPRM'') has benefited significantly from the ABA 
Submission, as well as conversations between Commission staff and 
members of the ABA Committee, both individually and collectively, to 
understand their thinking with respect to various aspects of the ABA 
Submission.

B. Major Themes in the Proposed Revisions to Part 190

    While the proposed revised part 190 carries forward significant 
portions of existing part 190, there are important changes that are 
proposed. The major

[[Page 36002]]

themes in changes to part 190 include the following:
    (1) The Commission is proposing to add Sec.  190.00, which is 
designed to set out the statutory authority, organization, core 
concepts, scope, and rules of construction for part 190. This section 
is intended to set out, subject to 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,\8\ and the public at large.
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    \8\ Including bankruptcy and SIPA trustees, as well as the FDIC 
in its role as a receiver.
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    (2) Some of the changes would further 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, established in 
title 11 of the United States Code (i.e., the ``Bankruptcy Code''), 
section 766(h), 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 changes would 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.\9\ Some of the benefits, for both customers 
and the markets as a whole, arising from this policy are addressed in 
the discussion of proposed Sec.  190.00(c)(4) in section II.A.1 below.
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    \9\ 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); see also current Sec.  190.06(g) (approving a 
wide variety of pre-relief and post-relief transfers).
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    (4) The Commission is proposing a new subpart C to part 190, 
governing the bankruptcy of a clearing organization. As explained in 
further detail in connection with proposed Sec.  190.11, the Commission 
is proposing to establish 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 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 the Dodd-Frank Wall Street Reform 
and Consumer Protection Act \10\ (hereinafter, ``Title II'' and ``Dodd-
Frank'').\11\ The Commission's approach toward a DCO bankruptcy is 
characterized by three overarching concepts:
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    \10\ Public Law 111-203 (July 21, 2010).
    \11\ 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.
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    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.\12\ These rules, procedures, and plans will, in most 
cases,\13\ 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.
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    \12\ See generally proposed Sec.  190.15.
    \13\ Only those DCOs that are subject to subpart C of part 39 
(i.e., those that have been designated as systemically important by 
the 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).
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    b. Second, resources that are intended to flow through to members 
as part of daily settlement (including both daily variation payments 
and default resources) should be devoted to that purpose, rather than 
to the general estate.\14\
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    \14\ See generally proposed Sec.  190.19.
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    c. Third, other provisions would draw, with appropriate 
adaptations, from provisions applicable to FCMs.\15\
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    \15\ See, e.g., proposed Sec. Sec.  190.16, 190.17(c).
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    (5) The Commission is proposing to note the applicability of part 
190 in the context of proceedings under the Securities Investors 
Protection Act (``SIPA'') in the case of FCMs subject to a SIPA 
proceeding,\16\ 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.
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    \16\ 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.
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    (6) In light of lessons learned from the MF Global bankruptcy, the 
Commission is proposing 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 discussed in proposed Sec.  190.00(c)(5) in section II.A.1 
below, 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 proposing in a number of areas to grant 
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 
customers on a bespoke basis, would permit the trustee to treat them on 
an aggregate basis. These changes represent a move from a model where 
the trustee receives/complies with instructions from individual 
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.
    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,\17\ both the current and proposed versions of part 190 
favor 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 is proposing 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. Doing so fosters transfer rather than liquidation of 
customer positions, and

[[Page 36003]]

return of most funds to customers in time periods of days or weeks 
rather than months or years. Similarly, calculations of each customer's 
funded balance are directed in proposed Sec.  190.05 to be ``as 
accurate as reasonably practicable under the circumstances, including 
the reliability and availability of information.'' The quoted language 
would allow the trustee to avoid more precise calculations where such 
precision would not be cost effective or could not reasonably be 
accomplished on a prompt basis (for example, in a situation where price 
information for particular assets or contracts at particular times was 
not readily available). 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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    \17\ See the overarching concept discussed in section IV.C.3 
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.\18\
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    \18\ 78 FR 68506 (Nov. 14, 2013). This refers to proposed new 
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, (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) As discussed further below, 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 seeks comment on these major themes. Do commenters 
agree or disagree with these themes and the analysis presented? Do 
commenters view proposed revised part 190 as appropriately implementing 
these major themes, or are some of the proposed changes inconsistent 
with (or does the proposal in some areas insufficiently address) these 
themes? General comments concerning these major themes are welcome, 
however, adding more specific suggestions for changes to the proposed 
regulations would be most helpful.

II. Proposed Regulations

A. Subpart A--General Provisions 19
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    \19\ The Commission is proposing technical corrections and 
updates to parts 1, 4 and 41, which are discussed in II.F. below.
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1. Regulation Sec.  190.00: Statutory Authority, Organization, Core 
Concepts, Scope, and Construction
    The Commission is proposing a new Sec.  190.00, which would contain 
general provisions applicable to all of part 190. Proposed Sec.  190.00 
is intended 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 this proposed part. Moreover, 
this 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. This provision generally would state facts and 
concepts that exist in the Commission's bankruptcy regulations.\20\ To 
the extent there are changes reflected in this proposed Sec.  190.00, 
these changes will be identified and the reasoning for these changes 
will be further detailed in the relevant section below.
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    \20\ See ABA Cover Note at 6:
    The Committee recommends adding a rule to Subpart A that 
provides context and sets forth the general framework for the Part 
190 Rules to assist a trustee or bankruptcy court in understanding 
the reasons for the specific requirements set forth in the other 
rules. If the individual appointed as the trustee, or the bankruptcy 
court, does not have extensive experience with the CEA or CFTC 
rules, in particular with requirements relating to clearing and 
customer funds segregation, the Part 190 Rules may well prove 
difficult to comprehend, particularly in the critical early days 
when the trustee is expected to act in circumstances that are likely 
chaotic and stressful. This context and description of the general 
framework will also be important to customers and other stakeholders 
that may not have experience with a subchapter IV proceeding.
    Thus, the Committee has proposed Rule 190.00, which explains:
     The Commission's statutory authority to adopt the Part 
190 Rules.
     The organization of the rules into the three subparts 
described above.
     The core principles reflected in the rules.
     The scope of the rules in terms of proceedings, account 
classes, customer property and commodity contracts.
    Although Rule 190.00 adds to the length of the rules, on 
balance, we believe it provides useful explanation that will benefit 
trustees, bankruptcy judges, customers and other stakeholders 
applying the rules in practice.
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    Proposed Sec.  190.00(a) would 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.
    Proposed Sec.  190.00(b) would explain that the proposed part 190 
regulations are organized into three subparts. Subpart A would contain 
general provisions applicable in all cases. Subpart B would contain 
provisions that apply when the debtor is a FCM, the definition of which 
includes acting as a foreign FCM.\21\ Subpart C would contain 
provisions that apply when the debtor is a DCO as defined by the CEA. 
Proposed Sec.  190.00(c) would present the core concepts \22\ of 
proposed part 190. These core concepts are central to understanding how 
a commodity broker bankruptcy works. These include those related to 
commodity brokers and commodity contracts; account classes; public 
customers and non-public customers, Commission segregation

[[Page 36004]]

requirements, and member property \23\; porting of public customer 
commodity contract positions; pro rata distribution; and deliveries. 
More specifically, this paragraph would explain the following concepts:
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    \21\ 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).
    \22\ The Commission is proposing 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).
    \23\ ``Member property'' would be defined in proposed Sec.  
190.01 and would 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).
---------------------------------------------------------------------------

     Proposed Sec.  190.00(c)(1) would 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.'' 
\24\ Proposed Sec.  190.00(c)(1) would further state that the rules in 
proposed part 190 apply to commodity brokers that are FCMs as defined 
by the Act, or DCOs as defined by the Act.
---------------------------------------------------------------------------

    \24\ See 11 U.S.C. 101(6) (definition of ``commodity broker''), 
761(9) (definition of ``customer'' referred to in 101(6)).
---------------------------------------------------------------------------

     Proposed Sec.  190.00(c)(2) would 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 would include the (domestic) futures account class 
(including options on futures),\25\ the foreign futures account class 
(including options on foreign futures),\26\ the cleared swaps account 
class for swaps cleared by a registered DCO (including cleared options 
other than options on futures or foreign futures),\27\ and the delivery 
account class for property held in an account designated as a delivery 
account. Delivery accounts would be used for effecting delivery under 
commodity contracts that provide for settlement via delivery of the 
underlying when a commodity contract would be held to expiration or, in 
the case of an option on a commodity, would be exercised.\28\
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    \25\ This corresponds to segregation pursuant to section 4d(a) 
of the CEA, 7 U.S.C. 6d(a).
    \26\ This corresponds to segregation pursuant to section 30.7 
(enacted pursuant to section 4(b)(2)(A) of the CEA, 7 U.S.C. 
6(b)(2)(A).
    \27\ This corresponds to segregation pursuant to section 4d(f) 
of the CEA, 7 U.S.C. 6d(f).
    \28\ 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.
---------------------------------------------------------------------------

     Proposed Sec.  190.00(c)(3)(i) would explain that in a 
bankruptcy, public customers are generally entitled to a priority 
distribution of cash, securities, or other customer property over 
``non-public customers,'' \29\ 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.\30\ That provision of the Code states explicitly that the trustee 
shall distribute customer 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.
---------------------------------------------------------------------------

    \29\ Non-public customers are customers who bear certain 
proprietary or other ``insider'' relationships to an FCM. This term 
would be more precisely defined in Sec.  190.01.
    \30\ Thus, as discussed further below, 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 would be allocated to non-
public customers' net equity claims until all of those are fully 
funded.
---------------------------------------------------------------------------

    As noted in proposed Sec.  190.00(c)(3)(i)(A), the cash, 
securities, or other property of public customers are subject to 
special segregation requirements under the CEA \31\ and Commission 
regulations \32\ for each class of account except delivery accounts. 
Although the transactions and property of non-public customers are not 
subject to segregation requirements, such transactions and property are 
deemed part of customer property. In the distribution of customer 
property, customer net equity claims of public customers are 
prioritized over those of non-public customers.
---------------------------------------------------------------------------

    \31\ See, e.g., section 4d of the CEA, 7 U.S.C. 6d.
    \32\ See, e.g., Sec. Sec.  1.20-1.29, part 22, Sec.  30.7.
---------------------------------------------------------------------------

    As noted in proposed Sec.  190.00(c)(3)(i)(B), the property in 
delivery accounts nonetheless constitutes ``customer property,'' and 
thus claims of public customers enjoy the same priority over claims of 
non-public customers in the distribution of delivery account property.
     Proposed Sec.  190.00(c)(3)(ii) would address the division 
of customer property and member property in proceedings in which the 
debtor is a clearing organization. The classification of customers as 
non-public customers in contrast to public customers also would be 
relevant, in that each member of the clearing organization would have 
separate claims against the clearing organization with respect to (A) 
transactions cleared for its own account or for any of its non-public 
customers and (B) transactions cleared on behalf of the public 
customers of the member. In such a proceeding, customer property would 
consist of member property, which could be distributed to pay member 
claims based on members' house accounts, and customer property other 
than member property, which would be reserved for payment of claims for 
the benefit of members' public customers.
     Proposed Sec.  190.00(c)(3)(iii) would address 
preferential assignment of property among customer classes and account 
classes in clearing organization bankruptcies: (1) Certain customer 
property, as specified in Sec.  190.18(c), would be 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 also would 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; (2) Where property would be assigned to a particular customer 
class with more than one account class, it would be assigned on a least 
funded to most funded basis among the account classes.
     Proposed Sec.  190.00(c)(4) would 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'') open commodity contract positions of the debtor's 
customers along with all or a portion of such customers' account 
equity. Porting 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).
     Proposed Sec.  190.00(c)(5) would address pro rata 
distribution. It would explain that, if the aggregate value of

[[Page 36005]]

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 would 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 would 
ensure 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.\33\
---------------------------------------------------------------------------

    \33\ 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. below.
---------------------------------------------------------------------------

    Moreover, any customer property that would not be 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, 
would 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.
     Proposed Sec.  190.00(c)(6) would address deliveries. It 
would explain 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.\34\
---------------------------------------------------------------------------

    \34\ See ABA Cover Note at 12 (``It is important to address 
deliveries to avoid disruption to the cash market for the commodity 
or adverse consequences to parties that may be relying on delivery 
taking place in connection with their business operations.'').
---------------------------------------------------------------------------

    In a proceeding in which the debtor is an FCM, the delivery 
provisions in proposed part 190 would 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).
    Proposed Sec.  190.00(d)(1)(i) would acknowledge that 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. However, since there are no commodity options dealers or 
leverage transaction merchants currently registered,\35\ in proposed 
Sec.  190.00(d)(1), the Commission would declare 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.
---------------------------------------------------------------------------

    \35\ See ABA Cover Note at 5 (``To our knowledge, no person is 
currently registered or operating as a commodity option dealer or 
leverage transaction merchant. . . . Thus, we recommend uncluttering 
the rules by limiting their scope to subchapter IV proceedings of 
commodity brokers that are FCMs or DCOs, with respect to commodity 
contracts that are cleared.'').
---------------------------------------------------------------------------

    Proposed Sec.  190.00(d)(1)(ii) would provide that, pursuant to the 
Securities Investor Protection Act (``SIPA''),\36\ the 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.\37\ This part would implement 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 would apply 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 \38\ when the debtor also is an FCM.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78aaa, et seq.
    \37\ 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).
    \38\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

    Moreover, in the context of a resolution proceeding under Title II 
of Dodd-Frank, section 210(m)(1)(B) \39\ 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 \40\ 
that is a commodity broker as if the resolution entity were a debtor 
for purposes of subchapter IV. Proposed Sec.  190.00(d)(1)(iii) would 
explain that this part shall serve as guidance with respect to 
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.\41\
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 5390(m)(1)(B).
    \40\ That is, the entity being resolved under Title II. Section 
210(m)(1)(b) refers to ``any covered financial company or bridge 
financial company.''
    \41\ 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)).
---------------------------------------------------------------------------

    Proposed Sec.  190.00(d)(2)(i) would clarify that a trustee may not 
recognize any account classes not explicitly provided for in proposed 
part 190.
    Proposed Sec.  190.00(d)(2)(ii) would provide that no property that 
would otherwise be included in customer property, as defined in 
proposed Sec.  190.01 of this part, 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.\42\ 
Generally, in a commodity broker bankruptcy, the basis for distributing 
segregated customer property is pro rata treatment and transparency. 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 allows 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 this 
regulation, the Commission is making clear that customer property 
cannot be burdened by equitable trusts. Attempting to

[[Page 36006]]

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.\43\
---------------------------------------------------------------------------

    \42\ This is in contrast to the (ultimately unsuccessful) claims 
of certain retail customers in the Peregrine bankruptcy, who claimed 
that their off-exchange retail foreign currency transactions and 
associated margin collateral were held in a constructive or 
resulting trust by Peregrine. An off-exchange retail foreign 
currency transaction is not defined as ``commodity contract'' under 
section 761(4) of the Bankruptcy code. Accordingly, counterparties 
that engage in off-exchange retail transactions with an FCM are not 
subject to the protections provided by part 190 with respect to 
their accounts in the event of the FCM's bankruptcy. See generally 
Secure Leverage Group, Inc. v. Bodenstein, 558 B.R. 226 (N.D. Ill. 
2016) aff'd 866 F.3d 775 (7th Cir. 2017).
    \43\ The ABA Submission included a more complex approach to this 
subsection:
    Absent extraordinary circumstances and upon application by the 
trustee (such as to address transfers of funds initiated prior to, 
but completed after, the entry of the order for relief), so long as 
there is any shortfall of customer property needed to satisfy 
customer net equity claims in the classes enumerated in Sec.  190.01 
of this part, no person is entitled to a distribution of any 
property in which the debtor holds any interest on the basis that 
the debtor holds such property in a `constructive trust' for such 
person. The foregoing does not restrict any rights a person may have 
to distribution of property held by the debtor that is not covered 
by an account class on a `custodial' or express trust basis pursuant 
to statute, governmental rule, regulation or order, or legally 
binding written agreement between the debtor and such person.
    The Commission concludes that the ABA Submission's approach here 
is overly complicated (both in the level of detail and, in 
particular, with relation to evaluating what constitutes 
``extraordinary circumstances''), and has instead determined to 
propose the more direct approach discussed above.
---------------------------------------------------------------------------

    Proposed Sec.  190.00(d)(3) would provide that certain 
transactions, contracts or agreements are excluded from the term 
``commodity contract.'' 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 \44\ (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). The agreements and transactions 
that would be so excluded have traditionally 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.\45\
---------------------------------------------------------------------------

    \44\ Security-based swaps and securities that are carried in a 
securities account are part of this exclusion because they are 
protected under SIPA.
    \45\ As the ABA Cover Note explains:
    The Committee believes it is important for the rules to cover 
cleared OTC transactions in contracts that may be outside the swap 
definition and futures contract classification, such as foreign 
exchange forwards or foreign exchange swaps excluded by the Treasury 
Department or spot forex transactions, because such transactions are 
already being cleared by DCOs as if they are swaps. It is the 
Committee's understanding that the DCOs are clearing such OTC 
transactions under the account structure, and subject to the 
customer funds segregation rules, for cleared swaps prescribed in 
the CFTC Part 22 Rules. Thus, we have included such commodity 
contracts in the cleared swaps account class.
    ABA Cover Note at 8 (footnote omitted).
---------------------------------------------------------------------------

    Positions or transactions that would be covered by part 190 
include:
     As part of the cleared swaps account class (discussed in 
further detail in the definitions section), ``swaps'' as defined in 
section 1a(47) of the CEA and Sec.  1.3 that are cleared by a DCO, 
including options on commodities cleared by a DCO unless otherwise 
excluded, and non-swap/non-futures contracts that are traded over-the-
counter on a swap execution facility and cleared by a DCO as if they 
were swaps (cleared swaps account class).\46\
---------------------------------------------------------------------------

    \46\ See the definition of commodity contract in proposed Sec.  
190.01in conjunction with the definition of swap in proposed Sec.  
190.01.
---------------------------------------------------------------------------

     As part of the futures or foreign futures account class 
(discussed in further detail in the definitions section), futures or 
options on futures executed on or subject to the rules of a DCM or 
FBOT, including retail commodity contracts if they were traded on such 
market ``as if'' they are futures and forward contracts which are 
cleared by a DCO as if they were futures.\47\
---------------------------------------------------------------------------

    \47\ See the definition of commodity contract in proposed Sec.  
190.01 in conjunction with the definition of swap in proposed Sec.  
190.01.
---------------------------------------------------------------------------

    Proposed Sec.  190.00(e) would address the context in which 
proposed 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''). Moreover, where they differ, the 
definitions set forth in proposed Sec.  190.01 shall be used instead of 
the defined terms set forth in section 761 of the Bankruptcy Code. It 
should be noted that the other regulations in proposed part 190 are 
designed to be consistent with subchapter IV of chapter 7 of the 
Bankruptcy Code.
    Proposed Sec.  190.00(e) also 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 requests comment with respect to all aspects of 
proposed Sec.  190.00. In particular, is a regulation setting forth 
core concepts useful? Are the core concepts that are addressed under or 
over inclusive? Are the definitions and discussions for each core 
concept helpful?
2. Regulation Sec.  190.01: Definitions
    The Commission would update the definitions for proposed revised 
part 190. The current and proposed definitions are in Sec.  190.01. 
Most of the changes in proposed Sec.  190.01 would be conforming 
changes, such as correcting cross-references and deleting definitions 
of certain terms that are not used in proposed part 190. Other changes 
would 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 
proposing 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 proposed part 190. In particular, the 
Commission is proposing to separate the delivery account class into two 
sub-classes, a physical delivery account class and a cash delivery 
account class; the relevant terms are defined below. The proposed 
definitions of commodity contract and physical delivery property would 
codify positions that the Commission has taken in recent commodity 
broker bankruptcies.\48\
---------------------------------------------------------------------------

    \48\ Respectively, In Re Peregrine Financial Group and In Re MF 
Global, Inc.
---------------------------------------------------------------------------

    The Commission is also proposing to amend the current Sec.  190.01 
to replace the paragraphs currently 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

[[Page 36007]]

implemented by the Commission with respect to, e.g., Sec.  1.3.\49\
---------------------------------------------------------------------------

    \49\ See generally 83 FR 7979, 7979 & n.6 (Feb. 23, 2018).
---------------------------------------------------------------------------

    The Commission is proposing the following definitions in proposed 
Sec.  190.01:
    ``Account Class'': 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 swaps accounts.'' The 
proposed definition of the term ``account class'' would be expanded to 
include definitions of each of these account classes. However, as 
discussed above with respect to proposed Sec.  190.00(d)(1)(i), the 
``commodity options'' and ``leverage account'' account classes are 
proposed to be removed, at least temporarily.
    The definition of ``futures account'' would cross-reference the 
definition of the same term in Sec.  1.3, while the definition of 
``cleared swaps account'' cross-references the definition of ``cleared 
swaps customer account'' in Sec.  22.1. Each of these definitions 
applies 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, a corresponding 
reference to such accounts at a clearing organization would be 
included, 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)). This would not apply to the 
case where a foreign clearing organization is clearing foreign futures 
for clearing members that are not subject to the requirements of Sec.  
30.7.
    Paragraph (1)(iv) of the definition of account class would address 
the delivery account class. The delivery account class is relevant when 
an FCM or DCO establishes delivery accounts through which it accounts 
for the making or taking of physical delivery under commodity contracts 
whose terms require settlement by delivery of a commodity, in either 
case in an account designated as a delivery account on the books and 
records of the entity.
    Paragraph (1)(iv)(A)(1) would define delivery accounts for FCMs, 
and would be based on current Sec.  190.05(a)(2). Paragraph 
(1)(iv)(A)(2) would incorporate the same concepts for clearing 
organizations, and also adds in additional concepts. Specifically, a 
clearing organization may 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 
would be subdivided into separate physical and cash delivery account 
classes, as provided in proposed Sec.  190.06(b).\50\ Customer property 
held in a delivery account is not subject to Commission segregation 
requirements. Thus, it may be more challenging and time-consuming to 
identify customer property for the delivery account class.
---------------------------------------------------------------------------

    \50\ It should be noted that under the proposed regulations, 
``physical delivery property'' refers to a commodity that is held in 
a form that can be delivered, including, e.g., virtual currencies, 
and (in contrast to current Sec.  190.01(ll)(3)), is not limited to 
physical (i.e., tangible) commodities.
---------------------------------------------------------------------------

    As the ABA Committee noted:

    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.\51\
---------------------------------------------------------------------------

    \51\ ABA Cover Note at 14. See also In re MF Global Inc., 2012 
WL 1424670 (noting how physical delivery property was traceable).

(and such cash would thus be commingled with the FCM's own cash 
intended for operations). Thus, separating (1) cash delivery property 
and customer claims therefor from (2) physical delivery property and 
customer claims therefor, would promote the more efficient and prompt 
distribution of the latter to customers.
    For these reasons, the Commission is proposing that the delivery 
account class 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 these subclasses are fixed on the filing 
date. 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.
    Paragraph (2) of the definition of account class would 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 such account class. This would take place 
because the contracts in question are risk-offsetting to contracts in 
the latter account class.\52\ 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). Paragraph (2) would 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.
---------------------------------------------------------------------------

    \52\ 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 derivatives clearing organization.
---------------------------------------------------------------------------

    Paragraph (3) of the definition of account class would 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 would confirm 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.
    ``Act'' is proposed to be added to the definitions in proposed 
Sec.  190.01 to refer to the Commodity Exchange Act.
    ``Allowed net equity'' is proposed to be revised to update cross-
references and to allow for two definitions of the term (as used in 
subparts B and C of part 190).
    ``Bankruptcy code'' is proposed to be revised to update cross-
references.
    ``Business day'' is proposed to be described further by defining 
what constitutes a Federal holiday. The definition also would clarify 
that the end of a business day is one second before the beginning of 
the next business day.
    ``Calendar day'' is proposed to be amended to include a reference 
to Washington, DC as the location of the Calendar day.
    ``Cash delivery account class'' is proposed to be cross-referenced 
to the new definition in ``account class.''
    ``Cash delivery property'' and ``physical delivery property'' are 
proposed to be added.

[[Page 36008]]

    The current definition of ``delivery account,'' Sec.  190.05(a)(2), 
refers to an account that contains only property described in three of 
the nine categories of property in the definition of ``specifically 
identifiable property.'' Following the suggestion of the ABA 
Committee,\53\ the Commission is proposing to define directly a 
delivery account class, taking elements of the definition from the 
current definition of ``specifically identifiable property,'' as 
discussed below with reference to the proposed changes to that 
definition. The proposed regulation will separate delivery property 
into subcategories, with separate definitions of ``cash delivery 
property'' and ``physical delivery property.''
---------------------------------------------------------------------------

    \53\ See ABA Cover Note at 10.
---------------------------------------------------------------------------

    Defining these terms would also be relevant for proposed Sec.  
190.06, which would address the process for making or taking physical 
delivery under commodity contracts, including deliveries that may occur 
outside a delivery account.
    The proposed definition of cash delivery property would 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 the 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 proposed definition of physical delivery property includes, 
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.\54\ 
The definition would note that this includes warehouse receipts, 
shipping certificates or other documents of title (including electronic 
title documents) for the commodity, or the commodity itself.
---------------------------------------------------------------------------

    \54\ The current definition is found in Sec.  190.01(ll)(3), and 
focuses on documents of title and physical commodities.
---------------------------------------------------------------------------

    Some of the changes in the definition address changes in delivery 
practices since the 1980s. The reference to electronic title documents 
explicitly would recognize 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.\55\
---------------------------------------------------------------------------

    \55\ See ABA Cover Note at 10, 12-13.
---------------------------------------------------------------------------

    For purposes of analytical clarity, the definition of physical 
delivery property would be separated into four categories:
    First, commodities or documents of title for commodities 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.\56\
---------------------------------------------------------------------------

    \56\ 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 account class.
---------------------------------------------------------------------------

    Second, commodities or documents of title for commodities 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.\57\
---------------------------------------------------------------------------

    \57\ 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 proposed definition explicitly 
would codify that position.
---------------------------------------------------------------------------

    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.\58\ This 
property would be considered physical delivery property solely for the 
purpose of the obligations, pursuant to proposed Sec.  190.06, to make 
or take delivery of physical delivery property. 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).
---------------------------------------------------------------------------

    \58\ See ABA Cover Note at 13 (``When 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.'').
---------------------------------------------------------------------------

    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 proposed Sec.  190.06(a)(2) (either by itself in the 
case of an FCM bankruptcy or in conjunction with proposed 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 proposed Sec.  190.06.\59\ 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.
---------------------------------------------------------------------------

    \59\ As noted immediately above, the third and fourth categories 
of physical delivery property are not part of the physical delivery 
account class. They are included because the Commission is 
proposing, consistent with the suggestion in the ABA Submission for 
Sec.  190.06 and the ABA Cover Note ``to provide more specificity 
than is found in current [Sec.  ] 190.05 on how to accomplish 
delivery'' where ``[o]pen positions . . . get caught in delivery 
position where parties incur bilateral contractual obligations.'' 
Id. at 13. This more ramified approach to setting out obligations in 
connection with delivery requires a correspondingly broader 
definition of physical delivery property.
---------------------------------------------------------------------------

    ``Cash equivalents'' is proposed to be added to define assets that 
might be accepted as a substitute for United States dollar cash.
    ``Cleared swaps account'' is proposed to be cross-referenced to the 
new definition in ``account class.''
    ``Clearing organization'' is proposed to be revised to update 
cross-references.
    ``Commodity broker'' is proposed to be updated to reflect the 
current definition of commodity broker in the Bankruptcy Code and the 
relevant cross-references.
    ``Commodity contract'' is proposed to be amended to incorporate and 
extend in context (through references to current Commission 
regulations) the definition in section 761(4) of the Bankruptcy 
Code.\60\
---------------------------------------------------------------------------

    \60\ It should be noted that, consistent with proposed 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.
---------------------------------------------------------------------------

    ``Commodity contract account'' is proposed to be added to refer to 
accounts of a customer based on commodity contracts in one of the 
account classes, as well as, for purposes of identifying customer 
property for the foreign futures account class, accounts maintained by 
foreign futures intermediaries or foreign clearing organizations 
reflecting foreign futures.
    ``Court'' is proposed to be clarified to refer to the court having 
jurisdiction over the debtor's estate, reflecting that such court may 
not be a bankruptcy court (e.g., in the event of a withdrawal of the 
reference.) \61\
---------------------------------------------------------------------------

    \61\ Cf. 28 U.S.C. 157(d).

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

[[Page 36009]]

    ``Cover'' is proposed to be reworded to improve clarity; no 
substantive change is intended.
    ``Customer'' is proposed to be revised 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.
    ``Customer claim of record'' is proposed to be reworded to improve 
clarity; no substantive change is intended.
    ``Customer class'' is proposed to be revised to reflect the 
revisions to part 190 through this rulemaking, specifically emphasizing 
the difference between public customers and non-public customers.
    ``Customer property, customer estate'' is proposed to be updated to 
clarify cross-references and to note that customer property 
distribution is also addressed in section 766(i) of the Bankruptcy 
Code.
    ``Dealer option'' is proposed to be eliminated as this term is no 
longer used.
    ``Debtor'' is proposed to be revised 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.
    ``Delivery account'' is proposed to be cross-referenced to the new 
definition in ``account class.''
    ``Distribution'' is proposed to be defined to include 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.
    ``Equity'' is proposed to be amended to update a cross-reference.
    ``Exchange Act'' and ``FDIC'' definitions are proposed to be added 
as the Commission is taking into account both in these proposed rules.
    ``Filing Date'' is proposed to be revised to include the 
commencement date for proceedings under SIPA or Title II of the Dodd-
Frank Act.\62\
---------------------------------------------------------------------------

    \62\ 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 proposal does not define the term 
``filing date'' to occur earlier in such a case, although it would 
(in proposed Sec.  190.02(f), discussed below) authorize such a 
receiver to 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., proposed 
Sec. Sec.  190.00(c)(4), 190.06(a)(1) and (b)(1), 190.08(b)(4), 
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(a)(3), 15 U.S.C. 78fff-2(b), (c)(1), 
(d), 78fff-3(a)(3).
---------------------------------------------------------------------------

    ``Final net equity determination date'' is proposed to be revised 
stylistically, to provide updated cross-references, and to further 
clarify who the parties involved are intended to be.
    ``Foreign board of trade'' is proposed to be added, and adopts by 
reference the definition in Sec.  1.3 (which is consistent with Sec.  
48.2(a)).
    ``Foreign clearing organization'' is proposed to be added 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.
    ``Foreign future'' and ``Foreign futures commission merchant'' are 
unchanged.
    ``Foreign futures account'' is proposed to be cross-referenced to 
the new definition in ``account class.''
    ``Foreign futures intermediary'' is proposed 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.
    ``Funded balance'' is proposed to be revised to refer to the 
definition in proposed Sec.  190.08(c). That definition is discussed 
further below.
    ``Futures, futures contract'' is proposed to be added to clarify 
what these terms mean for purposes of part 190.
    ``Futures account'' is proposed to be cross-referenced to the new 
definition in ``account class.''
    ``House account'' is proposed to be modified to replace the current 
definition with one that (a) clarifies 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 defines the term 
in relation to an FCM, in relation to a foreign futures commission 
merchant, and in relation to a DCO.
    ``In-the-money amount'' is proposed to be deleted as the term will 
no longer be used. It is proposed to be replaced by ``in-the-money,'' a 
term that is Boolean, and is used in proposed Sec.  190.04(c).
    ``Joint account'' is proposed to be edited to reflect the fact that 
a commodity pool must be a legal entity.\63\ Thus, the reference to a 
commodity pool that is not a legal entity is removed.
---------------------------------------------------------------------------

    \63\ See Sec.  4.20(a)(1).
---------------------------------------------------------------------------

    ``Leverage contract'' and ``Leverage transaction merchant'' are 
proposed to be deleted, consistent with the discussion above with 
respect to proposed Sec.  190.00(d)(1)(i)(B).
    ``Member property'' is proposed to be moved from current Sec.  
190.09(a), and clarified to note that member property may be used to 
pay net equity claims based on claims on behalf of non-public customers 
of the member.
    ``Net equity'' is proposed to be revised to update cross-
references, including the difference between bankruptcy of an FCM and 
of a clearing organization.
    ``Non-public customer'' and ``public customer'': These definitions 
are complements (i.e., every customer is either a public customer or a 
non-public customer, but not both). The Commission is proposing to 
define who is considered a public versus a non-public customer 
separately for FCMs and for clearing organizations.
    In the case of a customer of an FCM, the proposed regulation would 
explicitly define ``public customer.'' \64\ The definition of public 
customer 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 Sec.  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. This would tie 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

[[Page 36010]]

non-public customers would be defined as customers that are not public 
customers.
---------------------------------------------------------------------------

    \64\ This is in contrast to the current definitions 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 proposed change would not be intended to be 
substantive, but rather would be intended to foster closely tying 
the account classes to business-as-usual segregation requirements.
---------------------------------------------------------------------------

    As part of the process for introducing a bespoke regime for the 
bankruptcy of a clearing organization, the proposed definitions also 
would differentiate between public and non-public customers for those 
purposes. Specifically, 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 proprietary member, then the customer 
would be treated as a proprietary member.
    ``Open commodity contract'' is proposed to be reworded to improve 
clarity; no substantive change is intended.
    ``Order for relief'' is proposed to be revised to update cross-
references and to be reworded for stylistic purposes.
    ``Person'' is proposed to be added as a definition to clarify what 
this term means.
    ``Physical delivery account class'' is proposed to be cross-
referenced to the new definition in ``account class.''
    ``Physical delivery property'' See discussion above under ``cash 
delivery property.''
    ``Premium'' is proposed to be deleted as that term is no longer 
used.
    ``Primary liquidation date'' is proposed to be revised to reflect 
the removal of the concept of accounts being held open for later 
transfer. As a result of such removal, the Commission would also delete 
current Sec.  190.03(a), which sets forth provisions regarding the 
operation of accounts held open for later transfer, since there will no 
longer be any such accounts.
    ``Principal contract'' is proposed to be deleted 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.
    ``Public customer'' is discussed under non-public customer.
    ``Securities Account'' and ``SIPA'' are proposed to be added 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.
    ``Security'' is proposed to be changed to update the cross-
reference to the Bankruptcy Code.
    ``Short term obligation'' is proposed to be removed as the term is 
no longer used. It would be removed from the definition of specifically 
identifiable property, and the concept of a duration or maturity date 
of 180 days or less would be stated explicitly in the text of that 
latter definition.
    ``Specifically identifiable property'': The Commission is proposing 
a new definition that updates and streamlines the definition in current 
Sec.  190.01(ll).
    The proposal in paragraph (1)(i) would focus on ``futures 
accounts,'' ``foreign futures accounts,'' and ``cleared swaps 
accounts.'' Paragraph (1)(i)(A) of the proposed definition corresponds 
in major part to paragraphs (ll)(1) and (6) of the current definition. 
For securities, paragraph (1)(i)(A)(1) of the proposal substantially 
copies current paragraph (ll)(1)(i), but would clarify that a security 
is not a short term obligation when it has ``a duration or maturity 
date of more than 180 days.'' Paragraph (1)(i)(A)(2) of the proposal 
simply would reformat 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 proposal 
would restate the corresponding portion of the current definition.
    Paragraph (1)(ii) of the definition in the proposal would further 
the approach of providing discretion to the trustee. It would include 
as specifically identifiable property commodity contracts that are 
treated as such in accordance with proposed Sec.  190.03(c)(2). As 
discussed further below,\65\ the latter provision would permit (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. It refers to open commodity 
contracts that meet the following criteria: They (A) have not been 
transferred, (B) are identified on the books and records of the debtor 
FCM as held for the account of a particular customer, and (C) are 
either bona fide hedging positions or transactions as defined in Sec.  
1.3 or are commodity option transactions that have been determined by 
the registered entity to be appropriate to the reduction of risks in 
the conduct and management of a commercial enterprise pursuant to rules 
that have been approved by the Commission pursuant to section 5c(c) of 
the CEA.
---------------------------------------------------------------------------

    \65\ See section II.B.1.
---------------------------------------------------------------------------

    Paragraph (ll)(3) of the current definition refers to documents of 
title, including warehouse receipts or bills of lading, or physical 
commodities that, as of the filing date, can be identified on the books 
and records of the debtor as received from or for the account of a 
particular customer as held specifically for the purpose of delivery or 
exercise. These types of property, to the extent included in the 
debtors estate, would be transposed in the proposed regulations to 
paragraphs (1) through (3) of the definition of physical delivery 
property, in this proposed Sec.  190.01, above, and discussed in that 
context.
    Paragraph (ll)(4) of the current definition refers to cash or other 
property deposited prior to the entry of the order for relief to pay 
for the taking of physical delivery on a long commodity contract, or 
the payment of the strike price upon exercise of a short put or a long 
call option contract on a physical commodity. Correspondingly, 
paragraph (ll)(5) of the current definition refers to the cash price 
tendered, for property deposited prior to the entry of the order for 
relief, where such property (i) has been deposited to make physical 
delivery on a short commodity contract, or for exercise of a long put 
or a short call option contract on a physical commodity, and (ii) is 
identified on the books and records of the debtor as received from or 
for the account of a particular customer on or after three calendar 
days before the first notice date (for delivery) or exercise date (for 
exercise). In either case, current paragraph (ll)(5) requires the 
customer to make delivery or exercise the option in accordance with the 
applicable contract market rules. These items both refer to cash, which 
is fungible, and thus are excluded from the definition of specifically 
identifiable property, but are instead proposed to be addressed in the 
definition of cash delivery property, the proper treatment of which is 
addressed in proposed Sec.  190.06(a)(3)(i)(B), discussed below.
    Current paragraph (ll)(7), which refers to open commodity contracts 
that have been transferred, would be deleted, in that open commodity 
contracts that

[[Page 36011]]

have been transferred are no longer part of the debtor's estate, and 
thus no longer subject to liquidation as part of a bankruptcy. While 
the customer may well have to provide margin to the transferee in order 
to collateralize the contract, that requirement does not deny the 
customer the protection applicable to specifically identifiable 
property.
    Current paragraph (ll)(8), limiting treatment as specifically 
identifiable property to the items specified in the definition thereof 
would be transposed to proposed paragraph (3), while current paragraph 
(ll)(9), which excludes security futures products and related 
collateral from specifically identifiable property, if they are held in 
a securities account, would be transposed to proposed paragraph (2).
    ``Strike price'' is proposed to be reworded for brevity. No 
substantive change is intended.
    ``Substitute customer property'': The Commission is proposing to 
add this definition 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.
    ``Swap'' is proposed as the term used to refer to what is in the 
current regulation referred to as a ``Cleared swap.'' \66\ The 
definition is proposed to be updated to reflect the current definition 
and meaning of the term ``swap'' under the Commission's rules and 
regulations outside of part 190. The definition also would 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\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    ``Trustee'' is proposed to be amended to include the trustee in a 
SIPA proceeding.
    ``Undermargined'': The Commission proposes to define 
``undermargined'' for purposes of part 190 as a futures account, 
foreign futures account, or cleared swaps account carried by the debtor 
is considered undermargined if 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, 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\
---------------------------------------------------------------------------

    \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-is-needed.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 proposed Sec.  
190.04(b)(4). 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.
---------------------------------------------------------------------------

    ``Variation Settlement'' is proposed to be added to define the 
payments a trustee may make with respect to open commodity contracts. 
It would include ``variation margin'' as defined in Sec.  1.3, and, in 
order to cover all of the potential obligations associated with an open 
commodity contract, also includes all other daily settlement amounts 
(such as price alignment payments) that may be owed or owing on the 
commodity contract.
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.01. In particular, are the revised definitions 
useful? Do any appear likely to lead to unintended consequences, and, 
if so, how may these best be mitigated?
3. Regulation 190.02: General
    Proposed Sec.  190.02(a)(1) is derived from current Sec.  
190.10(b)(1). There is one substantive change: the proposed section 
would permit a request to the Commission for exemption 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. This change would further 
major theme 7, discussed in section I.B above, of enhancing trustee 
discretion. It would allow, e.g., the trustee to request to be 
permitted to extend a deadline or to amend a form.
    Proposed Sec.  190.02(a)(2)(i) and (ii), (a)(3), and (b), are 
derived from current Sec. Sec.  190.10(b)(2), (3), and (4) and 
190.10(d), respectively, with minor editorial and conforming changes.
    Proposed Sec. Sec.  190.02(c) (forward contracts), (d) (other), and 
(e) (rule of construction) would be transposed from current Sec.  
190.10(e), (g), and (h), respectively.
    Proposed Sec.  190.02(f) would be added to enhance customer 
protection in cases where a receiver has been appointed (pursuant to 
e.g., section 6c of the CEA) for an FCM due to a violation or imminent 
violation \70\ 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 of this chapter). It would 
explicitly permit 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 in order to protect customers' interests in 
customer property.
---------------------------------------------------------------------------

    \70\ 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. 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.
---------------------------------------------------------------------------

    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.02. In particular, is it appropriate to permit 
trustees to request relief from procedural provisions such as 
requirements as to forms, in addition to requesting relief from 
deadlines? Is it appropriate to permit receivers for FCMs to file 
voluntary petitions in bankruptcy? Does any portion of proposed Sec.  
190.02 appear likely to lead to unintended consequences, and, if so, 
how may these be mitigated?

B. Subpart B--Futures Commission Merchant as Debtor

    The provisions of subpart B (proposed Sec. Sec.  190.03-190.10) 
address debtors that are FCMs.
1. Regulation Sec.  190.03: Notices and Proofs of Claims
    In proposed Sec.  190.03, the Commission is proposing to reorganize 
and revise much of current Sec.  190.02. Moreover, some portions of 
current Sec.  190.10 have been reorganized into proposed Sec.  190.03, 
and have been revised.

[[Page 36012]]

a. Regulation Sec.  190.03(a): Notices--Means of Providing
    Proposed Sec.  190.03(a)(1) is substantially similar to current 
Sec.  190.10(a). In an effort to modernize part 190, the Commission 
proposes to delete the current requirement that all mandatory or 
discretionary notices to be given to the Commission under part 190 be 
sent to the Commission via overnight mail (i.e., hard copy). Proposed 
Sec.  190.03(a)(1) would retain the requirement that all such notices 
be sent to the Commission via electronic mail. Overnight hard copy 
delivery is unnecessary, and removing the requirement to send notices 
to the Commission via overnight mail will result in cost savings.
    Proposed Sec.  190.03(a)(2) is a new paragraph proposed by the 
Commission to provide a general means of providing notice to customers 
under part 190. Proposed Sec.  190.03(a)(2) would replace the specific 
procedures for providing notice to customers that currently appear in 
Sec.  190.02(b) and, in light of evolving technology since the original 
issuance of part 190, implement a more generalized approach for giving 
notice to customers, whereby the trustee must establish and follow 
procedures ``reasonably designed'' for giving notice to customers under 
part 190. In addition, in an effort to modernize part 190, the 
Commission proposes to state that 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 to customers under part 190 and is consistent with the 
manner in which bankruptcy trustees in recent FCM bankruptcy cases have 
provided notice to customers. The Commission anticipates that adopting 
the more generalized approach to notifying customers set forth in 
proposed Sec.  190.03(a)(2), rather than retaining the specific notice 
requirements in the existing regulations, including newspaper 
publication, will result in both cost savings for the debtor's estate, 
and more efficient and effective notification of customers.
    The Commission requests comment as to the proposed approach to 
notice requirements set forth in proposed Sec.  190.03(a). Are the 
proposed changes helpful? Do the proposed revisions appear likely to 
lead to unintended consequences, and, if so, how may such consequences 
be mitigated?
b. Regulation Sec.  190.03(b): Notices to the Commission and Designated 
Self-Regulatory Organizations
    Proposed Sec.  190.03(b)(1) is derived from current Sec.  
190.02(a)(1). The time requirements set forth in proposed Sec.  
190.03(b)(1) are meant to ensure that the Commission and the relevant 
designated SRO (``DSRO'') \71\ will be aware of a bankruptcy filing or 
SIPA application as soon as is practicable. These changes to the 
regulation are designed to codify the practices observed in recent 
bankruptcy and SIPA cases.
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    \71\ For further detail regarding SROs and DSROs see generally 
Sec.  1.52.
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    The Commission proposes to revise the time within which a commodity 
broker must notify the Commission in the event of a voluntary or 
involuntary bankruptcy filing.\72\ First, proposed Sec.  190.03(b)(1) 
would provide that, in the event of a voluntary bankruptcy filing, the 
commodity broker must notify the Commission and the appropriate 
designated SRO (``DSRO'') as soon as practicable before, and in any 
event no later than, the time of filing.\73\
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    \72\ 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). (A 
commodity broker may only be a debtor under chapter 7. See generally 
section 109 of the Bankruptcy Code, 11 U.S.C. 109.) 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.
    \73\ The historical background of such notice is discussed below 
in section II.C.1.
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    Second, proposed Sec.  190.03(b)(1) would provide that, in the 
event of an involuntary bankruptcy filing or an application for a 
protective decree under SIPA,\74\ the commodity broker must notify the 
Commission and the appropriate DSRO immediately upon the filing of such 
petition or application.
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    \74\ A SIPA proceeding is commenced when SIPC files a petition 
for a protective order. See generally SIPA section 5, 15 U.S.C. 
78eee.
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    Moreover, as a practical matter, a decision to file for bankruptcy 
takes measurable time, as does the preparation of the necessary papers. 
The Commission notes that, in previous FCM voluntary bankruptcy 
filings, the commodity broker has provided the Commission and its DSRO 
with notice ahead of the bankruptcy filing. Proposed Sec.  190.03(b)(1) 
merely would codify the expectation that such advance notice should, in 
fact, occur to the extent practicable.
    Proposed Sec.  190.03(b)(1) further would amend current Sec.  
190.02(a)(1) by allowing 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. It is better that the Commission 
promptly be notified of the filing, rather than waiting for assignment 
and communication of the docket number.
    Proposed Sec.  190.03(b)(2), concerning intent to transfer customer 
accounts, is derived from current Sec.  190.02(a)(2). Current Sec.  
190.02(a)(2) provides that the trustee, the applicable DSRO, or the 
commodity broker 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 and relevant provisions of 
current part 190 no later than three days after the order for relief. 
Proposed Sec.  190.03(b)(2) would remove the deadline for such 
notification because three days 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 
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 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 the

[[Page 36013]]

Commission; thus, a specified deadline for such notification to occur 
would not appear to be helpful under such circumstances. The proposal 
also clarifies that notification should be made with respect to a 
transfer of customer property.
    The Commission requests comment on proposed Sec.  190.03(b). As 
proposed, would Sec.  190.03 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? Why or why not?
c. Regulation Sec.  190.03(c): Notices to Customers; Treatment of 
Hedging Accounts and Specifically Identifiable Property
    Proposed Sec.  190.03(c) introductory text would address notices to 
customers and treatment of hedging accounts and specifically 
identifiable property.
    Proposed Sec.  190.03(c)(1) would deal with notices to customers 
concerning specifically identifiable property other than open commodity 
contracts, and is derived from current Sec.  190.02(b)(1). Proposed 
Sec.  190.03(c)(1) would require 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, 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 proposed 
part 190.
    The Commission would remove the requirement that the trustee 
publish notice to customers regarding specifically identifiable 
property in a newspaper for two consecutive days prior to liquidating 
such property. Instead, the new notice requirement to customers under 
part 190 are contained in proposed Sec.  190.03(a)(2), which would 
provide that a trustee must establish and follow procedures 
``reasonably designed for giving adequate notice to customers.'' As 
noted above, this change is meant to provide the trustee with 
flexibility in notifying customers regarding specifically identifiable 
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.
    Pursuant to current Sec.  190.02(b)(1), the trustee may commence 
liquidation of specifically identifiable property on the sixth calendar 
day following the second publication date of the notice to customers. 
Because proposed Sec.  190.03(c)(1) would not require newspaper 
publication of customer notice, the Commission would allow 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.
    With respect to the return of specifically identifiable property, 
proposed Sec.  190.03(c)(1) would add that the trustee's notice to 
customers whose futures accounts, foreign futures accounts, or cleared 
swaps accounts include specifically identifiable property must specify 
the terms upon which such property may be returned, ``including, if 
applicable and to the extent practicable, any substitute customer 
property that must be provided by the customer.'' This addition is 
meant to make clear that the trustee's notice to customers with 
specifically identifiable property should include, where applicable, a 
reference to substitute customer property.\75\
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    \75\ For an explanation of why proposed Sec.  190.03(c)(1) would 
refer to ``substitute customer property'' rather than ``cash,'' 
please see discussion below, section II.B.7, in connection with 
proposed Sec.  190.09(d)(1).
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    Proposed Sec.  190.03(c)(2) would change how a bankruptcy trustee 
may treat open commodity contracts carried in hedging accounts to a 
categorical approach; it would replace the bespoke approach of current 
Sec.  190.02(b)(2). Part 190 currently treats hedging positions as a 
type of specifically identifiable property, where the customer is given 
special rights, namely, to have the trustee endeavor to avoid 
liquidating its hedging positions.\76\ Under current Sec.  
190.02(b)(2), the trustee treats customers with specifically 
identifiable open commodity contracts 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 is required to liquidate such contracts within a 
certain time period.
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    \76\ See current Sec. Sec.  190.01(ll), 190.02(f)(1)(ii), and 
190.04(e)(1).
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    Proposed Sec.  190.03(c)(2) would take a more categorical approach 
with respect to open commodity contracts. As discussed in major theme 7 
in section I.B above, 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 within days--in some cases, 
hours--after being appointed.
    In light of the practical difficulties of treating such large 
numbers of customers with similar open commodity contracts on a bespoke 
basis, under proposed Sec.  190.03(c)(2), the Commission is proposing 
instead to give the trustee 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.\77\ To the 
extent the trustee exercises such authority, proposed Sec.  
190.03(c)(2) would provide that the trustee must notify each relevant 
public customer in accordance with proposed Sec.  190.03(a)(2) and 
request that the customer provide instructions whether to transfer or 
liquidate the relevant open commodity contracts.\78\
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    \77\ See also discussion of ``Changing the Special Treatment for 
Hedge Positions'' in the ABA Cover Note:
    Given the policy preference set out in the Model Part 190 Rules 
that the trustee should attempt to port positions of public 
customers, which in practice is what typically occurs in actual 
subpart IV proceedings, we question the need to provide special 
protection to assure that hedge positions are transferred. We are 
also concerned that if a trustee is required to identify hedge 
accounts and provide the hedge account holders the opportunity to 
keep their positions open, that could interfere with the trustee's 
ability to take prudent and timely action to manage the debtor FCM's 
estate to protect all customers. We have attempted to strike a 
balance by allowing the trustee to provide special hedge account 
treatment when it is practical to do so.
    ABA Cover Note at 11-12.
    \78\ The Commission also would make 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 proposed Sec.  190.10(b). 
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 proposed Sec.  190.10(b)(3).
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    Proposed Sec.  190.03(c)(2) would also require the notice to 
customers to inform the customer that (i) 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; (ii) any transfer of the open 
commodity contracts is subject to the terms for distribution contained 
in

[[Page 36014]]

proposed Sec.  190.09(d)(2); (iii) absent compliance with any terms 
imposed by the trustee or the court, the trustee may liquidate the open 
commodity contracts; and (iv) providing instructions may not prevent 
the open commodity contracts from being liquidated.
    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 would 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. The Commission is 
proposing to make these changes to reflect the policy preference to 
port all positions of public customers. Requiring a trustee to identify 
hedging accounts and provide the hedging account holders the 
opportunity to keep their positions open may be a resource and time 
intensive process, which 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. By allowing the FCM to rely on 
representations made by customers during business-as-usual, the trustee 
will be able to take timely and prudent action to manage the debtor 
FCM's estate and protect all customers. In cases where it may be 
practical, the trustee may elect to provide special hedging account 
treatment.
    Proposed Sec.  190.03(c)(3) would address notice of an involuntary 
bankruptcy proceeding, and is derived from current Sec.  190.02(b)(3). 
Both sections provide that a trustee appointed in an involuntary 
proceeding may notify customers of the commencement of such a 
proceeding prior to entry of an order for relief, and upon leave of the 
court, and that a trustee in an involuntary proceeding may request 
customer instructions with respect to the return, liquidation or 
transfer of specifically identifiable property. Proposed Sec.  
190.03(c)(3) would add a specific reference to proposed Sec.  
190.03(a)(2), which would set forth the procedure the trustee must 
follow in providing notice to customers. This change is intended to 
make clear that the notice described in proposed Sec.  190.03(c)(3) 
must be in accordance with the notice provisions set forth in proposed 
Sec.  190.03(a)(2). In addition, the Commission proposes to change the 
reference to ``the trustee'' in current Sec.  190.02(b)(3) to ``a 
trustee'' in proposed Sec.  190.03(c)(3) since appointment of a trustee 
in an involuntary bankruptcy proceeding is not automatic.\79\ Lastly, 
the Commission would delete the specific reference to ``open commodity 
contracts at the end of current Sec.  190.02(b)(3); given that the 
treatment of open commodity contracts as specifically identifiable 
property is likely to be less relevant under the proposed regulations, 
the Commission is proposing that such specific reference is 
unnecessary.
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    \79\ See 11 U.S.C. 303(g).
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    Proposed Sec.  190.03(c)(4) would require the bankruptcy trustee to 
notify customers that an order for relief has been entered and instruct 
customers to file a proof of customer claim and is derived from current 
Sec.  190.02(b)(4). Proposed Sec.  190.03(c)(4) would add a specific 
reference to proposed Sec.  190.03(a)(2), which would set forth the 
procedure the trustee must follow in providing notice to customers. 
This change would make clear that the notice described in proposed 
Sec.  190.03(c)(4) must be in accordance with the notice provisions set 
forth in proposed Sec.  190.03(a)(2).
    In addition, the Commission would replace the term ``customer of 
record'' in current Sec.  190.02(b)(4) with ``customer'' in proposed 
Sec.  190.03(c)(4). The term ``customer of record'' is not a defined 
term in part 190, and the Commission notes that whether or not a 
customer qualifies as a ``customer of record,'' all customers should 
receive notice that an order for relief has been entered. Specifically, 
those customers for whom the debtor has contact information in its 
records should be notified using such contact information. For those 
customers whose contact information is not available in the debtor's 
records, notice is effectively given via the use of a website pursuant 
to proposed Sec.  190.03(a)(2).
    Proposed Sec.  190.03(c)(4) also would provide that the trustee 
shall cause the proof of customer claim form to set forth the bar date 
for its filing, a requirement that exists in current Sec.  190.02(d).
    The Commission requests comment on proposed Sec.  190.03(c). Are 
the proposed changes to the notice requirements helpful? Is the grant 
of discretion to the trustee concerning whether hedging accounts should 
be treated as specifically identifiable property (based on a policy of 
facilitating cost effective and prompt administration of the debtor's 
estate) appropriately tailored? Do the proposed revisions appear likely 
to lead to unintended consequences, and, if so, how may such 
consequences be mitigated?
d. Regulation Sec.  190.03(d): Notice of Court Filings
    Proposed Sec.  190.03(d) addresses notice of court filings and is 
derived from current Sec.  190.10(f). The Commission would replace the 
term ``court papers'' in current Sec.  190.10(f) to ``court filings'' 
in proposed Sec.  190.03(d), as, in the Commission's view, the term 
``court filings'' is a more accurate description, given that the 
modernization of court filings means that many are filed electronically 
rather than in paper form. In addition, whereas current Sec.  190.10(f) 
provides that all court papers must be directed to the Washington, DC 
headquarters of the Commission, in an effort to modernize this 
paragraph, proposed Sec.  190.03(d) would refer back to proposed Sec.  
190.03(a)(1), which requires notices to the Commission to be sent by 
electronic mail.
    The Commission requests comment on proposed Sec.  190.03(d). Do the 
proposed revisions appear likely to lead to unintended consequences, 
and, if so, how may such consequences be mitigated?
e. Section 190.03(e): Proof of Customer Claim
    Proposed Sec.  190.03(e) would set forth the requirement for a 
trustee to request that customers provide information sufficient to 
determine a customer's claim in accordance with the regulations 
contained in part 190, and is derived from current Sec.  190.02(d). The 
proposed regulation would list certain information that customers shall 
be requested to provide, to the extent reasonably practicable, but 
would grant the trustee discretion to adapt the request to the facts of 
the particular case. This discretion would be granted to the trustee in 
order to enable them to tailor the proof of claim form to the 
information that, in the considered view of the trustee, 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).
    Proposed Sec.  190.03(e) would reorganize and revise certain 
information items that are listed in current Sec.  190.02(d), though 
most of the information items listed in proposed Sec.  190.03(e) 
correspond to those listed in current Sec.  190.02(d). The changes to 
the listed information items are as follows:
     Proposed Sec.  190.03(e)(1) corresponds to current Sec.  
190.02(d)(1). Proposed Sec.  190.03(e)(1) would add, for clarity, the 
four types of commodity contract

[[Page 36015]]

accounts as defined in proposed Sec.  190.01.
     Proposed Sec.  190.03(e)(2) corresponds to current Sec.  
190.02(d)(4). Proposed Sec.  190.03(e)(2) would ask whether the 
claimant itself is a public or non-public customer, rather than asking 
whether the account is a public or non-public customer account, as 
current Sec.  190.02(d)(4) does. In the Commission's view, such a 
revision corresponds to the fact that ``public customer'' and ``non-
public customer'' are the terms that would be defined in proposed part 
190, and the information provided by customers should correspond to 
those defined terms.
     Proposed Sec.  190.03(e)(3) would gather certain 
information that should be collected with respect to commodity contract 
accounts held by each claimant with the debtor. Much of the information 
that would be requested in proposed Sec.  190.03(e)(3) is included in 
current Sec.  190.02(d), though it would be reorganized and several 
information items would be revised. Proposed Sec.  190.03(e)(3) would 
ask for (i) the account number; (ii) the name in which the account is 
held; (iii) the balance as of the last account statement and any 
subsequent activity that would affect the balance of the account as 
stated on the last account statement; (iv) the capacity in which the 
account is held; (v) whether the account is a joint account and, if so, 
the claimant's percentage interest in the account; (vi) whether the 
account is discretionary; (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.
     Proposed Sec.  190.03(e)(4) would seek information 
regarding any accounts held by the claimant with the debtor that are 
not commodity contract accounts. Proposed Sec.  190.03(e)(4) would be 
added in order for a claimant to provide a full picture of all accounts 
it holds with the debtor beyond those classified as commodity contract 
accounts that are listed in response to paragraph (e)(3) of this 
section.
     Proposed Sec.  190.03(e)(5) is derived from current Sec.  
190.02(d)(6). Proposed Sec.  190.03(e)(5) would seek information 
regarding all claims against the debtor not based upon a commodity 
contract account or an account listed in response to paragraph (e)(4) 
of this section. This provision is meant for a claimant to provide a 
full picture of all claims it has against the debtor beyond those 
arising from its commodity accounts with the debtor.
     Proposed Sec.  190.03(e)(6) is the same as current Sec.  
190.02(d)(7). Proposed Sec.  190.03(e)(6) would seek information 
regarding any claims of the debtor against the claimant. Proposed Sec.  
190.03(e)(6) would be included in order for a claimant to provide any 
information about amounts it might owe to the debtor.
     Proposed Sec.  190.03(e)(7) is derived from current Sec.  
190.02(d)(8), though the wording would be revised from that in current 
part 190. While current Sec.  190.02(d)(8) asks about any ``deposits of 
money, securities or property'' that the claimant holds with the 
debtor, proposed Sec.  190.03(e)(7) would seek information regarding 
``any open positions, unliquidated securities or other unliquidated 
property'' that the claimant may hold with the debtor. This change is 
meant to correspond to the various forms that specifically identifiable 
property may take. In addition, proposed Sec.  190.03(e)(7) explicitly 
would ask for the value of any open positions, unliquidated securities 
or other unliquidated property. A claimant in an FCM bankruptcy should 
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.
     Proposed Sec.  190.03(e)(8) corresponds to current Sec.  
190.02(d)(11). The Commission is proposing slight revisions to the text 
in the proposed regulation and would ask the claimant to first identify 
whether it holds positions in security futures products and, only if 
so, to specify the type of account(s) in which such positions are held.
     Proposed Sec.  190.03(e)(9) corresponds to current Sec.  
190.02(d)(12). The Commission would change the word ``possible'' to 
``practicable'' to clarify that there may be situations where payment 
in kind is indeed possible but not practicable, and thus to manage 
expectations.
     Proposed Sec.  190.03(e)(10) is the same as current Sec.  
190.02(d)(13). The Commission continues to believe that a claimant in 
an FCM bankruptcy proceeding should provide copies of any documents 
that support the information contained in the proof of customer claim.
    There is one information item listed in current Sec.  190.02(d) 
that would not appear in proposed Sec.  190.03(e). Proposed Sec.  
190.03(e) would not include current Sec.  190.02(d)(9), which asks 
whether the claimant is or was an ``affiliate,'' ``insider,'' or 
``relative'' of the debtor as those terms are defined by sections 
101(2), (25), and (34) of the Bankruptcy Code. This deletion is 
proposed due to the fact that proposed Sec.  190.03(d)(4) now asks 
whether the claimant is a public or non-public customer, terms that are 
defined within proposed part 190. Therefore, a reference to terms as 
defined in the Bankruptcy Code is no longer necessary.
    Finally, the header language to proposed Sec.  190.03(e), unlike 
that to current Sec.  190.02(d), would not contain a requirement that 
the proof of customer claim form set forth the bar date for its filing 
because such requirement would be moved to proposed Sec.  190.03(c)(4), 
as discussed above.
    The Commission requests comment on proposed Sec.  190.03(e). Are 
the proposed changes helpful? Is the grant of discretion to the trustee 
concerning the data to be requested appropriately tailored? Do the 
proposed revisions appear likely to lead to unintended consequences, 
and, if so, how may such consequences be mitigated?
f. Regulation Sec.  190.03(f): Proof of Claim Form
    Proposed Sec.  190.03(f) is a new paragraph which would provide 
that a template proof of claim form is included as appendix A to part 
190.\80\ The Commission would substantially revise the customer proof 
of claim form referred to in proposed Sec.  190.03(f), and that is 
described above in the discussion of proposed Sec.  190.03(e). In 
revising the customer proof of claim form, the Commission has 
endeavored to streamline the form, and to better map it to the 
information listed in proposed Sec.  190.03(e). In that respect, the 
revised customer proof of claim form now would include, in each 
section, citations to the location in the text of proposed Sec.  
190.03(e) where such information is listed.
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    \80\ Appendix A is discussed in section II.D below.
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    Proposed Sec.  190.03(f)(1) would provide 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. This would be the case, if, e.g., 
all open commodity contracts had been transferred or liquidated before 
the proof of claim form is sent. Proposed Sec.  190.03(f)(2) would make 
clear that the trustee has discretion 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 proposed Sec.  190.03(f), taken together, are meant to 
provide bankruptcy trustees with the appropriate flexibility to 
determine the

[[Page 36016]]

best and most efficient way to compose the customer proof of claim 
form.
    The Commission requests comment on proposed Sec.  190.03(f). Are 
the proposed changes to the treatment of the proof of customer claim 
form helpful? Do the revisions appear likely to lead to unintended 
consequences, and, if so, how may such consequences be mitigated? Is 
the discretion granted to the trustee appropriately tailored? If not, 
what changes should be made?
2. Regulation Sec.  190.04: Operation of the Debtor's Estate--Customer 
Property
    Proposed Sec.  190.04 would address the collection of margin and 
variation settlement, as well as the liquidation and valuation of 
positions. The Commission is proposing to clarify and update portions 
of current Sec. Sec.  190.02, 190.03, and 190.04 in its proposed Sec.  
190.04. Changes from the current to the proposed regulation text are 
discussed below.
    The Commission is proposing to revise current Sec.  190.02(e) 
regarding transfers for customers in a bankruptcy proceeding in 
proposed Sec.  190.04(a). It would largely retain the current 
provisions, including the identification of a clear policy preference 
\81\ 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.\82\ 
Proposed Sec.  190.04(a)(1) would provide 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 immediately'' do so. 
This revision would be a minor change, designed to signal to the 
trustee to take action to transfer open commodity contracts as soon as 
practicable, while avoiding the potential pressure of the term 
``immediately'' in light of the challenges presented in an FCM 
bankruptcy. In addition, in proposed Sec.  190.04(a)(2), the Commission 
is proposing a clarifying change to replace the term ``equity'' with 
``property.'' In doing so, the Commission would 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 also would add the word ``public'' 
before ``customers'' to clarify that the transfers discussed in 
proposed Sec.  190.04(a)(1) relate to the open commodity contracts and 
property of the debtor's public customers.\83\
---------------------------------------------------------------------------

    \81\ The rationale for this policy preference is addressed in 
the discussion of proposed Sec.  190.00(c)(4) in section II.A.1 
above. See also ABA Cover Note at 14 (``We recommend explicitly 
identifying in proposed Rule 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.''
    \82\ Proposed Sec.  190.04(a) also would contain updated cross-
references to other provisions within proposed part 190 that discuss 
transfers of customer property.
    \83\ The Commission is proposing the same change--addition of 
the word ``public'' before ``customers''--to proposed Sec.  
190.04(a)(2), discussed below.
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    Proposed Sec.  190.04(a)(2) is derived from current Sec.  
190.02(e)(2), and would address transfers in the case of involuntary 
proceedings. In proposed Sec.  190.04(a)(2), the Commission would 
strike language from current Sec.  190.02(e)(2), addressing involuntary 
cases, that would limit a commodity broker against which an involuntary 
petition in bankruptcy is filed to trading for liquidation only unless 
otherwise directed by the Commission, by any applicable self-regulatory 
organization or by the court. Limitations on the business of an FCM in 
bankruptcy would be dealt with more generally in proposed Sec.  
190.04(e)(4); there is no need to separately address involuntary 
cases.\84\ Proposed Sec.  190.04(a)(2), like current Sec.  
190.02(e)(2), also would provide that if such a 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 would 
retain this provision because, in the Commission's view, 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 preliminarily 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, similarly to proposed Sec.  
190.04(a)(1), discussed above, the Commission would replace the term 
``equity'' with ``property'' to clarify that the transfers discussed in 
proposed 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, as in proposed Sec.  190.04(a)(1), discussed 
above, the Commission would add the word ``public'' before 
``customers'' to clarify that the transfers discussed in proposed Sec.  
190.04(a)(1) relate to the open commodity contracts and property of the 
debtor's public customers.
---------------------------------------------------------------------------

    \84\ The reference to ``liquidation'' further down in current 
Sec.  190.02(e)(4) accordingly would be deleted, since the 
limitation to trading for liquidation only would be deleted from the 
proposed provision.
---------------------------------------------------------------------------

    In proposed Sec.  190.04(b)(1), the Commission would clarify and 
update the provisions in current Sec.  190.02(g)(1) allowing a trustee 
to make ``variation and maintenance margin payments'' on behalf of the 
debtor FCM's customers. While the proposed regulation is intended to be 
consistent with the current regulation, there are a number of 
substantive changes to the proposed regulation from the current 
regulation text.
    First, the current regulation limits margin payments to ``pending 
liquidation.'' In fact, the approach consistent with the Commission's 
longstanding policy is 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. 
The regulation would accordingly be revised to permit the trustee to 
make margin payments pending transfer or liquidation, not just pending 
liquidation.
    Second, the current provision could be read to prohibit margin 
payments for contracts that are being held open. 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 proposed 
regulation would delete the phrase ``required to be liquidated under 
paragraph (f)(1) of this section'' and thus would instead apply more 
broadly to any open commodity contracts.
    The following changes are more technical in nature.
    Third, the proposed regulation would replace 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 proposed regulation would replace 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 proposed 
regulation would replace the phrase ``specifically identifiable to a 
particular customer'' with ``specifically identifiable property of a 
particular customer'' in order to be consistent with

[[Page 36017]]

the definitions in proposed part 190, which includes as a defined term 
``specifically identifiable property.''
    Proposed Sec.  190.04(b)(1)(i), which is derived from current Sec.  
190.02(g)(1)(i), would 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 also would add the 
phrase ``to the extent within the trustee's control'' as recognition of 
the fact 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, lastly, would add a 
proviso noting that proposed 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. The Commission is 
proposing this addition 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.
    Proposed Sec.  190.04(b)(1)(ii) is new and would add a restriction 
that the trustee cannot make an upstream margin payment with respect to 
a specific customer account that would exceed the funded balance of 
that account. This revision would be consistent with the pro rata 
distribution principle discussed in proposed 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.
    Proposed Sec.  190.04(b)(1)(iii) would make some minor non-
substantive clarifications of the language in current Sec.  
190.02(g)(1)(ii), but retains 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.
    Proposed Sec.  190.04(b)(1)(iv)-(v) would expand and clarify 
current Sec.  190.02(g)(1)(iii) \85\ to provide that margin must be 
used consistent with the requirements of section 4d of the CEA.\86\ 
First, proposed Sec.  190.04(b)(1)(iv) would 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,\87\ the trustee must 
use such payments to make margin payments for the open commodity 
contract positions of such customer. Second, proposed Sec.  
190.04(b)(1)(v) would 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), it may be impracticable for a trustee to follow paragraph 
(b)(1)(iv); in such a situation, 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.\88\
---------------------------------------------------------------------------

    \85\ 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 . . . .''
    \86\ See 7 U.S.C. 6d.
    \87\ The Commission's proposal to use the phrase ``to the extent 
within the trustee's control'' would recognize the reality that 
certain accounts are held on an omnibus basis. See discussion of 
proposed Sec.  190.04(b)(1)(i) above.
    \88\ See proposed Sec.  190.08(c)(1)(ii).
---------------------------------------------------------------------------

    Proposed Sec.  190.04(b)(1)(vi) has its analog in current Sec.  
190.02(g)(1)(iv), but would build upon the concept in the current 
regulation. Current Sec.  190.02(g)(1)(iv) provides that no payments 
need be made to restore initial margin, thus noting that such payments 
are not required but implicitly allowing such payments to be made. 
Proposed Sec.  190.04(b)(1)(vi) would explicate this in more detail and 
provides more comprehensive guidance to the trustee about when such 
payments may be made. Specifically, proposed Sec.  190.04(b)(1)(vi) 
would provide 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 under-margined, but not in deficit, and sets conditions around such 
use.
    In proposed Sec.  190.04(b)(2), the Commission would update 
existing Sec.  190.02(g)(2), which concerns margin calls made by a 
trustee with respect to under-margined accounts of public customers. 
The Commission would remove the current requirement that the trustee 
issue such 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. The 
proposed changes, as reflected in proposed Sec.  190.04(b)(2), would 
recognize that an FCM in bankruptcy will be operated in crisis mode, 
and may be pending wholesale transfer or liquidation of open 
positions.\89\ Therefore, the Commission would allow for the 
possibility that the trustee may issue margin calls. The specification 
of highly prescriptive conditions for issuing such calls is no longer 
appropriate, given the Commission's proposal that whether or not to 
make such a call is now based on the trustee's discretion.
---------------------------------------------------------------------------

    \89\ See generally major theme 7 discussed in section I.B above.
---------------------------------------------------------------------------

    Proposed Sec.  190.04(b)(3) is largely similar to current Sec.  
190.02(g)(3), with updated cross-references. The Commission would 
retain in proposed Sec.  190.04(b)(3) 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. Since these post-
petition margin payments by the customer are fully counted toward the 
customer's net allowed equity claims, under proposed Sec.  
190.04(b)(3), they would not be subject to pro rata distribution (in 
contrast to the treatment of the debtor commodity broker's pre-petition 
obligations to customers).
    Proposed Sec.  190.04(b)(4) addresses the trustee's obligation to 
liquidate certain open commodity contracts, in particular, those in 
deficit and those where the customer has failed promptly to meet a 
margin call. It would be a combination of current Sec. Sec.  
190.03(b)(1) and (2) and 190.04(e)(4).
    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.\90\ 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.\91\ These 
ongoing requirements are intended to protect other customers with 
positive account balances.
---------------------------------------------------------------------------

    \90\ See, e.g., Sec. Sec.  1.22(i)(4), 1.23(a)(2).
    \91\ See, e.g., Sec.  1.22(c)(3).
---------------------------------------------------------------------------

    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.\92\ Proposed Sec.  190.04(b)(4) is

[[Page 36018]]

intended to mitigate the risk to those other customers by directing the 
trustee to liquidate such accounts.
---------------------------------------------------------------------------

    \92\ While the trustee may seek to recover any debit balance 
from a customer, see proposed Sec.  190.09(a)(1)(ii)(E), proposed 
Sec.  190.04(b)(4) proceeds from the conservative assumption that 
such efforts will be unsuccessful.
---------------------------------------------------------------------------

    In light of the importance of mitigating this fellow-customer risk, 
proposed Sec.  190.04(b)(4) would, in contrast to many of the other 
proposed changes to part 190, act to cabin the trustee's discretion. 
Specifically, it would first provide 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. This requirement, in part, would reflect 
current Sec.  190.03(b)(1) and (2). 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.'' \93\ In proposed Sec.  190.04(b)(4), the 
Commission would add 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 proposed revised language would 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'' calculation 
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 proposed regulation would direct the 
trustee to begin the liquidation process immediately upon gaining that 
awareness, rather than delaying until the time when a margin payment is 
due.
---------------------------------------------------------------------------

    \93\ 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.
---------------------------------------------------------------------------

    Proposed Sec.  190.04(b)(4) further would provide 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.\94\ This proposed language is largely reflective of current 
Sec.  190.04(e)(4), though it would add 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. This revision would 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.
---------------------------------------------------------------------------

    \94\ 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 undermargined 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 undermargined account without notice).
---------------------------------------------------------------------------

    The Commission would delete current Sec.  190.03(b)(3), which would 
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. This change is being proposed as part of a move from 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.\95\
---------------------------------------------------------------------------

    \95\ Cf. major theme 7 in section I.B above.
---------------------------------------------------------------------------

    Proposed Sec.  190.04(b)(5) is new, and would provide guidance to 
the trustee in assigning liquidating positions \96\ to the debtor FCM's 
customers when only a portion of the open commodity contracts in an 
omnibus account are liquidated. It is intended 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 proposed Sec.  190.04(b)(4) above, at the risk of other customers. 
To mitigate the risk of such losses, the provision would establish 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 under-margined; \97\ and finally to liquidate any remaining open 
commodity contracts. Where there are multiple accounts in any of these 
groups, the trustee would be instructed to, to the extent practicable, 
allocate such liquidating transactions pro rata. The proposed section 
would explain that the term ``risk-reducing manner'' is measured by the 
margin methodology and parameters 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.''
---------------------------------------------------------------------------

    \96\ 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.
    \97\ And thus are next at risk of going into deficit.
---------------------------------------------------------------------------

    Proposed 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. It has its analog in current Sec.  
190.03(b)(5) and would incorporate 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. Proposed Sec.  190.04(c) would have 
the same purpose, but would use more explicit language regarding 
physical delivery, referring to ``any open commodity contract that 
settles upon expiration or exercise via the making or taking of 
delivery of a commodity,'' and moving into the delivery position. In 
addition, proposed Sec.  190.04(c) would expand on current Sec.  
190.03(b)(5) to include explicit reference to how options on 
commodities move into delivery position, some of which is taken from 
current Sec.  190.02(f)(1)(ii).
    Proposed Sec.  190.04(d) is derived from current Sec. Sec.  
190.02(f) and 190.04(d). Specifically, proposed Sec.  190.04(d) would 
set 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

[[Page 36019]]

the market or by book entry offset, promptly and in an orderly 
manner.\98\
---------------------------------------------------------------------------

    \98\ The Commission is proposing three non-substantive changes 
in the header language to proposed Sec.  190.04(d) from that in 
current Sec.  190.02(f): (1) Addition of the phrase ``except as 
otherwise set forth in this paragraph (d)'' to account for any 
exceptions that are included in the subsections under the header 
language; (2) 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) deletion of the 
phrase ``subject to limit moves and to applicable procedures under 
the Bankruptcy Code.''
---------------------------------------------------------------------------

    Importantly, the Commission would retain the requirement, present 
in the header language to current Sec.  190.02(f), that the trustee 
effect such liquidation ``in an orderly manner.'' This is to recognize 
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.''
    Proposed Sec.  190.04(d)(1) derives from current Sec.  
190.02(f)(1), and would provide 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.\99\ In the former case (specifically identifiable property), 
proposed Sec.  190.04(d)(1) would revise the language of current Sec.  
190.02(f)(1)(ii) to add references to the provisions of proposed Sec.  
190.03(c)(2) (concerning the trustee's option to treat hedging accounts 
as specifically identifiable property) and proposed 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).\100\ The latter exception, for open commodity contract 
positions that are in a delivery position is new, and would provide 
that such positions should be treated in accordance with proposed Sec.  
190.06, which concerns delivery.\101\
---------------------------------------------------------------------------

    \99\ Proposed Sec.  190.04(d)(1) would also delete the reference 
in current Sec.  190.02(f)(1)(i) to dealer option contracts since 
such term is no longer used.
    \100\ As noted above in the discussion of proposed Sec.  
190.04(c), part of current Sec.  190.02(f)(1)(ii) would be 
incorporated into proposed Sec.  190.04(c), and therefore would not 
appear in proposed Sec.  190.04(d)(1).
    \101\ As noted in section II.A.1 above in the discussion of 
proposed 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.
---------------------------------------------------------------------------

    Proposed Sec.  190.04(d)(2) would describe when specifically 
identifiable property, other than open commodity contracts or physical 
delivery property must be liquidated. This provision derives from 
current Sec.  190.02(f)(2), but would contain a number of revisions.
    First, the proposed provision would apply 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. 
This change is intended 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,\102\ the 
proposed regulation (in paragraph (d)(2)(i)) changes that figure to 75% 
of the fair market value, in order to provide greater discretion to the 
trustee to forego or postpone liquidation in appropriate cases.
---------------------------------------------------------------------------

    \102\ See current Sec.  190.02(f)(2)(i).
---------------------------------------------------------------------------

    Third, the proposed regulation (in paragraph (d)(2)(ii)) would add 
an additional condition that would 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, the proposed regulation (in paragraph (d)(2)(iii)), while 
similar to current Sec.  190.02(f)(2)(ii), would include updated cross-
references to the provisions in proposed part 190 that discuss the 
return of specifically identifiable property.
    Proposed Sec.  190.04(d)(3) is new, and is intended to codify 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.\103\ Accordingly, customers who post letters of credit as 
margin would be treated no differently than other customers and thus 
would suffer the same pro rata loss.
---------------------------------------------------------------------------

    \103\ 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].'')
---------------------------------------------------------------------------

    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; \104\ the codifications of this policy in proposed 
Sec. Sec.  190.00(c)(5) (clarifying policy), 190.04(d)(3) (treatment in 
bankruptcy), and 190.10(d) (treatment during business as usual) are 
intended to effectively implement the policy and to forestall any 
future challenge.
---------------------------------------------------------------------------

    \104\ See ConocoPhillips v. Giddens, No. 12 Civ. 6014, 2012 WL 
4757866 (S.D.N.Y. 2012)
---------------------------------------------------------------------------

    Proposed paragraph (d)(3) would provide 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 would 
apply whether the letter of credit is held by the trustee on behalf of 
the debtor's estate or a DCO or 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. Proposed paragraph (d)(3)(i) would provide 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.
    Proposed paragraph (d)(3)(ii) would address 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 would be 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 would 
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 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.

[[Page 36020]]

    Paragraph (d)(3)(iii) would confirm 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.
    Proposed Sec.  190.04(d)(4), which would provide for the 
liquidation of all other property not required to be transferred or 
returned pursuant to customer instructions and which has not been 
liquidated, is derived from current Sec.  190.02(f)(3). Proposed Sec.  
190.04(d)(4) would except from the liquidation requirement any 
``physical delivery property held for delivery in accordance with the 
provision of'' proposed Sec.  190.06, in order to avoid interfering 
with the physical delivery process.
    In proposed Sec.  190.04(e), the Commission would provide details 
regarding the liquidation and valuation of open positions.\105\ This 
paragraph is derived from current Sec.  190.04(d), subject to a number 
of changes.
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    \105\ In proposed Sec.  190.08(d), the Commission would 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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    Proposed Sec.  190.04(e)(1)(i), which would describe the process of 
liquidating open commodity contracts when the debtor is a member of a 
clearing organization, is derived from current Sec.  190.04(d)(1)(ii). 
Both the current and the proposed regulations include an emphasis on 
achieving 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-certification 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 proposing in Sec.  
190.04(e)(1)(i) to delete the requirement, contained in current Sec.  
190.04(d)(1)(i), that a clearing organization obtain approval pursuant 
to section 5c(c) of the CEA for its rules regarding liquidation of open 
commodity contracts.
    Proposed Sec.  190.04(e)(1)(i) also would add 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 new provision would be analogous to the 
current one, but would additionally extend to cases where the debtor 
FCM is a member of a foreign clearing organization.
    Proposed Sec.  190.04(e)(1)(ii) is new. It would provide 
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, the proposed regulation would provide 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 would add 
this provision in order to account for those circumstances where the 
trustee must liquidate open commodity contracts for a debtor that is 
not a clearing member.
    As with proposed Sec.  190.04(e)(1)(i), the Commission would delete 
the rule approval requirement in proposed Sec.  190.04(e)(2) for the 
same reasons stated above. Proposed Sec.  190.04(e)(2) is derived from 
current Sec.  190.04(d)(1)(ii). The proposed regulation would provide 
for 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.
    Proposed Sec.  190.04(e)(3) is new. It would 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. The proposed rule would confirm 
that the upstream intermediary may exercise such rights. However, there 
would be a proviso: 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, designated contract market, swap execution 
facility 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 are the trustee's 
sole available remedy; the proposed regulation makes clear that ``[i]n 
no event shall any such liquidation be voided.''
    Proposed Sec.  190.04(e)(4)(i) and (ii) derive from current Sec.  
190.04(d)(2) and (3), respectively, with some minor non-substantive 
language changes and updated cross-references.
    Proposed Sec.  190.04(f) derives from current Sec.  190.04(e)(5). 
Proposed Sec.  190.04(f) would contain only minor non-substantive 
changes from the current regulation text, 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 requests comment with respect to all aspects of 
proposed Sec.  190.04. Specifically, do the revisions create any 
unintended conflicts with customer protection regulations set forth in 
parts 1, 22, and 30? If so, how may such conflicts be resolved? Are any 
of the proposed clarification changes (here or elsewhere) likely to 
create unintended consequences? If so, how might those be avoided or 
mitigated?
    The Commission specifically seeks comment on whether the revised 
approach in proposed Sec.  190.04(b)(4) regarding the required 
liquidation of certain open commodity contract accounts provides the 
trustee with an appropriate amount of discretion and is practicable. 
Given the level of discretion provided, are the trustee's choices 
likely to be challenged by customers who believe they did not benefit 
from those decisions? Could such challenges materially slow down the 
distribution of customer property relative to a context where the 
trustee was granted less discretion? Also, is the approach set forth in 
proposed Sec.  190.04(b)(5), regarding the assignment of liquidating 
positions to debtor FCM customers in a ``risk-reducing manner'' when 
only a portion of the open commodity contracts in an omnibus account 
are liquidated, practicable? The

[[Page 36021]]

Commission also seeks comment in particular on the treatment of letters 
of credit in bankruptcy, as set forth in proposed Sec.  190.04(e).
3. Regulation Sec.  190.05: Operation of the Debtor's Estate--General
    The Commission would revise parts of current Sec.  190.04 in 
proposed Sec.  190.05, and would add two 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 obligations with respect 
to residual interest.
    Proposed Sec.  190.05(a) is derived from current Sec.  190.04(a). 
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. Accordingly, while 
current Sec.  190.04(a) states that the trustee ``shall'' comply with 
all provisions of the CEA and of the regulations thereunder as if it 
were the debtor, the Commission would amend the language in proposed 
Sec.  190.05(a) 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 some flexibility in making decisions in 
an emergency bankruptcy situation, subject, of course, to the 
requirements of the Bankruptcy Code.
    Proposed Sec.  190.05(b) is derived from current Sec.  190.04(b). 
In revising this provision, the Commission's objective 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 and permitting an approach that, to an appropriate extent, 
favors cost effectiveness and promptness over precision.\106\ Whereas 
current Sec.  190.04(b) provides that a trustee ``must'' compute a 
funded balance for each customer account which contains open commodity 
contracts as of the close of each business day, proposed Sec.  
190.05(b) would require that 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 has been transferred or liquidated. Proposed Sec.  
190.05(b) further would provide that such computations ``shall be as 
accurate as reasonably practicable under the circumstances, including 
the reliability and availability of information.''
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    \106\ See major theme 7.c discussed in section I.B above.
---------------------------------------------------------------------------

    In addition, proposed Sec.  190.05(b) would increase the scope of 
customer accounts for which the bankruptcy trustee is obligated to 
compute a funded balance to accounts that contain open commodity 
contracts or other property, as opposed to just accounts that contain 
open commodity contracts. In the Commission's view, this broadened 
scope is appropriate; 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. Moreover, proposed Sec.  190.05(b) would revise the 
length of time the trustee has the obligation to compute the funded 
balance of customer accounts. In current Sec.  190.04(b), the trustee 
must compute a funded balance for certain customer accounts ``until the 
final liquidation date.'' In proposed Sec.  190.05(b), however, the 
trustee must compute a funded balance only 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, while 
current Sec.  190.04(b) required the computation to be completed by 
noon on the next business day, the Commission does not believe that a 
noon deadline is crucial in a bankruptcy context (as it is with respect 
to an FCM conducting ongoing daily business \107\); proposed Sec.  
190.05(b) therefore would not contain a specific deadline. Of course, 
such computation would inherently need to be accomplished prior to 
performing any action where knowledge of funded balances is essential, 
such as transfer of accounts or property.
---------------------------------------------------------------------------

    \107\ See, e.g., Sec.  1.32(d).
---------------------------------------------------------------------------

    Proposed Sec.  190.05(c) is derived from current Sec.  190.04(c).
    Proposed Sec.  190.05(c)(1) concerns record retention, and is 
derived from current Sec.  190.04(c)(1). It is intended to be more 
comprehensive than the current provision, and thus would expand the 
records referred to from ``computations required by this part'' to 
``records required under this chapter to be maintained by the debtor, 
including records of the computations required by this part.'' It is 
also, on the other hand, intended to enable the trustee to mitigate the 
expenses of record retention by permitting them to end their record 
retention responsibilities effectively when they close the bankruptcy 
case. The proposed provision would thus reduce 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.''
    Proposed Sec.  190.05(c)(2) would simplify the corresponding 
portion of current Sec.  190.04(c)(2) by omitting the requirement that 
the records required in proposed Sec.  190.05(c)(1) be available to the 
Court and parties in interest. It would retain the requirement that 
such records be available to the Commission and the United States 
Department of Justice. A court will generally 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.
    Proposed Sec.  190.05(d) is new. It is intended 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. 
It would require 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. The provision also would require 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.
    Proposed Sec.  190.05(e)(1) concerns disbursements to customers. It 
is derived from current Sec.  190.04(e)(2). The Commission is proposing 
to change this provision to reflect the policy preference to transfer 
as many public customer positions as practicable in the event of an FCM 
insolvency.\108\

[[Page 36022]]

Proposed Sec.  190.05(e)(1) would provide that a trustee needs court 
approval to make disbursements to customers, but (in contrast to the 
current regulation) would specifically carve out disbursements made in 
connection with a transfer of customer property made in accordance with 
proposed Sec.  190.07. The Commission notes, however, that specifically 
carving out transfers made in accordance with proposed Sec.  190.07 
from requiring court approval does not detract from the trustee's 
ability to, in their discretion, nonetheless seek and obtain court 
approval for certain transfers of customer 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 proposed Sec.  190.05(e)(1) strikes the 
right balance between these competing objectives.\109\
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    \108\ 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 would delete this 
provision in favor of allowing transfers without court approval for 
the reasons stated above.
    \109\ The concept of prioritizing cost effectiveness and 
promptness over precision is discussed in detail in major theme 7.c 
in section I.B above and in overarching concept three in the cost-
benefit considerations, section IV.C.3 below.
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    Proposed Sec.  190.05(e)(2) is derived from current Sec.  
190.04(e)(3). It concerns how a bankruptcy trustee may invest the 
proceeds \110\ from the liquidation of open commodity contracts and 
specifically identifiable property, and other customer property. 
Proposed Sec.  190.05(e)(2) would retain much of current Sec.  
190.04(e)(3), although the Commission would expand the provision in 
current Sec.  190.04(e)(3) 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,'' albeit continuing to strictly limit the 
permissible investments to obligations of, or fully guaranteed by, the 
United States, and limiting the location of permissible depositories to 
those located in the United States or its territories or possessions.
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    \110\ Proposed Sec.  190.05(e)(2) would use the term 
``proceeds'' rather than the term ``equity,'' which is used in 
current Sec.  190.04(e)(3). This would be simply a change in wording 
and would not be meant to be a substantive difference.
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    Proposed Sec.  190.05(f) is new. It would 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.'' \111\
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    \111\ Section 1.11(e)(3)(i)(D).
    The ABA Submission would instead have provided:
    Residual interest. The trustee is not required to transfer cash, 
securities, or other property of the debtor into a segregated 
account to maintain the debtor's ongoing compliance with its 
targeted residual amount obligations pursuant to Sec.  1.11 of this 
chapter and the debtor's residual interest policies adopted 
thereunder or its related obligations to cover debit balances or 
under-margined amounts as provided in Sec. Sec.  1.22, 22.2 or 30.7 
of this chapter; provided, however, that any property not segregated 
under this exception shall nonetheless constitute customer property 
as provided in Sec.  190.09(a)(1).
    The ABA Cover Note explains that ``It seems impractical to 
require the trustee to continue to assure that funds of the debtor 
FCM are transferred into segregation to meet the FCM's top up 
obligations after the order for relief.'' Id. at 15.
    For the reasons explained in the text, the Commission is instead 
proposing to require the trustee to apply the residual interest 
provisions, but on a modified basis.
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    In the Commission's view, the residual interest provisions 
contained in Sec.  1.11 remain important, even in bankruptcy, in order 
to facilitate the goal of having each customer of the debtor receive in 
distributions from the debtor's estate all that the customer is 
entitled to, and therefore a trustee should be obligated to continue to 
apply such provisions, as appropriate, during the course of an FCM 
bankruptcy proceeding.
    The context of the trustee's responsibilities--to wind down 
operations, and to transfer or liquidate positions and assets--will 
have a significant impact on how the trustee should apply the residual 
interest provisions. The references to a surplus or deficit in customer 
property in proposed Sec.  190.05(f) are meant to apply the residual 
interest provisions to the bankruptcy context. Specifically, the 
Commission expects that, to the extent there is a surplus of segregated 
customer funds in a particular account class, a trustee would apply the 
residual interest provisions to minimize the risk that there could be a 
deficit and, to the extent there is a deficit of segregated customer 
funds in a particular account class, the trustee would apply the 
residual interest provisions to minimize such deficit and to promote 
the fair distribution of customer property consistent with the pro rata 
principle.
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.05. Specifically, the Commission seeks comment on 
the practicability of the proposed requirements in proposed Sec.  
190.05(d) regarding the issuance of account statements. The Commission 
also requests comment on the practicability and appropriateness of 
Sec.  190.05(f), which proposes to require the application of the 
residual interest provisions set forth in Sec.  1.11 in order to 
minimize risks of deficit of customer property during bankruptcy.
4. Regulation Sec.  190.06: Making and Taking Delivery Under Commodity 
Contracts
    The issues concerning delivery in bankruptcy are discussed in some 
detail in proposed Sec.  190.00(c)(6).
    As discussed above,\112\ proposed 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. 
Where the trustee is unable to do so, proposed Sec.  190.06(a)(2), 
discussed below, would direct the trustee to use reasonable efforts to 
permit the relevant customer to make or take delivery outside the 
administration of the debtor's estate. Where that is not practicable, 
proposed Sec.  190.06(a)(3) would address delivery as part of the 
administration of the debtor's estate. Proposed Sec.  190.06(a)(4) and 
(5) discuss, respectively, issues relating to deliveries in a 
securities account and in a house account, while proposed Sec.  
190.06(b) addresses the issues concerning special account class 
provisions for delivery accounts.\113\
---------------------------------------------------------------------------

    \112\ Section II.B.2.
    \113\ These issues are also addressed in the definitions of 
account class, delivery account class, cash delivery property and 
physical delivery property, discussed in section II.A.2 (Sec.  
190.01 (definitions)).
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    In proposed Sec.  190.06, the Commission is proposing to make 
significant changes to current Sec.  190.05 regarding making and taking 
deliveries on commodity contracts to provide more specificity and to 
reflect current delivery practices. Generally, open positions may get 
caught in a delivery position where the parties incur bilateral 
contractual delivery obligations.\114\ 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

[[Page 36023]]

place in connection with their business operations.
---------------------------------------------------------------------------

    \114\ 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 determine 
whether a delivery issue may arise. Additionally, during business as 
usual, market participants typically offset contracts before 
incurring delivery obligations.
---------------------------------------------------------------------------

    The current delivery provisions 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 energy futures) 
the party with the contractual obligation to make delivery will 
physically transfer a tangible commodity to meet its obligations.\115\ 
In other cases, intangible commodities may be delivered, including 
virtual currencies.
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    \115\ See ABA Cover Note at 15.
---------------------------------------------------------------------------

    As noted previously, in the definitions section (proposed Sec.  
190.01), the Commission is proposing to divide the delivery account 
class into physical delivery and cash delivery account classes to 
recognize the differing obligations for the different types of 
delivery.
    The Commission is also proposing to recognize that, consistent with 
current practice, physical deliveries \116\ may be effected in 
different types of accounts in proposed Sec.  190.06.\117\ 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.
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    \116\ Current Sec.  190.05 applies to delivery of a physical 
commodity. Proposed Sec.  190.06 would apply to any type of 
commodity that is subject to physical delivery, whether tangible or 
intangible. This would be captured in the definition of physical 
property discussed earlier. 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 category under the definition of physical delivery property in 
Sec.  190.01 in section II.A.2 above.
    \117\ See also proposed Sec.  190.10(c).
---------------------------------------------------------------------------

    Proposed Sec.  190.06(a)(2), which would replace current Sec.  
190.05(b), addresses 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). 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.\118\
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    \118\ The proposed regulation again would delete the requirement 
for registered entity rules to be submitted for approval in 
accordance with section 5c(c) of the Act for reasons discussed in 
proposed Sec.  190.04(e)(1) and (2).
---------------------------------------------------------------------------

    Thus, proposed Sec.  190.06(a)(2)(i) would direct 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 requiring the trustee to use ``reasonable 
efforts,'' rather than (as in current Sec.  190.06(a)(1)) ``best 
efforts,'' to allow a customer to deliver physical property that is 
held directly by the customer and not by the debtor to occur outside 
the administration of the debtor's estate, the Commission would 
recognize 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 more 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.
    Proposed Sec.  190.06(a)(2)(ii) would address 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 existing 
Sec.  190.05(b)(2), the proposed paragraph 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.
    Proposed Sec.  190.06(a)(3) would apply when it is not practicable 
to effect delivery outside the estate. The Commission would revise 
current Sec.  190.05(c)(1)-(2) in proposed Sec.  190.06(a)(3) by 
providing additional details for when delivery is made or taken within 
the debtor's estate. Proposed Sec.  190.06(a)(3) would clarify that 
which was implied and was not addressed in current Sec.  190.5(c)(1)-
(2). It would contain 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. This regulation would include 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.
    Proposed Sec.  190.06(a)(4) is new and would 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. Nonetheless, 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. Moreover, 
such transfer may not be made if the customer is under-margined or has 
a deficit balance in any other commodity contract accounts.
    Proposed Sec.  190.06(a)(5) is derived from current Sec.  
190.05(c)(3), with some clarifying rewording. No substantive change is 
intended.
    Proposed Sec.  190.06(b) is new, and would create separate account 
subclasses for physical delivery property held in delivery accounts and 
the proceeds of such physical delivery property separate from cash 
delivery property.\119\ As noted by the ABA Committee:
---------------------------------------------------------------------------

    \119\ See reference to discussion of physical delivery property 
above in proposed Sec.  190.00. In particular, recall that 
``physical delivery property'' can include any deliverable 
commodity, and is not limited to commodities that are tangible.

    Customer property held in a delivery account is not subject to 
Commission segregation requirements. Thus, it may be more difficult 
to identify customer property for the delivery account class. Based 
on lessons learned from the MF Global bankruptcy, it appears that 
those challenges are greater for tracing cash. Physical delivery 
property, in particular when held in the form

[[Page 36024]]

of electronic title documents 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.\120\
---------------------------------------------------------------------------

    \120\ ABA Cover Note at 14. See generally discussion of the 
delivery account class in the discussion of the definition of 
account class in Sec.  190.01 in section II.A.2 (definitions) above.

    For these reasons, the Commission proposal would 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. 
Proposed Sec.  190.06(b)(1)(i) would provide 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., after the filing date), 
and Sec.  190.06(b)(1)(ii) 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., after the filing date) on behalf of a 
customer in accordance with proposed Sec.  190.06(a)(3).
    Proposed Sec.  190.06(b)(2) would provide 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 would also include 
any other property that is (x) not segregated for the benefit of 
customers in the futures, foreign futures, or cleared swaps account 
classes) and (y) traceable (through, e.g., account statements) as 
having been received after the filing date as part of taking delivery.
    Proposed Sec.  190.06(b)(2) would also provide, 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 physical delivery account class 
would also include any other property that is (x) not segregated for 
the benefit of customers in the futures, foreign futures, or cleared 
swaps account classes) and (y) 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 requests comment with respect to all aspects of 
proposed Sec.  190.06. In particular, the Commission seeks comment on 
the implications of the proposal in Sec.  190.06(b) to subdivide the 
delivery account class into separate physical delivery and cash 
delivery account subclasses. Are there additional challenges or 
benefits that the Commission has not considered?
5. Regulation Sec.  190.07: Transfers
    The policy preference for transferring (or ``porting'') public 
customer commodity contract positions, as well as all or a portion of 
such customers' account equity, is discussed in proposed Sec.  
190.00(c)(4). In proposed Sec.  190.07, the Commission is proposing to 
make changes to current Sec.  190.06 governing transfers.
    Proposed Sec.  190.07(a) introductory text would revise current 
Sec.  190.06(a) introductory text, which sets forth general provisions 
for transfers.
    Proposed Sec.  190.07(a)(1) derives from current Sec.  
190.06(a)(1), with a few technical changes.
    In proposed Sec.  190.07(a)(2), which derives from current Sec.  
190.06(a)(2), the Commission would make minor changes to improve 
readability, although no substantive changes are intended. In addition, 
in Sec.  190.07(a)(2), the Commission would delete ``or persons which 
are required to be registered as futures commission merchants'' because 
such persons are included within the definition of futures commission 
merchants in Sec.  1.3.
    The changes in proposed Sec.  190.07(a)(3) from current Sec.  
190.06(a)(3) focus on the goal of promoting transfers, but only to the 
extent consistent with good risk management. Specifically, the current 
regulation provides that no clearing organization or other self-
regulatory organization may adopt, maintain in effect, or enforce rules 
that prevent 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. It 
also states that this provision shall not limit the exercise of any 
contractual right of a clearing organization or other registered entity 
to liquidate open commodity contracts.
    In proposed Sec.  190.07(a)(3), the Commission would change the 
word ``prevent'' to ``[i]nterfere with'' to focus on the goal of 
promoting transfers consistent with good risk management. Further, the 
Commission would re-word the current regulation and specifically would 
clarify that the regulations do not limit a clearing organization or 
other registered entity's contractual right adequately to manage risk 
or to liquidate or transfer open commodity contracts.\121\
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    \121\ See ABA Cover Note at 14 (``recommend[ing] . . . 
[c]larification that the rule does not limit a DCO's (or other 
registered entity's) contractual right to liquidate or transfer open 
commodity contracts.'') Separately, the Commission would delete 
current Sec.  190.06(b) regarding notice to the Commission regarding 
an intention to transfer commodity contracts held by or for a 
commodity broker from or for the account of a customer to another 
person registered as an FCM after a bankruptcy petition has been 
filed. In the Commission's view, this provision would be duplicative 
of the notice provision in proposed Sec.  190.03(b)(2) and therefore 
would be unnecessary.
---------------------------------------------------------------------------

    Proposed Sec.  190.07(b) introductory text would revise current 
Sec.  190.06(c), regarding requirements for transferees. In proposed 
Sec.  190.07(b)(1), the Commission would clarify current Sec.  
190.06(c)(1) to establish that it is the duty of the transferee--not of 
anyone else--to assure that the transferee is not in violation of the 
minimum financial requirements upon accepting a transfer. The 
Commission would reframe current Sec.  190.06(c)(2) in proposed Sec.  
190.07(b)(2)(i), but the changes would not be substantive. Similarly, 
proposed Sec.  190.07(b)(2)(ii)(A) and (B) would transpose current 
Sec.  190.06(c)(3) and (4), respectively, with conforming and non-
substantive wording changes.
    Proposed Sec.  190.07(b)(3) and (4) are new common sense provisions 
to guide the transfer of open commodity contracts and property.
    Proposed Sec.  190.07(b)(3) 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. It thus would provide 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. The 
Commission believes that this proposal is entirely consistent with past 
practice in FCM bankruptcies, and provides the flexibility that is 
likely to be needed in a bankruptcy situation by allowing transfers to 
occur before customer due diligence is completed, while still

[[Page 36025]]

retaining the requirement that due diligence be performed as soon as 
practicable thereafter.
    Proposed Sec.  190.07(b)(4) is intended to further clarify what the 
governing agreement between the transferred customer and the transferee 
is at and after the time the transfer becomes effective. It is intended 
to make clear that any consequences for breaches pre-transfer would be 
borne by the transferor rather than the transferee. It would provide 
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, and would 
also provide that a breach of the agreement prior to a transfer does 
not constitute a breach on the part of the transferee.
    Proposed Sec.  190.07(b)(5) carries forward current Sec.  
190.02(c), and would provide 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, who shall comply therewith to the extent 
practicable (if the transferee subsequently enters insolvency).
    The Commission would revise current Sec.  190.06(e), eligibility 
for transfer under section 764(b) of the Bankruptcy Code (accounts 
eligible for transfer), in proposed Sec.  190.07(c). Sections and 
references pertaining to dealer option accounts and leverage accounts 
would be deleted because those account types are no longer being 
addressed in this regulation.\122\ The proposed revision in Sec.  
190.07(c) would change the language ``all accounts are eligible for 
transfer'' in current Sec.  190.06(e)(1) to ``[a]ll commodity contract 
accounts (including accounts with no open commodity contract positions) 
are eligible for transfer . . . .'' The new language would focus on the 
commodities business and recognizes that accounts can be transferred 
even if the accounts are intended for trading commodities but do not 
include any open commodity contracts at the time of the order for 
relief.\123\
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    \122\ This refers to the entirety of current Sec.  
190.06(e)(1)(ii)-(iii) and (f)(1) and the reference to dealer option 
contracts in Sec.  190.06(f)(3)(i). Accounts for trading commodities 
are used to purchase or sell a commodity.
    \123\ 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.
---------------------------------------------------------------------------

    Proposed Sec.  190.07(d), special rules for transfers under section 
764(b) of the Bankruptcy Code, primarily would revise current Sec.  
190.06(f). Current Sec.  190.06(f)(1) concerning dealer options would 
not be covered in this regulation.
    Proposed Sec.  190.07(d)(1) would be relocated from current Sec.  
190.02(e)(1).
    Proposed Sec.  190.07(d)(2) would be drawn from current Sec.  
190.06(f)(3), with revision intended to more generally promote 
transfers.
    Currently Sec.  190.06(f)(3)(i) provides that the Commission will 
not disapprove such a transfer for the sole reason that it was a 
partial transfer if it would prefer the transfer of accounts, the 
liquidation of which could adversely affect the market or the bankrupt 
estate. The Commission would revise the language in proposed Sec.  
190.07(d)(2)(i) to state that the Commission will not disapprove such a 
transfer for the sole reason that it was a partial transfer.'' The 
proposed revision would be consistent with the policy of promoting the 
transfer of customer commodity accounts.
    In proposed Sec.  190.07(d)(2)(ii), the Commission would clarify 
that the open commodity contracts and the associated property are to be 
transferred, thus the term ``property'' has been inserted throughout 
the section. The Commission would propose to add to current Sec.  
190.06(f)(2)(ii) 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 would caution against partial transfers that would break 
netting sets and make the customer worse off. The Commission also would 
add language that clarifies 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. The revisions are 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, the Commission would insert language in Sec.  
190.07(d)(2)(ii) that states ``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 would be added 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.
    Proposed Sec.  190.07(d)(3) is new. It would provide details 
regarding the treatment and transfer of letters of credit used as 
margin, consistent with other proposed provisions related to letters of 
credit. Generally, this provision states that a letter of credit 
associated with a commodity contract may be transferred with an 
eligible commodity contract account if it is held by a DCO on a pass-
through basis or if it is transferable by its terms. This transfer 
cannot be made if it would result in a recovery that exceeds the amount 
to which the customer is entitled in proposed Sec. Sec.  190.08 and 
190.09 (note that, pursuant to proposed Sec.  190.04(d)(3)(ii), any 
portion of such a letter of credit that is not drawn upon is treated as 
having been distributed to the customer, except to the extent that the 
customer delivers substitute customer property).
    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.\124\
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    \124\ See also discussion of treatment of letters of credit in 
bankruptcy under proposed Sec.  190.04(d)(3) in section II.B.2.
---------------------------------------------------------------------------

    Proposed Sec.  190.07(d)(4) is new and would 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. The Commission is proposing this regulation to clarify its 
expectations in such situations, specifically, to promote the delivery 
process.
    Proposed 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

[[Page 36026]]

available to make equivalent percentage distributions to all equity 
claim holders in the applicable account class. It would revise current 
Sec.  190.06(e)(2), changing the framing of the current regulation and 
focusing on transfers as a whole. The Commission further would clarify 
that the trustee should make determinations 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.
    The Commission would revise current Sec.  190.06(g) in proposed 
Sec.  190.07(e), regarding the prohibition on avoidance of transfers 
under section 764(b) of the Bankruptcy Code. Throughout proposed Sec.  
190.07(e), the Commission would insert ``or customer property'' 
following ``the transfer of commodity contract accounts'' to clarify 
that transfers of commodity contract accounts include the associated 
customer property, and that customer property may be transferred even 
if the customer has no open commodity contracts (as was done in the MF 
Global bankruptcy).
    In proposed Sec.  190.07(e)(1), concerning transfers that were made 
pre-relief,\125\ the Commission would add language that transfers ``are 
approved'' to clarify that the Commission is following the procedure 
set forth in the Bankruptcy Code and adding specific citations to the 
Bankruptcy Code. Proposed Sec.  190.07(e)(1)(ii) also would apply to 
withdrawals or settlements at the request of public customers, in 
addition to transfers, in order to incorporate current Sec.  
190.06(g)(3). 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).
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    \125\ Proposed Sec.  190.07(e) refers to transfers that were 
made ``pre-relief'' rather than ``pre-filing date'' because section 
764(b) is based on the date of relief, not the filing date. The 
difference is attributable to the fact that, unlike voluntary 
bankruptcy cases, where the filing of the case constitutes an order 
for relief, see 11 U.S.C. 301(b), the order for relief in an 
involuntary bankruptcy will issue only if the petition is not timely 
controverted, or after trial. See 11 U.S.C. 303(h).
---------------------------------------------------------------------------

    Proposed Sec.  190.07(e)(1)(iii) would add a provision to respect 
the actions of a receiver acting to protect the interests of customers 
in their property. Specifically, the provision would prohibit the 
avoidance of a transfer from ``a receiver that has been appointed for 
the FCM that is now a debtor.'' \126\
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    \126\ A receiver might be appointed pursuant to, e.g., section 
6c(a) of the CEA, 7 U.S.C. 13a-1(a).
---------------------------------------------------------------------------

    Proposed Sec.  190.07(e)(2) would pertain to post-relief transfers. 
In proposed Sec.  190.07(e)(2)(i), which is derived from current Sec.  
190.06(g)(2)(i), the Commission would modify the term ``SRO/commodity 
broker'' to ``clearing organization'' because the only entities who can 
perform the transfers that are subject to the provision are the 
trustee, and, in certain circumstances, clearing organizations. 
Proposed Sec.  190.07(e)(2)(ii) is derived from current Sec.  
190.06(g)(2)(ii). Similarly, proposed Sec.  190.07(e)(3) is derived 
from current Sec.  190.06(g)(3), dealing with withdrawals (in contrast 
to the transfers dealt with previously).
    Proposed Sec.  190.07(f) is a revision to current Sec.  190.06(h) 
regarding Commission action. The Commission would clarify that, 
notwithstanding the other provisions of this section (with exceptions 
discussed below), it 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 would clarify that the transfers of the commodity contract 
accounts includes the associated customer property. 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).
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.07. Specifically, the Commission seeks comment on 
proposed Sec.  190.07(b)(3), which permits transferees to accept open 
commodity contracts and property prior to completing customer 
diligence. Does the proposed provision with a maximum six-month period 
post-transfer (absent Commission action) for diligence requirements 
provide FCMs with sufficient flexibility to accept transfers following 
an FCM bankruptcy? Are there additional constraints on the requirements 
to perform diligence imposed by other regulators that the Commission 
should take into account? The Commission also seeks comment on proposed 
Sec.  190.07(d)(2)(ii). Are there better ways to structure the 
provisions regarding partial transfers of a customer's commodity 
contract account? Is the discretion granted to the trustee concerning 
estimates of other customer claims appropriate?
6. Regulation Sec.  190.08: Calculation of Allowed Net Equity
    Proposed Sec.  190.08 is derived from current Sec.  190.07, with a 
significant number of technical changes.
    Proposed Sec.  190.08(a) is derived from current Sec.  190.07(a), 
but changed to reflect 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.\127\ 
Since no (relevant) operations will occur subsequent to the liquidation 
date, current Sec.  190.07(d), a provision that sets forth instructions 
on how to adjust a customer's funded balance due to operations 
subsequent to the primary liquidation date, is rendered moot, and the 
reference to such section would be removed in proposed Sec.  
190.08(a).\128\
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    \127\ See definition of ``primary liquidation date'' in proposed 
Sec.  190.01.
    \128\ For the same reason, two other provisions in current Sec.  
190.07 also would be deleted. First, current Sec.  190.07(b)(6), 
which instructs the trustee how to adjust the calculation of net 
equity of accounts remaining open subsequent to the primary 
liquidation date, would be deleted from proposed part 190. Second, 
current Sec.  190.07(c)(2)(v), which provides that the calculation 
of funded balance must be adjusted by deficits generated by the 
continued operation of accounts after the primary liquidation date 
which cannot be fully adjusted under current Sec.  190.07(d), has 
also would be deleted. Since, under the revised definition of the 
term ``primary liquidation date,'' no accounts will remain open 
subsequent to the primary liquidation date, these two provisions 
would no longer be necessary.
---------------------------------------------------------------------------

    Proposed Sec.  190.08(b), like current Sec.  190.07(b), would set 
forth the steps for a trustee to follow when calculating each 
customer's net equity.\129\ This proposed revision is meant to clarify 
that, when calculating the customer's claim against the debtor, the 
basis for calculating such claim should be what 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. However, for 
purposes of the calculations set forth in proposed Sec.  190.08(b), the 
focus should be on the numbers that appear in the debtor's own records. 
In the header language to proposed Sec.  190.08(b), the text would 
accordingly refer to ``a customer's total customer claim of record'' 
rather than ``the total claim of a customer'' against the estate of the 
debtor.''
---------------------------------------------------------------------------

    \129\ 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.
---------------------------------------------------------------------------

    In addition, the header language to proposed Sec.  190.08(b) would 
clarify that the calculation of a customer's claim against the debtor 
is based on all types of customer property, including any commodity 
contracts, held by the debtor for or on behalf of the customer. While

[[Page 36027]]

this was always the Commission's intent, the language in current Sec.  
190.07(b) could be construed more narrowly to exclude any customer 
property other than commodity contracts.
    Proposed Sec.  190.08(b)(1), which would set forth the steps for a 
trustee to follow when calculating the equity balance of each commodity 
contract account of a customer, is derived from current Sec.  
190.07(b)(1), with the following changes (to the extent not addressed 
below, the provisions in proposed Sec.  190.08(b)(1) are the same as 
those in current Sec.  190.07(b)(1)).
    First, in proposed Sec.  190.08(b)(1)(i), which corresponds to 
current Sec.  190.07(b)(1), the revised text would instruct the trustee 
to determine the equity balance of ``each commodity contract account,'' 
rather than ``each customer account.'' The term ``commodity contract 
account'' would be a defined term and, in the Commission's view, using 
such defined term in this context would be more precise because a 
customer may have other types of accounts (e.g., securities accounts) 
with the debtor that are not relevant for the purposes of calculating 
net equity.
    Second, in proposed Sec.  190.08(b)(1)(i)(C), which corresponds 
with current Sec.  190.07(b)(1)(iii), the Commission would replace the 
term ``current realizable market value'' with ``realizable market 
value'' in order to avoid confusion, since, according to the regulation 
text, the realizable market value is determined as of the close of the 
market on the last preceding market day.
    Third, proposed Sec.  190.08(b)(1)(ii)(A)(2), which corresponds 
with current Sec.  190.07(b)(1)(iii)(A)(2), would be simplified to more 
clearly refer to the cash proceeds from the liquidation of the customer 
securities or other property referred to earlier in proposed Sec.  
190.08(b)(1)(i)(C).
    Fourth, proposed Sec.  190.08(b)(1)(ii)(A)(4) regarding letters of 
credit is new, and would be added to be consistent with other new 
provisions regarding how letters of credit are to be treated in the 
event of an FCM bankruptcy. This provision would treat the face amount 
of any letter of credit received, acquired or held to margin, 
guarantee, secure, purchase, or sell a commodity contract as part of 
the posting customer's ledger balance.\130\
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    \130\ Separately, in proposed Sec.  190.04(d)(3)(ii), any 
portion of the letter of credit that is not drawn upon is treated as 
having been distributed to the customer (with any substitute 
customer property posted serving as an offset).
---------------------------------------------------------------------------

    Lastly, in proposed Sec.  190.08(b)(1)(ii)(B)(2), which corresponds 
with current Sec.  190.07(b)(1)(iii)(B)(2), the Commission would add a 
reference to transfers made pursuant to proposed Sec. Sec.  190.04(a) 
and 190.07, which the Commission would clarify should be categorized as 
disbursements for the purposes of this paragraph.
    Proposed Sec.  190.08(b)(2) is derived from current Sec.  
190.07(b)(2). Proposed Sec.  190.08(b)(2) would provide 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 proposed regulation would set forth how to determine 
whether accounts are held in the same capacity or in separate 
capacities. The Commission is proposing three changes in proposed Sec.  
190.08(b)(2) from current Sec.  190.07(b)(2). First, in both proposed 
Sec.  190.08(b)(2)(iii) and (iv), the Commission would add language to 
clarify that, in discussing accounts held in the name of an executor or 
administrator of an estate, the Commission is referring to accounts 
held in the name of an executor or administrator in its capacity as 
such. This clarification would reflect what was always intended in 
current Sec.  190.07(b)(2)(iii) and (iv). Second, in proposed Sec.  
190.08(b)(2)(viii), the Commission would delete the terms ``leverage 
accounts'' and ``options accounts,'' as those types of accounts are no 
longer being addressed in proposed part 190.\131\ Third, also in 
proposed Sec.  190.08(b)(2)(viii), the Commission would add a 
referenced exception to the paragraph, which notes that futures 
accounts, delivery accounts, and cleared swaps accounts of the same 
person shall not be deemed to be held in separate capacities, although 
such accounts may be aggregated in accordance with paragraph (b)(3) of 
the section. Current Sec.  190.07(b)(2)(viii) is subject to one 
exception, paragraph (b)(2)(ix) of the section, which sets forth that 
an omnibus customer account of an FCM shall be deemed to be held in a 
separate capacity from the house account and any other omnibus customer 
account of such person. Proposed Sec.  190.08(b)(2)(viii) would also be 
subject to exception from paragraph (b)(2)(ix) and would add another 
exception, from paragraph (b)(2)(xiv), which would reflect that 
accounts held by a customer in separate capacities shall be deemed to 
be accounts of separate customers. Fourth, in proposed Sec.  
190.08(b)(2)(xi), the Commission would expand the scope of retirement 
or pension plans that are discussed in that paragraph. As written, 
current Sec.  190.07(b)(2)(xi) refers only to retirement or pension 
plans under the Employee Retirement Income Security Act of 1974 
(``ERISA''); the Commission's proposal would expand the scope of plans 
dealt with in proposed Sec.  190.08(b)(2)(xi) to those under ERISA or 
similar federal,\132\ state or foreign laws or regulations applicable 
to pension and retirement plans since, in the Commission's view, any 
such retirement or pension plan is a separate entity from its 
administrators, employers, employees, participants, or beneficiaries.
---------------------------------------------------------------------------

    \131\ See proposed Sec.  190.00(d)(1)(i).
    \132\ Including, e.g., a church plan exempt from ERISA pursuant 
to section 403(b)(9) thereof.
---------------------------------------------------------------------------

    Proposed Sec.  190.08(b)(3), which sets forth instructions 
regarding how and when to set off positive and negative equity 
balances, is derived from current Sec.  190.07(b)(3). The Commission 
would make several non-substantive edits to the current text for 
clarification purposes including, in proposed Sec.  190.08(b)(3)(ii), 
adding letters to illustrate the equation that is described in the 
text. In addition, the Commission would edit Sec.  190.08(b)(3)(ii) and 
(iii) to clarify that the provisions regarding the offset against a 
positive equity balance only apply in the event a customer has more 
than one class of account with a positive equity balance. Lastly, the 
Commission would make a slight change in proposed Sec.  190.08(b)(3)(v) 
to clarify that, prior to the entry of an order for relief, the 
provisions of Sec.  1.22 of the Commission's regulations and section 4d 
of the CEA govern what setoffs are permitted. As written, current Sec.  
190.07(b)(3)(v) refers to both the date of entry of an order for relief 
and the filing date, but the Commission notes that, in an involuntary 
bankruptcy, there may be a time gap between those dates. The 
Commission's proposed change to refer only to the date of entry of an 
order for relief would account for that inconsistency.
    Proposed Sec.  190.08(b)(4), which would provide that the value of 
property that has been transferred or distributed must be added to the 
net equity amount calculated for that customer, is substantially 
similar to current Sec.  190.07(b)(4). In the proviso language, the 
Commission would replace the term ``customer claims'' with ``allowed 
customer claims.'' This change is intended to clarify that the 
calculation of net equity for any late-filed claims should be based on 
the amount that the customer is actually entitled to. The Commission 
also would correct a

[[Page 36028]]

typographical error in current Sec.  190.07(b)(4) where the word 
``data'' should be ``date.''
    Proposed Sec.  190.08(b)(5), which would provide that the 
calculation of net equity should 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, would be 
substantially similar to current Sec.  190.07(b)(5), with two minor 
changes. First, the Commission is proposing to revise the term 
``subsequent events'' to ``ongoing events'' in order to recognize that 
such events may be ``ongoing'' during the administration of the estate, 
accounting for the volatility that may arise with such events. The 
prior term of ``subsequent events'' refers to the primary liquidation 
date. Second, the Commission would add the phrase ``or specifically 
identifiable property'' to clarify that one of the ongoing events that 
should result in an adjustment to the calculation of net equity is the 
liquidation of unliquidated claims or specifically identifiable 
property at a value different from the estimated value previously used.
    Proposed Sec.  190.08(c), concerning the calculation of the funded 
balance, is derived from current Sec.  190.07(c). In the header 
language to proposed Sec.  190.08(c), the references to calculation as 
of the primary liquidation date would be deleted, because the funded 
balance (i.e., each customer's pro rata share of the customer estate 
with respect to an account class) is relevant both (i) before the 
primary liquidation date (in support of determining how much value may 
be transferred, if a prompt transfer can be arranged) and (ii) after 
the primary liquidation date (as the value of property in the estate 
relative to claims may change as assets (including claims by the 
estate) are marshalled and liquidated, and claims against the estate 
are made and resolved).
    Proposed Sec.  190.08(c)(1), would set forth instructions for 
calculating the funded balance of any customer claim, and is derived 
from current Sec.  190.07(c)(1). The Commission would make several non-
substantive edits to the current text for clarification purposes, 
including (1) in proposed Sec.  190.08(c)(1), clarifying that the 
funded balance of any customer claim shall be computed separately by 
account class and customer class; (2) in proposed Sec.  
190.08(c)(1)(i), adding letters to illustrate the equation that is 
described in the text; and (3) in proposed Sec.  190.08(c)(1)(i)(B) and 
(C), referring to ``other property'' instead of simply ``property.'' In 
addition, the Commission would add Sec.  190.08(c)(1)(i)(A), which 
would state that the ratio calculated in proposed Sec.  190.08(c)(1)(i) 
should be multiplied by the sum of, among other items, 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. This provision would be added to provide 
consistency with the other new provisions regarding the use of letters 
of credit.
    Proposed Sec.  190.08(c)(1)(i)(B) is derived from current Sec.  
190.07(c)(1)(i)(A). Here, the Commission would refer to ``all customer 
accounts of the same class'' rather than ``all accounts of the same 
class.'' This change is meant to clarify that this provision only 
applies to customer accounts.
    Proposed Sec.  190.08(c)(1)(ii) is derived from current Sec.  
190.07(c)(1)(ii), with two proposed changes: First, the Commission 
would recognize that an FCM may be taken into insolvency involuntarily, 
and proposes to account for that possibility by starting the period 
during which 100% of margin is credited in an involuntary case on the 
date of the bankruptcy filing. Second, taking into account prior 
changes made with respect to the use of letters of credit, the 
Commission would add a proviso at the end of the paragraph to describe 
how margin posted to substitute for a letter of credit would affect the 
calculation of funded balance.
    Proposed Sec.  190.08(c)(2) is derived from current Sec.  
190.07(c)(2), and would require the funded balance to be adjusted to 
correct for ongoing events including, but not limited to, those events 
listed in the proposed and current regulation. Current Sec.  
190.07(c)(2)(v) would be deleted from the proposed regulation since, 
under the revised definition of ``primary liquidation date,'' no 
account will be continuing to operate after the primary liquidation 
date, thus rendering current Sec.  190.07(c)(2)(v) moot. In this 
paragraph the Commission would revise the term ``subsequent events'' to 
``ongoing events'' for the same reasons discussed in Sec.  
190.08(b)(5).
    Proposed Sec.  190.08(d) is derived from current Sec.  190.07(e). 
Both set forth instructions about how to value commodity contracts and 
other property for purposes of calculating net equity as set forth in 
the rest of proposed Sec.  190.08. The Commission is proposing to 
delete current Sec. Sec.  190.07(e)(2) (valuation of principal 
contracts) and (e)(3) (valuation of bucketed contracts) in favor of the 
more generalized approach to valuing property held by or for a 
commodity broker set forth in proposed Sec.  190.08(d)(5), which allows 
the trustee a certain degree of flexibility in valuing such property. 
Proposed Sec.  190.08(d)(5) is discussed in further detail below.
    In addition, current Sec.  190.07(e) contains, in the header 
language, instructions to the trustee about when the trustee may use 
the weighted average of the liquidation prices of commodity contracts 
and other property in computing the net equity of each customer. The 
Commission would retain the concept of using the weighted average of 
liquidation prices in certain circumstances, but would move such 
concept into other sections of proposed Sec.  190.08(d); as such, this 
concept is discussed in further detail below.
    Proposed Sec.  190.08(d)(1) is derived from current Sec.  
190.07(e)(1), and would set forth instructions about how to value 
commodity contracts. The Commission would reorganize proposed Sec.  
190.08(d)(1) into two paragraphs: (i) Open commodity contracts, and 
(ii) liquidated commodity contracts.
    In proposed Sec.  190.08(d)(1)(i) regarding the valuation of open 
commodity contracts, the Commission would maintain the requirement that 
the value of an open commodity contract shall be equal to the 
settlement price as calculated by the clearing organization pursuant to 
its rules. The Commission, however, would delete the requirement that 
the clearing organization's rules must be approved by the Commission. 
As noted above,\133\ the Commission believes that the various processes 
set forth in part 40 of the Commission's regulations (including self-
certification 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 valuation of open 
commodity contracts is no longer necessary.
---------------------------------------------------------------------------

    \133\ See discussion of proposed Sec.  190.04(e)(2) in section 
II.B.2 above.
---------------------------------------------------------------------------

    In addition, current Sec.  190.07(e)(1) provides that, if an open 
commodity contract is transferred, its value shall be determined as of 
the end of the settlement cycle in which it is transferred. The 
Commission would change the timing for valuation in proposed Sec.  
190.08(d)(1)(i) to the end of the last settlement cycle on the day 
preceding the transfer. This would allow the value of the open 
commodity contract to be known prior to the transfer. There would be 
other non-substantive revisions to the wording of

[[Page 36029]]

proposed Sec.  190.08(d)(1)(i) as compared to that in current Sec.  
190.08(e)(1).
    Proposed Sec.  190.08(d)(1)(ii) would be changed to clarify how to 
value commodity contracts that have been liquidated. Current Sec.  
190.07(e)(1) provides that the value of a liquidated commodity contract 
``shall be equal to the net proceeds of liquidation.'' Proposed Sec.  
190.08(d)(1)(ii) instead provides that the value of a liquidated 
commodity contract ``shall equal the actual value realized on 
liquidation of the commodity contract.''
    Proposed Sec.  190.08(d)(1)(ii)(A) would allow 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. This concept derives from text that is 
currently in Sec.  190.07(e). This provision is important because it 
recognizes that, in a bankruptcy situation, the trustee may liquidate 
identical commodity contracts over a short period of time but may not 
be able to liquidate them all at the same price. In order to provide 
the trustee with an appropriate mechanism for determining the value of 
such commodity contracts, the Commission is proposing to allow the 
trustee to use the weighted average of liquidation prices of identical 
commodity contracts liquidated within a certain period of time but at 
different prices. The Commission proposes certain changes to the 
current text including, for example, the time period within which such 
contracts must be liquidated in order for the trustee to use the 
weighted average of the liquidation prices. While current Sec.  
190.07(e) applies this concept to commodity contracts liquidated ``on 
the same date,'' proposed Sec.  190.08(d)(1)(ii)(A) would apply this 
concept to commodity contracts liquidated ``within a 24 hour period or 
business day (or such other period as the bankruptcy court may 
determine is appropriate).'' The Commission notes that settlement days 
and business days often do not fall within one calendar date. For 
instance, in accordance with proposed Sec.  190.01, a ``business day'' 
begins at 8 a.m. one day and ends at 7:59:59 a.m. the next day that is 
a business day. On weekends, a ``business day'' begins at 8 a.m. on 
Friday morning and ends at 7:59:59 a.m. on Monday morning. Thus, the 
Commission would revise the time frame in proposed Sec.  
190.08(d)(1)(ii)(A) to bring it more in line with how settlement cycles 
and business days work.
    Proposed Sec.  190.08(d)(1)(ii)(B), which would provide 
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, is a new provision. It is important to recognize 
that commodity contracts are, at times, liquidated as part of a bulk 
auction or otherwise outside of the open market, and to provide for a 
mechanism by which to value commodity contracts that are liquidated in 
such a manner. The proposed regulation 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. The 
Commission is not proposing to set the value of a commodity contract 
that is liquidated as part of a bulk auction at the auction price, 
because the auction will not necessarily establish the price for each 
particular position; rather, the auction might cover an entire 
portfolio, or a portfolio that is divided into separate ``lots'' that 
consist of related (but not necessarily identical) positions.
    Proposed Sec.  190.08(d)(2) is derived from current Sec.  
190.07(e)(4). Proposed Sec.  190.08(d)(2) would incorporate the same 
weighted average concept discussed above with respect to proposed Sec.  
190.08(d)(1)(ii)(A), allowing a trustee to use the weighted average of 
the liquidation prices of identical securities that are liquidated 
within a 24-hour period or business day (or such other period as the 
bankruptcy court may determine is appropriate), but not at the same 
price. As discussed above, allowing a trustee to use the weighted 
average of liquidation prices of identical securities liquidated within 
a certain period of time but at different prices provides the trustee 
with an appropriate mechanism for determining the value of such 
securities. For the same reasons stated above, the Commission would 
revise the time period within which such securities must be liquidated 
in order for the trustee to use the weighted average of the liquidation 
prices. In addition, for clarification purposes, the Commission is 
proposing that the value of liquidated securities shall equal the 
actual value realized on liquidation of the securities.
    Proposed Sec.  190.08(d)(3) is derived from current Sec.  
190.07(e)(5). While current Sec.  190.07(e)(5) determines how to value 
``cash commodities'' held in inventory, the Commission believes that 
this concept is more appropriately applied to all ``commodities'' held 
in inventory. Additionally, recognizing that the fair market value of a 
commodity held in inventory is not always readily ascertainable, the 
Commission would provide that, in such an event, the trustee may value 
such commodity in accordance with proposed Sec.  190.08(d)(5), a catch-
all provision providing the trustee with flexibility to value property 
using such professional assistance as they deem necessary.
    Proposed Sec.  190.08(d)(4) is new, and would be added by the 
Commission to be consistent with other changes regarding the use of 
letters of credit received, acquired or held to margin, guarantee, 
secure, purchase, or sell a commodity contract.
    Proposed Sec.  190.08(d)(5) is derived from current Sec.  
190.07(e)(5). Proposed Sec.  190.08(d)(5) would provide the trustee 
with pragmatic flexibility in determining the value of customer 
property by allowing the trustee, in their discretion, to enlist the 
use of professional assistance to value customer property. In 
furtherance of the goal of providing flexibility to the trustee, the 
Commission would delete the requirement that the trustee seek approval 
of the court prior to enlisting professional assistance to value 
customer property.\134\ Such a constraint, in the Commission's view, 
unduly restricts the trustee's actions in a bankruptcy situation and is 
unnecessary. In addition, for clarification purposes, the Commission is 
proposing that the value of property that is sold shall equal the 
actual value realized on sale of such property.
---------------------------------------------------------------------------

    \134\ To be sure, the requirements of 11 U.S.C. 327 concerning 
the employment of professional persons would still apply. However, 
the regulation would no longer require the approval of the court to 
invoke the assistance of such an approved professional in valuing 
customer property, so long as such assistance falls within the scope 
of activity approved pursuant to Code section 327.
---------------------------------------------------------------------------

    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.08. Specifically, the Commission seeks comment with 
regards to the proposed revisions to the calculation of the equity 
balance of a commodity contract set forth in proposed Sec.  
190.08(b)(1). Are there any unintended consequences from the proposed 
revisions and, if so, how can such consequences be mitigated? The 
Commission also seeks comment as to 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).
7. Regulation Sec.  190.09: Allocation of Property and Allowance of 
Claims
    Proposed Sec.  190.09 is derived from current Sec.  190.08. 
Generally, proposed Sec.  190.09 would provide that the

[[Page 36030]]

property of a debtor's estate must be allocated among account classes 
and between customer classes as provided in the proposed regulation. 
This property would constitute a separate estate of the customer class 
and the account class to which it is allocated and would be designated 
by reference to such customer class and account class.
    There are three substantive changes in proposed Sec.  190.09, and a 
significant number of technical changes. The substantive changes are as 
follows:
    Proposed Sec.  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).
    Paragraph (a)(1)(ii)(G) would be a new category of property that 
constitutes customer property. It would include 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 under-margined amounts as provided in 
Sec. Sec.  1.20, 1.22, 22.2 and, 30.7.\135\ 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 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. The 
Commission is of the view that proposed Sec.  190.09(a)(1)(ii)(G) would 
be appropriate since an FCM is already required, under the Commission's 
regulations, to set aside the funds referred to for the benefit of its 
customers, and because the provision limits the amount of funds a 
trustee may take from the debtor's current assets to put into 
segregation for the FCM's customers. Proposed Sec.  190.09(a)(1)(ii)(G) 
also fits within the definition of ``customer property'' in section 761 
of the Bankruptcy Code, which refers to ``other property of the debtor 
that any applicable law, rule, or regulation requires to be set aside 
or held for the benefit of a customer.'' \136\
---------------------------------------------------------------------------

    \135\ See ABA Cover Note at 15 (``recommend[ing] adding a 
provision to the customer property definition that deems property in 
the debtor's estate to be customer property to the extent of the 
FCM's obligation to maintain a targeted residual amount in 
segregation pursuant to CFTC Rule 1.11, or its obligation to cover 
debit balances or under-margined amounts in customer accounts under 
CFTC Rules 1.22, 22.2 or 30.7 . . . adding a provision that 
expressly covers an FCM's `top-up' obligations prescribed under 
specific CFTC rules provides greater legal certainty.'')
    \136\ 11 U.S.C. 761(10)(A)(ix).
---------------------------------------------------------------------------

    Proposed Sec.  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 would state 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. The Commission notes 
that in In re Griffin Trading Co.,\137\ the United States Bankruptcy 
Court for the Northern District of Illinois ruled that the Commission 
exceeded its statutory authority by adopting current Sec.  
190.08(a)(1)(ii)(J) and held that it was invalid. This decision was 
vacated on appeal pursuant to a settlement reached by the parties. The 
property described in proposed Sec.  190.09(a)(1)(ii)(L), like proposed 
Sec.  190.09(a)(1)(ii)(G) discussed above, would appear to fit within 
the definition of ``customer property'' in section 761 of the 
Bankruptcy Code, which refers to ``other property of the debtor that 
any applicable law, rule, or regulation requires to be set aside or 
held for the benefit of a customer'' \138\ because of the Commission's 
regulations regarding segregation of customer property. Thus, though 
current Sec.  190.08(a)(1)(ii)(J) may be subject to challenge, the 
Commission continues to be of the view that section 20 of the CEA 
provides it with the authority to include proposed Sec.  
190.09(a)(1)(ii)(L) in part 190.
---------------------------------------------------------------------------

    \137\ 245 B.R. 291 (Bankr. N.D. Ill. 2000), vacated, 270 B.R. 
882 (N.D. Ill. 2001).
    \138\ 11 U.S.C. 761(10)(A)(ix).
---------------------------------------------------------------------------

    A new second sentence of proposed Sec.  190.09(a)(1)(ii)(L) would 
note 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.\139\ It would appear that 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.
---------------------------------------------------------------------------

    \139\ See generally SIPA section 8(c)(1), 15 U.S.C. 78fff-
2(c)(1).
---------------------------------------------------------------------------

    Proposed Sec.  190.09(d) introductory text would govern the 
distribution of customer property, and has its analog in current Sec.  
190.08(d). While current Sec.  190.08(d)(1)(i) and (ii) and (d)(2) 
require customers to deposit cash in order to obtain the return of 
specifically identifiable property, proposed Sec.  190.09(d)(1)(i) and 
(ii) and (d)(2) would require instead the posting of ``substitute 
customer property,'' a term proposed to be defined in proposed Sec.  
190.01 to mean (in relevant part) ``cash or cash equivalents.'' ``Cash 
equivalents'' is proposed, in turn, to be 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.'' \140\
---------------------------------------------------------------------------

    \140\ The header language in proposed Sec.  190.09(d)(1) deletes 
the phrase ``other than a commodity contract,'' though this deletion 
does not have a substantive effect, and is meant for clarification 
purposes only.
---------------------------------------------------------------------------

    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 proposed Sec.  190.00(d)(5). More particularly, 
section 766(d) provides that if the value of specifically identifiable 
property exceeds the amount to which the customer is entitled under 
subsection (h) or (i) of section 766, then the customer may deposit 
cash with the trustee equal to the difference between the value of such 
property and the amount to which the customer is entitled, and the 
trustee then shall return or transfer the property.
    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. In addition, each of proposed Sec.  
190.09(d)(1)(i) and (ii) and (d)(2) would replace the phrase ``in an 
amount equal to'' with ``with a value equal to'' to account for the 
proposal that customers may now use cash equivalents, rather than just 
cash, to

[[Page 36031]]

redeem their specifically identifiable property.\141\
---------------------------------------------------------------------------

    \141\ While section 766(d) would require the customer to deposit 
cash, section 20(a)(3) of the CEA permits the Commission to 
``[n]otwithstanding title 11 . . . provide . . . by rule or 
regulation . . . the method by which the business of [a debtor] 
commodity broker is to be conducted or liquidated after the date of 
the filing of the petition'' in bankruptcy. It would appear that 
this power extends to enacting a regulation permitting a customer to 
post cash equivalents rather than cash in this situation. 7 U.S.C. 
24(a)(3).
---------------------------------------------------------------------------

    The remaining provisions of proposed Sec.  190.09 include only 
technical changes:
    The header language to the proposed regulation would note that 
property that is connected with certain cross-margining arrangements is 
subject to the provisions of appendix B, framework 1 of part 190. With 
the revisions in the header language to proposed Sec.  190.09, the 
Commission has attempted to clarify that, where certain cross-margining 
arrangements are involved, allocation of customer property will be 
subject not just to proposed Sec.  190.09, but also to the provisions 
in appendix B, framework 1.
    Proposed Sec.  190.09(a)(1), like its analog in current Sec.  
190.08(a)(1), would define the scope of ``customer property'' that is 
available to pay the claims of a debtor FCM's customers. Customers are 
entitled to a priority over other creditors of the debtor with respect 
to distributions of customer property.\142\ The claims of public 
customers are satisfied ahead of those of non-public customers. 
Proposed Sec.  190.09(a)(1)(i), derived from current Sec.  
190.08(a)(1)(i), and would list the categories of property that are 
included in the term ``customer property,'' specifically ``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.'' Proposed changes to these categories from the 
current regulation text would be as follows (to the extent not 
addressed below, the provisions in proposed Sec.  190.09(a)(1)(i) would 
be the same as those in current Sec.  190.08(a)(1)(i)):
---------------------------------------------------------------------------

    \142\ However, consistent with section 766(h) of the Bankruptcy 
Code, certain claims involving administrative expenses connected 
with administering customer property take precedence over customer 
claims. 11 U.S.C. 766(h).
---------------------------------------------------------------------------

     While current Sec.  190.08(a)(1)(i)(C) refers to warehouse 
receipts, bills of lading, or other documents of title or property held 
or acquired by the debtor to fulfill a commodity contract, proposed 
Sec.  190.09(a)(1)(i)(C) simply would refer back to the definition of 
``physical delivery property'' set forth in proposed Sec.  190.01.
     Proposed Sec.  190.09(a)(1)(i)(D) is new, and would 
clarify explicitly that customer property includes cash delivery 
property, as well as any other property that the debtor received as 
payment for a commodity to be delivered to fulfill a commodity contract 
from or for the commodity customer account of a customer.
     Proposed Sec.  190.09(a)(1)(i)(F), which is the analog to 
current Sec.  190.08(a)(1)(i)(E), would state that letters of credit 
are included in customer property, including any proceeds of a letter 
of credit drawn by the trustee pursuant to proposed Sec.  190.04(c)(3). 
Substitute customer property posted by a customer pursuant to proposed 
Sec.  190.04(d)(3) also would be included. While current Sec.  
190.08(a)(1)(i)(E) also discusses letters of credit, the changes made 
to proposed Sec.  190.09(a)(1)(i)(F) are meant to be consistent with 
the new letters of credit provisions added elsewhere in proposed part 
190.
     Proposed Sec.  190.09(a)(1)(i)(G), which is the analog to 
current Sec.  190.08(a)(1)(i)(F), would delete the phrase ``To the 
extent not otherwise included'' solely for clarification purposes.
    Proposed Sec.  190.09(a)(1)(ii), derived from current Sec.  
190.08(a)(1)(ii), would list the categories of ``[a]ll cash, 
securities, or other property'' that are included in customer property. 
Proposed changes to these categories from the current regulation text 
are as follows (to the extent not addressed below, the provisions in 
proposed Sec.  190.09(a)(1)(ii) would be the same as those in current 
Sec.  190.08(a)(1)(ii)):
     Proposed Sec.  190.09(a)(1)(ii)(A), which is the analog to 
current Sec.  190.08(a)(1)(ii)(A), would clarify that any cash, 
securities, or other property that is segregated for customers on the 
filing date is considered customer property.
     Proposed Sec.  190.09(a)(1)(ii)(D) would make a number of 
changes to its analog in current Sec.  190.08(a)(1)(ii)(D). First, 
proposed Sec.  190.09(a)(1)(ii)(D) would include in customer property 
any ``cash, securities, or other property'' that was (rather than is, 
as the current regulation text states) property received, acquired or 
held to margin, guarantee, secure, purchase, or sell a commodity 
contract. This change would be made for the sake of logical consistency 
with respect to time references; the reference is to the prior status 
of property that is subsequently recovered by the trustee. Second, 
proposed Sec.  190.09(a)(1)(ii)(D) would delete the phrase ``which has 
been withdrawn'' as unnecessary. Lastly, proposed Sec.  
190.09(a)(1)(ii)(D) would add the phrase ``or is otherwise recovered by 
the trustee on any other claim or basis,'' to account for the fact that 
the trustee may recover such property by means other than their 
avoidance powers and that, no matter the means of recovery, such 
property should be included in customer property.
     Proposed Sec.  190.09(a)(1)(ii)(E), which is the analog to 
current Sec.  190.08(a)(1)(ii)(E), would change the phrase ``against a 
customer account'' to ``against a customer.'' Such change is made for 
clarification purposes only.
     Proposed Sec.  190.09(a)(1)(ii)(G) is discussed above as a 
substantive change.
     Proposed Sec.  190.09(a)(1)(ii)(H), which is the analog to 
current Sec.  190.08(a)(1)(ii)(G), would delete the phrase ``unless 
including such property in the customer estate would not significantly 
increase the customer estate.'' The Commission views this restriction 
in the current regulation text as unnecessary and therefore proposes 
deleting it.
     Proposed Sec.  190.09(a)(1)(ii)(K) is new, and would 
include in customer property any cash, securities, or other property 
which 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. The Commission is of the view that adding this provision will 
ensure that any such cash, securities, or other property would become 
part of the pool of customer property, and is appropriate because the 
funds recovered pursuant to such insurance payment would, absent the 
conversion or misuse, have been available to pay customers.
     Proposed Sec.  190.09(a)(1)(ii)(L) is discussed above as a 
substantive change.
    Proposed Sec.  190.09(a)(2), like its analog in current Sec.  
190.08(a)(2), would list categories of property that are not included 
in the ``customer property'' that is available to pay the claims of a 
debtor FCM's customers. Proposed changes to these categories from the 
current regulation text are as follows (to the extent not addressed 
below, the provisions in proposed Sec.  190.09(a)(2) are the same as 
those in current Sec.  190.08(a)(2)):
     Proposed Sec.  190.09(a)(2)(iii), which is the analog to 
current Sec.  190.08(a)(2)(iii), would state that forward contracts 
will not be included in customer property, but would add ``unless such 
contracts are cleared by a clearing organization or, in the case of 
forward contracts treated as foreign futures, a foreign clearing 
organization.'' This addition is meant to clarify that any forward 
contracts that are cleared by a clearing organization are included

[[Page 36032]]

in customer property, so it is only uncleared forward contracts that 
will be excluded from the pool of customer property.\143\
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    \143\ Cf. 11 U.S.C. 761(4)(F)(ii) (including within the 
definition of ``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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     Proposed Sec.  190.09(a)(2)(iv), which is the analog to 
current Sec.  190.08(a)(2)(iv), would exclude from customer property 
any physical delivery property that is not held by the debtor and is 
delivered or received by a customer to fulfill the customer's delivery 
obligation under a commodity contract. The definition of the term 
``physical delivery property'' in proposed Sec.  190.01 specifically 
would note that any commodities or documents of title that are not held 
by the debtor, and are delivered or received by a customer to fulfill 
the customer's delivery obligation under a commodity contract outside 
the administration of the estate pursuant to proposed Sec.  
190.06(a)(2), are not subject to pro rata distribution. Thus, proposed 
Sec.  190.09(a)(2)(iv) simply would import this concept into proposed 
Sec.  190.09 by specifying that such physical delivery property is not 
considered ``customer property'' for purposes of allocation to 
customers.
     Proposed Sec.  190.09(a)(2)(v), which is the analog to 
current Sec.  190.08(a)(2)(v), would delete the word ``maintenance'' as 
it appears in the current regulation text, so as to eliminate any 
distinction between initial and maintenance margin. As proposed, the 
provision would not include in customer property any property deposited 
by a customer with the commodity broker, after the entry of an order 
for relief, that is not necessary to meet the initial or maintenance 
margin requirements applicable to that customer's account(s).
     Proposed Sec.  190.09(a)(2)(viii) is new, and would 
clarify that any money, securities or other property held in a 
securities account to fulfill delivery, under a commodity contract, 
from or for the account of a customer, is excluded from customer 
property. Proposed Sec.  190.09(a)(2)(viii) would be parallel to 
proposed Sec.  190.09(a)(2)(vii) (which would be the same as current 
Sec.  190.08(a)(2)(vii)), which excludes from customer property any 
money, securities or property held to margin, guarantee or secure 
security futures products if held in a securities account. These 
provisions, together, are meant to focus on securities futures 
contracts that are held in securities accounts, and that therefore 
would be protected under SIPA and would not constitute customer 
property for purposes of part 190.
    Proposed Sec.  190.09(a)(3) is new. It would reserve the right of 
the bankruptcy trustee to assert claims against any person to recover 
the shortfall of property enumerated in proposed Sec. Sec.  
190.09(a)(1)(i)(F) and 190.0(a)(1)(ii)(A) through (L). The purpose of 
proposed Sec.  190.09(a)(3) is to clarify, for the avoidance of doubt, 
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, or might be, able to satisfy customer claims 
by other means.
    Proposed Sec.  190.09(b) is analogous to current Sec.  
190.08(b).\144\ The Commission would add the phrase ``or attributable 
to'' when discussing how to treat property segregated on behalf of or 
attributable to non-public customers. This addition is to clarify that 
this provision would apply both to property that is in the debtor's 
estate as of 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 on a later date.
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    \144\ Cf. 11 U.S.C. 766(h) (Notwithstanding any other provision 
of this subsection, a customer net equity claim based on a 
proprietary account, as defined by Commission rule, regulation, or 
order, 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.).
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    Proposed Sec.  190.09(c) would set forth instructions regarding 
allocation of customer property, including a few changes from its 
analog in current Sec.  190.08(c). Specifically, proposed Sec.  
190.09(c)(1)(i) would add ``or recovered by the trustee on behalf of or 
for the benefit of an account class'' when describing property that 
must be allocated to the specific account class. This addition is meant 
to clarify, similar to the addition discussed above with respect to 
proposed Sec.  190.09(b), that this provision regarding allocation of 
customer property would apply both to (1) property that is in the 
debtor's estate as of the time of the bankruptcy filing as well as (2) 
property that is later recovered by the trustee and becomes part of the 
debtor's estate on a later date.
    Proposed Sec.  190.09(c)(1)(ii) is new. It would instruct the 
trustee with respect to the treatment of any property remaining after 
payment in full is made to allowed customer claims in a particular 
account class. Specifically, the new text would provide that such 
remaining property shall be allocated in accordance with proposed Sec.  
190.09(c)(2), which would set forth the order of allocation for any 
customer money, securities and property that cannot be traced to a 
specific customer account class. This new provision would also be 
consistent with the requirement, under section 766(h) of the Bankruptcy 
Code, that customer property must be distributed to customers in 
priority to all other claimants.
    Proposed Sec.  190.09(c)(2) would delete the restrictions that 
``money, securities, and property received from or for the account of 
customers'' must also be ``on behalf of any account class which is 
received on behalf of the customer estate.'' The latter restriction is 
unnecessary: Any ``money, securities and property received from or for 
the account of customers'' should be treated as customer property, and 
needs to be allocated. Moreover, the reference to allocation as of 
``the primary liquidation date'' is removed, because money, securities 
or property may be recovered or marshalled at a variety of times during 
the proceedings.
    Proposed Sec.  190.09(d)(1) and (2) were discussed above as 
substantive changes. Certain other changes to proposed Sec.  190(d)(2), 
and changes to the remaining paragraphs of Sec.  190.09(d), governing 
the distribution of customer property, are technical:
    There would be a few additional changes to Sec.  190.09(d)(2) from 
the text in current Sec.  190.08(d)(2), including (1) replacement of 
the phrase ``[a]ny specifically identifiable commodity contract'' with 
``[a]ny open commodity contract that is specifically identifiable 
property''; (2) replacement of the term ``customer'' with ``public 
customer''; and (3) replacement of the phrase ``adequate security for 
the non-recovery of any overpayments'' with ``to assure the recovery of 
any overpayments.'' These changes are all meant for clarification 
purposes only.
    Proposed Sec.  190.09(d)(3) is derived from current Sec.  
190.08(d)(3). Both the proposed and current regulations refer to the 
distribution, at the request of the customer, of ``like-kind 
securities.'' The purpose of this provision is to allow for 
distribution of securities that are interchangeable with the securities 
deposited by the customer.\145\ However, it would appear that there is 
no commonly understood definition of ``like-kind securities.''
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    \145\ In the context of dematerialized securities, it is 
impracticable to identify the exact securities deposited by a 
customer (e.g., Class A Share #12345 of Acme, Inc.).
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    The Commission notes that SIPA addresses an analogous issue. SIPA 
section 7(b)(1), 15 U.S.C. 78fff-1(b)(1), provides that ``the trustee 
shall deliver

[[Page 36033]]

securities to or on behalf of customers to the maximum extent 
practicable in satisfaction of customer claims for securities of the 
same class and series of an issuer . . . .'' In order to clarify the 
meaning of like- kind securities, proposed Sec.  190.03(d)(3) would 
adopt this approach, and would read, in relevant part that: 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 
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.
    Additional changes in proposed Sec.  190.09(d)(3) from the text of 
current Sec.  190.08(d)(3) are (1) addition of a cross-reference to a 
portion of the definition of ``specifically identifiable property'' as 
set forth in proposed Sec.  190.01; and (2) replacement of the phrase 
``if that customer had had no open commodity contracts'' with ``but the 
customer has no open commodity contracts.''
    Proposed Sec.  190.09(d)(4) is substantially similar to current 
Sec.  190.08(d)(4). The only difference is that proposed Sec.  
190.09(d)(4) would contain updated cross-references to proposed 
Sec. Sec.  190.03(e) and (f), which discuss the customer proof of claim 
form.
    Proposed Sec.  190.09(d)(5) is derived from current Sec.  
190.08(d)(5). The proposed regulation would contain a few changes to 
the text of current Sec.  190.08(d)(5) that are meant solely for 
clarification, including (1) the addition of the phrase ``with respect 
to a particular account class''; (2) the addition of the phrase ``in 
such account class''; and (3) updated cross-references.
    Lastly, current Sec.  190.08(d)(6) would be moved to proposed Sec.  
190.04(b)(1)(ii).
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.09. Specifically, the Commission seeks comment as to 
whether the proposed revisions to Sec.  190.09(a)(1) would 
appropriately preserve customer property for the benefit of customers. 
In particular, the Commission seeks comment on whether proposed 
Sec. Sec.  190.09(a)(1)(ii)(G), concerning property that other 
regulations require to be placed into segregation, and (L), concerning 
remaining shortfalls, are appropriately crafted. Moreover, is it 
advisable to permit customers to post ``substitute customer property'' 
rather than ``cash'' in proposed Sec.  190.09(d)? Is it 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?''
8. Regulation Sec.  190.10: Provisions Applicable to Futures Commission 
Merchants During Business as Usual
    The Commission is proposing to revise current Sec.  190.10, which 
sets forth the provisions generally applicable to FCMs. Certain 
provisions in current Sec.  190.10 would be moved to proposed 
Sec. Sec.  190.02 and 190.03, as described above. Proposed Sec.  190.10 
would contain new and moved provisions that set forth an FCM's 
obligations during business as usual.
    The most substantive change in proposed Sec.  190.10 concerns 
paragraph (d). This provision is new, and would address letters of 
credit. It would prohibit an FCM from accepting a letter of credit 
unless certain conditions (1) are met at the time of acceptance and (2) 
remain true through its date of expiration.
    First, 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 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.
    As noted in Sec.  190.00(c)(5), the concept of pro rata 
distribution would apply to all customers, including those posting 
letters of credit. Proposed Sec.  190.04(d)(3) would describe how the 
trustee must treat letters of credit in bankruptcy. The trustee would 
be required to treat the letter of credit in a manner consistent with 
pro rata distribution and be permitted to draw upon the full amount of 
unexpired letters of credit or any portion thereof or treat the letter 
of credit as having been distributed to the customer for purposes of 
calculating entitlements to distribution or transfer. Section 190.10(d) 
is intended to 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 proposed Sec. Sec.  190.00(c)(5) and 190.04(d)(3).\146\
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    \146\ The Commission notes that, unlike the case in 
ConocoPhillips, 2012 WL 4757866 at *5-*6, it is entirely clear that 
this regulation does not constitute an ``exercise of regulatory 
authority'' with respect to an ``identified banking product.'' 
Assuming for the sake of analysis that letters of credit constitute 
identified banking products, the Commission would not exercise any 
regulatory authority over them, and would not specify what should be 
done with any letter of credit. Rather, the Commission simply is 
proposing to exercise regulatory authority over FCMs, and prohibit 
them from accepting certain letters of credit (i.e., those which do 
not meet the criteria specified in proposed Sec.  190.10(d)) as 
collateral for CFTC-regulated futures, options, and swaps.
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    The Commission has considered the impact that the implementation of 
this regulation would have on FCMs and their customers, since letters 
of credit are currently in use by the industry.\147\ Accordingly, upon 
the effective date of the regulation, proposed Sec.  190.10(d) 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 
proposes to include a reasonable transition period of one year from the 
effective date until Sec.  190.10(d) would apply to existing letters of 
credit and customer agreements.
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    \147\ The Commission notes that the Joint Audit Committee 
(``JAC'') forms for an Irrevocable Standby Letter of Credit (both 
Pass-Through and Non Pass-Through) would appear to be consistent 
with the requirements of proposed Sec.  190.10(d).
    See https://www.cmegroup.com/clearing/audit/files/rm_FU_Irrevocable_Standby_LOC920.pdf; https://www.cmegroup.com/clearing/audit/files/S_irrstandbynonpassthroughloc.pdf. Based on 
staff discussions with industry participants, the Commission 
understands that most letters of credit currently in use by the 
industry follow the JAC forms.
---------------------------------------------------------------------------

    Proposed Sec.  190.10(a) is also new. It would note that an FCM 
would be required to maintain current records relating to its customer 
accounts, pursuant to Sec. Sec.  1.31, 1.35, 1.36, and 1.37 of this 
chapter, 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 would recognize 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.\148\
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    \148\ As the ABA Cover Note observes:
    Paragraph (a) requires an FCM to maintain current records 
relating to its customer accounts, and provides that those records 
may be provided to another FCM to facilitate transfer of open 
customer positions. The provision is not intended to expand an FCM's 
recordkeeping obligations under other Commission rules. It is 
intended to emphasize the importance of current and accurate records 
for an FCM that is accepting the transfer of customer positions and 
property from the debtor FCM.
    ABA Cover Note at 15.

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[[Page 36034]]

    Proposed Sec.  190.10(b) would concern the designation of hedging 
accounts. It would incorporate concepts contained in current Sec. Sec.  
190.04(e), 190.06(d), and the current Bankruptcy appendix form 3 
instructions. As noted below, for purposes of this regulation, a 
customer would not need to provide, and an FCM would not be required to 
judge, evidence of hedging intent for purposes of bankruptcy treatment. 
Rather, proposed Sec.  190.10(b) would 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 would not be determinative for any other 
purpose.
    Proposed Sec.  190.10(b)(1) would 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). Giving this opportunity to each customer at the 
outset would provide the opportunity to allow for clear instruction at 
a point when both customer and FCM are focused on the specifics of the 
relationship between them, and would enhance the ability of the FCM 
properly to account for the customer property. The proposed regulation 
would also require, consistent with current Sec.  190.06(d)(2), that 
the FCM indicate prominently in its accounting records for each 
customer account whether the account is designated as a hedging 
account.
    Proposed Sec.  190.10(b)(2) would 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 rule or rule of a DCO, DCM, SEF, or FBOT. This is 
in lieu of obtaining written hedging instructions as required under 
current Sec.  190.06(d).\149\
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    \149\ See ABA Cover Note at 16.
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    In order to avoid the significant burden that would be associated 
with requiring FCMs to re-obtain hedging instructions for existing 
accounts, proposed Sec.  190.10(b)(3) would provide that the 
requirements of paragraph (b)(1) and (2) do not apply to commodity 
contract accounts opened prior to the effective date of these revisions 
to part 190. Rather, the regulation would 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, proposed Sec.  190.10(b)(4) would 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 proposed paragraph (b)(2) 
from such customer. As noted above with respect to Sec.  190.10(b)(2), 
this treatment only would be relevant for purposes of hedging account 
treatment in bankruptcy.
    Proposed Sec.  190.10(c) is new. It would address the establishment 
of delivery accounts during business as usual.\150\ As recognized in 
current Sec.  190.05 (and, in particular, current Sec.  190.05(a)(2)) 
and the definition in current Sec.  190.01(ll)(3), (4), and (5), 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.\151\ 
The Commission is proposing to recognize 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 would clarify that the property must be held in 
one of these types of accounts. The Commission is proposing to address 
the establishment of delivery accounts during business as usual because 
of their importance during bankruptcy, as addressed in proposed Sec.  
190.06.
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    \150\ See proposed Sec.  190.06 regarding the making and taking 
of deliveries during bankruptcy.
    \151\ See 48 FR at 8731 (Property segregated on behalf of a 
delivery account, under the allocation provisions, will be allocated 
only to that account class. This means that although this property 
will not be distributed to the extent its value exceeds a claimant's 
net equity claim and will be distributed pro rata among claimants 
with delivery claims which are of the same class, it will not be 
diluted by other types of customer claims. This solution reduces the 
dilution effect of proration without offending the basic principle 
of proration of equivalent claims.).
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    Proposed 190.10(d) was addressed above as a substantive change.
    Proposed Sec.  190.10(e) would concern the disclosure statement for 
non-cash margin. It is derived from current Sec.  190.10(c), with 
corresponding changes to cross-references. The reference in the 
required disclosure statement to notice (in the event of bankruptcy) by 
publication would be deleted, consistent with the changes to notice 
provisions in proposed Sec.  190.03(a)(2).
    The Commission notes, however, that the ABA Committee proposed to 
delete entirely the requirement that FCMs provide this disclosure 
statement, on the basis that the requirement was originally imposed in 
order to address a concern that customers might otherwise challenge pro 
rata distribution of non-cash collateral on the basis that they did not 
consent to such treatment. The ABA Committee stated that it ``does not 
believe that such a risk exists today under prevailing bankruptcy 
law.''
    Do commenters believe that requiring this disclosure is helpful, 
either legally (with respect to pro rata distribution) or practically 
(with respect to enhancing customer understanding)? Should the form of 
disclosure be changed in some manner? Or do commenters believe that 
this requirement should be deleted?
    The Commission also requests comment with respect to all other 
aspects of proposed Sec.  190.10. Specifically, the Commission seeks 
comment with respect to the impact of proposed Sec.  190.10(b) 
regarding the designation of hedging accounts and proposed Sec.  
190.10(c) regarding the establishment of delivery accounts during 
business as usual.
    The Commission also specifically seeks comment on proposed Sec.  
190.10(d), regarding changes to the business as usual requirements for 
acceptance of letters of credit, and in particular seeks comment as to 
(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.

C. Subpart C--Clearing Organization as Debtor

    The Commission is proposing to promulgate a new subpart C of part 
190 (proposed Sec. Sec.  190.11-190.19), addressing the currently 
unprecedented context of a clearing organization as debtor.
1. Regulation Sec.  190.11: Scope and Purpose of Subpart C
    When originally proposing part 190 in 1981, the Commission proposed 
to (and ultimately did) forego providing generally applicable rules for 
the

[[Page 36035]]

bankruptcy of a clearing organization.\152\ 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.\153\
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    \152\ 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.
    \153\ 46 FR 57535, 57545 (Nov. 24, 1981).
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    Much has changed in the intervening 38 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.\154\ 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.
---------------------------------------------------------------------------

    \154\ Commodity Futures Modernization Act of 2000 Public Law 
106-554 section 1(a)(5); Appendix E, section 112(f).
---------------------------------------------------------------------------

    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.\155\ 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.\156\
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    \155\ 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.
    \156\ 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).
---------------------------------------------------------------------------

    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 \157\ 
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) \158\ 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.\159\ 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 organization under chapter 
7 (subchapter IV) of the Bankruptcy Code.
---------------------------------------------------------------------------

    \157\ 12 U.S.C. 5390(a)(7)(B).
    \158\ 12 U.S.C. 5390(d)(2).
    \159\ 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.
---------------------------------------------------------------------------

    Accordingly, proposed Sec.  190.11 would establish that this 
subpart C to part 190 applies to proceedings under subchapter IV to 
chapter 7 of the Bankruptcy Code where the debtor is a clearing 
organization.
    The Commission requests comment regarding the proposed scope of 
subpart C of part 190 as set forth in proposed Sec.  190.11. Do 
commenters support or oppose the decision to establish an explicit, 
bespoke set of regulations for the bankruptcy of a clearing 
organization?
2. Regulation Sec.  190.12: Required Reports and Records
    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, 
and that the trustee that is appointed (and the Commission) are rapidly 
provided with critical documents, as discussed further below.
    Proposed Sec.  190.12(a)(1) would be analogous to proposed Sec.  
190.03(a), 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 proposed part 
190.\160\ For a discussion of how these notice provisions differ from 
those in current part 190, please refer to the discussion of proposed 
Sec.  190.03(a).\161\
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    \160\ While proposed Sec.  190.03(a)(2) would apply to notice to 
an FCM's customers, and proposed Sec.  190.12(a)(1)(ii) would apply 
to notice to a clearing organization's members, the means of giving 
notice are identical.
    \161\ See section II.B.1 above.
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    Proposed Sec.  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).\162\ 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

[[Page 36036]]

number, if the docket number is not immediately assigned, that 
information would be provided separately as soon as available.
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    \162\ 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, proposed Sec.  190.12(b)(1) would require 
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),\163\ 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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    \163\ See Sec.  39.19(c)(4)(xxiv).
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    Similarly, proposed Sec.  190.12(b)(2) would require 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).
    Current 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, proposed Sec.  190.12(c) would require the 
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.\164\
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    \164\ 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 requests comment with respect to all aspects of 
proposed Sec.  190.12. In particular, are the reports and records 
identified in proposed Sec.  190.12 to be provided to the Commission 
useful and appropriate? Are the proposed time deadlines appropriate? 
Are there additional reports and records that should be included in the 
regulation?
3. Regulation Sec.  190.13: Prohibition on Avoidance of Transfers
    Proposed Sec.  190.13 would implement section 764(b) of the 
Bankruptcy Code, protecting certain transfers from avoidance (sometimes 
referred to as ``claw-back''), with respect to a debtor clearing 
organization. It is analogous to proposed Sec.  190.07(e) (and current 
Sec.  190.06(g)), with certain changes. Specifically, while proposed 
Sec.  190.07(e) approves FCM transfers unless they are explicitly 
disapproved, proposed Sec.  190.13 requires explicit Commission 
approval for DCO transfers. While an FCM can transfer only a portion of 
its customer positions, a DCO must maintain a balanced book, and thus 
must transfer all of its customer positions (or at least all positions 
in a given product set). Given the importance of transferring open 
commodity contracts and the property margining such contracts in the 
event of a DCO bankruptcy, the Commission is proposing that any such 
transfer should require explicit Commission approval.
    Thus, whereas current Sec.  190.06(g)(1)(iii) provides that a pre-
relief transfer by a clearing organization cannot be avoided as long as 
it is not disapproved by the Commission, proposed Sec.  190.13(a) would 
instead provide 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, while current Sec.  190.06(g)(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, proposed Sec.  190.13(b) would 
instead provide 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 requests comment with respect to all aspects of 
proposed Sec.  190.13. In particular, do commenters agree with the 
approach of requiring explicit approval of transfers by clearing 
organization debtors?
4. Regulation Sec.  190.14: Operation of the Estate of the Debtor 
Subsequent to the Filing Date
    Proposed Sec.  190.14(a) would provide discretion to the trustee to 
design the proof of claim form and to specify the information that is 
required. Broad discretion would appear to be appropriate, given the 
bespoke nature of a clearing organization bankruptcy.
    Proposed Sec.  190.14(b) addresses continued operation of a DCO. 
Proposed Sec.  190.14(b)(1) would provide that, after

[[Page 36037]]

the order for relief, the debtor clearing organization would cease 
making calls for either variation or initial margin, except as 
otherwise provided in Sec.  190.14(b).
    Proposed Sec.  190.14(b)(2) would allow for the possibility that 
the trustee believes that continued operation of the debtor clearing 
organization would be both useful and practicable, in which event the 
trustee may request permission of the Commission to operate the 
clearing organization for up to six calendar days after the order for 
relief, to the extent practicable, in accordance with the rules and 
procedures of the debtor, and with respect to open commodity contracts 
of the debtor.
    In this context, usefulness would be addressed in paragraph 
(b)(2)(i), namely that such continued operation would facilitate 
accomplishing promptly (the outer limit of which would be no more than 
six calendar days) either (A) transfer of the clearing operations to 
another DCO or (B) resolution of the DCO pursuant to Title II of Dodd-
Frank. (i.e., that such transfer or entry into a Title II resolution 
proceeding was not practicable to accomplish before the order for 
relief, but could be accomplished within a brief period thereafter).
    Practicability would be addressed in paragraph (b)(2)(ii). If the 
rules of the debtor clearing organization compel the termination of all 
or substantially all outstanding contracts under the relevant 
circumstances (e.g., upon an order for relief), then continued 
operation would not be practicable. Moreover, cooperation by the 
members of the clearing organization would be required for 
practicability. Thus, it would be necessary that all (or substantially 
all) of the members of the clearing organization (other than those 
which are themselves subject to a bankruptcy proceeding) are both able 
and willing to make variation payments as owed during the temporary 
timeframe.
    The reason for the six calendar day outer limit is that six 
calendar days is one less than seven calendar days, the maximum under 
section 764(b) of the Bankruptcy Code.
    Proposed Sec.  190.14(b)(3) would require the Commission, upon 
receiving such a request, to consider it promptly (as a practical 
matter, a failure to grant such a request within a relatively small 
number of hours during business days would likely make continued 
operation impracticable). Where the Commission is persuaded that the 
trustee's conclusions with respect to usefulness and practicability are 
well grounded (a standard that is intended to grant the Commission wide 
discretion in making a decision, which discretion appears necessary in 
light of the unprecedented and exigent circumstances), the Commission 
may grant the request. The proposed regulation would also permit the 
Commission to grant the request for fewer calendar days than the 
trustee has requested, but then to renew permission to continue 
operations, so long as the total calendar days of continued operation 
total no more than six.
    Proposed Sec.  190.14(c)(1) would require 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, such liquidation would not be required if the 
Commission (whether at the request of the trustee or sua sponte) 
determines that such liquidation would be inconsistent with the 
avoidance of systemic risk \165\ or, in the expert judgment of the 
Commission, would not be in the best interests of the debtor clearing 
organization's estate.\166\ The trustee would be directed to carry out 
such liquidation in accordance with the rules and procedures of the 
debtor clearing organization, to the extent applicable and practicable.
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    \165\ 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.).
    \166\ 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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    Proposed Sec.  190.14(c)(2) would, analogously to existing Sec.  
190.08(d)(3) and proposed Sec.  190.09(d)(3), permit the trustee to, 
rather than liquidating securities and making distributions in the form 
of cash, instead 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.
    Proposed Sec.  190.14(d) would 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.'' Proposed Sec.  190.14(d) is analogous to proposed Sec.  
190.05(b), modified for the context of a DCO bankruptcy. Similarly to 
proposed Sec.  190.05(b), the Commission's objective in proposed Sec.  
190.14(d) would be 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 would be required to calculate each customer's funded balance 
prior to distributing property, to achieve an appropriate allocation of 
property between customers.
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.14. In particular, the Commission seeks comment on 
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 Dodd-
Frank. Is there a better way to frame either of these terms? Moreover, 
is it appropriate to provide for the possibility that the trustee may 
be permitted to delay liquidating contracts?
5. Regulation Sec.  190.15: Recovery and Wind-Down Plans; Default Rules 
and Procedures
    Proposed Sec.  190.15 would favor implementation of the debtor'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, Subpart 
C DCOs, their clearing members, customers of clearing members, and the 
financial system more broadly by requiring SIDCOs and Subpart C DCOs to 
have plans and procedures to address credit losses and liquidity 
shortfalls beyond their prefunded resources.'' \167\ Similarly, in 
adopting Sec.  39.39, the Commission explained that it is ``designed to 
protect the members of such DCOs and their customers, as well as the 
financial system more broadly, from the

[[Page 36038]]

consequences of a disorderly failure of such a DCO.'' \168\
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    \167\ 78 FR 72476, 72492 (December 2, 2013).
    \168\ Id. at 72494.
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    Proposed Sec.  190.15(a) would provide that the trustee shall not 
avoid or prohibit any action taken by the DCO debtor 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 Code. This is intended 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.
    Proposed Sec.  190.15(b) would instruct 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, proposed Sec.  190.15(c) would instruct the trustee to, 
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, to the extent reasonable and practicable. These 
proposed regulations are intended to provide the trustee, who will need 
quickly to take action to manage the DCO (and any member default), with 
a roadmap to manage such action, which roadmap is based on the rules, 
procedures, and plans the DCO has developed in advance, and subject to 
the requirements of the Commission's regulations.
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.15. In particular, is it appropriate to steer the 
trustee towards implementation of the debtor DCO's default rules and 
procedures and recovery and wind-down plans in proposed Sec.  190.15(b) 
and (c)? Are the qualifiers concerning discretion, reasonability and 
practicability appropriate and sufficient?
6. Regulation Sec.  190.16: Delivery
    Proposed Sec.  190.16(a) would instruct the trustee to use 
reasonable efforts to facilitate and cooperate with completion of 
delivery in a manner consistent with proposed Sec.  190.06(a) (which 
would instruct 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 addressed in proposed Sec.  190.00(c)(5). As 
noted in discussing proposed Sec.  190.06(a), 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 would be limited 
to requiring ``reasonable efforts.''
    Proposed Sec.  190.16(b) would carry 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 
that would be set forth in proposed Sec.  190.06(b). Specifically, 
physical delivery property that is held in delivery accounts for the 
purpose of making delivery would be treated as physical delivery 
property, as are 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 would be treated as cash delivery 
property, as would any physical delivery property for which delivery is 
subsequently taken.
    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.16. Specifically, the Commission seeks comment 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. If so, should the physical delivery 
account class for a clearing organization be further divided into 
separate sub-classes for each type of physical delivery property? If 
so, what should be the definition of a ``type of physical delivery 
property''? Alternatively, might it be more prudent in the context of a 
clearing organization to treat the delivery account class as a single, 
undivided account class?
7. Regulation Sec.  190.17: Calculation of Net Equity
    Proposed Sec.  190.17(a) with respect to net equity is parallel to 
proposed Sec.  190.18(a) with respect to customer property. Proposed 
Sec.  190.17(a)(1) would confirm that a member of a clearing 
organization may have claims in separate capacities, that is, claims on 
behalf of its public customers (customer account) and claims on behalf 
of itself and its non-public customers (affiliates) (house account), 
and, within those separate customer classes, further separated by 
account class. The member would 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. Proposed Sec.  190.17(a)(2) would direct that net equity shall 
be calculated separately with respect to each customer capacity and, 
within such customer capacity, by account class.
    Proposed Sec.  190.17(b)(1) would confirm that the calculation of 
members' net equity claims--and, thus, the allocation of losses among 
members and their accounts--is 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 thus the Commission 
preliminarily believes it is appropriate to give them effect regardless 
of the bankruptcy of the DCO--and regardless of the timing of any such 
bankruptcy (i.e., regardless of whether such loss allocation rules and 
procedures have been applied fully 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.
    DCOs also often have rules to ``reverse the waterfall''--that is, 
to allocate to members' accounts recoveries on claims against 
defaulting members \169\ in reverse order of the allocation of the 
losses.\170\ Proposed Sec.  190.17(b)(2) would

[[Page 36039]]

implement such rules in bankruptcy, that is, to adjust members' net 
equity claims (and the basis for distributing any such recoveries) in 
light of such recoveries. This regulation would similarly implement 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.
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    \169\ 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.
    \170\ 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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    Proposed Sec.  190.17(c) would adopt by reference the equity 
calculations set forth in proposed Sec.  190.08, to the extent 
applicable.\171\
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    \171\ For a discussion of the proposed changes between current 
Sec.  190.07 and proposed Sec.  190.08, which both set forth the 
methodology for calculating net equity, please see sections II.B.5 
and II.B. 6 above.
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    Section 766(i) of the Bankruptcy Code (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. Proposed Sec.  190.17(d) would 
implement this provision by defining 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 
is calculated with respect to each account class available for 
distribution to customers of the same customer class. Moreover, given 
that calculation of funded balance for FCMs is an analogous exercise, 
calculations would be made in the manner provided in the relevant 
regulation, proposed Sec.  190.08(c), to the extent applicable.\172\
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    \172\ For a discussion of the proposed changes between current 
Sec.  190.07(c) and proposed Sec.  190.08(c), which both set forth 
the methodology for calculating funded balance, please see sections 
II.B.5 and II.B.6 above.
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    The Commission requests comment with respect to all aspects of 
proposed Sec.  190.17. Is it appropriate to base these calculations 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?
8. Regulation Sec.  190.18: Treatment of Property
    Proposed Sec.  190.18(a), with respect to customer property, is 
parallel to proposed Sec.  190.17(a) with respect to net equity. It 
would provide that property of the debtor clearing organization's 
estate is allocated between member property, and customer property 
other than member property, as provided in proposed Sec.  190.18, in 
order to satisfy claims of clearing members, as customers of the 
debtor. The property so allocated 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.
    Proposed Sec.  190.18(b) would set out the scope of customer 
property for a clearing organization.\173\ It is based in large part on 
proposed Sec.  190.09(a) (scope of customer property for FCMs). 
Specifically, proposed Sec.  190.18(b)(1)(i)(A) through (G) are based 
on proposed Sec.  190.09(a)(1)(i)(A) through (G). Proposed Sec.  
190.09(a)(1)(i)(H) would not be mapped over because loans of margin are 
not applicable to DCOs.\174\
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    \173\ 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).
    \174\ For a discussion of the proposed changes between current 
Sec.  190.08(a) (on which proposed Sec.  190.09(a) is based) and 
proposed Sec.  190.09(a), please see section II.B.7 above.
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    Proposed Sec.  190.18(b)(1)(ii) (A) through (D) are based on 
proposed Sec.  190.09(a)(1)(ii)(A), (D), (E), and (F)) respectively, 
while proposed Sec.  190.18(b)(1)(ii)(E) would adopt 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. Proposed Sec.  
190.09(a)(1)(ii)(B), (C), (G), and (L)) would not be mapped over 
because they would not be applicable based on the differences in 
business models, structures, and activities between FCMs and of DCOs.
    Proposed Sec.  190.18(b)(1)(iii) would be unique to a clearing 
organization. It would include 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. It also would include 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.
    Proposed Sec.  190.18(b)(2), which would identify property that is 
not included in customer property, would adopt by reference proposed 
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.\175\
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    \175\ For a discussion of the proposed changes between current 
Sec.  190.08(a)(2) (on which proposed Sec.  190.09(a)(2) is based) 
and proposed Sec.  190.09(a)(2), see section II.B.7 above.
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    Proposed Sec.  190.18(c) would allocate customer property between 
customer classes. It would operate in the following order of 
preference: 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. 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.
    Thus, proposed Sec.  190.18(c)(1) would allocate any property 
referred to in proposed Sec.  190.18(b)(1)(iii) (guarantee deposits, 
assessments, etc.) first to customer property other than member 
property (i.e., to benefit public customers) to the extent any account 
class therein is not fully funded, and then to member property. This is 
a change from the proviso in current Sec.  190.09(b), which would 
allocate such property to member property. This change is intended to 
favor public customers, consistent with the policy embodied in section 
766(h) of the Bankruptcy Code.
    Similarly, proposed Sec.  190.18(c)(2) would allocate 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, proposed Sec.  190.18(c)(3) would 
allocate 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.
    Proposed Sec.  190.18(d) would allocate customer property among 
account classes within customer classes.

[[Page 36040]]

Proposed Sec.  190.18(d)(1) would confirm 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).
    Pursuant to proposed Sec.  190.18(d)(2), customer property which 
cannot be allocated in accordance with the previous paragraph would be 
allocated in a manner that promotes equality of percentage distribution 
among account classes within a customer class. Thus, 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 forth, until 
all account classes within the customer class are fully funded.
    Proposed Sec.  190.18(e) would confirm, however, 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.
    Proposed Sec.  190.18(f) would be the analog in the DCO context to 
proposed Sec.  190.09(a)(3) in the context of FCMs. It would reserve 
the right of the trustee to assert claims against any person to recover 
the shortfall of property enumerated in proposed Sec.  
190.18(b)(1)(i)(E), (b)(1)(ii), and (b)(1)(iii). The purpose of 
proposed Sec.  190.18(f), as with proposed Sec.  190.09(a)(3), would be 
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 requests comment with respect to all aspects of 
proposed Sec.  190.18. In particular, the Commission seeks comment on 
the comprehensiveness of the scope of customer property for a clearing 
organization in proposed Sec.  190.18(b). The Commission also requests 
comment on 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).
9. Regulation Sec.  190.19: Support of Daily Settlement
    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.'' \176\ Indeed, 
Congress confirmed this by requiring that each DCO complete money 
settlements not less frequently than once each business day.\177\
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    \176\ 76 FR 3608, 3708 (Jan. 11, 2011).
    \177\ 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,\178\ 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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    \178\ 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 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.\179\ 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.\180\ 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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    \179\ 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.
    \180\ 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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    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. Accordingly, the Commission is 
proposing Sec.  190.19(a), pursuant to section 20(a)(1) of the 
CEA,\181\ to provide that, upon and after an Order for Relief, such 
funds \182\ are to be included in the customer property of the DCO, 
that they will be considered traceable to, and shall promptly be 
distributed to, member and customer accounts entitled to payment with 
respect to the same daily settlement. 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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    \181\ 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, by rule or 
regulation that certain cash, securities, other property, or 
commodity contracts are to be included or excluded from customer 
property or member property.).
    \182\ Because deposits of initial margin described in Sec.  
39.14(a)(iii) are separate from the variation settlement process, 
they are treated separately in proposed 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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    Section 190.19(b) would deal with cases where there is a shortfall 
in funds received pursuant to paragraph (a) (i.e., settlement payments 
received by the DCO). This generally would occur in case of a member 
default. Proposed paragraph (b)(1), to the extent of such shortfall, 
would supplement the available settlement funds in

[[Page 36041]]

accordance with the DCO's default rules and procedures (adopted 
pursuant to Sec.  39.16 for all DCOs and, for DCOs subject to subpart C 
of part 39, Sec.  39.35) and any recovery plans and wind-down plans 
maintained pursuant to Sec.  39.39 and submitted to the Commission 
pursuant to Sec.  39.19.\183\ These funds would be allocated in the 
same proportion as referred to in paragraph (a).
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    \183\ See Sec.  39.19(c)(4)(xxiv).
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    Four types of property would 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. This would be 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 (which include provisions restricting the use of 
customer margin); (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 previous 
paragraph, (such assets are sometimes referred to as ``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 DCO debtor's default rules and procedures.
    Paragraph (b)(2) would provide 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 requests comment with respect to all aspects of 
proposed Sec.  190.19.

D. Appendix A Forms

    The Commission is proposing to delete forms 1 through 3 contained 
in appendix A and would replace form 4 with a streamlined proof of 
claim form. Current forms 1 through 3 include (i) a schedule of the 
trustee's duties in operating the debtor FCM's estate, (ii) a form for 
requesting customer instructions regarding non-cash property; and (iii) 
a form for requesting instructions from a customer concerning transfer 
of hedging positions. The forms contain outdated provisions that 
require unnecessary information to be collected. The Commission 
believes these changes provide a trustee with flexibility to act based 
on the specific circumstance of the case, while still acting 
consistently with the rules.
    As noted in proposed Sec.  190.03(f), the trustee would be 
permitted, but not required, to use the revised template proof of claim 
form proposed as new appendix A. That template is intended to implement 
proposed Sec.  190.03(e), and includes cross-references to the detailed 
paragraphs of that section. Similarly, the proposed instructions would 
also be 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 requests comment with respect to all aspects of 
proposed revisions to the appendix A template proof of claim form. Is 
the information called for by the template fit for the goal of 
providing the trustee with the information they will need to determine 
whether and in what amount to allow a claim? Is any of the information 
called for unnecessary, unhelpful, or disproportionately burdensome? 
Does the form fail to request any information that is necessary to 
accomplish that goal? Are the proposed instructions clear and correct?

E. Appendix B Forms

    Appendix B to the current part 190 regulations 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.
    Framework 1 is applicable to specific cross-margining programs that 
explicitly refer to that distributional framework. The framework 
establishes separate pools of cross-margining and non-cross-margining 
funds and subordinates customer claims for cross-margining wherever 
that would be to the benefit of customer claims for non-cross-
margining.
    The ABA Committee proposed clarifying changes to framework 1, and 
one substantive change: \184\ The ABA Committee ``propose[s] deleting 
the specific limitation that customers must be market professionals, 
should the Commission decide to expand the scope of customers that may 
participate in futures-securities cross-margining programs.'' \185\
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    \184\ See ABA Submission at 58-59.
    \185\ See ABA Cover Note at 17.
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    More recent cross-margining programs established in Commission 
Orders pursuant to section 4d of the CEA treat all customer claims 
(whether involving cross-margining or not, whether involving securities 
or not) equally, and do not refer to Framework 1. Accordingly, it is 
already possible for customers who are not market professionals to 
participate in cross-margining programs, including those that involve 
securities. There thus appears no need substantively to change 
framework 1. On the other hand, framework 1 will continue to apply to 
the programs established pursuant to Orders that refer to that 
framework, and so it would appear helpful to make clarifying changes.
    The Commission is accordingly proposing the clarifying changes 
suggested in the ABA Submission, but is not proposing the substantive 
change incorporated in the ABA Submission. It would retain the current 
instructions and examples following the first three paragraphs in 
appendix B, framework 1 entirely unchanged.
    The Commission is proposing to retain framework 2 with some 
clarifying changes to the opening paragraph; no substantive change is 
intended. It would retain the current instructions and examples 
following the first paragraph in appendix B, framework 2 entirely 
unchanged.
    The Commission requests comment with respect to all aspects of the 
proposed revisions to the opening paragraph of appendix B, framework 2.

F. Technical Corrections to Other Parts

1. Part 1
    The Commission is proposing 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 would revise the 
cross-reference to specifically identifiable property, since the 
definition would be updated in proposed Sec.  190.01.
     In Sec.  1.55(d) introductory text and (d)(1) and (2), 
references to current Sec.  190.06 would be removed consistent with the 
revisions to proposed Sec.  190.10(b).
     In Sec. Sec.  1.55(f) and 1.65(a)(3) introductory text and 
(a)(3)(iii) the Commission would update references to the customer 
acknowledgment in proposed Sec.  190.10(e).

[[Page 36042]]

2. Part 4
    In part 4, the Commission is proposing 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 would change the cross-references to the proposed 
defined term for ``in-the-money-amount.''
3. Part 41
    In part 41, the Commission would is proposing one technical 
correction. In Sec.  41.41(d), the Commission would delete the cross-
reference to the recordkeeping obligations in current Sec.  190.06, 
pursuant to the revisions to proposed Sec.  190.10(b).

III. Revisions Proposed By the ABA Committee That Have Not Been 
Proposed by the Commission

    As noted in section I.A above, this NPRM has benefited greatly from 
the ABA Submission. In this section, the Commission will address those 
points where this proposal departs most significantly from the ABA 
Submission and ABA Cover Note.
    First, as discussed in section II.A.1 above, the Commission has, in 
proposed Sec.  190.00(d)(2)(ii), proposed a more direct approach to 
addressing the issue of constructive and other trusts than the approach 
suggested in the ABA Submission.
    Second, as discussed in section II.B.3 above, the Commission would 
propose in Sec.  190.05(f) to modify the application to the trustee of 
the residual interest provisions in Sec.  1.11 rather than to exempt 
the trustee from those provisions completely as suggested in the ABA 
Submission.
    Third, sections III A-E of the ABA Cover Note recommend that the 
Commission make changes to Commission Rules outside part 190, including 
(A) the definition of Foreign Option in Sec.  30.1(d), (B) the 
definition of Proprietary Account in Sec.  1.3, (C) the definition of 
Variation Margin in Sec.  1.3, (D) part 22 regulations concerning non-
swap and non-futures OTC transactions cleared by a DCO, and (E) part 31 
regulations for Leverage Transaction Merchants. The ABA Committee 
``emphasize[s], though, that [these proposed changes] are not 
prerequisites for the Model Part 190 Rules to work as drafted. The 
Proposed Model Part 190 Rules stand on their own.'' \186\
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    \186\ ABA Cover Note at 18-19.
---------------------------------------------------------------------------

    While these proposals merit due consideration, the Commission has 
determined, in light of practical limits to staff time and resources, 
to address these proposals at a later time and separately from these 
proposed revisions to part 190. By contrast, the ``Technical 
Housekeeping Changes'' proposed in section III F of the ABA Cover Note 
are more simple, and have been addressed in today's proposal, as 
discussed in section II.F above.
    The ABA Submission also included proposed revisions to appendix B, 
framework 1 (Special Distribution of Customer Funds When FCM 
Participated in Cross-Margining). As discussed in section II.E above, 
the Commission is proposing the clarifying changes included in the ABA 
Submission, but is declining to ``delet[e] the specific limitation that 
customers must be market professionals.'' \187\
---------------------------------------------------------------------------

    \187\ Id. at 17.
---------------------------------------------------------------------------

    Finally, the ABA Cover Note suggests that the Commission delete 
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) on the grounds that the framework is complicated 
and unnecessary.\188\ While the operation of framework 2 is undeniably 
complicated, it appears still to be necessary in order to protect those 
customers who post collateral in the form of U.S. dollars required to 
be held in the United States.\189\ Indeed, staff recently issued a no-
action letter to Eurex Clearing conditioned upon FCMs providing 
customers with a written disclosure statement describing ``the 
operation of Framework 2 of Part 190 of the Commission's regulations in 
the event of an FCM bankruptcy.'' \190\ Accordingly, while the 
Commission would welcome proposals to simplify framework 2, it does not 
intend to delete or amend that framework at this time.
---------------------------------------------------------------------------

    \188\ ABA Cover Note at 17.
    \189\ Cf. Sec.  1.49(e).
    \190\ See CFTC Staff Letter 18-31 at 7.
---------------------------------------------------------------------------

IV. 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.\191\ 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'').
---------------------------------------------------------------------------

    \191\ Section 15(a) of the CEA, 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission recognizes that the proposed changes to part 190 
could create benefits, but also could impose costs. The Commission has 
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 \192\ (``PRA-related costs''), 
where possible. In situations where the Commission is unable to 
quantify the costs and benefits, the Commission identifies and 
considers the costs and benefits of the applicable proposed rules in 
qualitative terms. The lack of data and information to estimate those 
costs is attributable in part to the nature of the proposed rules.
---------------------------------------------------------------------------

    \192\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any costs and benefits not discussed herein; the 
potential costs and benefits of the alternatives discussed herein; data 
and any other information to assist or otherwise inform the 
Commission's ability to quantify or qualitatively describe the costs 
and benefits of the proposed rules; and substantiating data, 
statistics, and any other information to support positions posited by 
commenters with respect to the Commission's discussion. The Commission 
welcomes comment on such costs from all members of the public, but 
particularly from FCMs, DCOs, and persons with experience as bankruptcy 
and SIPA trustees (or professionals who have provided support to such 
trustees), who can provide quantitative cost data or other learning 
based on their respective experiences. Commenters may also suggest 
other alternatives to the proposed approaches.

B. Baseline

    The baselines for the Commission's consideration of the costs and 
benefits of this proposed 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

[[Page 36043]]

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. The Commission seeks comment on all aspects of the 
baseline laid out above.

C. Overarching Concepts

1. Changes to Structure of Industry
    The Commission is proposing several revisions in proposed part 190 
in order to take into account the changes to the structure of the 
industry since part 190 was originally published in 1983. In 
particular, the Commission would recognize that 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. 
These changes result from a number of factors, in particular advances 
in technology and the global nature of underlying markets. While 
trading through FCMs in the 1980's took place predominantly through 
open-outcry during what were then considered business hours in the 
United States, in the 21st Century, FCMs and DCOs are responsible for 
trades that take place continuously from Sunday afternoon through 
Friday afternoon (U.S. Eastern time), due to overnight electronic 
trading, as well as trading in time zones that are up to 16 hours ahead 
of U.S. Eastern time (Sydney, Australia, from approximately October 
through March).
    As a result, several of the changes the Commission is proposing to 
part 190 would address these changed circumstances. For instance, 
proposed Sec.  190.03(b)(2) would remove the current deadline of three 
days following the entry of an order for relief for the trustee or DSRO 
to notify the Commission its intent to transfer open commodity 
contracts. Instead, proposed Sec.  190.03(b)(2) would provide that the 
trustee or DSRO must notify the Commission of an intent to transfer 
``[a]s soon as possible.'' As discussed further below, this change 
would be in recognition of the fact that a DCO or upstream FCM is 
unlikely to hold a position open for three days following entry of the 
order for relief, and that the trustee would be expected to be working 
on transferring any open positions immediately upon appointment.\193\ 
The Commission believes that the revisions in proposed part 190 that 
would address the computerized and fast-paced nature of the industry 
would benefit all parties involved in a bankruptcy proceeding, since 
the rules would reflect how the industry actually works today and would 
not unnecessarily delay the administration of a bankruptcy proceeding.
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    \193\ Another example appears in proposed Sec.  190.04(b)(4), 
which provides that a trustee shall liquidate all open commodity 
contracts in any commodity contract account that is in deficit or 
for which the customer fails to meet a margin call made by the 
trustee within a reasonable time. The provision further provides 
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.'' Proposed Sec.  
190.04(b)(4) thus allows for the possibility that, in the event of 
exigent circumstances, a ``reasonable time'' could be deemed by the 
trustee to be less than one hour, a possibility that accounts for 
the fast-paced nature of the industry.
    Other revisions that reflect changes to the structure of the 
industry are reflected in proposed Sec.  190.00(c)(6)(iv), which 
makes clear that the delivery provisions contained in the proposed 
regulations apply to any commodity that is subject to delivery under 
a commodity contract, whether the commodity itself is tangible or 
intangible, including virtual currencies, and in the definition of 
``physical delivery property'' contained in proposed Sec.  190.01, 
which reflects the fact that a document of title for a commodity can 
be electronic.
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2. Trustee Discretion
    In several places in proposed part 190, the Commission would 
attempt to provide additional flexibility and discretion to the 
bankruptcy trustee in taking certain actions.\194\ For instance, 
proposed Sec.  190.03(e) and (f) permit the trustee flexibility to 
modify the proof of claim form to take into account the particular 
facts and circumstances of the case. Proposed Sec.  190.03(a)(2) would 
provide that the trustee the discretion to ``establish and follow 
procedures reasonably designed for giving adequate notice to customers 
under this part.'' This discretionary approach would be in contrast to 
the customer notice procedures in current part 190, which are more 
prescribed and depend on the type of notice being given.\195\
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    \194\ The alternative, to forego providing such flexibility or 
discretion, would invert the benefits and costs discussed below.
    \195\ Other examples include proposed Sec.  190.04(d)(3), 
providing the trustee with discretion to request that a customer 
deliver substitute customer property with respect to a letter of 
credit, which ``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;'' proposed Sec.  
190.08(d)(5), providing that a trustee shall value certain property 
``using such professional assistance as the trustee deems necessary 
in its sole discretion under the circumstances;'' and proposed Sec.  
190.14(a), providing that a trustee in a clearing organization 
bankruptcy 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.
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    The Commission is of the view 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. 
Moreover, each formal approval the trustee is required to obtain takes 
significant time and involves significant administrative costs, to the 
detriment of customers, 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.
    Therefore, increased discretion of the trustee would benefit the 
estate by allowing the trustee to make decisions that are uniquely 
tailored to the particular case, rather than being compelled to follow 
a procrustean framework, or being required to request formal approval 
from the Commission or other parties before implementing those 
decisions. This approach leads to approaches that are better tailored 
to the specifics of the circumstances, reductions in administrative 
costs (to the benefit of customers and/or other creditors) and faster 
distributions of customer property (to the benefit of 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.
    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 the customers or other creditors. 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 would be mitigated by (1) the high degree of informal (and, where 
necessary, formal) involvement of Commission staff in FCM and DCO 
bankruptcy matters,\196\ and (2) the fact that such discretion would 
not be unbounded and would apply only in particular circumstances, as 
discussed

[[Page 36044]]

below. Therefore, the Commission's judgment in granting discretion to 
the trustee would apply these principles.
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    \196\ 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.
---------------------------------------------------------------------------

    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 have an opportunity to object) 
and (2) the likelihood that bankruptcy courts would respect the 
Commission's rules granting the trustee discretion, thereby mitigating 
the cost of such litigation.
    Instances where the revisions to proposed part 190 would afford 
more flexibility or discretion to the bankruptcy trustee are discussed 
in further detail where they appear in each provision below.
3. Cost Effectiveness and Promptness Versus Precision
    In its proposed revisions to part 190, the Commission is 
endeavoring 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, where, following the policy choice made by Congress in 
section 766(h) of the Bankruptcy Code, the Commission is proposing 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 proposed revisions to part 190 
would 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. For instance, proposed Sec.  190.05 would provide that 
the bankruptcy trustee shall use reasonable efforts to compute a funded 
balance for each customer account that contains open commodity 
contracts and other property as of the close of each business day, 
``which shall be as accurate as reasonably practicable under the 
circumstances, including the reliability and availability of 
information.'' The quoted language would allow the trustee to avoid 
more precise calculations where such precision would not be cost 
effective or could not reasonably be accomplished on a prompt basis 
(for example, in a situation where price information for particular 
assets or contracts was not readily available).\197\ The Commission 
believes that these revisions emphasizing cost effectiveness and 
promptness over precision would further the policy embodied in section 
766(h) of the bankruptcy code and benefit parties involved in a 
bankruptcy proceeding overall, as they 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. There could, however, be 
corresponding costs to this approach for some customers in that they 
may lose out on being treated precisely in terms of their individual 
circumstances (and may receive a smaller distribution of customer 
property than otherwise).
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    \197\ Another example of advancing the overarching concept of 
favoring cost effectiveness over precision is in proposed Sec.  
190.08(d)(5), which would provide that, in computing net equity, a 
trustee may value all customer property not otherwise listed in 
proposed Sec.  190.05(d) using such professional assistance as the 
trustee deems necessary. This provision, which would replace more 
specific valuation instructions that currently appear in part 190, 
would recognize that it is more cost effective for the trustee to 
enlist whatever professional help they need to value certain types 
of customer property rather than prescribe certain valuation methods 
for every type of customer property they may encounter in the course 
of a bankruptcy proceeding, and thereby would emphasize cost 
effectiveness over precision.
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4. Unique Nature of Bankruptcy Events
    The Commission would recognize in proposed 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 would be 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, would address the uniqueness of these bankruptcy 
events and would 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.\198\ History has shown that FCM 
bankruptcies play out in very different ways, and several of the 
Commission's proposed revisions to part 190 would address that reality. 
For instance, proposed Sec.  190.03(e) and (f), addressing the customer 
proof of claim form in an FCM bankruptcy, would allow the trustee, in 
their discretion, to modify the proof of claim form to take into 
account the particular facts and circumstances of the particular 
bankruptcy case rather than using, unmodified, a standardized proof of 
claim form that may not be appropriate for those circumstances. 
Similarly, proposed Sec.  190.14(a) would allow the trustee in a DCO 
bankruptcy, ``in its discretion based upon the facts and circumstances 
of the case,'' to instruct each customer to file a proof of claim form 
containing such information as is deemed appropriate by the trustee. 
These provisions would reflect the fact that each FCM and DCO 
bankruptcy would present individual circumstances, and that the proof 
of claim form would likely have to be modified to take into account the 
unique facts and circumstances of each case. The Commission believes 
that the revisions of this type would 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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    \198\ 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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5. Administrative Costs are Costs to the Estate, and Often to the 
Customers
    In many instances in this proposal, the Commission has noted that a 
certain provision would impose or reduce administrative costs. The 
Commission notes that, in each of these cases, administrative costs 
would be a cost to the estate of the debtor, since administrative 
expenses that the bankruptcy trustee would incur in administering the 
estate (including for the time of the trustee, accountants, counsel, 
consultants, etc.) would be passed onto the estate itself, which means 
that, in the event of a shortfall, such costs would be ultimately be 
borne by the customers of the debtor, who would receive smaller 
dividends on their claims as the value of the debtor's estate 
decreases.\199\ By a parity of reasoning, reducing such administrative 
costs would reduce the shortfall, and increase recoveries by customers.
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    \199\ While such costs could 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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[[Page 36045]]

6. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to the overarching concepts 
described above. Are there additional costs or benefits that the 
Commission should consider? Are there any alternatives that could 
provide preferable costs or benefits than the costs and benefits 
related to the overarching concepts discussed above? Commenters are 
encouraged to include both qualitative and quantitative assessments of 
any costs and benefits.

D. Subpart A--General Provisions

1. Regulation Sec.  190.00: Statutory Authority, Organization, Core 
Concepts, Scope, and Construction
a. Consideration of Costs and Benefits
    Proposed Sec.  190.00 would contain general provisions applicable 
to all of proposed part 190 that would set forth the concepts that 
guide the Commission's bankruptcy regulations. While all of proposed 
Sec.  190.00 is new, in that current part 190 does not contain an 
analogous regulation, there would be cost-benefit implications only for 
certain provisions within proposed Sec.  190.00, since the bulk of 
proposed Sec.  190.00 is designed to explain concepts that would be 
either (1) not different from those contained in current part 190, but 
would be simply made explicit in the proposed rules, or (2) new, in 
that they would not be contained in current part 190, but simply would 
be 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 believes that there would be no cost-benefit 
implications to the following provisions within proposed Sec.  190.00:
     Proposed Sec.  190.00(a), which would set forth the 
statutory authority pursuant to which the Commission is proposing to 
adopt proposed part 190.
     Proposed Sec.  190.00(b), which would describe how the 
proposed rules are organized into three subparts. The Commission notes 
that, while the addition of DCO-specific rules in this proposal would 
be new, the cost-benefit implications of the DCO-specific provisions 
(proposed Sec. Sec.  190.11 through 190.18) are discussed separately 
below.
     Proposed Sec.  190.00(c)(2), which would provide that 
proposed part 190 establishes four separate account classes, each of 
which would be treated differently under the proposed rules. In the 
Commission's view, this provision would be a mere clarification, as 
current part 190 also establishes different account classes for 
different types of cleared commodity contracts, and would treat each 
account class differently.
     Proposed Sec.  190.00(c)(3), which would explain the 
distinction between ``public customers'' and ``non-public customers,'' 
and the priority that both public and non-public customers enjoy with 
respect to distributions of customer property. Both of these concepts 
exist in current part 190 and would be merely clarified and explained 
further in proposed Sec.  190.00(c)(3).
     Proposed Sec.  190.00(c)(4), which would clarify that the 
policy preference behind the rules in subpart B of part 190 is to 
transfer a debtor FCM's customers' open commodity contract positions to 
another FCM (frequently referred to as ``porting'' customer positions) 
rather than liquidating those customer positions.
     Proposed Sec.  190.00(c)(5), which would explain that 
proposed part 190 applies the concept of pro rata distribution when it 
comes to shortfalls of property in a particular account class. In the 
Commission's view, this provision would not add anything new to part 
190 and would be merely explanatory, as current part 190, consistent 
with section 766(h) of the Bankruptcy Code, also rests on the concept 
of pro rata distribution.
     Proposed Sec.  190.00(d)(1)(i)(A), which would provide 
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 a FCMs under the 
CEA and Commission regulations.
     Proposed Sec.  190.00(d)(1)(ii), which would provide that 
proposed 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. In the Commission's view, this 
provision would be merely explanatory.
     Proposed Sec.  190.00(d)(2)(i), which would state that the 
bankruptcy trustee may not recognize any account class that is not one 
of the account classes enumerated in proposed Sec.  190.01. This 
provision, again, would be a mere clarification that is not meant to 
add anything new to proposed part 190.
     Proposed Sec.  190.00(d)(3), which would set forth the 
transactions that are excluded from the definition of ``commodity 
contract.'' This provision, in the Commission's view, merely would 
explain and carry over concepts that are already embedded in current 
part 190.
     Proposed Sec.  190.00(e), which would set forth rules of 
construction concerning amendments to statutes and regulations referred 
to in proposed part 190, and defining the relationship between proposed 
part 190 and statutes and other regulations. In the Commission's view, 
these rules of construction would have no cost-benefit implications, as 
they merely would make explicit the Commission's expectations with 
respect to a very narrow set of issues involved in reading and 
interpreting the provisions in proposed part 190.
    The Commission believes that there would be cost-benefit 
implications to the following provisions within proposed Sec.  190.00:
     Proposed Sec.  190.00(c)(1) would state that proposed 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 
proposed narrowing of the application of part 190 (by excluding the 
empty categories of commodity options dealers and leverage transaction 
merchants) would benefit the Commission, the bankruptcy estate, and 
customers by allowing the Commission to propose regulations that are 
better tailored to the new, narrower, set of commodity brokers that are 
covered by the proposed regulations (and thus, less complex).\200\ 
There would a corresponding cost, in that the Commission would need to 
develop such regulations, if and when a commodity options dealer or 
leverage transaction merchant registers as such.
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    \200\ 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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     Proposed Sec.  190.00(c)(6) would discuss the treatment of 
commodity contracts that require delivery performance. As in current 
part 190, proposed part 190 would reflect a policy preference for a 
bankruptcy trustee to liquidate commodity contracts that settle via 
delivery before they move into a delivery position. When that cannot be 
done, however, and when parties to a commodity contract incur delivery 
obligations, the regulations in proposed part 190 would direct the 
trustee to use reasonable efforts to allow a customer to fulfill its 
delivery obligation directly, outside administration of the debtor's 
estate, when the rules of the relevant

[[Page 36046]]

market or clearinghouse allow delivery to be fulfilled (1) in the 
normal course directly by the customer, (2) by substitution of the 
customer for the commodity broker, or (3) through agreement of the 
buyer and seller to alternative delivery procedures. This is contrast 
to current Sec.  190.05(b), which 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 proposed regulations, in 
allowing for more flexibility in how a customer could effect delivery 
outside of the debtor's estate, would benefit customers by allowing for 
a more bespoke approach to effecting delivery when customers incur 
delivery obligations under their open commodity contracts. There, 
however, would be costs in acting in such a bespoke fashion in contrast 
to following standards established during business as usual.
     Proposed Sec.  190.00(d)(1)(i)(B) would note that there 
are currently no registered leverage transaction merchants or commodity 
options dealers, and that the Commission would 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 change would benefit the Commission in terms of cost 
effectiveness by allowing the Commission to propose bankruptcy rules 
specifically tailored to leverage transaction merchants or commodity 
options dealers only in the event an entity registers as such. In the 
event that happens, there would be costs involved in doing so. It is 
possible that the cost of such a separate rulemaking or rulemakings 
would be greater than the marginal costs of proposing and finalizing 
such rules as part of this rulemaking.
     Proposed Sec.  190.00(d)(1)(iii), would provide that 
proposed 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. Section 
210(m)(1)(B) of title II,\201\ 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. This provision would have the 
benefits associated with transparently providing to FDIC during 
business-as-usual the guidance of the agency with regulatory and 
supervisory responsibility for supervising commodity brokers (i.e., 
FCMs and DCOs).\202\
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    \201\ 12 U.S.C. 5390(m)(1)(B).
    \202\ 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, FDIC staff (in cooperation with 
Commission staff) 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 clearly guidance as 
to the distribution of customer property and member property in a 
DCO resolution proceeding.
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     Proposed Sec.  190.00(d)(2)(ii) would provide 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. 
This provision would have the 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 would 
mitigate the friction costs of particular customers structuring their 
relationships with their FCMs in order to establish such a trust for 
the purpose of thwarting their exposure to pro rata distribution, as 
well as the friction costs of litigation within the bankruptcy 
proceeding over the effectiveness of such structures in achieving that 
goal.
     However, this approach would 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).
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.00. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
2. Regulation Sec.  190.01: Definitions
a. Consideration of Costs and Benefits
    Proposed Sec.  190.01 would set forth definitions as they are used 
for purposes of proposed part 190. In the Commission's view, only 
certain of the definitions in proposed Sec.  190.01 would have any 
cost-benefit implications, and these are discussed in more detail 
below. The rest of the definitions would set forth in proposed Sec.  
190.01, in the Commission's view, would not impose any costs or 
benefits, as the changes to the definitions would be minor (in the vein 
of, for example, updating cross-references or updating language to 
reflect the changes in the rest of proposed part 190) or merely would 
clarify the current definition.
    Where, in the Commission's view, a definition in proposed Sec.  
190.01 would have cost-benefit implications, those implications are 
discussed in more detail below:
     ``Account class,'' ``cash delivery property,'' and 
``physical delivery property:'' The definition of the term ``account 
class'' would be 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. Including 
a specific definition of each type of account class would benefit all 
parties involved in a bankruptcy proceeding by ensuring that all 
parties would have a common understanding of how these various types of 
accounts would be defined for purposes of part 190.
     The proposed definition of ``account class'' also would 
remove the category in current part 190 of ``leverage account'' 
because, as noted above, there are currently no registered leverage 
transaction merchants. Rather, the Commission would 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 would benefit market participants by 
allowing the Commission to propose bankruptcy rules specifically 
tailored to leverage transaction merchants (and, accordingly, to 
leverage accounts) in the event an entity registers as such. As noted 
above with respect to Sec.  190.00(d)(1)(i)(B), in the event of the 
registration of a leverage transaction merchant, there would be costs 
involved in proposing and finalizing such

[[Page 36047]]

tailored rules. It is possible that the cost of such a separate 
rulemaking or rulemakings would be greater than the marginal costs of 
proposing and finalizing such rules as part of this rulemaking.
    The proposed definition of ``account class'' also would split 
``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,\203\ this separate treatment of physical delivery property and 
cash delivery property would benefit customers with physical delivery 
property by allowing for more prompt distribution of such physical 
delivery property. This separation would also benefit the estate, 
because the trustee would 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 would be potential added costs in 
the form of complications, in that 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, while others could obtain smaller recoveries.
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    \203\ 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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    Pursuant to section 4d of the CEA, certain contracts and associated 
collateral that would be associated with one account class may instead 
(pursuant to, e.g., Commission regulation \204\ or order) be commingled 
with a different account class.\205\ The purpose of such arrangements 
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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    \204\ See Sec.  39.15(b)(2), which provides a mechanism for 
these arrangements to be implemented pursuant to clearing 
organization rules.
    \205\ Securities positions may also be commingled in an account 
class subject to section 4d of the CEA, 7 U.S.C. 6d.
---------------------------------------------------------------------------

    Paragraph (2) of the definition of account class confirms that such 
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 would be to foster such risk-reducing (and margin-efficient) 
arrangements during business as usual; there would be no associated 
costs in bankruptcy.
    Finally, paragraph (3) of the definition addresses cases where a 
commodity broker's account for a customer is non-current, or otherwise 
inaccurate, a matter over which the customer has, at best, limited 
control. Paragraph (3) would confirm 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 would 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 definition of the terms ``public 
customer'' and ``non-public customer'' would be revised to include 
separate definitions of those terms for FCMs and DCOs. This change 
would reflect the new organization of proposed part 190, which would 
include separate provisions for when the debtor is (1) an FCM (subpart 
B), and (2) a DCO (subpart C). The ``public customer'' definition for 
FCMs also would be revised to define that term with respect to each of 
the relevant account classes.
    These changes likely would result in the benefit of clarifying and 
making more transparent who qualifies as a ``public'' versus a ``non-
public'' customer, a categorization which would have an effect on the 
distribution of property to which each customer is entitled. This 
clarity and transparency would, in turn, tend to reduce the 
administrative costs (to the estate and to claimants) involved in the 
claims allowance process, as well as the likelihood (and cost) of 
litigation by dissatisfied claimants. These changes could, however, 
impose costs on any customers (if they exist) for whom, under current 
part 190, it would not be clear which category they fall into. Given 
that the pool of customer property would be different for public and 
non-public customers, a hypothetical customer who could have been 
considered ``public'' under current part 190 but would be categorized 
as ``non-public'' under proposed part 190 could receive less in the 
distribution of customer property (with other customers receiving 
more).
     ``Futures, futures contract:'' The Commission is proposing 
to add a definition for the terms ``futures'' and ``futures contract'' 
to clarify what those terms mean for purposes of proposed part 190. 
This clarification would serve the goals of clarity and transparency 
(and, consequently, reducing administrative costs) by making it more 
explicit, and transparent, which types of transactions are considered 
``futures'' and therefore form part of the futures account or foreign 
futures account.
     ``House account:'' The definition of the term ``house 
account'' would be revised to include separate definitions of that term 
for FCMs, foreign FCMs and DCOs, in a manner that clarifies the 
connection between the concept of a ``house account'' in part 190 and 
the concept of a proprietary account in Sec.  1.3. This change would 
reflect the new organization of proposed part 190, which now includes 
separate provisions for when the debtor is (1) an FCM (subpart B), or 
(2) a DCO (subpart C). This change would serve the goals of clarity and 
transparency (and, consequently, reducing administrative costs) by 
clarifying what precisely constitutes a house account for purposes of 
each type of proceeding.
     ``Primary liquidation date:'' The definition of the term 
``primary liquidation date'' would be revised to remove the reference 
to accounts being held open for later transfer, as currently reflected 
in Sec.  190.03(a). The concept of holding certain commodity contracts 
open for later transfer would be removed from proposed part 190 in 
favor of a policy of transferring as many open commodity contracts as 
possible within a particular timeframe after entry of an order for 
relief \206\ or, if that is not possible, liquidating such commodity 
contracts. The proposed definition of ``primary liquidation date'' 
would reflect this preferred policy. This change in policy would 
benefit some customers, who would be able to avoid having their open 
commodity contracts liquidated in favor of transferring such contracts 
to another commodity broker. It could, however, impose costs on any 
customers, if they exist,\207\ who might have benefited from having 
their open commodity contracts held open for transfer after the primary 
liquidation date (by, for instance, being able to transfer such 
contracts to a preferred commodity broker). In the hypothetical event 
that a larger number of contracts is liquidated rather than 
transferred, that additional quantum of liquidation may result in 
additional (downward) pressure on prices. This policy shift

[[Page 36048]]

could also impose administrative costs, since the bankruptcy trustee 
may expend time and effort to carry out its obligation to use its 
``best efforts'' to transfer all open commodity contracts prior to the 
primary liquidation date.
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    \206\ See proposed Sec.  190.04(a)(1).
    \207\ 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 indeed 
hypothetical.
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     ``Specifically identifiable property:'' The Commission is 
proposing to revise the definition of the term ``specifically 
identifiable property'' to update, clarify and streamline the current 
definition of that term. These updates, clarifications and streamlining 
edits would serve the goals of clarity and transparency (and, 
consequently, reducing administrative costs). Of course, increasing 
clarity and transparency may be to the detriment of those customers (if 
any there be) for whom such clarity results in assignment to a less 
favorable category.
     ``Substitute customer property:'' The definition of the 
term ``substitute customer property'' would be 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 would benefit customers who, in a 
bankruptcy event, would like to redeem their specifically identifiable 
property or letters of credit and, under the current rules, have no way 
to do so.\208\ Introducing the concept of substitute customer property 
could impose administrative costs, however, because the trustee would 
have to expend time and resources on accounting for the substitute 
customer property and ensure that such property ends up in the proper 
pool of customer property once received.
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    \208\ Benefits and costs associated with the use of substitute 
customer property are addressed further below in connection with 
proposed Sec.  190.04(d)(3) in section IV.E.2.
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     ``Swap:'' The Commission would amend 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 would serve the goals of clarity and transparency (and, 
consequently, reducing administrative costs).
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.01. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
to the costs and benefits related to the proposed amendments discussed 
above? Commenters are encouraged to include both qualitative and 
quantitative assessments of any costs and benefits.
3. Regulation Sec.  190.02: General
a. Consideration of Costs and Benefits
    Proposed Sec.  190.02(a)(1) would 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 
change could benefit the estate, the Commission, and customers by 
allowing the trustee to request an exemption from a requirement in 
proposed part 190 that would lower administrative costs and increase 
timeliness. This change could, however, 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 would be any cost-
benefit implications to proposed Sec.  190.02(a)(2) and (3), (b), (c), 
(d), and (e), as those sections largely align with the provisions in 
current part 190 from which they would be derived.
    Proposed Sec.  190.02(f) is a new paragraph which would explicitly 
allow a receiver 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 of this chapter, to file a petition for 
bankruptcy of such FCM in appropriate cases. This provision may benefit 
customers, in that a bankruptcy proceeding may be necessary to protect 
customers' interests in customer property. However, this provision 
could also impose costs on the customers, who may not receive as much 
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 under the current rules; these costs could possibly be greater 
than the costs of continuing to administer the FCM under receivership.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.02. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
4. Section 15(a) Factors--Subpart A
a. Protection of Market Participants and the Public
    Subpart A of the proposed rules would 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 would be 
to promote clarity in terms of how the insolvency of an FCM or DCO 
would proceed, 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.
b. Efficiency, Competitiveness, and Financial Integrity
    Subpart A of the proposed rules would 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 would, 
in turn, enhance the competitiveness and financial integrity of U.S. 
FCMs and DCOs, by enhancing market confidence in the protection of 
customer funds and positions entrusted to U.S. FCMs and DCOs, 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. To the extent that the proposed 
regulations would mitigate the need for liquidations in conditions of 
distress, they would avoid negative impacts on price discovery.
d. Sound Risk Management Practices
    Subpart A of the proposed rules would generally promote sound risk 
management practices by setting forth the core concepts to which the 
bankruptcy trustee must adhere in

[[Page 36049]]

administering an FCM or DCO bankruptcy.
e. 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. An effective bankruptcy 
process that efficiently facilitates the proceedings is likely to 
benefit the financial system (and thus the public interest), as that 
process would help to attenuate the detrimental effects of the 
bankruptcy on the financial network.

E. Subpart B--Futures Commission Merchant as Debtor

1. Regulation Sec.  190.03: Notices and Proofs of Claims
a. Consideration of Costs and Benefits
    Proposed Sec.  190.03(a)(1) would replace 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.\209\ This change would result 
in a benefit to all parties required to provide notices to the 
Commission because they would be able to avoid the costs of sending 
such notice in hardcopy form via overnight mail. These revisions would 
also allow the Commission to receive such notices--and thus, to act--
much more expeditiously.
---------------------------------------------------------------------------

    \209\ See also proposed Sec.  190.03(d), which is proposing to 
adopt this new method of providing notice to the Commission for any 
court filings filed in a bankruptcy.
---------------------------------------------------------------------------

    Proposed Sec.  190.03(a)(2), which is new, would replace the more 
specific procedures for providing notice to customers that appear in 
current Sec.  190.02(b), allowing the trustee to establish and follow 
procedures ``reasonably designed'' for giving adequate notice to 
customers.\210\ Proposed Sec.  190.02(a)(2) also would provide 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.'' Such a generalized and more modernized approach to notifying 
customers would benefit the debtor's estate by leading to 
administrative cost savings, as the trustee would be able to choose 
cost effective means of providing notice to customers within the more 
flexible bounds of the proposed regulation. Similarly, it would 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 would carry the 
potential cost of trustee misfeasance and abuse of such discretion, as 
discussed above.
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    \210\ Proposed Sec.  190.03(a)(2) would be referenced throughout 
proposed Sec.  190.03 as the proper procedure for providing notice 
to customers in various circumstances. As an example, proposed Sec.  
190.03(c)(1) deletes the requirement in current Sec.  190.02(b)(1) 
that the trustee publish notice to customers regarding specifically 
identifiable property in a newspaper for two consecutive days prior 
to liquidating such property, in favor of the more flexible approach 
for notice set forth in proposed Sec.  190.03(a)(2). Similarly, see 
proposed Sec.  190.03(c)(3), which requires a trustee appointed in 
an involuntary proceeding to notify customers of the commencement of 
such a proceeding, and Sec.  190.03(c)(4), which requires the 
trustee to notify customers that an order for relief has been 
entered, both of which require that such notice be made in 
accordance with the flexible notice provisions set forth in proposed 
Sec.  190.03(a)(2).
---------------------------------------------------------------------------

    Proposed Sec.  190.03(b)(1) would revise the time in which a 
commodity broker must notify the Commission of a bankruptcy filing. In 
particular: (1) In the event of a voluntary bankruptcy filing, the 
commodity broker would be required to notify the Commission and the 
appropriate DSRO as soon as practicable before, and in any event no 
later than, the time of filing, and (2) in the event of an involuntary 
bankruptcy filing or an application for a protective decree under SIPA, 
the commodity broker would be required to notify the Commission and the 
appropriate DSRO immediately upon the filing of such petition or 
application. These revisions would codify expectations that (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 notify the Commission immediately upon the filing. 
With respect to a voluntary bankruptcy filing, the Commission expects 
that both the Commission and the relevant DSRO would be aware of any 
financial circumstances in the lead-up to a bankruptcy filing in 
accordance with the mandatory reporting requirements in Sec.  1.12; the 
revision in proposed Sec.  190.03(b)(1) merely would codify the 
expectation that the FCM would notify the Commission of the actual 
bankruptcy filing as soon as practicable before, and in no event later 
than, the time of the filing. In addition, proposed Sec.  190.03(b)(1) 
also would allow a commodity broker to provide the relevant docket 
number of the bankruptcy proceeding to the Commission ``as soon as 
known,'' while not waiting on notifying the Commission of the filing 
itself, to account for the potential time lag between the filing of a 
proceeding and the assignment of a docket number. These revisions would 
foster the ability of the Commission and its staff to perform their 
duties by providing the Commission with notice of any bankruptcy 
proceeding as soon as possible.
    Proposed Sec.  190.03(b)(2) would remove 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, instead 
instructing such parties to give such notice ``[a]s soon as possible'' 
of an intent to transfer. 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 does not expect that a DCO would 
be likely to hold a position open for more than three days following 
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 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 unique circumstances of each case. Under different circumstances, 
that is, where transfer arrangements cannot be made within three days 
after the order for relief, this revision would benefit the estate and 
some customers by removing time constraints that could be construed to 
prohibit notification after expiration of the deadline (and thus, 
prohibit the trustee from forming the intent to transfer after that 
time).
    The revision would also enhance the Commission's ability to fulfil 
its responsibilities to customers and the markets by facilitating 
prompt notice of an 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 would 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

[[Page 36050]]

customers who would have benefited from an earlier transfer.
    Proposed Sec.  190.03(c)(1) would no longer require the trustee to 
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, instead 
requiring notification to customers with specifically identifiable 
property in accordance with proposed Sec.  190.03(a)(2). Administrative 
costs would decrease, as the trustee would thus be relieved of the cost 
of identifying, and publishing notice in, such newspapers. Moreover, 
under the proposed regulation, the trustee would no longer have to wait 
seven days after the second publication date to commence liquidation of 
specifically identifiable property. Rather, under proposed Sec.  
190.03(c)(1), the trustee would be free to commence liquidation of 
specifically identifiable property starting on the seventh day after 
entry of the order for relief, which would 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 could ultimately result in a better price. Moreover, by using the 
notice provisions that would be set forth in proposed Sec.  
190.03(a)(2) to notify customers with specifically identifiable 
property, such customers would benefit from receiving 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 increasing the chances that a customer who would like 
their specifically identifiable property returned could request such a 
return within the specified timeframe.
    Proposed Sec.  190.03(c)(2) would provide 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.\211\ This would be 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 would be required to liquidate such contracts within a certain 
time period. To the extent the trustee would exercise the authority 
derived from proposed Sec.  190.03(c)(2), they would 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 would treat 
these open commodity contracts the same as other customer property and 
effect a transfer of such contracts. This new framework would 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. However, it is possible that some customers would have been 
in a better position if treated on a bespoke basis.
---------------------------------------------------------------------------

    \211\ See proposed Sec.  190.10(b)(2) for the process of 
designating an account as a ``hedging account.''
---------------------------------------------------------------------------

    The Commission does not believe that there would be any cost-
benefit implications to proposed Sec.  190.03(c)(3) or (4), other than 
those discussed above with respect to the new notice provision 
referenced in each, or to proposed Sec.  190.03(d).
    Proposed Sec.  190.03(e), like its analog in current Sec.  
190.02(d), would set forth the information required from customers 
regarding their claims against the debtor. As revised, proposed Sec.  
190.03(e), would reorganize and add certain information items to those 
listed in the current regulation including, for example, account 
numbers for accounts held by the claimant with the debtor,\212\ whether 
the account is an individual retirement account for which there is a 
custodian,\213\ and information regarding any accounts held by the 
claimant with the debtor that are not commodity contract accounts.\214\ 
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 would 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 would 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 proposed regulation would 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.
---------------------------------------------------------------------------

    \212\ Proposed Sec.  190.03(e)(3)(i).
    \213\ Proposed Sec.  190.03(e)(3)(vii).
    \214\ Proposed Sec.  190.03(e)(4).
---------------------------------------------------------------------------

    This proposed regulation also would provide that the specific items 
referred to would be included ``in the discretion of the trustee.'' 
This discretion would 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 would 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 could 
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 a new paragraph which would provide the 
trustee with flexibility to modify the customer proof of claim form set 
forth in appendix A to proposed part 190. Specifically, proposed Sec.  
190.03(f) would allow the trustee to modify the proof of claim form to 
take into account the particular facts and circumstances of the case. 
This provision would benefit the estate because the trustee would 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 
would no longer be required to get an order from the bankruptcy court 
to make such modifications, thereby saving time and resources. This new 
proposed section would also benefit customers, who would be able to 
take advantage of the more streamlined and tailored proof of claim 
forms developed by the trustee, and would therefore spend less time 
filling out such forms, and the estate, which would bear less 
administrative cost in evaluating such forms. Again, there could 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).
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.03. Are there 
additional costs or benefits that the Commission should consider? Is 
the information called for in proposed Sec.  190.03(e) and the template 
proof of claim form in fact readily available to customers? If not, 
what changes should be made?

[[Page 36051]]

    Are there any alternatives that could provide preferable costs or 
benefits than the costs and benefits related to the proposed amendments 
discussed above? In particular, what desirable results may be 
sacrificed by deleting existing requirements for newspaper publication? 
What are the costs associated with newspaper publication? Do the cost 
savings from deleting the requirement outweigh the associated loss?
    Commenters are encouraged to include both qualitative and 
quantitative assessments of any costs and benefits.
2. Regulation Sec.  190.04: Operation of the Debtor's Estate--Customer 
Property
a. Consideration of Costs and Benefits
    In proposed Sec.  190.04(a), the Commission would revise current 
Sec.  190.02(e). The revisions would identify explicitly a policy 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, while largely retaining the current provisions. The 
proposed changes would set forth a clear policy for trustees to follow, 
which would benefit customers of the failed FCM in a more streamlined 
description of the transfer process that is consistent with the core 
concepts set forth in this part. Thus, the Commission estimates that 
there would be very little to no cost to the changes.
    In addition in proposed Sec.  190.04(a)(1), the Commission is 
proposing to replace the term ``equity'' with ``property,'' in order to 
clarify that the transfer is for all types of property that the 
commodity broker is holding on behalf of customers, rather than limited 
to equity. The Commission is also proposing to add the word ``public'' 
before ``customer'' to clarify that the transfers discussed in the 
regulation related to the open commodity contracts and property of the 
debtor's public customers. In each case, the Commission believes that 
the changes would clarify the existing regulation to conform to how it 
has been interpreted in the past, as demonstrated by industry practice. 
Thus, the type of property transferred would be unlikely to change. 
Nevertheless, the clarification would benefit customers of the failed 
FCM by minimizing the likelihood of future disputes concerning 
qualification of property for transfer. As compared to the text of the 
current regulation, the revision would be intended to reduce costs for 
customers and would be designed to increase the amount of property 
transferred following a default. Based on how the existing regulation 
has been interpreted in the past, as demonstrated by industry practice 
in prior bankruptcy proceedings, no additional costs would be 
anticipated.\215\
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    \215\ The Commission is proposing the same change--the addition 
of the word ``public'' before ``customers'' to proposed Sec.  
190.04(a)(2). The anticipated cost and benefit analysis of the 
change would be the same as in proposed Sec.  190.04(a)(1).
---------------------------------------------------------------------------

    Proposed Sec.  190.04(a)(2) is derived from current Sec.  
190.02(e)(2) and concerns transfers by a commodity broker against which 
an involuntary petition in bankruptcy has been filed. As discussed in 
more detail in section II.B.2 above, both the current and the proposed 
regulations require such a commodity broker to use best efforts to 
effect a transfer within seven calendar days. The current regulation 
also limits such a commodity broker to trading for liquidations only 
unless otherwise directed by the Commission, by any applicable self-
regulatory organization or by the court. Proposed Sec.  190.04(a)(2) 
deletes this limitation. Rather, proposed Sec.  190.04(e)(4) more 
generally would cover limitations on the business of an FCM in 
bankruptcy. Similarly any requirement to transfer customers would be 
more properly addressed by Sec.  1.17(a)(4).\216\ Accordingly, the 
benefit would be the removal of redundant regulation (and corresponding 
mitigation of administrative costs). The Commission does not anticipate 
any resulting increase in cost.
---------------------------------------------------------------------------

    \216\ Reg. Sec.  1.17(a)(4) provides that an FCM that is not in 
compliance with the minimum financial requirements established by 
Sec.  1.17, or is unable to demonstrate such compliance as required 
by Sec.  1.17(a)(3), or cannot demonstrate that it has sufficient 
access to liquidity to operate as a going concern, must transfer all 
customer accounts and immediately cease doing business as an FCM 
until such time as it is able to demonstrate compliance. The FCM is 
nonetheless authorized to trade for liquidation purposes only unless 
otherwise directed by the Commission or the DSRO, or may be allowed 
by the Commission or the DSRO up to 10 business days in which to 
achieve compliance without having to transfer accounts.
---------------------------------------------------------------------------

    In proposed Sec.  190.04(b)(1), the Commission is clarifying and 
updating conditions under which the trustee may make variation and 
maintenance margin payments on behalf of the FCM debtor's customers via 
five changes to the current regulation, Sec.  190.02(g)(1). First, the 
proposed regulations would replace the phrase ``variation and 
maintenance margin payments'' with ``payments of initial margin and 
variation settlement'' which, in the Commission's view, more accurately 
would describe the types of payments being reflected in this provision. 
Second, the proposed regulation would replace 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. Third, the proposed revisions 
would permit the trustee to make margin payments pending transfer or 
liquidation rather than just pending liquidation. Fourth, the proposal 
would delete the phrase ``required to be liquidated under current 
paragraph (f)(1) of this section'' and instead applies more broadly to 
any open commodity contracts. In sum, the revisions would clarify that 
payments can be made prior to pending transfers or liquidation, not 
just pending liquidation. The revision would 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. This change would clarify powers the trustee already had 
available under the Bankruptcy Code and would have no associated costs. 
More specifically, the changes would describe more accurately the types 
of payments that the trustee would be able to make and to account 
specifically for the types of entities to which the trustee would be 
able to make the types of payments referred to in this paragraph. 
Finally, the deletion in the last portion of the paragraph is being 
proposed in order to prevent a misreading of the current provision, 
which could be read to prohibit margin payments for contracts that are 
being held open, which would undermine the trustee's ability to hold 
the contracts open. The revisions to proposed Sec.  190.04(b)(1) would 
clarify the current regulatory text, which should benefit stakeholders. 
The Commission does not anticipate any increased cost from the changes.
    Proposed Sec.  190.04(b)(1)(i) is derived from current Sec.  
190.02(g)(1)(i), which would prevent 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 proposal would 
add the explicit phrase ``to the extent within the trustee's control'' 
and would add a proviso noting that the regulation shall not be 
construed to prevent a clearing organization, foreign clearing 
organization, FCM or foreign futures intermediary carrying an account 
of the debtor from exercising its rights to the extent permitted under 
applicable law. The proposal would recognize 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

[[Page 36052]]

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. Thus, this change would reflect the nature of the omnibus 
accounts that are part of the regulatory and statutory framework. The 
proviso similarly would clarify that this prohibition on making margin 
payments on behalf of accounts in deficit is not intended to prohibit 
entities from exercising legal rights to margin under applicable law. 
Due to the structure of the accounts and the explicit requirement of 
lack of trustee control, any payments that would be made under the new 
provision would have been made pursuant to Commission authorization 
under the current regulation. Thus, neither provision would add any new 
regulatory burden and the Commission does not estimate that there would 
be any additional cost associated with the proposed changes.
    Proposed Sec.  190.04(b)(1)(ii) is a new regulation that would add 
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. This restriction would support the pro 
rata distribution principle discussed in proposed Sec.  190.00(c)(5), 
and would benefit the other customers of the FCM debtor--any payment of 
customer property in excess of a particular customer's funded balance 
would be to the detriment of other customers. This change would be a 
clarification of the statutory requirements applicable to the customer 
account.\217\
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    \217\ While there would 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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    Proposed Sec.  190.04(b)(1)(iii) would be a minor, non-substantive 
clarification of current Sec.  190.02(g)(1)(ii), that would not create 
any changes from the status quo with regards to costs and benefits.
    In proposed Sec.  190.04(b)(1)(iv)-(v), the Commission is expanding 
current Sec.  190.02(g)(1)(iii) to clarify that margin must only be 
used (i.e., paid to a clearing organization or upstream intermediary) 
consistent with section 4d of the CEA. Proposed Sec.  190.04(b)(1)(vi) 
would revise the language in current Sec.  190.02(g)(1)(iv), which 
states that ``no payments need be made to restore initial margin.'' The 
current regulation implies that the trustee may make such upstream 
payments, but does not specify the circumstances in which the trustee 
may do so. As discussed in detail in section II.B.2 above, proposed 
Sec.  190.04(b)(1)(vi) would state 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 encourage 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, would 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 would be a clarification of the statutory 
requirements applicable to funds in the customer account. While there 
would 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 would be any material additional costs 
associated with this change.
    Proposed Sec.  190.04(b)(2) would clarify and update existing Sec.  
190.02(g)(2). The current regulation requires retail-level analysis for 
determining whether to issue margin calls based on the funded balance 
of the account, and does not grant the trustee discretion as to whether 
to do so. It is based on a model of the FCM continuing in business.
    The Commission is proposing to revise this provision to delete the 
highly prescriptive conditions, and instead to allow the trustee 
discretion as to whether to issue margin calls to customers who are 
undermargined. The revision would 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 would cause no change 
to the related costs and benefits.
    Proposed Sec.  190.04(b)(3) would retain the concept in current 
Sec.  190.02(g)(3) with updated cross-references. There Commission does 
not anticipate that there would be any costs or benefits to the 
proposed minor revisions.
    Proposed Sec.  190.04(b)(4) would combine parts of current 
Sec. Sec.  190.03(b)(1) and (2) and 190.04(e)(4). The proposal would 
make two changes. First, while the current provision would require the 
trustee to liquidate open commodity contracts if the account is on the 
threshold of deficit, the proposed revision also would apply to an 
account that is already in deficit. The revision would clarify the 
applicability of current authority to a situation that is already 
implicit in the current rule. The benefit would be a less ambiguous 
rule that clearly sets forth the applicability of the trustee's 
authority (and thus results in reduced administrative costs). The 
Commission does not anticipate any increased cost associated with the 
change. Relatedly, the proposed rule would change ``payment of margin'' 
to ``mark-to-market calculation.'' This change would not require the 
trustee to make additional calculations but, if a calculation made by 
the trustee would reveal that the mark-to-market value of the account 
is a deficit, the trustee would be 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 would be to liquidate accounts 
in deficit more promptly (thus mitigating potential further losses), 
the cost would 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).
    Second, the Commission is also proposing to add 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 revision would 
benefit other customers of the debtor FCM by giving

[[Page 36053]]

the trustee flexibility to respond to market conditions following an 
FCM default, and by recognizing that in stressed markets or in 
situations where communication protocols cannot practicably be 
followed, liquidation with one hour notice may be insufficiently 
prompt. This may mitigate losses to the estate. However, customers who 
are required to make payments more promptly would bear associated 
costs, from making such payments in a reduced time frame, or from 
having contracts liquidated that would otherwise not have been 
liquidated if the customer had more time to make payment.
    The Commission is proposing to delete current Sec.  190.03(b)(3), 
which permits 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. Under the proposed model, the trustee would liquidate as 
many open commodity contracts as possible. The Commission is of the 
view that this change would reflect actual practice in commodity broker 
bankruptcies in recent decades. The estate would benefit from such a 
model in that they would be permitted to deal with the customers as a 
group, requiring less tailored analysis of individual customer 
positions. The trustee would have more flexibility and could be more 
cost effective. Many customers would benefit from the trustee being 
able to act with such flexibility and cost effectiveness. However, some 
others could fare less well due to losing the tailored treatment under 
the current model.
    The Commission is proposing to add 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. 
Under the status quo, the trustee must allocate liquidating positions. 
The benefit of this new provision would be that it presents a clear and 
transparent mechanism by which the trustee is to allocate the 
positions. This mechanism would protect the customer account as a 
whole, by establishing a preference for assigning liquidating 
transactions to individual customer accounts in a risk-reducing manner: 
First to commodity contract accounts that are in deficit, next, to 
commodity contract accounts that are under-margined, and finally to 
liquidate any remaining open commodity contracts. Consistent with the 
pro rata distribution principle in Sec.  190.00(c)(5), to the extent 
that there are multiple accounts in any of these groups, the trustee 
would be instructed to allocate the transactions on a pro rata basis, 
thereby minimizing the risk of further losses on the positions and 
reducing the risk of creating any additional debts for the debtor 
estate. The allocation mechanism would be, however, 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.
    Proposed Sec.  190.04(c) would incorporate and clarify current 
Sec.  190.03(b)(5) regarding the liquidation of contracts moving into 
the delivery position. Current Sec.  190.03(b)(5) requires the 
liquidation of 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.
    The proposed revision would amend this provision using more 
explicit language regarding physical delivery and includes an explicit 
reference addressing how options move into the delivery position 
(portions of this provision are moved from current Sec.  
190.02(f)(1)(ii)). These clarifications are likely to reduce 
administrative costs, to the benefit of the estate (and, ultimately, 
customers). There would be no cost associated with the revision.
    Proposed Sec.  190.04(d) would clarify and update portions of 
current Sec. Sec.  190.02(f) and 190.04(d) regarding the liquidation 
and valuation of open positions. The proposal would make three changes 
to the header text in Sec.  190.04(d) from the text in current Sec.  
190.02(f): Adding 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; adding cross-references to 
proposed Sec.  190.04(e) when discussing liquidation in the market and 
book entry via offset (as that provision contains instructions on how 
to effect such liquidation); and deleting the phrase ``subject to limit 
moves and to applicable procedures under the Bankruptcy Code.'' These 
changes would be non-substantive and would not have associated costs or 
benefits.
    In proposed Sec.  190.04(d)(1), the Commission is proposing to make 
two changes to current Sec.  190.02(f)(1). The proposal would delete 
the reference in current Sec.  190.02(f)(1)(i)) to dealer option 
contracts since such term no longer would be used in the proposal. 
Additionally, the proposal would revise the language of current Sec.  
190.02(f)(1)(ii) to add references to the provisions of proposed Sec.  
190.03(c)(2) (concerning the trustee's option to treat hedging accounts 
as specifically identifiable property) and proposed Sec.  190.09(d)(2) 
(concerning the payments that customers on whose behalf specifically 
identifiable commodity contracts would be transferred must make to 
ensure that they do not receive property in excess of their pro rata 
share). These revisions would be non-substantive and would not have 
associated costs.
    Proposed Sec.  190.04(d)(2) would clarify and update current Sec.  
190.02(f)(2) and would contain a number of proposed revisions. The 
current regulation applies only to specifically identifiable property 
other than open commodity contracts, while the proposal would apply to 
specifically identifiable property, other than open commodity contracts 
or physical delivery property. While the current regulation requires 
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, the proposal would (in paragraph (d)(2)(i)) change that figure 
to 75% of the fair market value. The proposed regulation (in paragraph 
(d)(2)(ii)) would add an additional new condition that would 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. Finally, the proposal (in paragraph 
(d)(2)(iii)), while similar to current Sec.  190.02(f)(2)(ii), would 
include updated cross-references that would discuss the return of 
specifically identifiable property. The proposal would benefit 
customers (including those customers with specifically identifiable 
property in a delivery account) by giving the trustee greater 
discretion to forego or postpone liquidation of specifically 
identifiable property in appropriate cases. It is, however, possible 
that the trustee would exercise their discretion poorly, or in a manner 
that in retrospect is regrettable, and postpone liquidation of 
specifically identifiable property or fail to liquidate specifically 
identifiable property when the estate would have realized more from a 
prompt liquidation of the property. Such failure could result in a cost 
to the estate of the FCM debtor to the extent that such funds are not 
available.
    Proposed Sec.  190.04(d)(3) is new and would codify the 
Commission's longstanding policies of pro rata distribution and 
equitable treatment of customers in bankruptcy, as described

[[Page 36054]]

in proposed Sec.  190.00(c)(5) above, as applied to letters of credit 
posted as margin. Under the new provision, the trustee could 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 could, 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 proposed Sec. Sec.  190.08 and 190.09. If 
necessary, the trustee could 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 could draw upon the full amount 
of the letter of credit or any portion thereof (if the letter of credit 
has not expired). Under paragraph (d)(3)(ii), the trustee would be 
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 would 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, would be considered 
customer property in the account class applicable to the original 
letter of credit.
    These proposed new provisions could impose costs on customers that 
use letters of credit as collateral for their positions in that 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 the 
full amount of the letter of credit. Under the status quo, the 
Commission has intended 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.\218\ However, the treatment was not explicitly 
codified previously in the Commission's regulations. The proposal would 
support the policy of pro rata treatment of customers embodied 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 would 
also avoid concentrating losses on those 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.
---------------------------------------------------------------------------

    \218\ See, e.g., 48 FR at 8718-19.
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    In the proposal, Sec.  190.04(e)(1)(i) would strike the requirement 
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. The current 
regulation is superfluous in light of the regulatory framework set 
forth in part 40 of the Commission's regulations. In addition, proposed 
Sec.  190.04(e)(1)(i) would add language that would apply the current 
provision to cases where the debtor FCM is a member of a foreign 
clearing organization, a new defined term added to Sec.  190.01.
    The first change simply would remove a superfluous regulatory 
requirement. It would have the benefit of enabling clearing 
organizations to avoid the cost of seeking rule approval. There would 
be potential costs, in that an ill-conceived rule could be more readily 
identified, and addressed, in a rule approval process. The second 
change would provide a benefit by recognizing that there are 
circumstances in which the trustee must liquidate the open commodity 
contracts where the debtor is a member of a foreign clearing 
organization. Since the current regulation is silent as to the 
trustee's handling of the debtor's contracts where it is a member of a 
foreign clearing organization, the trustee arguably could have some 
discretion as to the handling of these contracts. However, where there 
are applicable rules of the foreign clearing organization, it is likely 
that the trustee would handle such contracts as specified in the 
proposed rule--and would liquidate such contracts pursuant to those 
rules. Accordingly, benefits and costs arising from the rule change 
likely would be minimal.
    Proposed Sec.  190.04(e)(2) is derived from current Sec.  
190.04(d)(1)(ii) with one change: The Commission is proposing to delete 
the rule approval requirement. As with Sec.  190.04(e)(1)(i), the 
proposed deletion would remove a redundant regulatory requirement in 
light of the part 40 rule filing framework, and would enable clearing 
organizations to avoid the cost of seeking rule approval. As discussed 
immediately above, there would be both potential benefits and costs to 
foregoing the rule approval process.
    The proposal would add a new, clarifying provision in Sec.  
190.04(e)(3), confirming that an FCM or foreign futures intermediary 
through which a debtor FCM carries open commodity contracts may 
exercise any enforceable contractual rights the FCM or foreign futures 
intermediary has to liquidate such commodity contracts. In addition, 
proposed Sec.  190.04(e)(3) would add a provision 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 
would be the only remedy; under no circumstance could the liquidation 
be voided.
    The proposed change would benefit carrying FCMs by confirming 
explicitly that carrying FCMs are allowed to exercise enforceable 
contractual rights to liquidate contracts. This will reduce 
administrative costs by reducing ambiguity. At the same time, 
clarification of the damages remedy protects 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. 
Thus, the regulation itself would provide the estate with a potential 
mitigant for the costs in the form of a damages remedy.
    The remainder of the proposed changes to Sec.  190.04(e)(4) and (f) 
would be non-substantive language changes and clarifications and 
updated cross-references and would not have associated costs or 
benefits.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.04. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
3. Regulation Sec.  190.05: Operation of the Debtor's Estate--General
a. Consideration of Costs and Benefits
    In proposed Sec.  190.05, the Commission is revising parts of 
current Sec.  190.04 and adding certain provisions. Current Sec.  
190.04 provides that the trustee ``shall comply with all of the 
provisions of the [CEA] and of the regulations thereunder

[[Page 36055]]

as if it were the debtor'' and ``must compute a funded balance for each 
customer account which contains open commodity contracts as of the 
close of business day subsequent to the order for relief until the 
final liquidation date'' (emphasis added).
    In both proposed Sec.  190.05(a) and (b), the Commission would make 
revisions providing the trustee with more flexibility to act in a 
bankruptcy situation. Proposed Sec.  190.05(a), for example, would 
provide that the trustee ``shall use reasonable efforts'' to comply 
with the CEA and the Commission's regulations. Proposed Sec.  190.05(b) 
would require 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 
would 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. 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, could carry the potential cost of trustee 
mistake, misfeasance, or abuse of such discretion, as discussed above. 
The Commission also notes that, in proposing to add the phrase ``which 
shall be as accurate as reasonably practicable under the 
circumstances'' with respect to the trustee's computation of funded 
balance, the Commission would be incorporating the principle of 
prioritizing cost effectiveness over precision, as discussed in more 
detail in the overarching concepts above.
    Whereas current Sec.  190.04(b) would require a trustee to compute 
a funded balance only for those customer accounts with open commodity 
contracts, proposed Sec.  190.05(b) would expand the scope of customer 
accounts for which a trustee would be 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 would represent an 
administrative cost, as the trustee would 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 would 
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 would, under the proposed revision, receive daily 
computations of the funded balance of their accounts with the debtor.
    In addition, as noted above, proposed Sec.  190.05(b) only would 
require the trustee to compute the daily funded balance of customer 
accounts until the open commodity contracts and other property in such 
account has been transferred or liquidated, rather than until the final 
liquidation date, as current Sec.  190.04(b) provides. This would 
benefit both the estate, because the trustee would no longer be 
required to compute the funded balance of customer accounts that do not 
contain any property, and would also result in some benefit to the 
customers, who would no longer continue to receive daily account funded 
balance computations once their accounts do not contain any property.
    Proposed Sec.  190.05(c)(1) would impose certain administrative 
costs because it would expand the scope of records required to be 
maintained by the debtor from ``records of the computations required by 
this part'' in current Sec.  190.04(c)(1) to ``records required under 
this chapter to be maintained by the debtor, including records of the 
computations required by this part'' in proposed Sec.  190.05(c)(1). 
The proposed paragraph would revise downward the amount of time that 
such records are required to be kept, from ``the greater of the period 
required by Sec.  1.31 of this chapter or for a period of one ear after 
the close of the bankruptcy proceeding for which they were compiled'' 
in current Sec.  190.04(c)(1) to ``until such time as the debtor's case 
is closed'' in proposed Sec.  190.05(c)(1). This revision would benefit 
the estate because it would limit the amount of time the trustee would 
have to maintain the relevant records, thereby mitigating the 
administrative costs associated with maintaining them.
    While current Sec.  190.04(c)(2) requires the records referred to 
in the previous paragraph to be available during business hours to the 
Court, parties in interest, the Commission and the Department of 
Justice, proposed Sec.  190.05(c)(2) no longer would require that such 
records be available to the Court or to parties in interest. This 
revision would be unlikely to impact either costs or benefits, as the 
Court itself would not be reviewing these records, and parties in 
interest should already have access to these records under the 
discovery rules in the Bankruptcy Code.
    Proposed Sec.  190.05(d) is a new provision. It would require 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 
would result in administrative costs, as the trustee would have to 
expend time and resources issuing account statements to customers, but 
would benefit customers because it would allow 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.
    Proposed Sec.  190.05(e)(1) would allow a bankruptcy trustee to 
effect transfers of customer property in accordance with proposed Sec.  
190.07, but would require the trustee to obtain court approval prior to 
making any other disbursements to customers. This provision would 
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.
    Proposed Sec.  190.05(e)(2) would allow 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 proposed regulation would expand 
the scope of customer property that the trustee is permitted to invest 
in such a

[[Page 36056]]

manner to include ``any other customer property.'' This change would 
benefit customers, in that additional customer property could be 
invested (in this limited manner).
    Proposed Sec.  190.05(f) is a new provision that does not appear in 
current part 190. It would, for the first time, require 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 could result 
in administrative costs, since the trustee would require resources to 
do so. However, this provision would benefit customers by making it 
more likely that they would receive what they are entitled to receive 
from the debtor's estate.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.05. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
4. Regulation Sec.  190.06: Making and Taking Delivery Under Commodity 
Contracts
a. Consideration of Costs and Benefits
    Proposed Sec.  190.06 would revise current Sec.  190.05 regarding 
the making and taking of deliveries under commodity contracts.
    Specifically, proposed Sec.  190.06(a)(2) would replace current 
Sec.  190.05(b), which 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. Under the proposed revision, the trustee would 
use ``reasonable efforts'' (rather than ``best efforts'' under current 
Sec.  190.06(a)(1)) 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 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. Management of contracts in 
the delivery positions involves a significant degree of tailored 
administration. Under the best efforts standard, the trustee could 
spend more time 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'' 
would benefit creditors of the estate as the trustee would not need to 
provide a disproportionate amount of individualized treatment to such 
contracts. 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.
    Proposed Sec.  190.06(a)(3) would revise current Sec.  
190.05(c)(1)-(2) by providing additional 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 would clarify the current 
regulation. They also would provide the trustee with the flexibility to 
act ``as it deems reasonable under the circumstances of the case,'' but 
would set an outer bound to that discretion in requiring the trustee to 
act ``consistent with the pro rata distribution of customer property by 
account class.'' This provision again would have the benefits and costs 
of enhanced discretion discussed above, but would include an outer 
bound to that discretion.
    In proposed Sec.  190.06(a)(4) the Commission would add a new 
provision to reflect that delivery may need to be made in a securities 
account.\219\ Transfers would be subject to limits based on the 
customer's funded balance for a commodity contract account and 
exceeding the minimum margin requirements for that account. Further, 
customers would be required not to be undermargined or have a deficit 
balance in any other commodity contract accounts. The new provision 
would 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 would mitigate the 
risk of transferring too much value out of the commodity contract 
account (and creating a risk of an undermargin or deficit balance).
---------------------------------------------------------------------------

    \219\ This would only be relevant for debtor FCMs that are also 
broker-dealers.
---------------------------------------------------------------------------

    Proposed Sec.  190.06(b) is also new and would create an account 
class for physical delivery property held in delivery accounts and the 
proceeds of such physical delivery property. This account class would 
further be sub-divided into separate physical delivery and cash 
delivery account subclasses. In general, creating the delivery account 
class would 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 would recognize that cash is more vulnerable to loss, and 
more difficult to trace, as compared to physical delivery property and 
would be likely to benefit those with physical delivery claims. Since 
cash is more vulnerable to loss and more difficult to trace, then under 
the proposal, customers in the cash delivery sub-class would be more 
likely to get a pro rata distribution that is less than that in the 
physical delivery property sub-class. 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.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.06. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
5. Regulation Sec.  190.07: Transfers
a. Consideration of Costs and Benefits
    Proposed Sec.  190.07 would revise current Sec.  190.06 regarding 
transfers. First, in proposed Sec.  190.07(a)(3) the Commission would 
revise current Sec.  190.06(a)(3). The current regulation would provide 
that no clearing organization or other self-regulatory organization may 
adopt, maintain in effect, or enforce rules that prevent 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

[[Page 36057]]

filed, if the transfers have been approved by the Commission. The 
revised regulation would change ``prevent'' to the more general term 
``[i]nterfere with,'' thus proscribing a potentially broader range of 
conduct in order to promote transfers. However, the revised regulation 
would include the proviso 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 would modify, 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. Accordingly, there would not be any 
material cost associated with the change. The clarification that the 
regulations do not limit contractual risk management rights would 
provide a benefit to clearing organizations and their members in 
clarifying that the regulation would not nullify the contracts in this 
regard, and would not have an associated cost.
    In proposed Sec.  190.07(b)(1), the Commission would clarify 
current Sec.  190.06(c)(1) to set forth 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. Under current Commission 
regulations, FCMs are responsible for meeting the requirements under 
such regulations for customer accounts. The proposed revision would 
recognize these obligations under already existing regulations and 
would clarify that such obligations apply when an FCM is a transferee. 
Accordingly, the Commission does not anticipate any material cost from 
this proposed revision. Under one interpretation of the current 
regulation, the trustee would need to do further diligence in order to 
make the determination whether the transferee would continue to meet 
minimum financial requirements. Where time is of the essence in making 
a transfer, and given the transferee's superior knowledge as to its own 
financial status, it would be more appropriate to leave this 
responsibility with the transferee,\220\ and not to impose any such 
responsibility on the trustee. The trustee's resources could be better 
spent on other tasks for the debtor estate. Accordingly, the proposed 
clarification would reduce administrative burden as well.
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    \220\ The focus here is on the responsibilities of the 
transferee in contrast to those of the trustee. This is without 
prejudice to any review of the transferee's status by any DCOs or 
SROs of which the transferee is a member, or of any regulators 
(including the Commission) with jurisdiction over the transferee.
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    Proposed Sec.  190.07(b)(3) is a new provision. It would permit 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 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. The proposal would provide a benefit to customers and 
transferee clearing members and trustees, by facilitating the transfer 
process.\221\ If such flexibility were not provided, under the current 
regulations, transfer might not be accomplished, or may not be 
accomplished promptly, and liquidation might be the only available 
option. As discussed in proposed Sec.  190.00(c)(4), it is preferable 
to avoid liquidation, as liquidation is much more disruptive to markets 
and to the customers of the defaulted FCM. The proposal would recognize 
the importance of the account opening diligence 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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    \221\ The corresponding costs would arise from the possibility 
that the transferee's diligence would reveal 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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    Proposed Sec.  190.07(b)(4) is also new. It would clarify that 
account agreements governing a transferred account are deemed assigned 
to the transferee until and unless a new agreement is reached. The 
provision would also explain that consequences for breaches pre-
transfer are borne by the transferor rather than the transferee. 
Proposed Sec.  190.07(b)(4) would codify the industry understanding 
regarding the legal implications for transfer agreements and thus the 
primary benefit is to provide transparency to the industry. The 
Commission does not anticipate that there would be material costs 
associated with the change.
    Proposed Sec.  190.07(b)(5) would carry forward current Sec.  
190.02(c), and would provide 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) would be merely clarifications, and there would be no costs 
or benefits associated with such revisions.
    Proposed Sec.  190.07(c) would revise current Sec.  190.06(e). The 
proposed revision would change the language ``all accounts are eligible 
for transfer'' in current Sec.  190.06(e)(1) to ``all commodity 
contract accounts (including accounts with no open commodity contract 
positions) are eligible for transfer . . .'' This change would 
recognize 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 
would clarify the current language and would not change the types of 
accounts that can be transferred. Accordingly, the Commission does not 
anticipate that there would be material added cost associated with the 
revision.
    Proposed Sec.  190.07(d) would revise special rules for transfers 
under section 764(b) of the Bankruptcy Code, set forth in primarily in 
current Sec.  190.06(f). Proposed Sec.  190.07(d)(2)(i) would state 
that the Commission will not disapprove such a transfer for the sole 
reason that it was a partial transfer.'' Current Sec.  190.06(f)(3)(i) 
sets forth that the Commission will not disapprove such a transfer for 
the sole reason that it was a partial transfer if it would prefer the 
transfer of accounts, the liquidation of which could adversely affect 
the market or the bankrupt estate. The revision would be made to 
promote transfer. Cost and benefit considerations related to transfer 
are as discussed above.\222\
---------------------------------------------------------------------------

    \222\ See section II.B.5 above.
---------------------------------------------------------------------------

    Several changes would be proposed in Sec.  190.07(d)(2)(ii). First, 
the Commission would clarify that associated property (i.e., 
collateral) would be transferred along with open commodity contracts, 
and thus would insert the term ``property'' throughout the section. 
This change would clarify the current regulation and would not have an 
associated cost. Second, the

[[Page 36058]]

Commission would create a limitation on partial transfers where netting 
sets would be broken and customers' net equity claims would increase. 
Trustees would therefore not permit partial transfers where individual 
customers would be in a worse position (with respect to margin) if the 
partial transfer were completed. While this provision would require the 
trustee to consider the impact of partial transfer, under current 
regulations, the trustee is already required to consider the extent to 
which a partial transfer would impact customer net equity claims 
against the FCM debtor's estate. The revised regulation would provide a 
benefit to customers by codifying this limitation. Third, Sec.  
190.07(d)(2)(ii) would be revised to add language that clarifies that 
liquidation could either crystalize gains or have the effect of 
reducing the required margin. This change would have a similar impact 
to the limitation on partial transfers just considered. It would codify 
a consideration the trustee should already be addressing, and as such, 
would not create an additional cost. Finally, the Commission would 
insert language in Sec.  190.07(d)(2)(ii) that would 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. The inserted language would steer 
the trustee toward respecting spreads and straddles, but would give the 
trustee more flexibility than the current regulation, so that the 
trustee can respond to the stressed market conditions and provide the 
best outcome for the FCM debtor estate and customers generally. The 
proposed insertion would recognize 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.\223\
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    \223\ See trustee discretion discussion in section IV.C.2 above.
---------------------------------------------------------------------------

    Proposed Sec.  190.07(d)(3) is new and would permit 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 (either because of its terms or because the transfer would 
result in a greater recovery of value for the customer then the 
customer is entitled to) and the customer does not deliver substitute 
property, the provision would 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 proposed regulation would 
codify the Commission's current intention with regards to letters of 
credit \224\ and the current practice trustees have used. It would 
ensure that letters of credit are treated in an economically similar 
fashion to other types of collateral and that customers using letters 
of credit would not be given any differential economic benefit, thus 
serving the goal of pro rata distribution. There could be 
administrative costs incurred by the estate associated with drawing 
upon a letter of credit, as well as costs to the customer that posted 
the letter of credit as collateral. Such costs may be mitigated if the 
customer delivers substitute property, as set forth in the proposed 
regulation.
---------------------------------------------------------------------------

    \224\ See ConocoPhillips, 2012 WL 4757866, and related 
discussion in section II.B.2 above.
---------------------------------------------------------------------------

    Proposed Sec.  190.07(d)(4) is also new and would 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 would 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 would benefit) the delivery 
process. Therefore, the additional administrative cost from the revised 
regulation would be minimal. There would be no cost to customers, who 
would benefit from the codification of a standard for the trustee.
    Proposed Sec.  190.07(d)(5) would revise current Sec.  190.06(e)(2) 
by making several clarifications. The revised provision would prevent 
prejudice to customers and prohibit the trustee from making transfers 
that would result in insufficient customer property being available to 
make equivalent percentage distributions to all equity claim holders in 
the applicable account class. This change would be a clarification of 
the current requirements. It would support achieving the statutory 
policy of pro rata distribution, but would work to the detriment of any 
customer who, absent the provision, would otherwise benefit from a 
larger distribution. The Commission is further proposing to clarify 
that the trustee should make determinations 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. The benefit here would be 
that the trustee is given discretion to make decisions based on the 
overarching principle set forth above, valuing cost effectiveness over 
precise values of entitlement. However, the same potential costs would 
apply--risk of mistake or misfeasance.
    Proposed Sec.  190.07(e) would revise current Sec.  190.06(g). The 
proposal would add language to clarify that transfers are approved by 
the Commission pursuant to the procedure set forth in the Bankruptcy 
Code and adding specific citations to the Code. Throughout proposed 
Sec.  190.07(e), the Commission would insert ``or customer property'' 
following ``the transfer of commodity contract accounts'' to clarify 
that transfers of commodity contract accounts include the associated 
customer property. These revisions would be clarifications or 
reorganizations, and there would be no costs or benefits associated 
with the revisions.
    Proposed Sec.  190.07(e)(1)(iii) would add a provision that would 
prohibit the trustee from avoiding a transfer from ``a receiver that 
has been appointed for the FCM that is now a debtor.'' The new 
provision would be 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 would 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, a 
possibility which cannot be foreclosed given the exigencies of an FCM 
receivership, the proposal would prevent the correction of such 
actions.
    In proposed Sec.  190.07(e)(2)(i), the Commission would revise 
current Sec.  190.06(g)(2)(i) to modify the term ``SRO/commodity 
broker'' to ``clearing organization'' because the only entities who can 
perform the transfers that are subject to the provision are the 
trustee, and, in certain circumstances, clearing organizations. This 
revision would be a clarification and would not have any associated 
cost.
    Proposed Sec.  190.07(f) would revise Sec.  190.06(h) regarding 
Commission action. The provision would 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

[[Page 36059]]

section. In addition, the Commission would clarify that the transfers 
of the commodity contract accounts includes the associated customer 
property. These revisions would be clarifications and would not have 
any associated costs.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.07. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
6. Regulation Sec.  190.08: Calculation of Allowed Net Equity
a. Consideration of Costs and Benefits
    In proposed Sec.  190.08, the Commission would incorporate much of 
current Sec.  190.07, though with certain revisions, but also would 
delete parts of current Sec.  190.07.
    The Commission is proposing to delete current Sec.  190.07(b)(6), 
(c)(2)(v), and (d) \225\ from the proposed rule text, all of which 
involve how to adjust the calculation of allowed net equity with 
respect to accounts remaining open after the primary liquidation date. 
The reason for these proposed deletions is that under the revised 
definition of the term ``primary liquidation date,'' all commodity 
contracts would be liquidated or transferred prior to the primary 
liquidation date--none would be held open for transfer thereafter. 
Therefore, since no accounts would remain open subsequent to the 
primary liquidation date, these sections would be rendered moot. 
Accordingly, the Commission does not anticipate any associated costs or 
benefits.
---------------------------------------------------------------------------

    \225\ In addition, as noted above, because the Commission is 
proposing to delete current Sec.  190.07(d) from the proposed rule 
text, the Commission is also proposing to delete the reference to 
such provision in proposed Sec.  190.08(a).
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    Proposed Sec.  190.08(b) would set forth the steps for a trustee to 
follow when calculating each customer's net equity. While proposed 
Sec.  190.08(b) would contain several revisions from its analog in 
current Sec.  190.07(b), most of the revisions would be non-substantive 
and would clarify, not change, the meaning of the provisions in current 
Sec.  190.07(b). The cost and benefit considerations of the substantive 
changes to proposed Sec.  190.08(b) are discussed below.
    First, proposed Sec.  190.08(b)(1) would set forth instructions for 
determining the equity balance of each commodity contract account of a 
customer. Proposed Sec.  190.08(b)(1)(ii) would provide instructions on 
how to calculate a customer's ledger balance, which goes into 
determining that customer's equity balance. Proposed Sec.  
190.08(b)(1)(ii)(A)(4) is new, and would provide that a customer's 
ledger balance includes ``the face amount of any letter of credit 
received, acquired or held to margin, guarantee, secure, purchase, or 
sell a commodity contract.'' This treatment would balance the fact that 
any portion of a posted letter of credit that is not drawn upon would 
be treated as distributed to the customer. This new provision could 
result in administrative costs, since the trustee could, if a 
particular customer has posted a letter of credit as margin for a 
commodity contract, be required to take the extra step of determining 
the value of such letter of credit in calculating that customer's 
equity balance. However, this provision could benefit customers posting 
letters of credit: Absent this addition to the rule text, such 
customers were not explicitly guaranteed that their letters of credit 
would be taken into account in calculations of their equity 
balance.\226\
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    \226\ The Commission considered similar costs and benefits when 
it proposed adding other references to letters of credit in proposed 
Sec.  190.08. For instance, proposed Sec.  190.08(c), which would 
set forth instructions for calculating the funded balance, includes 
in the computation ``the value of letters of credit received, 
acquired or held to margin, guarantee, secure, purchase, or sell a 
commodity contract related to all customer accounts of the same 
class.'' In addition, proposed Sec.  190.08(d)(4) would set the 
value of a letter of credit ``received, acquired or held to margin, 
guarantee, secure, purchase, or sell a commodity contract'' as its 
face amount less the amount, if any, drawn and outstanding. These 
new provisions regarding letters of credit could result in 
administrative costs, in that they could involve certain additional 
steps being taken by the trustee with respect to calculating the 
allowed net equity of each customer when certain customers have 
posted letters of credit to margin their commodity contracts, but 
they would also benefit customers posting letters of credit, who 
would have explicit assurance that any such letters of credit would 
be taken into account in such calculations.
---------------------------------------------------------------------------

    Second, proposed Sec.  190.08(b)(2) would provide instructions to 
the trustee regarding how to determine whether accounts are held in the 
same capacity or in separate capacities, for purposes of aggregating 
the credit and debit equity balances of all accounts of the same class 
held by a customer in the same capacity. Proposed Sec.  
190.08(b)(2)(viii), similar to current Sec.  190.07(b)(2)(viii), would 
note that futures accounts, delivery accounts, and cleared swaps 
accounts of the same person shall not be deemed to be held in separate 
capacities, although such accounts may be aggregated in accordance with 
paragraph (b)(3) of the section. Current Sec.  190.07(b)(2)(viii) is 
subject to one exception, paragraph (b)(2)(ix) of the section, which 
sets forth that an omnibus customer account of an FCM shall be deemed 
to be held in a separate capacity from the house account and any other 
omnibus customer account of such person. Proposed Sec.  
190.08(b)(2)(viii) would also be subject to exception from paragraph 
(b)(ix) and would add another exception, from paragraph (b)(2)(xiv), 
which would reflect that accounts held by a customer in separate 
capacities shall be deemed to be accounts of separate customers. This 
change provides additional cross-references and clarifies the existing 
regulations, but does not change any obligations. Accordingly, there is 
no cost from the revisions.
    Proposed Sec.  190.08(b)(2)(xi), like its analog in current Sec.  
190.07(b)(2)(xi), would state that certain retirement or pension 
accounts maintained with the debtor FCM shall be deemed to be held in a 
separate capacity from an account held in an individual capacity by the 
retirement or pension plan administrator, or by any employer, employee, 
participant, or beneficiary with respect to such plan. While current 
Sec.  190.07(b)(2)(xi) would refer only to retirement or pension plans 
under ERISA, proposed Sec.  190.08(b)(2)(xi) would expand the scope of 
retirement and pension plans that would be described in this provision 
to include such plans under similar Federal, state or foreign laws or 
regulations. This provision could result in administrative costs, 
because the trustee would need to ensure that all accounts in the name 
of a retirement or pension plan as described in proposed Sec.  
190.08(b)(2)(xi) would be properly categorized as being held in a 
separate capacity from accounts held in an individual capacity by the 
plan administrator, or by any employer, employee, participant, or 
beneficiary with respect to such plan. The benefit of this change would 
be to foster the achievement of the statutory policies favoring 
retirement accounts and pension plans.
    While the Commission would make certain revisions in proposed Sec.  
190.08(b)(3), (b), and (5), as described above, the Commission views 
such revisions as non-substantive and would merely clarify the text in 
the current analogous provisions. Thus, the Commission would not expect 
these changes to result in any costs or benefits.
    Proposed Sec.  190.08(c) would set forth instructions for 
calculating each customer's funded balance. As noted

[[Page 36060]]

above in section II.B.6, the references to calculation as of the 
primary liquidation date would be deleted, because the funded balance 
(i.e., each customer's pro rata share of the customer estate with 
respect to an account class) is relevant both before the primary 
liquidation date as well as after.
    In addition, proposed Sec.  190.08(c)(1)(ii) would provide that, in 
calculating each customer's funded balance, the trustee should add any 
margin payment made between (i) the entry of the order for relief or, 
in an involuntary case, the date on which the petition for bankruptcy 
is filed, and (ii) the primary liquidation date. In the analogous 
current provision, the text did not account for the possibility of an 
involuntary proceeding, so the Commission is proposing to add text to 
account for such possibility. This revision would promote the goal of 
fair distribution. It would likely benefit those customers of a debtor 
in an involuntary bankruptcy proceeding who make margin payments 
between the date on which the petition for bankruptcy is filed and the 
primary liquidation date, in that those payments would be taken into 
account when the trustee is calculating their funded balance under the 
proposed rules; it would correspondingly act to the detriment of other 
customers.
    In proposed Sec.  190.08(d), the Commission is proposing in general 
to implement changes to provide more flexibility to the trustee in 
valuing commodity contracts and other property held by or for a 
commodity broker. For instance, the Commission is proposing to delete 
current Sec.  190.07(e)(2) and (3), regarding the valuation of 
principal contracts and bucketed contracts, respectively, in favor of 
the more generalized approach to valuing property set forth in proposed 
Sec.  190.08(d)(5). Moreover, in proposed Sec.  190.08(d)(5), which is 
based on current Sec.  190.07(e)(5), the Commission is proposing to 
delete the requirement that the trustee seek approval of the court 
prior to enlisting professional assistance to value customer property. 
These changes would 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 would 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 could carry 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 some of the specific provisions within proposed 
Sec.  190.08(d), the Commission is proposing substantial changes with 
respect to the valuation of commodity contracts. First, the Commission 
is proposing to separate more explicitly the instructions concerning 
the valuation of (1) open commodity contracts, and (2) liquidated 
commodity contracts. With respect to open commodity contracts, the 
Commission would retain the provision that the value of an open 
commodity contract shall be equal to the settlement price as calculated 
by the clearing organization pursuant to its rules. However, the 
Commission is proposing that such clearing organization rules no longer 
need to be approved by the Commission in order to be used in valuing 
such contracts for purposes of computing net equity. The benefits and 
costs of that change in approach are discussed above with respect to 
proposed Sec.  190.04(e).
    With respect to commodity contracts that have been transferred, 
proposed Sec.  190.08(d)(1)(i) would provide 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 would benefit both the estate 
and customers by making it practical to calculate the value of the 
transferred commodity contracts prior to the transfer.
    With respect to liquidated commodity contracts, the Commission is 
proposing that the value of such contracts shall equal the value 
realized on liquidation of the contract. However, in certain 
circumstances, proposed Sec.  190.08(d)(1)(ii) also would allow the 
trustee to either (1) use the weighted average of commodity contracts 
liquidated within a 24-hour period or business day, or (2) use the 
settlement price calculated by a clearing organization for commodity 
contract liquidated as part of a bulk auction by a clearing 
organization. With respect to the weighted average provision, the 
Commission is proposing to change the time period within which such 
contracts must be liquidated in order for the trustee to use the 
weighted average, from ``on the same date'' (as provided in current 
Sec.  190.07(e)) to ``within a 24 hour period or business day.'' This 
change would benefit the estate and the goal of pro rata distribution, 
since it has been proposed in order to bring the time frame more in 
line with how settlement cycles and business days work.\227\ In 
addition, the Commission is proposing to add the provision regarding 
valuation in the case of a bulk auction by a clearing organization. In 
the Commission's view, such an addition would benefit the estate by 
providing the trustee with another option for determining appropriately 
the value of commodity contracts that were liquidated as part of a bulk 
auction.
---------------------------------------------------------------------------

    \227\ The trading day is generally not the same as the calendar 
day, but instead may run from e.g., 5 p.m. on one business day until 
4:59 p.m. on the next. Closing prices for contracts would thus be 
set at the end of the trading day, not at the end of the calendar 
day.
    This consideration of costs and benefits also applies to 
proposed Sec.  190.08(d)(2), which would incorporate the same 
weighted average concept as in proposed Sec.  190.08(d)(1)(ii)(A).
---------------------------------------------------------------------------

    In proposed Sec.  190.08(d)(4), which would set forth the valuation 
method for commodities held in inventory, the Commission is proposing 
to allow the trustee, in circumstances where the fair market value of 
the commodity held in inventory is not readily ascertainable, to value 
the commodity in accordance with proposed Sec.  190.08(d)(5), discussed 
above. This change would benefit both the estate, since the trustee 
would have the flexibility to value a commodity held in inventory using 
such professional assistance as they deem necessary, as well as the 
customers, who would benefit from a more appropriate valuation due to 
the trustee's increased flexibility in determining such valuation. It 
would again, however, involve the costs of possible mistake, 
misfeasance or abuse of discretion discussed above.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.08. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives (e.g., approaches that will more likely lead to 
accurate valuation) that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? In particular, do the proposed rules strike an 
appropriate balance of discretion and prescription? Commenters are 
encouraged to include both qualitative and quantitative assessments of 
any costs and benefits.
7. Regulation 190.09: Allocation of Property and Allowance of Claims
a. Consideration of Costs and Benefits
    In proposed Sec.  190.09, the Commission would incorporate much of 
current

[[Page 36061]]

Sec.  190.08, though with certain revisions and additions. Proposed 
Sec.  190.09(a)(1) would define the scope of ``customer property'' that 
is available to pay the claims of a debtor FCM's customers, and 
proposed Sec.  190.09(a)(1)(i) would set 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. The Commission is proposing certain 
substantive changes to the categories listed in proposed Sec.  
190.09(a)(1)(i), as discussed below:
     First, proposed Sec.  190.09(a)(1)(i)(D) is a new 
paragraph that would provide 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.'' While the Commission's intention was 
always to include such property within the definition of ``customer 
property,'' clarifying this explicitly would benefit both the estate 
and customers by avoiding confusion or potential litigation.
     Second, proposed Sec.  190.09(a)(1)(i)(F) would provide 
that letters of credit, including proceeds of letters of credit drawn 
by the trustee, or substitute customer property, constitute ``customer 
property.'' This paragraph would be revised to be consistent with the 
other letters of credit provisions that would be added throughout the 
proposed part 190. The Commission does not anticipate that this 
provision would result in any material costs or benefits, as current 
Sec.  190.08(a)(1)(i) already includes a provision regarding letters of 
credit.\228\
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    \228\ 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 proposed 
Sec.  190.04(d)(3) in section IV.E.2 above.
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    Proposed Sec.  190.09(a)(1)(ii) would set forth the categories of 
``[a]ll cash, securities, or other property'' that would be included in 
customer property. The Commission is proposing certain substantive 
changes to the categories listed in Sec.  190.09(a)(1)(ii), as 
discussed below:
     First, proposed Sec.  190.09(a)(1)(ii)(D) would provide 
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 proposed revisions to this 
paragraph would benefit the estate, by assuring that any property they 
recover would be included in the pool of customer property, no matter 
the method of recovery, rather than going to some other creditor (to be 
sure, those other creditors would receive correspondingly less).
     Second, proposed Sec.  190.09(a)(1)(ii)(G) is new, and 
would provide that any current assets of the debtor in the greater of 
(i) the amount that the debtor would be obligated to be set aside as 
its targeted residual interest amount, or (ii) the debtor's obligations 
to cover debit balances or under-margined amounts, constitutes customer 
property. This new provision would result in administrative costs, 
because the trustee would 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 would benefit 
customers (and serve the policy of protecting customer collateral), 
however, because it would mitigate the risk of a shortfall in customer 
funds by ensuring that the trustee would fulfill the Commission's 
regulations that require an FCM to put certain funds into segregation 
on behalf of customers. This would result in such funds being included 
in the pool of customer property, rather than going to some other 
creditor. It would, to the same extent, operate to the detriment of 
general creditors.
     Third, proposed Sec.  190.09(a)(1)(ii)(K) is also new, and 
would provide 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 would benefit customers 
(and, again, the policy of protecting customer collateral), since any 
insurance payment as described in this proposed section would enlarge 
the pool of customer property, rather than going to some other 
creditor.\229\ It could result in administrative costs, however, as the 
trustee would need to spend time and resources in order to determine 
whether any such insurance payments exist, and in prosecuting such 
insurance claims.
---------------------------------------------------------------------------

    \229\ It would, again, to the same extent, act to the detriment 
of general creditors.
---------------------------------------------------------------------------

     Fourth, the second sentence of proposed Sec.  
190.09(a)(1)(ii)(L) is new, and would provide 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 would benefit commodity 
customers (and act to the detriment of general creditors) because any 
securities customer property remaining after full allocation to 
securities customers would 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.\230\
---------------------------------------------------------------------------

    \230\ The Commission further notes that the first sentence of 
proposed Sec.  190.09(a)(1)(ii)(L), which would provide that 
customer property would include 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, would impose no costs and 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.
---------------------------------------------------------------------------

    Proposed Sec.  190.09(a)(2) sets forth the categories of property 
that are not included in customer property. The Commission has proposed 
certain substantive changes to the categories listed in proposed Sec.  
190.09(a)(2), as discussed below:
     First, in proposed Sec.  190.09(a)(2)(iii), the Commission 
would add 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 would 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, proposed Sec.  190.09(a)(2)(v) would provide 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'' would eliminate any 
distinction between initial and variation margin; this deletion would 
benefit the estate 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

[[Page 36062]]

requirements would be included in the pool of customer property. It 
also would benefit customers who post excess margin, who could be 
assured that any such excess margin they deposit after the entry of an 
order for relief will remain their property and will not be included in 
the pool of customer property. This provision would correspondingly act 
to the detriment of general creditors.
     Third, proposed Sec.  190.09(a)(2)(viii), which is new, 
would provide 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.
    Proposed Sec.  190.09(a)(3), which is new, would give the trustee 
the authority to assert claims against any person to recover the 
shortfall of customer property enumerated in certain paragraphs 
elsewhere in proposed 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 would, however, benefit 
customers, since it would ensure that the trustee would be in a 
position to recover any such shortfalls and would give the trustee 
authority to take action to do so. Moreover, since this provision would 
make explicit what is implicit in current part 190, an additional 
benefit of this provision would be reduced litigation costs over a 
trustee's authority to engage in attempts to recover shortfalls in 
customer property.\231\
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    \231\ While the persons against whom such claims are 
successfully asserted may perceive a subjective cost, the Commission 
does not find these costs relevant to the analysis, as those persons 
would simply be forced to pay what they rightfully owe the debtor 
FCM's estate.
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    Proposed Sec.  190.09(b) would add the phrase ``or attributable 
to'' when describing how to treat property segregated on behalf of or 
attributable to non-public customers (''house accounts''); the addition 
of this phrase, as described above, would clarify that proposed Sec.  
190.09(b)(1) would apply 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), 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.\232\
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    \232\ Proposed Sec.  190.09(c)(1) would 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 would present similar costs and benefits to 
those discussed above.
---------------------------------------------------------------------------

    Proposed Sec.  190.09(c)(1)(ii) is a new provision that would 
instruct 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 would set 
forth the order of allocation for any customer property that could not 
be traced to a specific customer account class. These provisions would 
benefit public customers who would otherwise face shortfalls (and then, 
non-public customers who would otherwise face shortfalls). Since these 
provisions would make explicit what is implicit in current part 190, an 
additional benefit of these provisions would result from the increased 
clarity over what to do with any excess customer property. However, the 
provisions would act to the detriment of general creditors 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.
    Proposed Sec.  190.09(d) would govern the distribution of customer 
property. The only substantive change in proposed Sec.  190.09(d) from 
its analog in current Sec.  190.08(d) would be in proposed Sec.  
190.09(d)(1)(i) and (ii), which would 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, proposed Sec.  
190.09(d)(1)(i) and (ii) would allow the posting of ``substitute 
customer property.'' This term, which would be defined in proposed 
Sec.  190.01, would mean cash or cash equivalents. This revision would 
benefit customers because it would make 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, would be required to value 
(and potentially to liquidate) such cash equivalents.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.09. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
8. Regulation Sec.  190.10: Provisions Applicable to Futures Commission 
Merchants During Business as Usual
a. Consideration of Costs and Benefits
    Proposed Sec.  190.10 addresses provisions applicable to FCMs 
during business as usual.
    In Sec.  190.10(a), the Commission would note that an FCM is 
required to maintain current records related to its customer accounts, 
consistent with current Commission regulations, and in a manner that 
would permit them to be provided to another FCM in connection with the 
transfer of open customer contracts and other customer property. The 
proposed regulation would not impose new obligations, but rather would 
inform the trustee regarding their duties by incorporating references 
to the Commission's existing regulations.
    Proposed Sec.  190.10(b) would incorporate concepts in current 
Sec. Sec.  190.04(e), 190.06(d), and the current Bankruptcy appendix 
form 3 instructions. Under this new provision, an FCM would be 
permitted to rely solely upon written record of the customer's 
representation of hedging intent regarding the designation of a hedging 
account, thus mitigating administrative costs.
    Proposed Sec.  190.10(b)(1) would require 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 clearing 
instruction to FCMs at the outset of the relationship. This provision 
is new, with regards to the timing of the opportunity. Clear 
instruction at the outset would facilitate the ability properly to 
account for customer property. There would be

[[Page 36063]]

some disclosure and accounting costs associated with this provision. 
The proposed regulation would require FCMs to give customers the 
opportunity to provide instructions as to whether an account is a 
hedging account at opening, including those who will never enter into 
hedging accounts. For those customers that do engage in hedging, it 
would be more cost effective to designate the account at opening, when 
both customer and FCM are focused on the specifics of the relationship 
between them, 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 proposed regulation 
would reduce the probability that the opportunity to designate the 
account as a hedging account will be missed.
    Proposed Sec.  190.10(b)(2) would set forth the conditions for 
treating an account as a hedging account. The current Sec.  190.06(d) 
requires written hedging instructions for such treatment to be given. 
By contrast, proposed Sec.  190.10(b)(2) would permit 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. This provision is new and would 
follow from the designation of the accounts. There would be accounting 
burdens for FCMs and customers associated with the provision.
    In proposed Sec.  190.10(b)(3), the Commission would provide that 
the requirements in Sec.  190.10(b)(1)-(2) would not apply to commodity 
contract accounts opened prior to the effective date of the revisions 
to part 190 and that an FCM could continue to designate existing 
accounts as hedging accounts based on written hedging instructions 
obtained under current regulations. This provision would mitigate the 
impact of the changes to current requirements in proposed Sec.  
190.10(b)(1)-(2) by not applying those provisions to already opened 
hedging accounts and would give FCMs the ability to continue to 
designated already-open hedging accounts based upon the information 
collected and maintained during the current regulatory framework.
    Proposed Sec.  190.10(b)(4) would 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 would give FCMs and customers 
flexibility to apply the proposed regulations to existing accounts 
where the impact would not be overly burdensome.
    In proposed Sec.  190.10(c), the Commission would address the 
establishment of delivery accounts during business as usual. The 
Commission would recognize 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.\233\ Delivery accounts are of particular 
importance during bankruptcy although there are costs associated with 
the opening and maintenance of such accounts. The use of such accounts 
is considered to be cost effective in facilitating delivery.\234\ The 
benefit of using such accounts would be twofold: To protect customer 
assets during the delivery process, and to foster the integrity of the 
delivery process itself.
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    \233\ As noted above in the discussion of proposed Sec.  
190.10(c) in section II.B.8, if the commodity that is subject to 
delivery is a security, the FCM may instead effect delivery through 
(and the property may be held in) a securities account.
    \234\ 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 
would be mitigated.
---------------------------------------------------------------------------

    Proposed Sec.  190.10(d) is new. It would address letters of credit 
and would prohibit and FCM from accepting a letter of credit during 
business as usual unless certain conditions are met at the time of 
acceptance and remain true through the date of expiration. First, the 
trustee would be required to 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 would be permitted to be and would in fact be passed 
through to a clearing organization, the trustee for such clearing 
organization (or the FDIC) would be required to 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). In addition, 
proposed Sec.  190.00(c)(5) would clarify that the trustee is required 
to treat letters of credit in a manner consistent with pro rata 
distribution and is permitted to draw upon the full amount of unexpired 
letters of credit or any portion thereof or treat the letter of credit 
as having been distributed to the customer for purposes of calculating 
entitlements to distribution or transfer.
    Proposed Sec.  190.10(d) would 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 proposed Sec. Sec.  190.00(c)(5) and 190.04(d)(3). 
Letters of credit are currently widely used in the industry. 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,\235\ and that these forms are consistent 
with the proposed new requirements. Nevertheless, FCMs would 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. The Commission has considered 
the extent of the use of letters of credit in the industry and is 
proposing that upon the effective date of the regulation, proposed 
Sec.  190.10(d) would apply only to new letters of credit and customer 
agreements. The Commission further is proposing to include a transition 
period of one year from the effective date until proposed Sec.  
190.10(d) would apply to existing letters of credit and customer 
agreements. The transition period would give FCMs an opportunity to 
conduct the necessary review of existing letters of credit and customer 
agreements, and to make any necessary changes.
---------------------------------------------------------------------------

    \235\ See section II.B.8 above.
---------------------------------------------------------------------------

    It is possible that some letters of credit could become more 
expensive if the proposed regulation is adopted as there would be an 
increased likelihood that the letter of credit will be drawn upon. (As 
discussed above, this would appear to not apply to the majority of 
existing arrangements). As noted in the discussion of proposed Sec.  
190.04(d)(3), the benefit of the proposed regulation would be ensuring 
consistent economic treatment of letters of credit with other types of 
collateral to ensure that all forms of collateral are treated 
similarly, thus promoting the goal of pro rata distribution.
    Proposed Sec.  190.10(e) would largely aligns with the provisions 
in current part 190 from which it was derived. The statement concerning 
publication of notice in a newspaper of general circulation would be 
deleted to correspond to changes discussed in connection with proposed 
Sec.  190.03(c)(1); there would be no additional cost or benefit 
implications.

[[Page 36064]]

b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.10. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
9. Section 15(a) Factors--Subpart B
a. Protection of Market Participants and the Public
    Subpart B of the proposed rules would increase the protection of 
market participants and the public by clearly setting forth how the 
bankruptcy trustee is expected to treat the property of customers of 
FCMs in the event of an FCM insolvency, thereby promoting ex ante 
transparency for such customers.
b. Efficiency, Competitiveness, and Financial Integrity
    Subpart B of the proposed rules would 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 
instructions for a bankruptcy trustee to follow in the event of an FCM 
insolvency, and by updating these instructions to account for current 
market practices. Moreover, subpart B would provide the bankruptcy 
trustee with discretion, in certain circumstances, to react flexibly to 
the particulars of the insolvency proceeding, thereby promoting 
efficiency of the administration of the proceeding. These effects 
would, 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. To the extent that the proposed 
regulations would mitigate the need for liquidations in conditions of 
distress, they would avoid negative impacts on price discovery.
d. Sound Risk Management Practices
    Subpart B of the proposed rules would promote sound risk management 
practices by encouraging the bankruptcy trustee effectively to manage 
the risk of the debtor FCM. Subpart B would accomplish this by revising 
the bankruptcy rules for an FCM insolvency that reflect current market 
practices and effectively protect customer property in the event of 
such an insolvency.
e. Other Public Interest Considerations
    Subpart B of the proposed rules 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. An effective bankruptcy process that 
efficiently facilitates the proceedings is likely to benefit the 
financial system (and thus the public interest), as that process would 
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.

F. Subpart C--Clearing Organization as Debtor

    Proposed 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. 
While the Commission, in promulgating part 190 in the 1980s, determined 
to ``take a case-by-case approach with respect to [the bankruptcy of] 
clearing organizations,'' \236\ the Commission is now proposing to 
provide a more detailed set of instructions.
---------------------------------------------------------------------------

    \236\ 46 FR at 57545.
---------------------------------------------------------------------------

    The overarching benefits of this approach include the following: 
(1) Uncertainty would be reduced both 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 in the unlikely event of the actual 
bankruptcy (or resolution) of a clearing organization (thus enhancing 
the cost effectiveness of either process). (2) 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, proposed subpart C would (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 could, to a certain extent, be 
costs imposed by proposed subpart C, in that there could be a 
corresponding reduction in flexibility with the addition of rules 
specifically tailored to address a DCO bankruptcy, but the Commission 
has attempted to draft these proposed rules with the intent of 
maintaining significant flexibility, where warranted.
1. Regulation Sec.  190.11: Scope and Purpose of Subpart C
a. Consideration of Costs and Benefits
    Proposed Sec.  190.11 simply would state that the new subpart C of 
part 190 would 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 proposed Sec.  
190.11 would be the overarching costs and benefits stated above.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.11. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
2. Regulation Sec.  190.12: Required Reports and Records
a. Consideration of Costs and Benefits
    Proposed Sec.  190.12(a)(1) would be analogous to proposed Sec.  
190.03(a), 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. For a discussion 
of the costs and benefits of this paragraph, please refer to the 
discussion of the cost and benefit implications of proposed Sec.  
190.03(a).
    Proposed Sec.  190.12(a)(2) would revise the time in which a debtor 
clearing organization must notify the

[[Page 36065]]

Commission of a bankruptcy filing. In particular: (1) In the event of a 
voluntary bankruptcy filing, the debtor would 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 would 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 the filing, or within at 
the most three hours thereafter. With respect to a voluntary bankruptcy 
filing, the Commission expects that the DCO would have made it aware of 
its financial distress in the lead-up to a bankruptcy filing in 
accordance with the mandatory reporting requirements in part 39; the 
revision in proposed Sec.  190.12(a) merely would codify the 
expectation that the clearing organization would 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, proposed Sec.  190.12(a) also would allow a debtor clearing 
organization to provide the relevant docket number of the bankruptcy 
proceeding to the Commission ``as soon as available,'' while not 
waiting on notifying the Commission of the filing itself, to account 
for the potential time lag between the filing of a proceeding and the 
assignment by the relevant court of a docket number. These revisions 
would 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.
    Proposed Sec.  190.12(b) and(c) would involve the provision of 
certain reports and records to the trustee and/or the Commission by the 
debtor clearing organization. In particular: Proposed Sec.  190.12(b) 
would set forth the reports and records that the clearing organization 
would 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 proposed Sec.  
190.12(c) would set 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 would impose 
administrative costs on the debtor clearing organization and/or the 
trustee, which would be obligated to spend time and resources 
transmitting copies of the required reports and records to the trustee 
and/or Commission. However, these provisions would 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.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.12. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
3. Regulation Sec.  190.13: Prohibitions on Avoidance of Transfers
a. Consideration of Costs and Benefits
    Proposed Sec.  190.13 would implement section 764(b) of the 
Bankruptcy Code with respect to DCOs, and prohibits the avoidance of 
certain transfers made either before or after entry of the order for 
relief. This provision is derived from current Sec.  190.06(g), with 
certain changes. While the prohibition of avoidance of pre- and post-
relief transfers in current Sec.  190.06(g) would apply so long as the 
transfer is not disapproved by Commission, the same prohibition on 
avoidance of pre- and post-relief transfers in proposed Sec.  190.13(a) 
and (b) would require the affirmative approval of the Commission 
(though such approval can be given either before or after the transfer 
is made). This change would impose administrative costs on the clearing 
organization or the trustee, who would 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,\237\ a clearing 
organization must maintain a ``balanced book,'' and thus must transfer 
all of its customer positions (or at least all positions in a given 
product set). Any such transfer would have significant effects on the 
markets cleared, and possibly on the broader financial system. There 
thus would seem to be important benefits from requiring the 
Commission's approval of such a significant transaction, and thus 
permitting the exercise of discretion by the administrative agency 
responsible for oversight of the derivatives markets.
---------------------------------------------------------------------------

    \237\ See section II.C.3 above.
---------------------------------------------------------------------------

b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.13. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
4. Regulation Sec.  190.14: Operation of the Estate of the Debtor 
Subsequent to the Filing Date
a. Consideration of Costs and Benefits
    Proposed Sec.  190.14(a) would provide 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 would 
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.
    Proposed Sec.  190.14(b) would provide that a debtor clearing 
organization will

[[Page 36066]]

cease making calls for variation or initial margin, except in the 
limited case where the debtor clearing organization continues operation 
for a limited time. Specifically, under proposed Sec.  190.14(b)(2), 
the trustee could request permission of the Commission to continue to 
operate the clearing organization for up to six calendar days after the 
order for the relief if the trustee believes that continued operation 
would (1) facilitate either prompt transfer of the clearing operations 
of the clearing organization to another DCO or resolution of the DCO 
under Title II of Dodd-Frank, and (2) be practicable, in the sense that 
the rules of the DCO do not compel termination of all outstanding 
contracts under the circumstances then prevailing and all or 
substantially all of the DCO's members would be able to, and would, 
make variation margin payments as owed during the period of continued 
operations. 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. Providing such a mechanism to 
enable the trustee to continue the operations of the debtor clearing 
organization for a set amount of time could, in certain circumstances, 
benefit clearing members and their customers as well as markets and the 
broader financial system by allowing time to accomplish an impending 
transfer of the debtor's clearing operations to another clearing 
organization, or to allow for the possibility of resolving the debtor 
clearing organization under Title II. Continuing operations of the 
debtor clearing organization could, however, impose administrative 
costs, as the trustee would have to essentially operate the clearing 
organization according to its rules and procedures, using the estate's 
already limited resources. Moreover, the attempt to continue operations 
could fail, despite the predictions of the trustee and of the 
Commission, and such failure could damage the interests of clearing 
members and their customers as well as markets and the broader 
financial system.
    The Commission notes that it considered alternatives to proposed 
Sec.  190.14(b)(2). Specifically, the Commission could have left out 
the possibility of the debtor clearing organization continuing 
operations for any period of time after entry of the order for relief. 
As another alternative, the Commission could have allowed for continued 
operations with fewer requirements than those in proposed Sec.  
190.14(b)(2). The Commission decided that the framework set out in 
proposed Sec.  190.14(b) for continuing operations of a debtor clearing 
organization would strike the proper balance between allowing for 
continuing operations where it is appropriate to do so while only 
allowing for continuing operations where such continued operations 
would be expected to be both useful and practical.
    Proposed Sec.  190.14(c)(1) would provide 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, 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 
provision would impose administrative costs in that the trustee would 
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 would 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 could benefit the broader 
financial markets by mitigating uncertainty.
    Proposed Sec.  190.14(c)(2), which is derived from current Sec.  
190.08(d)(3), would 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), 
proposed Sec.  190.14(c)(2) would not allow the customer to request 
that the trustee purchase like-kind securities and distribute those 
instead of cash, instead would leave it up 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 would take away their right 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.
    Proposed Sec.  190.14(d) would 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.'' Setting forth an explicit requirement on the bankruptcy 
trustee to calculate the funded balance of customer accounts in certain 
circumstances would impose administrative costs due to the time and 
effort involved in making such calculations. However, this calculation 
would be necessary to achieve the goal of making distributions that 
would be consistent with each customer's proportionate share.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.14. Are there 
additional costs or benefits that the Commission should consider? Is it 
plausible that there would be circumstances under which allowing the 
trustee to continue DCO operations for a limited period of time would 
be the best approach to resolving the DCO? Are there any alternatives 
that could provide preferable costs or benefits than the costs and 
benefits related to the proposed amendments discussed above? Commenters 
are encouraged to include both qualitative and quantitative assessments 
of any costs and benefits.
5. Regulation Sec.  190.15: Recovery and Wind-down Plans; Default Rules 
and Procedures
a. Consideration of Costs and Benefits
    Proposed Sec.  190.15, which is not derived from any provision in 
current part 190, would provide that (1) the trustee shall not avoid or 
prohibit any 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, 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,

[[Page 36067]]

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. With respect to the first alternative, 
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. This would be in contrast to the 
trustee's power under the proposed rule to act differently to a limited 
extent, in cases where aspects of the plan would be impracticable. As 
for the second alternative, given the differences between DCOs, a one-
size-fits-all approach likely would be less effective.
    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 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. However, 
adding concepts of reasonability and practicability would give the 
trustee the discretion to modify those rules, procedures, and plans 
where and to the extent necessary. 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 
would be the most cost effective.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.15. Are there 
additional costs or benefits that the Commission should consider? Are 
there any other alternatives that could provide preferable costs or 
benefits to the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
6. Regulation Sec.  190.16: Delivery
a. Consideration of Costs and Benefits
    Proposed Sec.  190.16 would address delivery in the context of a 
clearing organization bankruptcy. Current part 190 does not contain any 
regulations specific to delivery in the context of a clearing 
organization bankruptcy.
    Proposed Sec.  190.16(a) would provide that a bankruptcy trustee is 
be 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 
would have the benefits of mitigating disruption to the cash market for 
the commodity and mitigating adverse consequences to parties that could 
be relying on delivery taking place in connection with their business 
operations. While the exertion of such reasonable efforts would 
necessarily involve administrative costs (predominantly, time of the 
trustee or their agents), the Commission is of the view that this 
approach would have 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.
    Proposed Sec.  190.16(b) would clarify which property would be part 
of the physical delivery account class and which would be part of the 
cash delivery account class. It is analogous to proposed Sec.  
190.06(b) in the FCM context, and would carry forward the concepts in 
that section but would be modified for the context of a DCO bankruptcy. 
Clearly delineating between the physical delivery account class and the 
cash delivery account class would benefit customers because it would 
increase transparency in terms of which account class their property 
belongs in. Proposed Sec.  190.16(b) could, however, impose 
administrative costs, since accounting separately for physical delivery 
property and cash delivery property would take the trustee's time and 
resources. As noted above,\238\ the sub-division of the delivery 
account class into the physical and cash delivery account classes would 
recognize that cash is more vulnerable to loss, and more difficult to 
trace, as compared to physical delivery property. Therefore, such sub-
division would be likely to benefit those with physical delivery 
claims. Since cash is more vulnerable to loss and more difficult to 
trace, then under the proposal, clearing members and customers in the 
cash delivery sub-class would be more likely to get a pro rata 
distribution that would be less than that in the physical delivery 
property sub-class.\239\
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    \238\ See discussion of Sec.  190.06(b) in section II.B.4 above.
    \239\ 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 proposed Sec.  
190.01, section II.A.2 above.
---------------------------------------------------------------------------

b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.16. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
7. Regulation Sec.  190.17: Calculation of Net Equity
a. Consideration of Costs and Benefits
    Proposed Sec.  190.17(a) would clarify 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 would state 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 
proposed Sec.  190.17(a) would be mere clarifications and would not 
impose any costs or benefits on any parties.
    Proposed Sec.  190.17(b) would provide 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, as well as full application of any 
recoveries made by the estate of the debtor in accordance with the 
debtor's rules and procedures. These provisions would benefit the 
estate, as the trustee would (a) have a clear roadmap in calculating 
net equity in the bankruptcy of a clearing organization and would not 
be obligated to come up with an ad hoc methodology of doing so, and (b) 
face reduced likelihood and expected amount of litigation costs arising 
from challenges to the trustee's choice of methodology. They would also 
benefit clearing members (and, therefore, their customers) by providing 
transparency as to how their net equity will be calculated. And in 
certain cases, where the debtor recovers any funds,

[[Page 36068]]

application of the debtor's ``reverse waterfall'' rules would benefit 
clearing members (and, in certain cases, their customers) by increasing 
the net equity claims of the entitled clearing members. These 
provisions could, however, impose costs on clearing members whose net 
equity claims may have been greater absent the application of the 
clearing organization's loss allocation rules and procedures.
    Proposed Sec.  190.17(c) would adopt by reference the net equity 
calculations set forth in proposed Sec.  190.08, to the extent 
applicable.\240\
---------------------------------------------------------------------------

    \240\ For a discussion of the cost and benefit considerations 
for proposed Sec.  190.08, please see section IV.E.6 above.
---------------------------------------------------------------------------

    Proposed Sec.  190.17(d) would set forth a definition of the term 
``funded balance,'' which is taken directly from Bankruptcy Code 
provisions. Clarifying the meaning of the term ``funded balance'' in 
the context of a clearing organization bankruptcy would benefit 
clearing members, in that they would know ex ante what is and is not 
included in their funded balance and how such amount is calculated. In 
addition, proposed Sec.  190.17(d) would adopt by reference the 
methodology for calculating funded balance that would be set forth in 
proposed Sec.  190.08(c).\241\
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    \241\ For a discussion of the cost and benefit considerations 
for proposed Sec.  190.08(c), please see section IV.E.6 above.
---------------------------------------------------------------------------

b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.17. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
8. Regulation Sec.  190.18: Treatment of Property
a. Consideration of Costs and Benefits
    Proposed Sec.  190.18(a) is analogous to proposed Sec.  190.17(a), 
in that it would provide that property of the debtor clearing 
organization's estate would be allocated between member property and 
customer property other than member property in order to satisfy the 
proprietary and customer claims of clearing members. In the 
Commission's view, the provisions in proposed Sec.  190.18(a) would be 
mere clarifications and do not impose any costs or benefits on any 
parties.
    Proposed Sec.  190.18(b)(1)(i) and (ii) would set out the scope of 
customer property for a clearing organization, and would be largely 
based on proposed Sec.  190.09(a).\242\
---------------------------------------------------------------------------

    \242\ For a discussion of the cost and benefit considerations 
for proposed Sec.  190.09(a), please see section IV.E.7 above.
---------------------------------------------------------------------------

    Proposed Sec.  190.18(b)(1)(iii) would provide that customer 
property would include 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 
would support the goal of making customers whole. Specifically, it 
would benefit clearing members of the debtor, since it clarifies that 
any property described in this paragraph 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.
    Proposed Sec.  190.18(b)(2) would adopt by reference proposed 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.\243\
---------------------------------------------------------------------------

    \243\ For a discussion of the cost and benefit considerations 
for proposed Sec.  190.09(a)(2), please see section IV.E.7 above.
---------------------------------------------------------------------------

    Proposed Sec.  190.18(c) would set 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, would set forth the principle, consistent with 
the statutory preference for public customers over non-public customers 
embodied in Bankruptcy Code section 766(h), 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 benefit the public customers of the 
debtor's clearing members, since it would make clear that allocation to 
such customers would be preferred over allocation to the clearing 
members' house accounts. It could impose corresponding costs on the 
debtor's clearing members and affiliates to the extent that, under the 
current regime, there would be a possibility that more customer 
property would be allocated to their house accounts. Overall, this 
provision would provide 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.
    Proposed Sec.  190.18(d) would set forth the allocation of customer 
property among account classes. This provision would be similar in 
concept to proposed Sec.  190.09(c) (and current Sec.  190.08(c)). The 
Commission is proposing to take an additional step that applies 
specifically in the context of a clearing organization bankruptcy. 
Specifically, the Commission is proposing to include a provision that 
would set forth the allocation of customer property among account 
classes. This provision would benefit clearing members and their 
customers, who would have increased transparency, ex ante, into how 
customer property would be allocated. Prescribing such allocation 
would, however, impose administrative costs, because the trustee would 
lose some amount of flexibility in terms of how to allocate customer 
property between account classes.
    Proposed Sec.  190.18(e) would provide 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 
would be considered to be in a single account class. This provision 
would benefit the estate, because the trustee would not be put to the 
considerable task of separating in bankruptcy that which was treated as 
a single account during business-as-usual. The proposed section would 
also benefit debtor's clearing members, who would have increased 
transparency as to how their member property would be treated.
    Proposed Sec.  190.18(f), which would be the analog to proposed 
Sec.  190.03(a)(3), would give the trustee the authority to assert 
claims against any person to recover the shortfall of customer property 
enumerated in certain paragraphs elsewhere in proposed Sec.  190.18. 
This provision could impose administrative costs, since the trustee 
could expend time and resources to assert claims to make up for any 
shortfall in customer property. The provision would, however, benefit 
customers, since it would support the trustee's efforts to recover any 
such shortfalls and by giving the trustee authority to take action to 
do so.

[[Page 36069]]

Moreover, since this provision would make explicit what is implicit in 
current part 190, an additional benefit of this provision would be 
reduced litigation costs over a trustee's attempts to recover 
shortfalls in customer property.\244\
---------------------------------------------------------------------------

    \244\ As discussed above in section IV.E.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.
---------------------------------------------------------------------------

b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.18. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
9. Regulation Sec.  190.19: Support of Daily Settlement
a. Consideration of Costs and Benefits
    Proposed Sec.  190.19, which is new, would deal with the treatment 
of variation settlement in a clearing organization bankruptcy, and 
would set forth what to do when there is a shortfall in variation 
settlement owed to a debtor clearing organization's clearing members 
and customers. Specifically, proposed Sec.  190.19(a) would provide 
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. Proposed Sec.  190.19(b) 
would deal with a situation where there is a shortfall in variation 
settlement received by the clearing organization, and provides that 
such funds shall be supplemented in accordance with the clearing 
organization's default rules and procedures and any recovery and wind-
down plans maintained by the clearing organization.
    Proposed Sec.  190.19 would benefit clearing members and their 
customers because it would ensure that any variation settlement 
received by the clearing organization would 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). There could be corresponding costs to general 
creditors of the clearing organization since, under current part 190, 
it would be conceivable that 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, 
proposed Sec.  190.19 would also benefit clearing members and their 
customers by providing enhanced transparency. There could be 
administrative costs, however, to the extent the trustee would lose 
some amount of flexibility in terms of how to treat variation 
settlement received by the clearing organization, and in terms of the 
time and resources they could need to spend to determine how to make up 
a shortfall in such settlement funds.
b. Request for Comment
    The Commission requests comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.19. Are there 
additional costs or benefits that the Commission should consider? Are 
there any alternatives that could provide preferable costs or benefits 
than the costs and benefits related to the proposed amendments 
discussed above? Commenters are encouraged to include both qualitative 
and quantitative assessments of any costs and benefits.
10. Section 15(a) Factors--Subpart C
a. Protection of Market Participants and the Public
    Subpart C of the proposed rules would increase the protection of 
market participants and the public by clearly setting forth 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. 
Moreover, the addition in part 190 of bespoke bankruptcy rules for a 
DCO bankruptcy would 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.
b. Efficiency, Competitiveness, and Financial Integrity
    Subpart C of the proposed rules would 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 would provide the bankruptcy trustee with 
discretion, in certain circumstances, to react flexibly to the 
particulars of the insolvency proceeding, thereby promoting efficiency 
of the administration of the proceeding. These effects would, 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.
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. To the extent that the proposed 
regulations would mitigate the need for liquidations in conditions of 
distress, they would avoid the resultant negative impacts on price 
discovery.
d. Sound Risk Management Practices
    Subpart C of the proposed rules would promote sound risk management 
practices by encouraging the bankruptcy trustee to effectively manage 
the risk of the debtor DCO. Subpart C would accomplish this by adding 
bankruptcy rules to part 190 for a DCO insolvency that reflect current 
market practices and effectively would protect customer property in the 
event of such an insolvency. Moreover, subpart C would 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.
e. 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 proposed rules would 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

[[Page 36070]]

interest), as that process would help to attenuate the detrimental 
effects of the bankruptcy on the financial network.

G. Technical Corrections to Parts 1, 4, and 41

    The Commission is proposing technical corrections to parts 1, 4, 
and 41 to update cross-references. These corrections and clarifying and 
do not have any impact on the substantive obligations related to these 
sections. Thus, there are no costs associated with these minor 
technical updates.

H. 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.\245\
---------------------------------------------------------------------------

    \245\ Section 15(b) of the CEA, 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is the promotion of competition. The Commission 
requests comment on whether the proposed rulemaking implicates any 
other specific public interest to be protected by the antitrust laws. 
The Commission has considered the proposed rulemaking to determine 
whether it might have anticompetitive effects. The Commission has not 
identified any effect on competition of the proposed rulemaking, which 
would apply only in the rare instance of an FCM or DCO bankruptcy. 
Accordingly, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the CEA. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the CEA that would otherwise be served by 
adopting the proposed rules.

V. Related Matters

A. 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.\246\ The 
regulations proposed by the Commission would 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.\247\
---------------------------------------------------------------------------

    \246\ 5 U.S.C. 601 et seq.
    \247\ 47 FR 18618 (Apr. 30, 1982).
---------------------------------------------------------------------------

    The Commission has previously determined that clearing 
organizations and FCMs are not small entities for purposes of the 
RFA.\248\ 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. The proposed regulations take 
into account existing trading practices and the logistical 
considerations of implementing the regulations.
---------------------------------------------------------------------------

    \248\ See 66 FR 45604, 45609 (Aug. 29, 2001); 67 FR 53146, 53171 
(Aug. 14, 2002).
---------------------------------------------------------------------------

    Accordingly, the Commission Chairman, on behalf of the Commission, 
hereby certifies pursuant to 5 U.S.C. 605(b), that the proposed 
amendments would not have a significant economic impact on a 
substantial number of small entities. The Commission invites public 
comments on this determination.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') provides that Federal 
agencies, including the Commission, may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a valid control number from the Office of Management 
and Budget (``OMB'').\249\ This proposed rulemaking contains reporting 
requirements that are collections of information within the meaning of 
the PRA and for which the Commission has previously received a control 
number from OMB: OMB Control Number 3038-0021 (Regulations Governing 
Bankruptcies of Commodity Brokers).
---------------------------------------------------------------------------

    \249\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Information Collection 3038-0021 \250\ 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.\251\ The Commission 
promulgated part 190 pursuant to the authority of 7 U.S.C. 24. The 
Commission is proposing to amend Information Collection 3038-0021 to 
(1) accommodate new information collection requirements for FCMs and 
DCOs as a result of this proposal, and (2) revise the existing 
information collection requirements for FCMs and DCOs as a result of 
this proposal.
---------------------------------------------------------------------------

    \250\ 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) proposed 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 proposed 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 proposed 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), as provided for in 
proposed Sec. Sec.  190.10(b) and 190.10(e) (which are analogs to 
current Sec. Sec.  190.06(d) and 190.10(c)), as well as new a third-
party disclosure requirement provided for in proposed Sec.  
190.10(d) (regarding letters of credit).
    \251\ 11 U.S.C. 761 et seq.
---------------------------------------------------------------------------

    The Commission therefore is submitting this proposal to the OMB for 
its review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 
Responses to this collection of information would be mandatory. The 
Commission will protect proprietary information according to the FOIA 
and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public data and 
information that would separately disclose the business transactions or 
market positions of any person and trade secrets or names of 
customers.\252\ The Commission is also required to protect certain 
information contained in a government system of records according to 
the Privacy Act of 1974.\253\
---------------------------------------------------------------------------

    \252\ 7 U.S.C. 12(a)(1).
    \253\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

    The information collection requirements of proposed part 190 are 
necessary and will be used to facilitate the effective, efficient and 
fair conduct of liquidation proceedings for FCMs and DCOs and to 
protect the interests of customers in these proceedings both directly 
and by facilitating the participation of the Commission in such 
proceedings. The estimates below reflect estimated burden hours per 
information collection requirement; the Commission has not identified 
any start-up, operational or maintenance costs

[[Page 36071]]

associated with the information collection requirements set forth 
below. The Commission requests comment on all aspects of its PRA 
analysis.
1. Reporting Requirements in an FCM Bankruptcy
    Proposed Sec.  190.03(b)(1) would require 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 would further require 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.
    Proposed Sec.  190.03(b)(2) would require 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.\254\ The Commission has 
estimated the burden hours for the reporting requirements in an FCM 
bankruptcy as follows:
---------------------------------------------------------------------------

    \254\ 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: 1.\255\
---------------------------------------------------------------------------

    \255\ The Commission estimates that (1) under proposed 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 proposed 
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 proposed Sec.  
190.03(b)(1), and 0.33 notifications annually pursuant to proposed 
Sec.  190.03(b)(2), for a total of one notification annually per 
respondent.
---------------------------------------------------------------------------

    Estimated total annual number of responses for all respondents: 1.
    Estimated annual number of burden hours per respondent: 1.\256\
---------------------------------------------------------------------------

    \256\ The Commission estimates that (1) the notifications 
required under proposed Sec.  190.03(b)(1) would take 0.5 hours to 
make, and (2) the notification required under proposed Sec.  
190.03(b)(2) would take 2 hours to make. In terms of burden hours, 
this amounts to (0.5*0.67 under proposed Sec.  190.03(b)(1)) plus 
(2*0.33 under proposed 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
    Proposed Sec.  190.05(b) would require 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.
    Proposed Sec.  190.05(d) would require 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.\257\ The Commission has 
estimated the burden hours for the recordkeeping requirements in an FCM 
bankruptcy as follows:
---------------------------------------------------------------------------

    \257\ 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.\258\
---------------------------------------------------------------------------

    \258\ The Commission estimates that (1) under proposed Sec.  
190.05(b), a trustee would compute a funded balance for customer 
accounts 40,000 times; and (2) under proposed 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 proposed Sec.  190.05(b), and 
13,333.33 records annually pursuant to proposed 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.\259\
---------------------------------------------------------------------------

    \259\ The Commission estimates that the each record required 
under proposed Sec.  190.05(b) and (d) would take 0.01 hours to 
prepare. In terms of burden hours, this amounts to (0.01*13,333.33 
under proposed Sec.  190.05(b)) plus (0.01*13,333.33 under proposed 
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
    Proposed Sec.  190.03(c)(1) would require 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 proposed part 190.
    Proposed Sec.  190.03(c)(2) would allow 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.\260\
---------------------------------------------------------------------------

    \260\ 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 proposed 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.
---------------------------------------------------------------------------

    Proposed Sec.  190.03(c)(4) would require 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 proposed Sec.  190.03(e).
    Proposed Sec.  190.07(b)(5) would, in the event that specifically 
identifiable property has been or will be transferred, require the 
trustee 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.\261\ The Commission has 
estimated the burden hours for the third-party disclosure requirements 
applicable to a single respondent in an FCM bankruptcy as follows:
---------------------------------------------------------------------------

    \261\ 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.\262\
---------------------------------------------------------------------------

    \262\ The Commission estimates that a trustee would make the 
required disclosures under each of proposed 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 proposed Sec.  190.03(c)(1), (2), and (4). The Commission 
further estimates that a trustee would make the required disclosure 
under proposed Sec.  190.07(b)(5) 10 times per bankruptcy. Dividing 
this number by three results in 3.33 disclosures annually pursuant 
to proposed 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.\263\
---------------------------------------------------------------------------

    \263\ The Commission estimates that (1) each disclosure required 
under proposed Sec. Sec.  190.03(c)(1) and 190.03(c)(2) (b) would 
take 0.1 hours to prepare; (2) each disclosure required under 
proposed Sec.  190.03(c)(4) would take 0.2 hours to prepare; and (3) 
each disclosure required under proposed 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 proposed Sec.  190.03(c)(1)) plus (0.1*3,333.33 
under proposed Sec.  190.03(c)(2)) plus (0.2*3,333.33 under proposed 
Sec.  190.03(c)(4)) plus (1*3.33 under proposed Sec.  190.07(b)(5)), 
or a total of 1336.67 burden hours annually per respondent.

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

[[Page 36072]]

    Estimated total annual burden hours for all respondents: 1,336.67.
4. Reporting Requirements in a DCO Bankruptcy
    Proposed Sec.  190.12(a)(2) would require 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 would require 
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.
    Proposed Sec.  190.12(b)(1) would require 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).
    Proposed Sec.  190.12(b)(2) would require 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.
    Proposed Sec.  190.12(c)(1) and (2) would require the debtor 
clearing organization 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.\264\ The 
Commission has estimated the burden hours for the reporting 
requirements in a DCO bankruptcy as follows:
---------------------------------------------------------------------------

    \264\ 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.\265\
---------------------------------------------------------------------------

    \265\ The Commission estimates that (1) under proposed Sec.  
190.12(a)(2), a clearing organization would make two notifications 
per bankruptcy; (2) under proposed Sec.  190.12(b)(1), a clearing 
organization would provide 40 reports to the trustee; (3) under 
proposed Sec.  190.12(b)(2), a clearing organization would provide 5 
reports to the trustee and the Commission; (4) under proposed Sec.  
190.12(c)(1), a clearing organization would provide 100 records to 
the trustee and the Commission; and (5) under proposed 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 proposed Sec.  190.12(a)(2); (2) 0.8 reports annually pursuant to 
proposed Sec.  190.12(b)(1); (3) 0.1 reports annually pursuant to 
proposed Sec.  190.12(b)(2); (4) 2 reports annually pursuant to 
proposed Sec.  190.12(c)(1); and (5) 0.04 reports annually pursuant 
to proposed Sec.  190.12(c)(2). This amounts to 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.\266\
---------------------------------------------------------------------------

    \266\ The Commission estimates that (1) each notification 
required under proposed Sec.  190.12(a)(2) would take 0.5 hours to 
make; (2) gathering the reports required under proposed Sec.  
190.12(b)(1) would take 0.2 hours; (3) gathering the reports 
required under proposed Sec.  190.12(b)(2) would take 0.2 hours; (4) 
gathering the reports required under proposed Sec.  190.12(c)(1) 
would take 0.2 hours; and (5) gathering the reports required under 
proposed Sec.  190.12(c)(2) would take 0.2 hours. In terms of burden 
hours, this amounts to (0.5*0.04 under proposed Sec.  190.12(a)(2)) 
plus (0.2*0.8 under proposed Sec.  190.12(b)(1)) plus (0.2*0.1 under 
proposed Sec.  190.12(b)(2)) plus (0.2*2 under proposed Sec.  
190.12(c)(1)) plus (0.2*0.04 under proposed 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
    Proposed Sec.  190.14(d) would require 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.\267\ The 
Commission has estimated the burden hours for the recordkeeping 
requirements in a DCO bankruptcy as follows:
---------------------------------------------------------------------------

    \267\ 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.\268\
---------------------------------------------------------------------------

    \268\ The Commission estimates that, under proposed 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.\269\
---------------------------------------------------------------------------

    \269\ The Commission estimates that computing the funded balance 
of customer accounts pursuant to proposed 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
    Proposed Sec.  190.14(a) would allow 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.\270\ The 
Commission has estimated the burden hours for the third-party 
disclosure requirements applicable to a single respondent in a DCO 
bankruptcy as follows:
---------------------------------------------------------------------------

    \270\ 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.\271\
---------------------------------------------------------------------------

    \271\ The Commission estimates that, under proposed 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.

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

[[Page 36073]]

    Estimated total annual number of responses for all respondents: 
0.9.
    Estimated annual number of burden hours per respondent: 0.18.\272\
---------------------------------------------------------------------------

    \272\ The Commission estimates that instructing customers to 
file a proof of claim pursuant to proposed 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
    Proposed Sec.  190.10(b) would require 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.
    Proposed Sec.  190.10(d) would prohibit an FCM from accepting a 
letter of credit as collateral unless such letter of credit may be 
exercised under certain conditions specified in the proposed 
regulation.
    Proposed Sec.  190.10(e) would require an FCM to provide any 
customer with the disclosure statement set forth in proposed Sec.  
190.10(e) 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.\273\
---------------------------------------------------------------------------

    \273\ The Commission estimates that under proposed Sec.  
190.10(b), (d), and (e), an FCM would make the required disclosures 
1,000 times per year. This amounts to a total of 3,000 responses 
annually per respondent.
---------------------------------------------------------------------------

    Estimated total annual number of responses for all respondents: 
375,000.
    Estimated annual number of burden hours per respondent: 60.\274\
---------------------------------------------------------------------------

    \274\ The Commission estimates that each disclosure required 
under Sec.  190.10(b), (d), and (e) would take 0.02 hours to make. 
In terms of burden hours, this amounts to (0.02*1,000 under proposed 
Sec.  190.10(b)) plus (0.02*1,000 under proposed Sec.  190.10(d)) 
plus (0.02*1,000 under proposed Sec.  190.10(e)), or a60 burden 
hours annually per respondent.
---------------------------------------------------------------------------

    Estimated total annual burden hours for all respondents: 7,500.
8. Request for Comment
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. The Commission will consider public 
comments on this proposed collection of information regarding:
     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 estimated burden of the 
proposed collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
     enhancing the quality, utility, and clarity of the 
information proposed to be collected; and
     reducing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC 
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer for the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).

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 proposes to amend 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. In Sec.  1.55, revise paragraphs (d) and (f) to 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.  1.33(g) and Sec.  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 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

[[Page 36074]]

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) and 1.65(a)(3), and Sec. Sec.  30.6(a), 
33.7(a), 155.3(b)(2), 155.4(b)(2), and 190.10(e) of this chapter.
* * * * *
0
4. 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. Sec.  33.7 (domestic exchange-traded commodity options) and 
190.10(e) (non-cash margin--to be furnished by futures commission 
merchants only) of this chapter and receive the required 
acknowledgments within sixty days of the transfer of accounts. The 
requirement in 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.  
1.55(a)(1)(ii) and Sec.  33.7(a)(1)(ii) of this chapter and can 
establish compliance with Sec.  190.10(e) of this chapter.
* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
5. 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
6. 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.  190.01 of this chapter may be 
excluded in computing such five percent; or
* * * * *
0
7. 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 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
8. 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
9. 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
10. 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). These rules 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
11. Revise part 190 to read as follows:

[[Page 36075]]

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
Sec.
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 allowed net equity.
190.09 Allocation of property and allowance of claims.
190.10 Provisions applicable to futures commission merchants during 
business as usual.
Subpart C--Clearing Organization as Debtor
Sec.
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 Commodity Exchange Act (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. 
Subpart A contains general provisions applicable in all cases. Subpart 
B 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 following descriptions of core concepts in this 
paragraph (c) 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 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

[[Page 36076]]

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.
    (ii) Clearing organization bankruptcies: Member property and 
customer property other than member property. 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). Thus, 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.
    (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 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 of appendix B to this 
part for cross-margin accounts and Framework 2 of appendix B to 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). 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).
    (ii) 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.
    (iii) 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.
    (iv) 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

[[Page 36077]]

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 [date final rule is signed by the 
Secretary of the Commission].\1\
---------------------------------------------------------------------------

    \1\ 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 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 that is 
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 refers to such section as the same may be 
amended, superseded, or renumbered.
    (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, for purposes of this part:

[[Page 36078]]

    (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 has the same definition as set forth in Sec.  
1.3 of this chapter.
    (ii) Foreign futures account means:
    (A) A 30.7 account, as such term is defined in Sec.  30.1(g) of 
this chapter; and
    (B) An account maintained on the books and records of a 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).
    (iii) Cleared swaps account means a cleared swaps customer account, 
as such term is defined in Sec.  22.1 of this chapter.
    (iv)(A) Delivery account means:
    (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
    (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.
    Allowed net equity means, for purposes of subpart B of this part, 
the amount calculated as allowed net equity in accordance with Sec.  
190.08(a), and for purposes of subpart C of this part, the amount 
calculated as allowed net equity in accordance with Sec.  190.17(c).
    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 three 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.
    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;

[[Page 36079]]

    (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. Notwithstanding the preceding sentence, 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 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).
    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

[[Page 36080]]

    (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:
    (1) In the case of a futures commission merchant, any proprietary 
account, as defined in Sec.  1.3 of this chapter, with respect to 
futures contracts or swaps;
    (2) In the case of a foreign futures commission merchant, any 
proprietary account, as defined in Sec.  1.3 of this chapter, with 
respect to foreign futures contracts; and
    (3) 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 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 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, shipping certificates or 
other documents of title (including electronic title documents) for the 
commodity, or the commodity itself:
    (1) 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;
    (2) 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; and
    (3) 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.
    (4) 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.
    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 Sec.  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;

[[Page 36081]]

    (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 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; and
    (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 any other provision of this definition of 
specifically identifiable property, 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 Division of Swap Dealer and Intermediary Oversight 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

[[Page 36082]]

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 Division of Swap Dealer and 
Intermediary Oversight, or such member 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 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 (FCM) 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 sections 4d or 4(b)(2) of the Act, or of the 
FCM'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 FCM pursuant to section 301 of 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. If the trustee does not exercise such authority, such open 
commodity contracts do not constitute specifically

[[Page 36083]]

identifiable property. If the trustee exercises such authority, 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 and 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. Such notice must also inform the customer that--
    (i) 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;
    (ii) Any transfer of the open commodity contracts is subject to the 
terms for distribution contained in Sec.  190.09(d)(2);
    (iii) Absent compliance with any terms imposed by the trustee or 
the court, the trustee may liquidate the open commodity contracts; and
    (iv) Providing 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 36084]]

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 undermargined (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 to 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 36085]]

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.
    (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 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

[[Page 36086]]

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 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

[[Page 36087]]

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; and
    (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 
undermargined or does not have a deficit balance in any other commodity 
contract accounts.
    (5) Delivery made or taken on behalf of house account. If delivery 
of physical delivery property is to be made or taken on behalf of a 
house account 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, 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

[[Page 36088]]

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 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) 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.
    (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) House accounts 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
    (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 section 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

[[Page 36089]]

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; or
    (iii) The transfer prior to the order for relief by a clearing 
organization, or by a receiver that has been appointed for the 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 section 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 allowed net equity.

    For purposes of this subpart, allowed net equity shall be computed 
as follows:
    (a) Allowed claim. 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.
    (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.
    (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.

[[Page 36090]]

    (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 of a futures commission merchant 
maintained with a debtor shall be deemed to be held in a separate 
capacity from the house account and any other omnibus customer account 
of such futures commission merchant.
    (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 (x), which is the 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, must be 
deducted from (y), which is any obligation to the customer owed by the 
debtor which is not required to be included in computing the equity of 
that customer. 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 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 (x), which is the amount of the net 
equity claim of such customer, less (y), which is the amounts referred 
to in paragraph (c)(1)(ii) of this section of such customer for any 
account class divided, by (p), which is the sum of the net equity 
claims of all customers for accounts of that class, less (q), which is 
the amounts referred to in paragraph (c)(1)(ii) of this

[[Page 36091]]

section of all customers for accounts of that class, (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 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.
    (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 temporary or 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:
    (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

[[Page 36092]]

    (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) through (D) of SIPA, 
15 U.S.C. 78fff-2(c)(1)(A) through (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 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
    (ii) Then 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
    (iii) Then 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

[[Page 36093]]

    (iv) Thereafter 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, 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 
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   Provisions applicable to futures commission merchants 
during business as usual.

    (a) Current records. 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.
    (b) Designation of hedging accounts. (1) 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.
    (2) 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.
    (3) The requirements set forth in paragraphs (b)(1) and (2) 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 [EFFECTIVE DATE OF FINAL RULE]. 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 Sec.  
190.06(d) as contained in 17 CFR part 190 revised as of April 1, 2020.
    (4) A futures commission merchant may designate an existing futures 
account, foreign futures account, or cleared swaps account of a 
particular

[[Page 36094]]

customer as a hedging account, provided that it has obtained the 
representation set out in paragraph (b)(2) of this section from such 
customer.
    (c) 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.
    (d) Letters of credit. 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:
    (1) 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).
    (2) 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). 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 the foregoing.
    (e) Disclosure statement for non-cash margin. (1) Except as 
provided in Sec.  1.65 of this chapter, 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 Sec.  
1.55(f) of this chapter, to margin, guarantee, or secure a commodity 
contract unless the commodity broker first furnishes the customer with 
the disclosure statement set forth in paragraph (e)(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 Sec.  1.55(c) of 
this chapter and set forth in appendix A to Sec.  1.55 which the 
Commission finds satisfies this requirement.
    (2) The disclosure statement required by paragraph (e)(1) of this 
section

    THIS STATEMENT IS FURNISHED TO YOU BECAUSE Sec.  190.10(e) 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 (e)(2) of this section 
need be furnished only once to each customer to whom it is required to 
be furnished by this section.

Subpart C--Clearing Organization as Debtor


Sec.  190.11   Scope and purpose of this subpart.

    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.


Sec.  190.12   Required reports and records.

    (a) Notices--(1) Notices--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. Sec.  
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

[[Page 36095]]

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 
section 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) Continued operation of the derivatives clearing organization. 
(1) Subsequent to the order for relief, the derivatives clearing 
organization shall cease making calls for variation or initial margin, 
except as otherwise explicitly provided in this paragraph (b).
    (2) If the trustee believes that continued operation of the 
derivatives clearing organization on a temporary basis would:
    (i) Facilitate either--
    (A) Prompt transfer of the clearing operations of the derivatives 
clearing organization to another derivatives clearing organization; or
    (B) Resolution of the derivatives clearing organization pursuant to 
title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act; and
    (ii) Be practicable, in the sense that--
    (A) The rules of the derivatives clearing organization do not 
compel the termination of all or substantially all of the outstanding 
contracts under the circumstances then prevailing (e.g., upon the order 
for relief); and
    (B) All or substantially all of the members of the derivatives 
clearing organization (other than those who are themselves subject to a 
bankruptcy proceeding) would be able to, and would in fact, make 
variation payments as owed during the temporary timeframe, then the 
trustee may request permission of the Commission to continue to operate 
the derivatives clearing organization for up to six calendar days after 
the order for relief to the extent practicable and in accordance with 
the rules and procedures of the debtor, with respect to open commodity 
contracts of the debtor.
    (3) Upon receiving a request pursuant to paragraph (b)(2) of this 
section, the Commission shall proceed promptly to consider the request 
and, if it is persuaded that the trustee's conclusions with respect to 
paragraphs (b)(2)(i) and (ii) of this section are well grounded, may 
grant the trustee's request. Such grant may be for fewer calendar days 
than the trustee has requested, but then may be renewed at the 
Commission's discretion so long as the calendar days of continued 
operation total no more than six.
    (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, 
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. 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.
    (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. Sec.  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 Sec.  39.39 of this chapter, to the extent 
reasonable and practicable.


Sec.  190.16   Delivery.

    (a) General. In the event that a commodity contract, cleared by the 
derivatives clearing organization (DCO), 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, 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--

[[Page 36096]]

    (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) 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. Sec.  39.16 and, if applicable, 39.35 of this 
chapter. This includes, 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.
    (2) 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) To 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), 
appropriate adjustments shall be made to the net equity claims of the 
clearing members that are so entitled.
    (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 such members' house 
accounts.
    (1) Customer property includes the following:
    (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 any commodity contract 
account of a clearing member carried by the debtor, 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) 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) Which 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) 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); and

[[Page 36097]]

    (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.
    (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) 
Property referred to in paragraph (b)(1)(iii) of this section should be 
allocated:
    (i) 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.
    (ii) Any remaining excess after the application of paragraph 
(c)(1)(i) of this section should be allocated to member property.
    (2) 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.
    (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 other account class.
    (3) 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.
    (ii) Any remaining excess after the application of paragraph 
(c)(3)(i) 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
    (ii) Then 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 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. Deposits of initial 
margin described in Sec.  39.14(a)(1)(iii) of this chapter shall be 
considered Member property and 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 in accordance with the 
derivatives clearing organization's default rules and procedures 
adopted pursuant to Sec. Sec.  39.16 and, as applicable, 39.35 of this 
chapter, and 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, including the property in paragraphs (b)(1)(i) and (iv) 
of this section, as applicable, to the extent necessary to meet the 
shortfall. 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

[[Page 36098]]

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.

Appendix A to Part 190--Customer Proof of Claim Form

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BILLING CODE 6351-01-C

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 distributional rule 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 
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 thereunder) (``non-XM accounts''), are 
treated as two subclasses

[[Page 36109]]

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 Part 190 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 or 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) 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. 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. If there is a 
shortfall in both the non-XM and XM pools:
    (1) 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
    (2) 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. In this way, non-XM 
customers will never be adversely affected by an XM shortfall.
    (g) The following examples illustrate the operation of this 
rule. 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 sovereign action of a foreign 
government or court has occurred that results in losses to the 
futures customer funds or Cleared Swaps Customer Collateral. 
Applying the allocation convention will result in reduction of 
certain customer claims for such futures customer funds or Cleared 
Swaps Collateral. 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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BILLING CODE 6351-01-C

    Issued in Washington, DC, on April 16, 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

    In his 1926 novel The Sun Also Rises, Ernest Hemingway offers 
what is perhaps the best chronicle of the anatomy of a typical 
bankruptcy. In the novel, the character Mike

[[Page 36130]]

Campbell is asked how he went bankrupt. He answers: ``two ways . . . 
gradually and then suddenly.''
    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, and we must be 
prepared with a bankruptcy regime that fosters a swift and equitable 
resolution.

Background on the CFTC's Bankruptcy Regime

    Part 190 of the CFTC's rules, addressing commodity broker \1\ 
bankruptcies, was enacted 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 revised to keep up. This regime is intended to 
protect customer funds, but having antiquated rules does not help 
achieve that goal.
---------------------------------------------------------------------------

    \1\ 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 therefore embarked on a process of updating Part 
190 over the last several years, while a healthy economy made 
bankruptcies relatively unlikely. Today's proposal is a product of 
that hard work and engagement with external stakeholders and subject 
matter experts, including the American Bar Association.
    To be clear, U.S. derivatives markets have weathered the recent 
volatility associated with the coronavirus pandemic admirably. The 
decision to issue this proposal was made long before COVID-19 
emerged as a concern, and I hope and anticipate that it will not be 
necessary to use this updated bankruptcy regime to address fallout 
from current market conditions. But as I just noted, we cannot know 
for certain what the future holds--for bankruptcy often comes 
``gradually and then suddenly.'' We must therefore be prepared for 
all contingencies.
    Accordingly, I am pleased to support today's proposal to update 
Part 190 for the 21st century. The proposal promotes the CFTC's core 
values in a number of ways, particularly the values of clarity and 
forward thinking. The proposal also furthers the agency's strategic 
goal of regulating our derivatives markets to promote the interests 
of all Americans.\2\
---------------------------------------------------------------------------

    \2\ 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).
---------------------------------------------------------------------------

Clarity for Customers and Creditors

    The proposed 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 would enumerate 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 non-public customers; the requirement of pro rata 
distribution; and the preference to transfer rather than liquidate 
open positions.
    The proposal would further codify 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 proposed rule would authorize 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 likely to occur than the 
alternative, the proposal would provide greater clarity on potential 
outcomes for trustees, brokers, and customers.
    Thus, for example, the proposed rule would expressly permit 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.\3\
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    \3\ The proposal would also grant the trustee needed discretion 
in other respects--for example, by allowing the trustee to modify 
the customer proof of claim form as appropriate for a particular 
bankruptcy.
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    The proposal 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. While a DCO bankruptcy is 
extremely unlikely, it is important to provide ex ante clarity to 
DCO members and customers as to how a resolution would be handled. 
The proposed rule would favor following the DCO's existing default 
management and recovery and wind-down rules and procedures. This 
would allow the bankruptcy trustee to take advantage of an 
established ``playbook,'' rather than being forced to form a 
resolution plan in a matter of hours during the onset of a crisis. 
The proposed rule would also give 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 proposed rule would update 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 many-fold 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 news cycle. In addition, the proposal would 
acknowledge digital assets as a physically deliverable asset class, 
in light of the listing of a number of physically delivered 
``virtual currency'' derivatives contracts.
    The proposed changes also reflect advances in communications 
technology. For example, under the proposed rule, notice of a 
bankruptcy filing and related filed documents would be provided to 
the CFTC by electronic rather than paper means. Furthermore, 
required customer notice procedures would no longer include 
publication in a ``newspaper of general circulation'' in light of 
the downward trend in newspaper readership. The proposal would 
similarly recognize 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 proposed 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 proposal 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 proposal 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 proposal makes clear that the CFTC's bankruptcy 
regime is complementary to relatively recently-enacted customer 
protection rules for day-to-day broker operations.\4\
---------------------------------------------------------------------------

    \4\ 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).
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    The proposal would also further the preference--consistent with 
Subchapter IV of

[[Page 36131]]

the Bankruptcy Code \5\--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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    \5\ 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 proposal 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 proposed rule further enhances these features of 
our regime. Through its focus on promoting customer protection, 
clarity, and forward thinking, I believe the proposed rule would, if 
finalized, 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 proposal to amend the 
Commission's regulations governing the bankruptcy proceedings of 
commodity brokers.\1\ This proposal makes the first comprehensive 
change to these regulations since they were first issued in 1983. It 
marks another important step in Chairman Tarbert's agenda to update 
and make more efficient several critical areas of the Commission's 
regulations. I note that today's proposal was not hastily prepared 
in response to the market events surrounding the COVID-19 pandemic. 
Commission staff has been considering these amendments since 2017, 
when a subcommittee of the American Bar Association (ABA) requested 
that the Commission update the part 190 bankruptcy regulations.\2\ 
The ABA provided its proposal in response to the CFTC's Project KISS 
initiative, which generally requested input from the public on how 
the Commission's regulations could be simplified to reduce 
compliance burdens.\3\ I commend former Chairman Giancarlo for 
launching Project KISS because it is important for agencies 
periodically to review their regulations, some of which may not have 
been amended for many years, to ensure they are as targeted, 
rational, and transparent as possible, in light of new developments 
in the markets they affect. I am pleased that the Commission's 
rulemaking work continues despite the new challenges the agency is 
facing in light of the pandemic.
---------------------------------------------------------------------------

    \1\ Part 190 of the Commission's regulations (17 CFR 190).
    \2\ Proposal by the Part 190 Subcommittee of the Business Law 
Section of the Amer. Bar Assoc., dated Sept. 29, 2017, available at: 
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61330&SearchText and https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61331&SearchText.
    \3\ CFTC Requests Public Input on Simplifying Rules, https://www.cftc.gov/PressRoom/PressReleases/pr7555-17.
---------------------------------------------------------------------------

    I would like to highlight a few aspects of today's proposal. 
First of all, the proposal 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.\4\ The Commission is proposing new rules for an 
insolvent DCO, which are similar to the rules applicable to an FCM. 
These rules take into account Title II of the Dodd-Frank Act, and I 
am pleased that the FDIC was consulted. Next, taking advantage of 
the Commission's experience with a few insolvent FCMs over the past 
decades, the proposal would provide increased 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 
light of the Commission's experience from the bankruptcy of MF 
Global in 2011, proposed amendments would 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 would apply equally to all 
collateral. The proposal 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 proposal's revised treatment of the ``delivery 
account,'' applicable in the context of physically-settled futures 
and cleared swaps, would 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.
---------------------------------------------------------------------------

    \4\ 11 U.S.C. 761 et seq.
---------------------------------------------------------------------------

    I look forward to reviewing the comments to this proposal, not 
only from FCMs and DCOs, but also from their diverse customer base, 
including asset managers, the agricultural community, energy firms, 
and other derivatives end-users.

Appendix 4--Concurring Statement of Commissioner Rostin Behnam

    I respectfully support the Commodity Futures Trading 
Commission's (the ``Commission'' or ``CFTC'') issuance of a proposed 
rule (the ``Proposal'') to amend Part 190 of its regulations, which 
govern bankruptcy proceedings of commodity brokers. First and 
foremost, I want to thank Commission staff for all of their hard 
work on this Proposal. If finalized, it will be 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 Proposal is not a response to current market conditions, nor 
is it a proposal that has only recently been considered; it 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 submitted 
detailed 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 Commission, market participants, 
customers, and the public will benefit greatly from this Proposal, 
and I am proud to have contributed to this effort.
---------------------------------------------------------------------------

    \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. The Commission finalized the 
existing part 190 the same year that the movie Trading Places 
debuted--when futures trading, so distinctly depicted in the film, 
occurred exclusively in oval trading pits, and markets were less 
global, less complex, and less sophisticated. To paraphrase former 
CFTC Chairman Giancarlo, Part 190 is an analog regulation applying 
to what has since become a digital world.\3\
---------------------------------------------------------------------------

    \3\ See Address of CFTC Commissioner J. Christopher Giancarlo to 
the American Enterprise Institute: 21st Century Markets Need 21st 
Century Regulation (Sep. 21, 2016),  https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-17.
---------------------------------------------------------------------------

    More personally, I was a lead advisor during the U.S. Senate's 
investigation of the 2011 MF Global bankruptcy, the eighth largest 
corporate bankruptcy in American history.\4\ 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 
together. It was during those frenzied days that I truly appreciated 
the regulatory principle that customer margin is sacrosanct 
property. As a Commissioner since 2017, I have made customer 
protections an absolute priority in part because of my experience 
during those few months. Having spoken with many market participants 
throughout the bankruptcy proceedings, including those whose money 
disappeared in the days immediately following, customer protection 
is my most pressing responsibility.
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

    The strengths and weaknesses of the Commission's bankruptcy 
regime were further laid bare just a few months later in early 2012 
following the bankruptcy of Peregrine Financial Group (``PFG'')--a 
second blow in short order. Important lessons have been learned, 
both in terms of

[[Page 36132]]

what works and what does not, and I believe today's Proposal is a 
positive step to addressing both.
    There are a number of changes in today's proposal that are 
intended to further support provisions of Part 190 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''), Futures Commission 
Merchants (``FCMs''), their customers, trustees, and the public at 
large. Changes in this proposal would foster the longstanding and 
continuing policy preference for transferring (as opposed to 
liquidating) the positions of public customers--an important 
customer protection. Other changes further support existing 
requirements including that short falls in segregated property 
should be shored up from the FCM's general assets, and that public 
customers are favored over non-public customers. The proposal also 
grants trustees enhanced discretion based upon prior positive 
experience, and codifies 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 proposing 
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 Proposal also addresses a number of changes that have 
naturally occurred in our markets since the original Part 190 
finalization in 1983. The Commission is proposing 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 Proposal also 
addresses changes in technology over the past 37 years, and the 
movement from paper-based to electronic-based means of 
communication--a stark reminder from the PFG bankruptcy.
---------------------------------------------------------------------------

    \5\ https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm.
---------------------------------------------------------------------------

    I am hopeful that the 90 day comment period will allow 
sufficient time for the public to digest this extensive Proposal and 
provide fulsome comments. There can be no higher demand of market 
participants and the general public than to assist and guide the 
Commission in its duty, especially for one as important as this 
Proposal; it is absolutely critical.
    If needed, I encourage market participants to request an 
extension of the comment period. As we all continue to endure the 
challenges of new realities at home and in the workplace as a result 
of the Covid-19 pandemic, I firmly believe the Commission needs to 
be as flexible as necessary to accommodate market participants and 
the general public in their efforts to provide us with the best 
comments to rulemakings. I have made my position clear on what and 
how the Commission should be allocating its resources during these 
unprecedented times.\6\
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    \6\ Statement of Commissioner Rostin Behnam Regarding COVID-19 
and CFTC Digital Assets Rulemaking (March 24, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement032420; 
Statement of Commissioner Rostin Behnam Regarding CFTC's Extension 
of Currently Open Comment Periods in Response to the COVID-19 
Epidemic (April 10, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement041020.
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    As we propose bankruptcy rules that would provide important 
customer protections, I note with approval that today we are also 
finalizing another rule related to customer protection. Rule 160.30 
re-establishes longstanding detailed requirements for Commission 
registrants to adopt policies and procedures to address 
administrative, technical and physical safeguards for the protection 
of customer records and information.
    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, and look forward to 
considering comments from the public as the Commission considers 
this critically important rule.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

Introduction

    I support the proposed comprehensive amendments to the 
Commission's bankruptcy regulations. These regulations specifically 
address the disposition of assets, particularly customer property, 
of a bankrupt futures commission merchant (FCM) or derivatives 
clearing organization (DCO). The amendments provide a needed update 
to regulations that the Commission originally adopted in 1983 to 
account for significant changes in the size, complexity, and 
structure of our derivatives markets and market participants over 
the past 37 years. They also incorporate ``lessons learned'' from 
FCM bankruptcies during that period. FCM bankruptcies are rare, and 
a registered DCO has never gone bankrupt in the history of the CFTC. 
It is nonetheless important to make the bankruptcy process as 
effective and efficient as possible to protect, preserve, and return 
customer assets quickly.
    The overarching purposes of the provisions in the U.S. 
Bankruptcy Code relating to the liquidation of commodity brokers are 
to protect the customers of such brokers and to mitigate systemic 
risks that could arise from a commodity broker bankruptcy.\1\ The 
Bankruptcy Code provides certain special protections for positions 
and property of customers of an FCM debtor so that the customers and 
current or future counterparties (and the clearing house) can be 
assured that those positions and property will not be treated as 
part of the FCM debtor's property and can be transferred to another 
FCM. In this way, a single FCM's bankruptcy will not cascade through 
derivatives markets by impacting customer positions and the 
counterparties to those positions.\2\
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    \1\ See 11 U.S.C., Chapter 7, Subchapter IV--Commodity Broker 
Liquidation. ``Commodity Broker'' is defined to mean a futures 
commission merchant, foreign futures commission merchant, clearing 
organization, leverage transaction merchant, or commodity options 
dealer, for which there is a ``customer,'' as defined in the 
bankruptcy code. See 11 U.S.C. 101(6).
    \2\ 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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    In section 20(a) of the Commodity Exchange Act (``CEA'') 
Congress gave the Commission broad authority to establish 
regulations regarding commodity broker debtors, including 
identifying which property shall be considered customer property (or 
commodity broker member property), the method for conducting the 
business of a commodity broker after the filing of a bankruptcy 
petition, and how net equity of customers is determined.\3\ Pursuant 
to CEA section 20, the Commission first adopted regulations to 
address these issues in 1983.
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    \3\ See CEA section 20(a), 7 U.S.C. 24(a).
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Need for Comprehensive Amendments

    Since 1983, trading volumes and speeds have increased 
significantly. There are fewer FCMs, and much of the FCM business is 
concentrated in a few large firms, particularly with respect to 
swaps. Swap trading and clearing were added to the CFTC's 
jurisdiction following the 2008 financial crisis, and FCMs and 
clearing organizations trade and clear large volumes of swaps that 
were not considered when the Commission first adopted its bankruptcy 
regulations. The volume of cleared derivatives trades has also 
grown, and the amount of customer property held by FCMs and clearing 
organizations has correspondingly increased to tens of billions of 
dollars. This increase in the amount of customer property holdings 
and concentration of activity in fewer commodity brokers increases 
the complexity and risks posed by a commodity broker bankruptcy.
    These changes in the derivatives industry since the Commission 
originally adopted its bankruptcy regulations warrant updating those 
regulations. In addition, the several FCM bankruptcies that have 
occurred during this period have provided valuable lessons regarding 
how the current regulations have operated in practice. It is 
appropriate to incorporate into the Commission's regulations these 
lessons to improve the timely and equitable distribution of customer 
assets. The preamble to the Proposal provides a good summary of the 
foundational principles underlying the Proposal and describes the 
large number of rule

[[Page 36133]]

amendments to implement those principles. I will mention here a few 
aspects of the Proposal that I encourage commenters to address.
    The Proposal is consistent with the bankruptcy code generally, 
while also recognizing the particular nature and uses of derivatives 
and their unique status under the code. The Proposal incorporates 
pro rata distribution among ``public customers'' \4\ as a class, 
with public customers having a priority interest in property held by 
a debtor FCM. This approach is appropriate because public customers 
are not participants in the business decisions of the FCM debtor, 
and pro rata distribution among public customers would put smaller 
customers on an equal footing with larger customers. The Proposal 
also grants greater discretion to the trustee that manages the 
bankruptcy process, in recognition of the complexity of modern 
commodity brokers, the speed of trading and price discovery, and the 
stated goal of prompt distribution of customer property.
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    \4\ Generally, public customers are customers whose accounts 
must be segregated from the proprietary accounts of an FCM or of the 
members of a clearing organization. See Definition of ``public 
customer'' in regulation 190.01.
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    Emphasizing prompt distribution of customer property over 
exacting precision in certain aspects of the bankruptcy proceedings 
is also a guiding concept in the Proposal. One of the lessons the 
Commission has learned from prior FCM bankruptcies is that many 
public customers rely on expected cash flows from commercial 
activities, including associated hedges, to fund ongoing operations. 
A failure to promptly distribute funds in a bankruptcy proceeding 
could therefore not only disrupt the cash flow and normal business 
operations of the debtor's customers, but also set in motion a chain 
of payment delays or failures in commercial markets.
    While I believe the Proposal largely achieves an appropriate 
balance of equitable and prompt resolution of a bankrupt commodity 
broker, I look forward to receiving comments from stakeholders on 
these issues. In particular, I look forward to hearing from smaller 
commercial market participants who may not have the resources to 
actively defend their own interests in an FCM bankruptcy proceeding. 
Does the Proposal provide sufficient protections? Are the likely 
outcomes from the customer property distribution choices made in the 
Proposal expected to provide an equitable and timely result? I look 
forward to comments.

Comment Period

    Speaking of comments, in light of the coronavirus emergency this 
country and the world are currently dealing with, 90 days is not 
sufficient time to review and comment on this nearly 400-page 
document. The Proposal amends almost every section in the existing 
bankruptcy regulations and adds several new provisions. A 90-day 
comment period would barely be long enough in normal times. Many 
stakeholders with an interest in these regulations are struggling 
day-by-day, hour-by-hour, just to maintain operations, generate cash 
flow, and pay employees. It is incongruous to ask the public to 
digest in 90 days a lengthy and complex rulemaking that took the 
Commission three years to develop. There is no statutory deadline or 
commercial imperative that compels a comment period of 90 days. 
There is no need to rush commenters or the rulemaking process in the 
midst of a pandemic in an area as complex and as important as 
bankruptcy.

Conclusion

    I commend the hard work of the Commission staff who have spent 
years working on this Proposal. The Proposal's deliberative, 
pragmatic choices reflect time spent learning from past bankruptcies 
and engaging with a number of interested parties (particularly the 
American Bar Association) on these issues. My office received a 
number of briefings on the Proposal and staff worked diligently to 
incorporate our comments throughout the process.
    The Proposal is a comprehensive and complex effort to modernize 
the Commission's existing bankruptcy regulations. While FCM 
bankruptcies are rare and clearing organization bankruptcies have 
not occurred to date, such events can be highly disruptive to market 
participants. In some cases, they could impact the continued 
operation of markets altogether. It is critical for the Commission 
to update its bankruptcy rules to reduce the probability and extent 
of potential disruptions should an unfortunate event of bankruptcy 
occur.
    I look forward to comments on the Proposal and working to 
finalize this rule in a thoughtful and deliberative manner.

[FR Doc. 2020-08482 Filed 6-11-20; 8:45 am]
 BILLING CODE 6351-01-P