[Federal Register Volume 85, Number 186 (Thursday, September 24, 2020)]
[Proposed Rules]
[Pages 60110-60115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21005]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 190

RIN 3038-AE67


Bankruptcy Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: In April of 2020, the Commodity Futures Trading Commission 
(the ``Commission'') proposed amendments to its regulations governing 
bankruptcy proceedings of commodity brokers. In light of comments on 
the proposed amendments, the Commission is proposing a revision of the 
proposed amendments with respect to a particular issue, specifically, 
efforts to foster a resolution proceeding under Title II of the Dodd-
Frank Act.

DATES: Comments must be received on or before October 26, 2020.

ADDRESSES: You may submit comments, identified by ``Part 190 Bankruptcy 
Regulations'' and RIN number 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

[[Page 60111]]

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], Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW, 
Washington, DC 20581.

I. Introduction

    In April 2020, the Commission approved a proposal to update 
comprehensively its commodity broker bankruptcy rules, 17 CFR part 190 
(the ``Proposal'').\2\ Subpart C of those proposed rules is intended to 
establish a bespoke set of rules for the bankruptcy of a derivatives 
clearing organization (``DCO''). Within Subpart C, Sec.  190.14 
addresses operation of the estate of the debtor clearing organization 
subsequent to the order for relief. Proposed Sec.  190.14(b)(1) states 
that except as otherwise explicitly provided in paragraph (b), the DCO 
shall cease making calls for variation or initial margin.
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    \2\ 85 FR 36000 (June 12, 2020).
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    That alternative provision is found in proposed Sec.  190.14(b)(2) 
and (3), and was intended to provide a brief opportunity, after the 
order for relief, to enable paths alternative to liquidation--that is, 
resolution under Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act \3\ (``Title II Resolution''), or transfer of 
clearing operations to another DCO--in cases where a short delay (i.e., 
less than or equal to six days) might facilitate such an alternative 
path.\4\ The aim of proposed Sec.  190.14(b)(2) and (3) was to avoid a 
DCO's bankruptcy filing having an irrevocable consequence of 
termination of clearing operations, an event that would likely be 
disruptive of markets and possibly the broader United States financial 
system, in a case where an alternative path was close to fruition. 
Proposed Sec.  190.14(b)(2) and (3) applied to all DCOs, and was 
intended to foster either Resolution or transfer of clearing 
operations.
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    \3\ 12 U.S.C. 5381 et. seq.
    \4\ Proposed Sec.  190.14(b)(2) would enable the trustee to 
request permission of the Commission to continue operations of the 
DCO while proposed paragraph (b)(3) would set forth the procedure 
for the Commission to respond to the request.
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    A number of commenters \5\ indicated strong concern that the 
approach in proposed Sec.  190.14(b) might interfere with DCO rules 
concerning close-out netting, noting that these rules, and the 
enforceability of such rules, are necessary for the DCO's rules to 
constitute a ``Qualifying Master Netting Agreement'' (``QMNA'') for 
purposes of bank capital requirements. These bank capital requirements 
are established by the regulators of the banks and bank holding 
companies that many clearing members are affiliated with or part of: 
The Federal Deposit Insurance Corporation (``FDIC''), the Board of 
Governors of the Federal Reserve System (``Federal Reserve''), and the 
Office of the Comptroller of the Currency (``OCC'') (together, the 
``Prudential Regulators''); qualification of such DCO rules as a QMNA 
is, in turn, necessary in order for the banks and bank holding 
companies that clearing members are affiliated with or part of to net 
the exposures of their contracts cleared with the DCO in calculating 
bank capital requirements.\6\
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    \5\ See, e.g., FIA at 3-6.
    \6\ For the FDIC, see 12 CFR 324.35(c)(2)(i) (measuring clearing 
member's trade exposure to a qualifying CCP based on either 
individual derivative contracts or netting sets of derivative 
contracts); 12 CFR 324.2 (defining netting set to mean, as relevant 
here, a group of transactions with a single counterparty that are 
subject to a qualifying master netting agreement). Analogous rules 
apply to banks regulated by the Federal Reserve (12 CFR 
217.133(c)(2)(i) and 217.2) and the OCC (12 CFR 3.35(c)(2)(i) and 
3.2).
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    Qualified Master Netting Agreements. The definition of QMNA \7\ 
requires that any exercise of rights under the agreement will not be 
stayed or avoided under applicable law in the relevant jurisdictions, 
other than receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act,\8\ Title II Resolution or under any 
similar insolvency law applicable to government-sponsored enterprises, 
or laws of foreign jurisdictions that are substantially similar to the 
foregoing. A Chapter 7 bankruptcy (including such a bankruptcy subject 
to part 190) does not fit within the foregoing list, and thus to the 
extent that proposed Sec.  190.14(b)(2) and (3) acts as a stay, it 
would undermine the QMNA status of DCO rules. If clearing members that 
are part of banks are not able to net their contracts cleared with a 
DCO, there would be significantly increased bank capital requirements 
associated with such contracts. Such an increase in bank capital 
requirements would disrupt both proprietary and customer clearing.
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    \7\ See 12 CFR 324.2 (FDIC), 217.2 (Federal Reserve), and 3.2 
(OCC).
    \8\ 12 U.S.C. 1811.
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    Some commenters noted that proposed Sec.  190.14(b)(2)(ii)(A) 
already required, for continued operation on a temporary basis, that 
such operation would need to be practicable, and that rules of the DCO 
that would compel the termination of outstanding contracts upon the 
order for relief would be inconsistent with the practicability of 
continued operation.\9\ Others considered that the references to 
continued operation created an unacceptable level of legal uncertainty 
regarding the enforceability of closeout netting provisions. In 
addition, some commenters expressed doubt that continued operation of a 
DCO by a trustee in bankruptcy, including collection and payment of 
margin, would be practicable.\10\
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    \9\ See, e.g., CME section IV.D.
    \10\ See, e.g., FIA at 6.
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    Withdrawal of proposed Sec.  190.14(b)(2) and (3). No DCO 
registered with the Commission has ever been subject to bankruptcy, or 
even come close to insolvency. In the unprecedented and highly unlikely 
case that such a bankruptcy were to happen, it would be beneficial to 
foster the transfer of clearing operations, including contracts, from 
the DCO in Chapter 7 liquidation to another DCO, to the extent that 
such an opportunity presents itself. However, to the extent that 
fostering the transfer of clearing operations in a hypothetical 
unprecedented bankruptcy undermines the present-day netting treatment 
under bank capital rules of all bank-affiliated clearing members of a 
DCO, the benefit is not worth the cost.\11\ Moreover, while it would be 
beneficial, and it may be possible to develop an acceptable means, to 
foster Resolution under Title II in the case of certain DCOs in Chapter 
7 liquidation, the means proposed in Sec.  190.14(b)(2) and (3) do not 
result in a practicable and effective way to achieve this result at an 
acceptable cost. Accordingly, the Commission is

[[Page 60112]]

withdrawing proposed Sec.  190.14(b)(2) and (3).\12\
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    \11\ As noted below, see infra n.233, a transfer approved 
pursuant to 11 U.S.C. 363 (unlike a transfer pursuant to a Title II 
Resolution) would not have the effect of avoiding a contractual 
termination provision.
    \12\ The Commission will make appropriate edits to the language 
in proposed Sec.  190.14(b)(1) as part of the process of finalizing 
the Part 190 rule proposal.
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    As discussed further below, the Commission is instead proposing 
that the part 190 regulations include a provision that is intended to 
foster, for a brief period after a bankruptcy filing, the Title II 
Resolution of a DCO, in particular a systemically important DCO 
(``SIDCO''),\13\ but through means different to those in the original 
proposal for Sec.  190.14(b)(2) and (3).
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    \13\ 17 CFR 39.2 defines systemically important derivatives 
clearing organization to mean a financial market utility that is a 
derivatives clearing organization registered under section 5b of the 
Act, which is currently designated by the Financial Stability 
Oversight Council to be systemically important and for which the 
Commission acts as the Supervisory Agency pursuant to 12 U.S.C. 
5462(8).
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    Resolution under Title II of Dodd-Frank. Title II Resolution is 
designed to address cases where a financial company is in default or 
danger of default, and where the failure of the financial company and 
its resolution under otherwise applicable Federal or State law would 
have serious adverse effects on financial stability in the United 
States.\14\ Default or danger of default includes a circumstance where 
a case has been, or likely will promptly be, commenced with respect to 
the financial company under the Bankruptcy Code.\15\ The Financial 
Stability Oversight Council (``FSOC'') has determined that the failure 
of either of the two systemically important derivatives clearing 
organizations, CME and ICE Clear Credit, would likely threaten the 
stability of the broader U.S. financial system.\16\
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    \14\ 12 U.S.C. 5383(b)(1, 2).
    \15\ 12 U.S.C. 5383(c)(4)(A).
    \16\ See 2012 FSOC Annual Report, Appendix A, at 163 (``a 
significant disruption or failure of CME could have a major adverse 
impact on the U.S. financial markets, the impact of which would be 
exacerbated by the limited number of clearing alternatives currently 
available for the products cleared by CME. Accordingly, a failure or 
disruption of CME would likely have a significant detrimental effect 
on the liquidity of the futures and options markets, clearing 
members, which include large financial institutions, and other 
market participants, which would, in turn, likely threaten the 
stability of the broader U.S. financial system''); id. at 178 (same 
for ICE Clear Credit with respect to swaps markets and the broader 
U.S. financial system).
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    The process for placing a financial company into Title II 
Resolution is deliberate and intricate. In the case of a SIDCO, this 
would include a written recommendation by each of the FDIC and the 
Federal Reserve covering eight statutory factors.\17\ Following that 
recommendation, the Secretary of the Treasury would then need to make a 
determination, in consultation with the President, that each of seven 
statutory factors is met.\18\ Following such a determination, the board 
of directors of the financial company may acquiesce or consent to the 
appointment of the FDIC as receiver, or there may be a period of 
judicial review which may extend to 24 hours.\19\
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    \17\ See 12 U.S.C. 5383(a)(1)(A). These include a description of 
the effect that the default of the financial company would have on 
financial stability in the United States and an evaluation of why a 
case under the Bankruptcy Code is not appropriate for the financial 
company. See 12 U.S.C. 5383(a)(2).
    \18\ See 12 U.S.C. 5383(b). These include that the failure of 
the financial company under otherwise applicable Federal or State 
law would have serious adverse effects on financial stability in the 
United States.
    \19\ See 12 U.S.C. 5382(a)(1)(A).
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    By contrast, a voluntary petition in bankruptcy commences the case, 
which in turn constitutes an order for relief.\20\
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    \20\ See 12 U.S.C. 301.
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    Accordingly, there exists a possibility that (in the highly 
unlikely event that a SIDCO would consider bankruptcy), the SIDCO could 
file for bankruptcy before a process to place that SIDCO into a Title 
II Resolution would have completed.\21\ While the appointment of the 
FDIC as receiver under Title II would automatically result in the 
dismissal of the prior bankruptcy,\22\ if the bankruptcy filing were to 
immediately and irrevocably result in the termination of the SIDCO's 
derivatives contracts with its members, that would undermine the 
potential success of any subsequent Title II Resolution.
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    \21\ The timeline for an involuntary bankruptcy is longer, in 
that it involves a petition, an answer (that the debtor has 21 days 
to file), and (if the petition is timely controverted) a trial. See 
12 U.S.C. 303 (b, h), Federal Rule of Bankruptcy Procedure 1011(b).
    \22\ See 12 U.S.C. 5388(a).
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    By contrast, if the FDIC is appointed as receiver in a Title II 
Resolution before a SIDCO's derivatives contracts with its members are 
terminated as a result of a bankruptcy filing, such termination would 
be stayed by operation of Title II until 5:00 p.m. (eastern time) on 
the business day following the date of the appointment and, if the FDIC 
were to transfer such contracts to, e.g., a bridge entity before that 
time, termination based on the insolvency or financial condition of the 
SIDCO would be permanently avoided,\23\ again by operation of Title 
II.\24\
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    \23\ See 12 U.S.C. 5390(c)(10)(B)(i). By contrast, a transfer 
within a bankruptcy proceeding (including a ``sale free and clear'' 
pursuant to 11 U.S.C. 363), would not have the effect of preventing 
termination of the contracts.
    \24\ As noted above, limitations of termination rights pursuant 
to Title II are explicitly made consistent with QMNA status of an 
agreement.
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II. Supplemental Proposal

    In view of the points raised by commenters on the Proposal and upon 
further review of the matter, the Commission is proposing a limited 
revision to the Proposal that would (1) stay the termination of SIDCO 
contracts for a brief time after bankruptcy in order to foster the 
success of a Title II Resolution, if the FDIC is appointed receiver in 
such a Resolution within that time, but (2) do so in a manner that does 
not undermine the QMNA status of SIDCO rules (the ``Supplemental 
Proposal.'') All other aspects of the Proposal remain the same.
    Specifically, the Supplemental Proposal would impose a temporary 
stay on the termination of derivatives contracts of a SIDCO that is the 
subject of a bankruptcy case.\25\ However, that provision would become 
effective only if the Commission finds that the Prudential Regulators 
have taken steps to make such a stay consistent with the QMNA status of 
SIDCO rules. As discussed further below, the Commission is seeking 
comment on whether the Supplemental Proposal can reasonably be expected 
to achieve both of those goals, is feasible, is the best design for 
such a solution, and appropriately reflects consideration of benefits 
and costs.
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    \25\ Under the Supplemental Proposal, the temporary stay would 
not apply in the case of the bankruptcy of a DCO that is not a 
SIDCO.
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    As noted above, the present regulations of the Prudential 
Regulators of the banks and bank holding companies that SIDCO clearing 
members may be affiliate with or part of make any stay under Part 190 
inconsistent with QMNA status for DCO rules. Thus, to meet the second 
goal, the Prudential Regulators must take action sufficient to change 
that result.
    Following analogous stay provision. The Commission notes that the 
regulations of the Prudential Regulators encourage a limited stay 
period in certain contexts. For example, 12 CFR 382.4(b)(1) (FDIC) 
provides that a covered qualified financial contract (``QFC'') may not 
permit the exercise of any default right with respect to the covered 
QFC that is related, directly or indirectly, to an affiliate of the 
direct party becoming subject to a receivership, insolvency, 
liquidation, resolution, or similar proceeding. However, Sec.  382.4(f) 
provides that, notwithstanding paragraph (b), under certain 
circumstances, a covered QFC may permit the exercise of a default right 
after the stay period. The term ``stay period'' is defined in Sec.  
382.4(g) as, with respect to a receivership,

[[Page 60113]]

insolvency, liquidation, resolution, or similar proceeding, the period 
of time beginning on the commencement of the proceeding and ending at 
the later of 5 p.m. (EST) on the business day following the date of the 
commencement of the proceeding and 48 hours after the commencement of 
the proceeding.\26\
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    \26\ Similar provisions are found in the regulations of the 
Federal Reserve (see 12 CFR 252.84) and of the OCC (see 12 CFR 
47.5).
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    While the ``stay period'' in 12 CFR 382.4(g) does not apply to a 
contract with a SIDCO (or any other central counterparty (``CCP'')) in 
bankruptcy, it would appear more likely that the Prudential Regulators 
would be comfortable with--and, thus, willing to make changes to the 
QMNA definition that would conform to--a stay period that is of 
identical length to a stay period that the Prudential Regulators 
already use in another context.
    Thus, instead of continued operation for up to six days as 
originally proposed, the Supplemental Proposal would provide for the 
use of a stay period, applicable to the bankruptcy of a SIDCO, that 
would extend for the period of time beginning on the commencement of 
the proceeding and ending at the later of 5 p.m. (EST) on the business 
day following the date of the commencement of the proceeding and 48 
hours after the commencement of the proceeding.
    Unlike the original Proposal, there would be no continued 
collection or payments of initial or variation margin during the stay 
period. Rather, the termination of contracts outstanding at the time of 
the order for relief would be stayed for the stay period. To be sure, 
risk levels would increase during the stay period, as the design of 
CCPs is based on daily collection and payment of variation margin.\27\ 
However, in a context where the DCO is (based on the prior bankruptcy 
filing) already in extremis, and collection and payment of variation 
margin is impracticable, such a stay may be the best available 
alternative (as compared to an immediate and irrevocable result of 
termination of contracts). The Commission notes that this risk is 
mitigated, albeit incompletely, by the limited maximum length of the 
stay period.\28\
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    \27\ See 17 CFR 39.14(b) (requiring daily variation settlement). 
Moreover, while no transactions would be entered into during the 
stay period, and thus there would be no changes in initial margin 
levels due to change in positions, the SIDCO would be unable to 
change initial margin levels even if an increase in such levels 
would otherwise be warranted.
    \28\ The Commission notes that 48 hours/5 p.m. on the next 
business day is the maximum length of the stay period. To the extent 
that the process of placing the SIDCO into Title II would be 
completed sooner, that would further mitigate the impact of not 
collecting and paying variation margin.
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    Need for a Springing Provision. For the reasons discussed above, in 
order to avoid undermining the QMNA status of SIDCO rules, no stay 
provision regarding DCO contract termination rules may be made 
effective as an element of the DCO bankruptcy provisions of Part 190 
unless and until each of the three Prudential Regulators takes action 
to make such a stay provision consistent with such QMNA status. The 
Commission seeks to complete the work of amending Part 190 in one 
coherent rulemaking. Moreover, the inclusion of such a stay provision, 
contingent on such action, might encourage the Prudential Regulators 
promptly to take such action.
    Accordingly, the Supplemental Proposal would provide for the 
implementation of a stay provision, as discussed above, applicable to 
the bankruptcy of a SIDCO, that would only become effective after each 
of the three Prudential Regulators has publically taken action 
sufficient to make such a stay provision consistent with the QMNA 
status of SIDCO rules. The length of the stay period would be the 
shorter of (a) the stay period discussed above (found in, e.g., 12 CFR 
382.4(g)) or (b) the shortest such period specified in the action by 
any of the Prudential Regulators.
    If the Prudential Regulators take such action prior to the 
finalization of the rulemaking embodied in the Proposal (as modified by 
this Supplemental Proposal), the Commission could implement the stay 
period provision as part of that finalization. Otherwise, the stay 
period provision would not become effective unless and until the 
Commission subsequently issues an Order, confirming that the stay 
provision is consistent with the QMNA status of SIDCO rules.\29\ In 
either event, before acting to implement a stay provision, the 
Commission would issue a request for public comment, limited to the 
issue of whether the Prudential Regulators' actions are each sufficient 
to make such a stay provision consistent with the QMNA status of SIDCO 
rules.\30\
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    \29\ Authority to issue such an Order would not be delegated to 
staff, and thus would be excluded from the delegation of authority 
set forth in proposed Sec.  190.02(b).
    \30\ As a practical matter, the Commission expects that before 
issuing the request for public comment, there would be contacts by 
Commission staff with relevant staff at each of the three Prudential 
Regulators confirming understanding of such action.
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    In summary, the Commission is withdrawing proposed Sec.  
190.14(b)(2) and (3) from the Proposal and instead proposing that the 
final amendments to part 190 would contain a regulation with the 
following elements:
     Subsequent to the order for relief with respect to a 
SIDCO, a stay period would apply to the termination of derivatives 
contracts outstanding at the time of the order for relief and the 
exercise of any other default right. There would be no continued 
collection or payments of initial or variation margin during the stay 
period.
     The length of the stay period would be the shorter of (a) 
the period of time beginning on the commencement of the proceeding and 
ending at the later of 5 p.m. (EST) on the business day following the 
date of the commencement of the proceeding and 48 hours after the 
commencement of the proceeding; or (b) the shortest such period 
specified in the action by any of the Prudential Regulators.
     This aspect of the regulation would not be effective until 
the Commission determines (whether as part of finalizing the rulemaking 
in the Proposal (as modified by the Supplemental Proposal) or by a 
subsequent Order), following public notice and comment, that each of 
the three Prudential Regulators has taken action sufficient to make the 
stay provision consistent with the QMNA status of SIDCO rules. Public 
comment would be limited to whether the Prudential Regulators' actions 
are sufficient on that point.

III. Cost-Benefit Considerations

    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.\31\ 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'').
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    \31\ Section 15(a) of the CEA, 7 U.S.C. 19(a).
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    In the Proposal, the Commission proposed amendments to its 
regulations governing bankruptcy proceedings of commodity brokers in 
part 190. The Proposal provided the public with an opportunity to 
comment on the

[[Page 60114]]

Commission's cost-and-benefit considerations of the proposed 
amendments, including identification and assessment of any costs and 
benefits not discussed therein. In particular, the Commission requested 
that commenters provide data or any other information that they believe 
supports their positions with respect to the Commission's 
considerations of costs and benefits.
    Baseline. In this release, the Commission sets out the Supplemental 
Proposal described above, and withdraws proposed Sec.  190.14(b) and 
(c). All other aspects of the Proposal remain the same. The Proposal 
set forth the costs and benefits of the Commission's proposed 
amendments of Part 190. All aspects of the Proposal's considerations of 
costs and benefits remain the same other than those related 
specifically to the Supplemental Proposal. Thus, while the Commission's 
practices under existing part 190 serve as the baseline for the 
consideration of costs and benefits of the Supplemental Proposal, we 
also discuss as appropriate for clarity the differences from the 
Proposal. The Commission seeks comment on all aspects of the baseline 
laid out above.
    The Commission recognizes that the Supplemental Proposal 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, but has not found it possible to do 
so, and instead has identified and considered the costs and benefits of 
the applicable proposed rules in qualitative terms. The lack of data 
and information to estimate those costs is attributable in part to the 
nature of the Supplemental Proposal, including that it relates to a 
situation--the failure of a DCO--that is unprecedented and is 
considered to be highly unlikely.
    Consideration of benefits and costs. The benefit of the 
Supplemental Proposal would be to provide a brief opportunity for a 
Title II Resolution of a SIDCO that has filed for bankruptcy to be 
initiated without the termination of the outstanding derivatives 
contracts. In the event that such a Resolution is initiated during the 
stay period, this would mitigate, and possibly avoid, the disruption to 
clearing members and clients, and to the U.S. financial system more 
broadly, that would result from such termination of the outstanding 
contracts. By delaying the effectiveness of this provision until a 
Commission Order confirming that the Prudential Regulators had taken 
action to make such a stay provision consistent with QMNA status for 
the DCO's rules, the Supplemental Proposal would avoid undermining QMNA 
status, and thus would avoid increasing capital requirements for bank-
affiliated clearing members.
    The Commission does not anticipate material administrative costs 
associated with the Supplemental Proposal. Nonetheless, there is at 
least one significant cost: For the duration of the stay period, 
clearing members and clients will be uncertain whether their contracts 
will continue (as part of a Resolution) or be terminated (and thus 
would need to be replaced). That uncertainty would mean that clearing 
members and clients would be disadvantaged in determining how best to 
protect their positions.
    The Commission notes that it has considered alternatives to the 
Supplemental Proposal. First, the Commission could simply withdraw 
proposed Sec.  190.14(b)(2) and (3), and not propose anything 
additional. As discussed above, that would permit the immediate and 
irrevocable result of the termination of a SIDCO's derivatives 
contracts with its members, and that result would undermine the success 
of any subsequent Title II Resolution. Second, and proceeding in the 
opposite direction, the Commission could propose to make the proposed 
solution immediately effective. However, that approach would undermine 
QMNA status for DCO rules. Third, the proposed solution could be 
extended to all DCOs with respect to potential resolution under Title 
II. However, while it is possible that a DCO that has not been 
designated as systemically important pursuant to Title VIII of Dodd-
Frank could nonetheless, in the event of its bankruptcy, be found 
eligible for Title II Resolution in that the bankruptcy proceeding 
would have serious adverse effects on financial stability in the United 
States, that is much less likely than in the case of a SIDCO and, in 
light of the impact on clearing members and clients, the Commission has 
determined not to propose to apply a stay period to DCOs that are not 
SIDCOs.
    Finally, while the original proposed Sec.  190.14(b)(2) and (3) 
would have been applied to cases where a prompt transfer of clearing 
operations (including contracts) outside of Title II Resolution might 
be facilitated, the Supplemental Proposal does not include transfers 
outside of Title II Resolution because, as noted above, such a transfer 
would not avoid the effect of a termination provision. Nor does the 
Commission anticipate that the Prudential Regulators would be inclined 
to permit avoidance of such termination outside the context of a Title 
II Resolution.

IV. Request for Comment

    The Commission requests comment on all aspects of the Supplemental 
Proposal and the issues raised in this document, including in 
particular:
    (1) Do commenters agree with the concerns identified (or consider 
that there are additional or different concerns) with respect to the 
status of DCO rules as qualifying master netting agreements for 
purposes of bank capital rules?
    (2) Does the Supplemental Proposal achieve the goals of fostering 
the success of a Title II Resolution while avoiding undermining the 
QMNA status of SIDCO rules? Are these the right goals?
    (3) Do commenters see a better way to achieve these goals? Do 
commenters see specific provisions that should be included in, or 
exclude from, the Supplemental Proposal?
    (4) Do commenters agree that the Supplemental Proposal should be 
limited to SIDCOs (i.e., that it should not be applied to DCOs that are 
not SIDCOs)?
    (5) 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 solution; 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. 
Commenters may also suggest other alternatives to the proposed 
approaches.

    Issued in Washington, DC, on September 18, 2020 by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

Appendices to Bankruptcy Regulations--Commission Voting Summary and 
Commissioner's Statement

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.

[[Page 60115]]

Appendix 2--Statement of Commissioner Dan M. Berkovitz

    The part 190 rulemaking supplemental notice of proposed 
rulemaking (``Supplemental NPRM'') addresses a potential unintended 
outcome of the original NPRM identified in a number of comments on 
the proposal. These comments stated that certain provisions in the 
original proposed rule related to the bankruptcy of a derivatives 
clearing organization (``DCO'') could have significant, unintended 
and detrimental impacts on various market participants with 
contracts cleared at the DCO. The Supplemental NPRM presents new, 
alternative provisions governing DCO bankruptcy that are intended to 
avoid these impacts. In issuing the Supplemental NPRM, the 
Commission seeks public comment on these alternative provisions.
    I support the issuance of this Supplemental NPRM because it will 
provide all interested persons with an opportunity to comment on the 
alternative provisions formulated by the Commission. This 
alternative approach was not set forth in the proposal. Providing 
the public with notice and opportunity to comment on rules being 
considered by the Commission is not only a basic legal requirement 
for agency rulemaking, but it is sound public policy as well. Public 
input from all interested persons is critical to sound regulation.
    Under the Administrative Procedure Act, the provisions in a 
final rule must be reasonably foreseeable and a logical outgrowth of 
the provisions in the proposal.\1\ The NPRM must contain more than a 
passing reference or question about an issue; the proposal must be 
sufficiently descriptive for members of the public to evaluate and 
comment on the approach being considered. The Supplemental NPRM 
meets that standard.
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    \1\ See, e.g., Idaho Farm Bureau Fed'n v. Babbitt, 58 F.3d 1392, 
1402-03 (9th Cir. 1995).
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    I look forward to reviewing all perspectives on these 
alternative provisions.

[FR Doc. 2020-21005 Filed 9-23-20; 8:45 am]
BILLING CODE 6351-01-P