[Federal Register Volume 86, Number 69 (Tuesday, April 13, 2021)]
[Rules and Regulations]
[Pages 19324-19477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28300]



[[Page 19323]]

Vol. 86

Tuesday,

No. 69

April 13, 2021

Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 4, 41, and 190





Bankruptcy Regulations; Final Rule

  Federal Register / Vol. 86 , No. 69 / Tuesday, April 13, 2021 / Rules 
and Regulations  

[[Page 19324]]


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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: Final rule.

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

DATES: 
    Effective date: The effective date for this final rule is May 13, 
2021.
    Compliance date: The compliance date for Sec.  1.43 is April 13, 
2022, for all letters of credit accepted, and customer agreements 
entered into, by a futures commission merchant prior to May 13, 2021.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel and 
Senior Advisor, 202-418-5092, [email protected], Ward P. Griffin, 
Senior Special Counsel, 202-418-5425, [email protected], Jocelyn 
Partridge, 202-418-5926, [email protected], Abigail S. Knauff, 202-
418-5123, [email protected], Division of Clearing and Risk; Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street 
NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Background of the Notice of Proposed Rulemaking
    B. Major Themes in the Revisions to Part 190
II. Finalized 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 (FCM) 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 Funded 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
    G. Additional Comments
    H. Supplemental Proposal
III. Cost-Benefit Considerations
    A. Introduction
    1. Baseline
    2. Overarching Concepts
    a. Changes to Structure of Industry
    b. Trustee Discretion
    c. Cost Effectiveness and Promptness Versus Precision
    d. Unique Nature of Bankruptcy Events
    e. Administrative Costs Are Costs to the Estate, and Often to 
the Customers
    f. Preference for Public Customers Over Non-Public Customers and 
for Both Over General Creditors
    B. Subpart A--General Provisions
    1. Regulation Sec.  190.00: Statutory Authority, Organization, 
Core Concepts, Scope, and Construction: Consideration of Costs and 
Benefits
    2. Regulation Sec.  190.01: Definitions: Consideration of Costs 
and Benefits
    3. Regulation Sec.  190.02: General: Consideration of Costs and 
Benefits
    4. Section 15(a) Factors--Subpart A
    C. Subpart B--Futures Commission Merchant as Debtor
    1. Regulation Sec.  190.03: Notices and Proofs of Claims: 
Consideration of Costs and Benefits
    2. Regulation Sec.  190.04: Operation of the Debtor's Estate--
Customer Property: Consideration of Costs and Benefits
    3. Regulation Sec.  190.05: Operation of the Debtor's Estate--
General: Consideration of Costs and Benefits
    4. Regulation Sec.  190.06: Making and Taking Delivery Under 
Commodity Contracts: Consideration of Costs and Benefits
    5. Regulation Sec.  190.07: Transfers: Consideration of Costs 
and Benefits
    6. Regulation Sec.  190.08: Calculation of Funded Net Equity: 
Consideration of Costs and Benefits
    7. Regulation Sec.  190.09: Allocation of Property and Allowance 
of Claims: Consideration of Costs and Benefits
    8. Regulation Sec.  190.10: Provisions Applicable to Futures 
Commission Merchants During Business as Usual: Consideration of 
Costs and Benefits
    9. Section 15(a) Factors--Subpart B
    D. Subpart C--Clearing Organization as Debtor
    1. Regulation Sec.  190.11: Scope and Purpose of Subpart C: 
Consideration of Costs and Benefits
    2. Regulation Sec.  190.12: Required Reports and Records: 
Consideration of Costs and Benefits
    3. Regulation Sec.  190.13: Prohibitions on Avoidance of 
Transfers: Consideration of Costs and Benefits
    4. Regulation Sec.  190.14: Operation of the Estate of the 
Debtor Subsequent to the Filing Date: Consideration of Costs and 
Benefits
    5. Regulation Sec.  190.15: Recovery and Wind-Down Plans; 
Default Rules and Procedures: Consideration of Costs and Benefits
    6. Regulation Sec.  190.16: Delivery: Consideration of Costs and 
Benefits
    7. Regulation Sec.  190.17: Calculation of Net Equity: 
Consideration of Costs and Benefits
    8. Regulation Sec.  190.18: Treatment of Property: Consideration 
of Costs and Benefits
    9. Regulation Sec.  190.19: Support of Daily Settlement: 
Consideration of Costs and Benefits
    10. Section 15(a) Factors--Subpart C
    E. Changes to Appendices A and B
    F. Technical Corrections to Parts 1, 4, and 41
IV. Related Matters
    A. Antitrust Considerations
    B. Regulatory Flexibility Act
    C. 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 Derivatives Clearing Organization 
(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 Notice of Proposed Rulemaking

    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. In April of

[[Page 19325]]

this year, the Commission proposed a comprehensive revision of part 190 
(the ``Proposal''),\1\ and in September of this year, the Commission 
issued a supplemental proposal (the ``Supplemental Proposal'') \2\ 
addressing a particular issue involving the interaction between 
bankruptcy and resolution of a clearing organization pursuant to Title 
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act \3\ 
(hereinafter, ``Title II'' and ``Dodd-Frank'').
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    \1\ 85 FR 36000 (June 12, 2020).
    \2\ 85 FR 60110 (Sept. 24, 2020).
    \3\ Public Law 111-203 (July 21, 2010).
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    The Commission is revising part 190 comprehensively in light of 
several major changes to the industry over the 37 years since part 190 
was first finalized. These changes include exponential growth in the 
speed of transactions and trade processing, important lessons learned 
over prior bankruptcies, and the increased importance of derivatives 
clearing organizations (``DCOs'') to the financial system.
    In promulgating 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.\4\
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    \4\ 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. In particular, the Proposal benefited from a 
thoughtful and detailed model set of part 190 rules submitted by the 
Part 190 Subcommittee of the Business Law Section of the American Bar 
Association (``ABA Subcommittee'').\5\ In addition, and as discussed 
further below, the Commission benefited from thoughtful, analytical, 
and detailed public comments submitted in response to the Proposal and 
Supplemental Proposal.
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    \5\ The submission by the ABA Subcommittee cautioned that 
``[t]he views expressed in this letter, and the proposed Model Part 
190 Rules, are presented on behalf of the [ABA Subcommittee]. 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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B. Major Themes in the Revisions to Part 190

    The major themes in the revisions to part 190 include the 
following:
    (1) The Commission is adding Sec.  190.00, which sets out the 
statutory authority, organization, core concepts, scope, and rules of 
construction for part 190. More generally, this section sets out, after 
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,\6\ and the public at large.
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    \6\ Including bankruptcy and SIPA trustees, as well as the FDIC 
in its role as a receiver.
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    (2) Some of the provisions 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, arising from both 
title 11 of the United States Code (i.e., the ``Bankruptcy Code''), 
section 766(h), and Commission policy, 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 provisions 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.\7\
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    \7\ 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), and in current Sec.  190.02(e).
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    (4) The Commission is promulgating a new subpart C to part 190, 
governing the bankruptcy of a clearing organization. In doing so, the 
Commission is establishing 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 more 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 Dodd-Frank.\8\ The Commission's 
approach toward a DCO bankruptcy is characterized by three overarching 
concepts:
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    \8\ 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. These rules, procedures, and plans will, in most 
cases,\9\ 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. 
However, as discussed further below, such plans are not rigid formulae. 
Moreover, the Commission's approach gives the trustee discretion in 
following those plans. Accordingly, the approach seeks to balance 
advance planning with flexibility to tailor the implementation to the 
specific circumstances.
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    \9\ Only those DCOs that are subject to subpart C of part 39 
(i.e., those that have been designated as systemically important by 
the Financial Stability Oversight Council (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 plans).
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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) are devoted to that purpose, rather than to the 
general estate.\10\
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    \10\ See generally Sec.  190.19.
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    c. Third, other provisions draw, with appropriate adaptations, from 
provisions applicable to FCMs.\11\
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    \11\ See, e.g., Sec. Sec.  190.16, 190.17(c).
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    (5) The Commission is noting the applicability of part 190 in the 
context

[[Page 19326]]

of proceedings under the Securities Investors Protection Act (``SIPA'') 
in the case of FCMs subject to a SIPA proceeding,\12\ 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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    \12\ 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) The Commission is enacting 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, 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 granting 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 
public customers on a bespoke basis, would permit the trustee to treat 
public customers on an aggregate basis. These changes represent a move 
from a model where the trustee receives and complies with instructions 
from individual public 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 on an 
omnibus basis.
    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,\13\ part 190 favors 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's 
policy is 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 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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    \13\ See the overarching concept discussed in section III.A.2.c 
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.\14\
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    \14\ 78 FR 68506 (Nov. 14, 2013). This refers to 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 and recording, (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) Finally, 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 invited comments on all aspects of the proposed 
rulemaking and received a total of 16 substantive comment letters in 
response.\15\ The comments generally supported the adoption of 
revisions to part 190, though several provided suggestions as to 
particular elements of the proposal that should be modified, clarified, 
deleted, or otherwise improved. The Commission has adopted many, though 
not all, of these suggestions, and in some cases has sought to address 
the concerns raised through alternative drafting.\16\
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    \15\ The Commission received comment letters submitted by the 
following: American Council of Life Insurers (ACLI); Better Markets, 
Inc. (Better Markets); Cboe Global Markets, Inc. (CBOE); CME Group 
Inc. (CME); Commodity Markets Council (CMC); Futures Industry 
Association (FIA); Investment Company Institute (ICI); 
Intercontinental Exchange Inc. (ICE); International Swaps and 
Derivatives, Inc. (ISDA); LCH Group (LCH); National Grain and Feed 
Association (NGFA); Options Clearing Corporation (OCC); Part 190 
Subcommittee of the Business Law Section of the American Bar 
Association (ABA Subcommittee); Securities Industry and Financial 
Markets Asset Management Group and Managed Funds Association (SIFMA 
AMG/MFA);); Kathryn Trkla; Geoffrey Goodman; and Vincent Lazar, as 
individuals (Subcommittee Members), and Vanguard Group, Inc. 
(Vanguard).
    \16\ The Commission also issued the Supplemental Proposal, which 
withdrew proposed Sec.  190.14(b)(2) and (3), and proposed an 
alternative. The Commission received 5 substantive comment letters 
in response, each of which was from an entity that had also 
submitted a comment letter on the Proposal. For the reasons 
discussed in section II.H below, the Commission is not adopting the 
Supplemental Proposal.
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II. Finalized Regulations

    In the discussion below, the Commission highlights topics of 
interest to commenters and discusses comment letters that are 
representative of the views expressed on those topics. The discussion 
does not explicitly respond to every comment submitted; rather, it 
addresses important issues raised by the proposed rulemaking and 
analyzes those issues in the context of specific comments.

A. Subpart A--General Provisions \17\
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    \17\ The Commission is adopting the proposed technical 
corrections and updates to parts 1, 4, and 41, which are discussed 
in section II.F. below. Moreover, as discussed in section II.B.8, 
parts of proposed Sec.  190.10 are being adopted, but codified in 
part 1.
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    The Commission is adopting as subpart A (Sec. Sec.  190.00-190.02) 
general provisions to address both debtors that are both FCMs and 
debtors that are DCOs.

[[Page 19327]]

1. Regulation Sec.  190.00: Statutory Authority, Organization, Core 
Concepts, Scope, and Construction
    The Commission is adopting Sec.  190.00 as proposed with the 
addition of Sec.  190.00(c)(3)(i)(C) and the modification to Sec.  
190.00(d)(3)(v), as set forth below. The Commission is adopting Sec.  
190.00 to set forth general provisions that state facts and concepts 
that exist in the Commission's bankruptcy regulations. It is applicable 
to all of part 190. The Commission's intent is 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 
part 190. The Commission also believes that the 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.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.00. The Commission also raised specific questions as 
to whether a regulation setting forth core concepts would be useful; 
whether the core concepts were under or over inclusive; and whether the 
definitions and discussions for each core concept would be helpful. The 
Commission received several comments expressing support for various 
aspects of proposed Sec.  190.00, including comments from SIFMA AMG/
MFA, CME, and the ABA Subcommittee. CME noted in particular that it 
believed that the regulation ``may prove particularly useful to a 
trustee who has little experience with the CEA or the Commission's 
customer funds segregation rules, as they try to get `up to speed' in 
the critical early hours and days following the trustee's appointment 
when the trustee is expected to act quickly on various matters.''
    The Commission is adopting Sec.  190.00(a) to 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. The Commission received comments from CME and the ABA 
Subcommittee specifically supporting the inclusion of an explanation of 
the Commission's authority to adopt the part 190 regulations in Sec.  
190.00.
    The Commission is adopting Sec.  190.00(b) to explain that the part 
190 regulations are organized into three subparts. Subpart A contains 
general provisions applicable in all cases. Subpart B contains 
provisions that apply when the debtor is an FCM, the definition of 
which includes acting as a foreign FCM.\18\ Subpart C contains 
provisions that apply when the debtor is a DCO, as defined by the CEA. 
The Commission received comments from the ABA Subcommittee, CME, and 
ICI in support of the reorganization of part 190.
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    \18\ 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).
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    The Commission is adopting Sec.  190.00(c) to set forth the core 
concepts \19\ of part 190 that are central to understanding how a 
commodity broker bankruptcy works. These include concepts related to 
commodity brokers and commodity contracts, account classes, public 
customers and non-public customers, Commission segregation 
requirements, member property,\20\ porting of public customer commodity 
contract positions, pro rata distribution, and deliveries.
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    \19\ The Commission is using 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).
    \20\ ``Member property'' is defined in Sec.  190.01 and will 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).
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    The Commission is adopting Sec.  190.00(c)(1) to 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.'' \21\ Section 190.00(c)(1) states that the regulations in 
part 190 apply to commodity brokers that are FCMs as defined by the 
Act, or DCOs as defined by the Act.
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    \21\ See 11 U.S.C. 101(6) (definition of ``commodity broker''), 
761(9) (definition of ``customer'' referred to in 101(6)).
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    The Commission is adopting Sec.  190.00(c)(2) to 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 include the (domestic) 
futures account class (including options on futures),\22\ the foreign 
futures account class (including options on foreign futures),\23\ the 
cleared swaps account class for swaps cleared by a registered DCO 
(including cleared options other than options on futures or foreign 
futures),\24\ and the delivery account class for property held in an 
account designated as a delivery account. Delivery accounts are used 
for effecting delivery under commodity contracts that provide for 
settlement via delivery of the underlying when a commodity contract is 
held to expiration or, in the case of an option on a commodity, is 
exercised.\25\
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    \22\ This corresponds to segregation pursuant to section 4d(a) 
of the CEA, 7 U.S.C. 6d(a).
    \23\ This corresponds to segregation pursuant to Sec.  30.7 
(enacted pursuant to section 4(b)(2)(A) of the CEA, 7 U.S.C. 
6(b)(2)(A).
    \24\ This corresponds to segregation pursuant to section 4d(f) 
of the CEA, 7 U.S.C. 6d(f).
    \25\ 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.
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    The Commission is adopting Sec.  190.00(c)(3)(i) to prescribe the 
separate treatment of ``public customers'' and ``non-public 
customers,'' as defined in Sec.  190.01, within each account class in 
the event of a proceeding in which the debtor is an FCM. It explains 
that, in a bankruptcy, public customers are generally entitled to a 
priority distribution of cash, securities, or other customer property 
over ``non-public customers,'' 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.\26\ The Commission is adopting Sec.  190.00(c)(3)(ii) to address 
the division of customer property and member property in proceedings in 
which the debtor is a clearing organization. In such a proceeding, 
customer property consists of member property, which is distributed to 
pay member claims based on members' house accounts, and

[[Page 19328]]

customer property other than member property, which is reserved for 
payment of claims for the benefit of members' public customers. The 
Commission is adopting Sec.  190.00(c)(3)(iii) to address the 
preferential assignment of property among customer classes and account 
classes in clearing organization bankruptcies. Certain customer 
property, as specified in Sec.  190.18(c), will be preferentially 
assigned to ``customer property other than member property'' (i.e., 
property for the public customers of members) instead of ``member 
property'' to the extent that there is a shortfall in funded balances 
for members' public customer claims. To the extent that there are 
excess funded balances for members' claims in any customer class/
account class combination, that excess will also 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. Where 
property will be assigned to a particular customer class with more than 
one account class, it will be assigned on a least funded to most funded 
basis among the account classes.
---------------------------------------------------------------------------

    \26\ Section 766(h) of the Bankruptcy Code explicitly states 
that the trustee shall distribute 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. Thus, 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 will be 
allocated to non-public customers' net equity claims until all of 
those are fully funded.
---------------------------------------------------------------------------

    The Commission is adopting Sec.  190.00(c)(4) to 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''), the open commodity contract positions of the debtor's 
customers along with all or a portion of such customers' account 
equity.\27\
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    \27\ Transfer or porting of customer positions 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).
---------------------------------------------------------------------------

    The Commission is adopting Sec.  190.00(c)(5) to address pro rata 
distribution. It explains that, if the aggregate value of 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 will 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 ensures 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.\28\ 
Any customer property that is not 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, will 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.
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    \28\ 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.2 below.
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    The Commission is adopting Sec.  190.00(c)(6) to address 
deliveries. It explains 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. In a proceeding in which the debtor is an FCM, the 
delivery provisions in part 190 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).
    The Commission received several comments expressing support for 
certain provisions in Sec.  190.00(c) and two comments expressing 
concerns. CME expressed support for ``limiting the scope of part 190 to 
the bankruptcy of a commodity broker that is an FCM or a DCO and to 
commodity contracts that are cleared'' as set forth Sec.  190.00(c)(1). 
CME, OCC, Vanguard, and NGFA supported the concept of preferring the 
claims of public customers over non-public customers in a bankruptcy 
proceeding. CME agreed with the inclusion of the core concept set forth 
Sec.  190.00(c)(3)(ii), noting that ``it aids understanding to explain 
how the distinction between the public customer class and the non-
public customer class is reflected at the DCO-level in the distinctions 
made between customer accounts and house accounts and between the two 
categories of customer property--customer property and member 
property--that are available to satisfy the net equity claims of 
each.'' Better Markets supported the clarification in Sec.  
190.00(c)(5)(ii) that customers relying on letters of credit must carry 
the same proportional losses as customers posting other forms of 
acceptable collateral.
    NGFA supported the core concept of prioritizing the prompt transfer 
of customer accounts and positions to another FCM as opposed to 
liquidating customer accounts. OCC, however, disagreed with this policy 
preference. OCC supported ``the Commission's objective to mitigate risk 
to an FCM's customers and limit market volatility,'' noting that 
``[p]orting positions and associated collateral in an FCM bankruptcy 
proceeding can be an effective way to achieve these objectives in some 
instances.'' OCC believed, however, that the trustee should retain 
broad discretion to decide, on a case-by-case basis and in 
consideration of certain factors (e.g., the defaulting FCM's total book 
of positions and market conditions) whether porting or liquidating 
positions will achieve the best result for customers involved in an 
FCM's bankruptcy. OCC further commented that the market risk associated 
with closing out and reopening positions for certain customers that may 
be introduced with liquidation should be weighed against potential 
drawbacks of porting, including that ``(i) a trustee (or DCO) must 
first identify a transferee to accept the open position[s] and 
collateral, which depending on market conditions could be a difficult 
and time consuming process; (ii) until the transfer is complete, the 
customer may face uncertainty as to how its position and associated 
collateral will be resolved and may not be able to exit the position in 
a timely and efficient manner; and (iii) a customer may be required to 
post additional collateral at a new FCM prior to or immediately after a 
transfer.''
    In response to the concerns raised by OCC, the Commission notes 
first that, as OCC forthrightly acknowledges,

[[Page 19329]]

liquidating customer positions may introduce market risk associated 
with closing out and reopening positions for certain customers. 
Additionally, liquidating a mass of customer positions may roil the 
markets, if any, where those positions are concentrated. For these 
reasons, the policy preference in favor of transfer is both supported 
by statute and quite longstanding. It is supported by Sec.  764(b) of 
the Bankruptcy Code, which explicitly permits transfers of commodity 
contracts that are authorized by the Commission up to seven calendar 
days after the order for relief. It is also embodied in current Sec.  
190.02(e), which requires the trustee to immediately use its best 
efforts to effect a transfer, and is continued in proposed (and 
adopted) Sec.  190.04(a)(1).
    Furthermore, Sec.  190.00(c)(4) establishes, consistent with Sec.  
764(b), a policy preference for porting, rather than a mandate for 
porting. This recognizes that finding willing and able transferees for 
all customer positions may or may not be practicable. Moreover, Sec.  
190.04(a)(1) requires the trustee to use its best efforts to effect a 
transfer no later than the seventh calendar day after the order for 
relief,\29\ and Sec.  190.04(d) requires the trustee promptly to 
liquidate most remaining contracts after than time. Indeed, as a 
practical matter, there is cause for doubt that a DCO will permit the 
trustee of a debtor that is a clearing member to hold open contracts 
quite that long.\30\ Thus, despite the preference for porting, there 
are practical limits to how long contracts will be held open before 
being liquidated. This also imposes temporal limits on the uncertainty 
customers will face as to how their positions will be resolved.
---------------------------------------------------------------------------

    \29\ Indeed, the preference contained Sec.  190.00(c)(4) does 
not represent a departure from the existing standards under current 
part 190. It merely highlights the requirement in Sec.  190.04(a)(1) 
that the trustee use its best efforts to effect a transfer no later 
than the seventh calendar day after the order for relief; that 
requirement is substantially identical to the requirement in current 
Sec.  190.02(e).
    \30\ For example, OCC Rule 1102(a) provides that OCC may 
summarily suspend any Clearing Member which is in such financial or 
operating difficulty that OCC determines and so notifies the 
Securities and Exchange Commission or the Commodity Futures Trading 
Commission that suspension is necessary for the protection of the 
Corporation, other Clearing Members, or the general public. OCC Rule 
1106 permits OCC to close out the positions of a suspended clearing 
member.
---------------------------------------------------------------------------

    Finally, while a customer may indeed be called for additional 
collateral at a transferee FCM (particularly if less than 100% of the 
collateral is transferred along with the positions), a customer that is 
unwilling to meet such a call will at the least be permitted to have 
their positions liquidated. That would entitle the customer to prompt 
return by the transferee FCM of the remaining collateral that was 
transferred--which may well be more prompt than a distribution in the 
bankruptcy proceeding of the debtor.
    ICI expressed concerns with respect to the discretion granted to 
the trustee under the part 190 regulations. ICI agreed with the 
Commission ``that trustees need flexibility given the myriad of 
decisions they must make in a short period of time and the unique 
circumstances that each commodity broker insolvency may present,'' and 
that ``trustees to date have exercised their discretion in a manner 
that has generally promoted customer protection.'' ICI cautioned, 
however, that the Commission should take steps to help ensure that the 
trustee prioritizes the protection of public customers. ICI urged the 
Commission to make clear in Sec.  190.00 ``that the trustee must 
exercise [its] discretion in a manner that it determines will result in 
the greatest recovery for, and the least disruption to, public 
customers.'' With respect to part 190 regulations that are 
``specifically aimed at protecting customers,'' ICI asserted the 
trustee's discretion should be more limited. While ICI acknowledged 
that, at times, compliance with such provisions ``may be impractical or 
impossible or may cause harm to customers,'' ICI was concerned that a 
``reasonable efforts'' standard ``could signal that the trustee has 
wider latitude to depart from the requirement at issue.'' ICI asked the 
Commission to impose a ``best efforts'' standard in certain cases.
    The Commission agrees with ICI that the trustee should exercise its 
discretion in a manner that best achieves the overarching goal of 
protecting the interests of public customers as a class, and 
specifically should act in the manner that it determines will result in 
the greatest recovery for, and the least disruption to, public 
customers. The Commission notes that, at times, those two sub-goals may 
be in tension. Because the Commission does not believe that there is a 
universally optimal means to reconcile the two sub-goals in aid of best 
achieving the overarching goal of protecting the interests of public 
customers, the Commission concludes that it is best to leave the 
balancing of the two sub-goals to the discretion of the trustee. It is 
in that context that the Commission has decided to direct the trustee 
to exercise ``reasonable efforts'' rather than ``best efforts'' to 
achieve certain standards. In determining what efforts are 
``reasonable,'' the trustee should act to achieve the overarching goal.
    In light of the foregoing and to provide clarity with respect to 
the scope of the trustee's discretion, the Commission is adopting new 
Sec.  190.00(c)(3)(i)(C) which provides that where a provision in part 
190 affords the trustee discretion, that discretion should be exercised 
in a manner that the trustee determines will best achieve the 
overarching goal of protecting public customers as a class by enhancing 
recoveries for, and mitigating disruptions to, public customers as a 
class. In seeking to achieve that overarching goal, the trustee has 
discretion to balance those two subgoals when they are in tension. 
Where the trustee is directed to exercise ``reasonable efforts'' to 
meet a standard, those efforts should only be less than ``best 
efforts'' to the extent that the trustee determines that such an 
approach would support the foregoing goals.\31\
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    \31\ While `` `[b]est efforts' is a term which necessarily takes 
its meaning from the circumstances,'' the trustee in exerting best 
efforts to meet a standard must diligently exert efforts to meet 
that standard ``to the extent of its own total capabilities.'' See 
generally Bloor v. Falstaff Brewing Corp, 454 F.Supp. 258, 266-67 
aff'd 601 F.2d 609 (2nd. Cir. 1979). By contrast, in exerting 
``reasonable efforts'' to meet a standard, the Commission expects 
that the trustee will work in good faith to meet the standard, but 
will also take into account other considerations, including the 
impact of the effort necessary to meet the standard on the 
overarching goal of protecting public customers as a class.
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    The Commission is adopting Sec.  190.00(d)(1) to describe the scope 
of commodity broker proceedings under subchapter IV of chapter 7 of the 
Bankruptcy Code,\32\ and the relationship between part 190 to SIPA 
proceedings (where the debtor is a commodity broker) and to resolution 
of commodity brokers under Title II of the Dodd-Frank Act.''
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 5381 et seq.
---------------------------------------------------------------------------

    Section 190.00(d)(1)(i) acknowledges that, while 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 currently registered as such. As set forth in the Note to 
paragraph (d)(1)(i)(B), the Commission is declaring 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.
    Section 190.00(d)(1)(ii) explains that, pursuant to section 7(b) of 
SIPA,\33\ the

[[Page 19330]]

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.\34\ This part 
implements 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 
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 \35\ when the debtor also is an FCM.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78aaa et seq.
    \34\ 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).
    \35\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

    Moreover, in the context of a resolution proceeding under Title II 
of Dodd-Frank, section 210(m)(1)(B) \36\ 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 \37\ 
that is a commodity broker as if the resolution entity were a debtor 
for purposes of subchapter IV. Accordingly, Sec.  190.00(d)(1)(iii) 
explains that this part shall serve as guidance with respect to the 
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.\38\
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 5390(m)(1)(B).
    \37\ That is, the entity being resolved under Title II. Section 
210(m)(1)(b) refers to ``any covered financial company or bridge 
financial company.''
    \38\ 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)).
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    The Commission is adopting Sec.  190.00(d)(2)(i) to clarify that a 
trustee may not recognize any account classes not explicitly provided 
for in part 190. Section 190.00(d)(2)(ii) provides that no property 
that would otherwise be included in customer property, as defined in 
Sec.  190.01, 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.
    Generally, in a commodity broker bankruptcy, the basis for 
distributing segregated customer property is pro rata treatment. 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 is necessary to enable 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 Sec.  190.00(d)(2)(ii), the Commission is making clear that 
customer property cannot be burdened by equitable trusts. Attempting to 
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.
    Section 190.00(d)(3) provides that certain transactions, contracts, 
or agreements are excluded from the term ``commodity contract.'' \39\ 
The excluded agreements and transactions traditionally have 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.
---------------------------------------------------------------------------

    \39\ 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 (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 Commission received four comments supportive of specific 
provisions of proposed Sec.  190.00(d) and one comment requesting a 
modification of the regulation. CME agreed that removing provisions 
relating to commodity option dealers and leverage transaction merchants 
would ``improve the rules' clarity.'' CME and Cboe expressed support 
for the clarification in Sec.  190.00(d)(1)(ii) of the applicability of 
SIPA in the bankruptcy proceeding of a firm that is dually registered 
as an FCM and a broker-dealer where the bankruptcy must be handled 
pursuant to SIPA rather than by the FCM rules. Cboe noted that such 
clarity will be ``beneficial to the entire ecosystem, including 
customers of FCMs and broker-dealers'' and will ``further the ability 
of market participants to utilize portfolio margining and the 
associated efficiencies.'' CME expressed support for Sec.  
190.00(d)(1)(iii). CME specifically supported ``setting out that Part 
190 `shall serve as guidance' to the FDIC as receiver for an FCM or DCO 
in a proceeding under Title II of Dodd Frank, with respect to the 
distribution of customer property and member property.'' Noting that 
``Title II [of the Dodd-Frank Act] directs the FDIC to apply the 
provisions of subchapter IV of chapter 7 of the [Bankruptcy] Code with 
respect to such distributions,'' CME stated its belief that ``it is 
reasonable to read Title II's cross-reference to subchapter IV of 
chapter 7 ``as indirectly bringing [p]art 190 into the scope of that 
provision given the need for Commission regulations to give specificity 
and meaning to the general principles set out in subchapter IV.'' SIFMA 
AMG/MFA supported the principle of excluding property held in a 
constructive trust from customer property as set forth in Sec.  
190.00(d)(2)(ii), noting that this principle ``serves to preserve the 
integrity of customer property.'' ICI strongly supported setting forth 
the prohibition on excluding property from ``customer property'' 
because it is considered to be held in a trust implied in equity in 
Sec.  190.00(d)(2)(ii), and the exclusion from the term ``commodity 
contract'' of off-exchange retail foreign currency transactions in 
Sec.  190.00(d)(3)(iv).
    The ABA Subcommittee recommended one modification to this 
regulation. It asked the Commission to amend proposed Sec.  
190.00(d)(3)(v) to clarify that mixed swaps could be commodity 
contracts subject to part 190. In support of its position, the ABA 
Subcommittee asserted that a DCO could theoretically provide clearing 
services to FCMs and their customers with respect to mixed swaps, where 
the mixed swap positions are carried in accounts subject to part 22 and 
customers are part of the cleared swap account class under part 190. 
The ABA Subcommittee analogized the inclusion of mixed swaps within the 
``commodity contract'' definition to the Commission's proposal to not 
exclude security futures products from the commodity contract 
definition when the security futures product is carried in an account 
for which there is a corresponding account class under part 190. The 
Commission agrees with the

[[Page 19331]]

ABA Subcommittee's reasoning with respect to proposed Sec.  
190.00(d)(3)(v) and is amending Sec.  190.00(d)(3)(v) to read in 
pertinent part, that ``. . . a security futures product or mixed swap 
(as defined in 1a(47)(D) of the Act) that is, in either case, carried 
in an account for which there is a corresponding account class under 
part 190 is not excluded.''
    The Commission is adopting Sec.  190.00(e) to explain the context 
in which 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'') and that, where they differ, the 
definitions set forth in Sec.  190.01 shall be used instead of the 
defined terms set forth in section 761 of the Bankruptcy Code. The 
Commission notes that other regulations in part 190 are designed to be 
consistent with subchapter IV of chapter 7 of the Bankruptcy Code.
    Section 190.00(e) 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 received two comments on proposed Sec.  190.00(e). 
ICI and Cboe expressed support for the clarity provided by Sec.  
190.00(e) with respect to portfolio margining and cross margining 
programs. ICI strongly supported the ``home field'' rule in proposed 
Sec.  190.00(e), noting that providing ``clarity regarding how 
transactions and margin that are portfolio margined in the same account 
will be treated in the event that an FCM or broker-dealer becomes 
insolvent is a ``prerequisite for an effective portfolio margining 
regime.''
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.00 as 
proposed with the addition of Sec.  190.00(c)(3)(i)(C) and the 
modification to Sec.  190.00(d)(3)(v), as set forth above.
2. Regulation Sec.  190.01: Definitions
    The Commission is adopting Sec.  190.01 as proposed with 
modifications set forth below, to update the definitions for revised 
part 190. Most of the changes in Sec.  190.01 are conforming changes, 
such as correcting cross-references and deleting definitions of certain 
terms that are not used in part 190, as amended. Other changes 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 adopting 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 part 190. In particular, the Commission is separating the delivery 
account class into two subclasses, a physical delivery account class 
and a cash delivery account class; the relevant terms are defined 
below. The definitions of commodity contract and physical delivery 
property codify positions that the Commission has taken in recent 
commodity broker bankruptcies.\40\
---------------------------------------------------------------------------

    \40\ Respectively, In Re Peregrine Financial Group, Inc., No. 
12-B27488 (Bankr. N.D. Ill.), and MF Global, Inc.
---------------------------------------------------------------------------

    The Commission is also amending Sec.  190.01 to replace the 
paragraphs 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 
implemented by the Commission with respect to, e.g., Sec.  1.3.\41\
---------------------------------------------------------------------------

    \41\ See generally 83 FR 7979, 7979 & n.6 (Feb. 23, 2018).
---------------------------------------------------------------------------

    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.01, including the usefulness and any unintended 
consequences of the revised definitions. The Commission received a 
number of comments on the proposed definitions in Sec.  190.01. As 
further detailed below, the Commission is modifying some of the 
definitions in response to comments. Unless stated otherwise below, the 
Commission did not receive any comments on a proposed definition in 
Sec.  190.01 and is adopting each definition as proposed.\42\
---------------------------------------------------------------------------

    \42\ The Commission did not receive comments with respect to the 
following part 190 definitions as proposed in Sec.  190.00: Act, 
Bankruptcy code, Business day, Calendar day, Cash delivery account 
class, Cash equivalents, Clearing organization, Commodity broker, 
Commodity contract account, Court, Cover, Customer, Customer claim 
of record, Customer class, Dealer option, Debtor, Distribution, 
Equity, Exchange Act, FDIC, Filing Date, Final net equity 
determination date, Foreign board of trade, Foreign clearing 
organization, Foreign future, Foreign futures commission merchant, 
Foreign futures intermediary, Funded balance, Futures and futures 
contract, In-the-money amount, Joint account, Leverage contract, 
Leverage transaction merchant, Member property, Net equity, Open 
commodity contract, Order for relief, Person, Premium, Primary 
liquidation date, Principal contract, Securities Account, SIPA, 
Security, Short term obligation, Specifically identifiable property, 
Strike price, Substitute customer property, Swap, Trustee, and 
Undermargined. Accordingly, the Commission is adopting those 
definitions as proposed, as discussed later in section II.A.2.
---------------------------------------------------------------------------

    The Commission is adopting the definition of ``account class'' as 
proposed with the modifications described below. 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 
swap accounts.'' The Commission is adding detail to the definition of 
``account class'' by including therein definitions of ``futures 
account,'' ``foreign futures accounts,'' ``cleared swaps accounts,'' 
and ``delivery accounts.'' However, as discussed above with respect to 
Sec.  190.00(d)(1)(i), the Commission is removing, at least 
temporarily, the ``commodity options'' and ``leverage account'' account 
classes.\43\
---------------------------------------------------------------------------

    \43\ The Commission is adopting paragraph (2) of the definition 
of account class to 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 that latter account class. This would take place because the 
contracts in question are risk-offsetting to contracts in the latter 
account class. For example, 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 DCO. 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). The Commission is adopting paragraph (2) to 
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. The Commission is also adopting 
paragraph (3) of the definition of account class to 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 confirms 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.

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[[Page 19332]]

    The Commission is adopting the definition of ``futures account'' to 
cross-reference the definition of the same term in Sec.  1.3 of the 
Act, while the definition of ``cleared swaps account'' cross-references 
the definition of ``cleared swaps customer account'' in Sec.  22.1. 
These definitions apply 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, the Commission is adopting a corresponding reference to such 
accounts at a clearing organization, 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)). The Commission clarifies that this would not apply if a 
foreign clearing organization is clearing foreign futures for clearing 
members that are not subject to the requirements of Sec.  30.7.
    The ABA Subcommittee and CME recommended that the Commission expand 
the definitions of ``futures account,'' ``foreign futures account,'' 
and ``cleared swaps account'' within the Sec.  190.01 definition of 
``account class'' to cover the accounts of non-public customers. The 
ABA Subcommittee and CME stated that as proposed, the cross-references 
to Sec.  1.3, the ``30.7 account'' in 30.1, and the ``cleared swaps 
customer account'' in Sec.  22.1 within the account class definitions, 
limited the scope of those definitions to only segregated accounts of 
public customers despite the Commission's intention to use those same 
account class distinctions for non-public customers elsewhere in the 
part 190 rules. The ABA Subcommittee and CME suggested that those 
account class distinctions are also relevant for the non-public 
customer class (i.e., the holders of proprietary accounts carried by 
FCMs and for clearing members' house accounts carried by DCOs).
    The Commission is persuaded by the comments that there are, in at 
least some cases, account class distinctions within the customer class 
for non-public customers,\44\ and thus agrees that the revised 
definitions of ``futures account,'' ``foreign futures account,'' and 
``cleared swaps account'' within the Sec.  190.01 definition of 
``account class'' should address separately non-public customers, and 
has amended the definitions to do so.
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    \44\ See, e.g., Sec.  190.09(c)(2)(iv) (allocating residual 
property 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.)
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    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting the ``account class,'' 
``futures account,'' foreign futures account,'' and ``cleared swaps 
account'' definitions in Sec.  190.01 as proposed with the 
modifications referred to above.
    The ``delivery account'' class is the fourth type of account class. 
It is the relevant account through which an FCM or DCO accounts for the 
making or taking of physical delivery under commodity contracts whose 
terms require settlement by delivery of a commodity. The FCM or DCO 
designates such account as a delivery account on its books and records. 
The Commission is adopting the definition of ``delivery account'' as 
proposed within paragraph (1)(iv) of the definition of account class, 
with a modification to conform to the issue addressed in the preceding 
paragraph: The delivery account applies to ``both public and non-public 
customers, considered separately.'' \45\
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    \45\ This separate consideration is a consequence of the fact 
that, pursuant to Bankruptcy Code section 766(h), public customer 
claims must be paid in full before non-public customer claims.
---------------------------------------------------------------------------

    The current definition of ``delivery account'' in Sec.  
190.05(a)(2) refers to an account that contains only property described 
in three of the nine categories of property in the current definition 
of ``specifically identifiable property.'' The Commission has 
determined to adopt a more functional definition of ``delivery 
account'' in Sec.  190.01. This revised definition will focus on an 
account maintained on the books and records of an FCM or DCO for the 
purpose of accounting for the making or taking of delivery under 
commodity contracts whose terms require settlement by delivery of a 
commodity.\46\
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    \46\ See Sec.  190.01.
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    The Commission is thus adopting paragraph (1)(iv)(A)(1) to define 
delivery accounts for FCMs. The Commission is adopting paragraph 
(1)(iv)(A)(2) to incorporate the same concepts for clearing 
organizations, and also permit a clearing organization to 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 is 
being subdivided into separate physical and cash delivery account 
classes, as provided in Sec.  190.06(b), for purposes of pro rata 
distributions to customers for their delivery claims. The definitions 
of the terms ``physical delivery property'' and ``cash delivery 
property'' are addressed in detail later in this section.
    As customer property held in a delivery account is not subject to 
the Commission's segregation requirements, the Commission believes it 
may be more challenging and time-consuming to identify customer 
property for the cash delivery account class,\47\ (and such cash would 
thus be commingled with the FCM's own cash intended for operations). 
Consequently, the Commission believes separating (1) most cash delivery 
property and customer claims from (2) most physical delivery property 
and customer claims should promote more efficient and prompter 
distribution of the latter to customers. For these reasons, the 
Commission is adopting the delivery account definition to be further 
divided into physical delivery and cash delivery account classes, for 
purposes of pro rata distributions to customers for their delivery 
claims.
---------------------------------------------------------------------------

    \47\ The Commission agrees with a point previously made by the 
ABA Committee: ``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.'' See 
Transmittal Letter from The Part 190 Subcommittee of the Business 
Law Section of the American Bar Association accompanying Model Part 
190 Rules (``ABA Cover Note''), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61330&SearchText at 14. See also In re MF Global 
Inc., 2012 WL 1424670 (noting how physical delivery property was 
traceable).
---------------------------------------------------------------------------

    The claims with respect to the physical delivery and cash delivery 
subclasses are fixed on the ``filing date.'' \48\ 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.
---------------------------------------------------------------------------

    \48\ ``Filing date'' means the date that 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).
---------------------------------------------------------------------------

    CME and ICE supported separate subaccounts of the delivery account 
for physical property (the property being delivered) and cash property 
(cash used

[[Page 19333]]

to pay for delivery). CME agreed with the proposed definition of the 
delivery account class and supported the proposed separation of the 
delivery account class into the cash delivery account and physical 
delivery account classes, as they delineate the customer property that 
is available to distribute to customers in each account class on a pro 
rata basis. CME agreed that cash delivery property should include cash 
or cash equivalents recorded in a customer's delivery account as of the 
filing date, along with any physical delivery property subsequently 
received in accepting a delivery, and likewise that physical delivery 
property should include any cash delivery property received subsequent 
to the filing date in exchange for making a delivery. CME also had 
specific comments on each of the two subaccount definitions as 
discussed below.
    CME noted that the Commission does not impose segregation 
requirements on FCMs with respect to the cash or physical delivery 
property that an FCM holds on behalf of its customers and records in a 
delivery account. As learned from the In re MF Global, Inc. bankruptcy 
(hereinafter ``MF Global''),\49\ CME agreed that it can be more 
challenging for a trustee to trace the cash recorded in delivery 
accounts than to trace physical delivery property. For example, the MF 
Global trustee could more readily identify physical delivery property 
in the form of electronic title documents, compared to identifying non-
segregated cash belonging to the delivery account class given the 
fungible nature of cash.
---------------------------------------------------------------------------

    \49\ In re MF Global, No. 11-2790 (MG) (SIPA) (Bankr. S.D.N.Y.).
---------------------------------------------------------------------------

    CME recommended that the Commission address through a separate 
rulemaking the broader issues around whether customer property carried 
in delivery accounts should be subject to any special customer 
protections, such as requirements that FCMs should hold such property 
in custody accounts or limitations on how long cash or cash equivalents 
should be held in delivery accounts that are not subject to custody 
requirements.\50\
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    \50\ This recommendation is addressed in section II.G below.
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    At this time, after consideration of the comments and for the 
reasons stated above the Commission is adopting the definition of 
``delivery account'' as proposed, with the modification to note that it 
applies to each of public and non-public customers, considered 
separately.
    The Commission is adopting the definition of ``cash delivery 
property'' as proposed with the modifications described below. The 
Commission proposed to define cash delivery property to 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 
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 Commission is adopting the cash delivery property definition to 
mean 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 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 definition also requires 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 seven 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 a cleared 
option.\51\ In response to comments discussed below, the Commission is 
adopting the definition of cash delivery property to also include any 
cash transferred by a customer to the trustee on or after the filing 
date for the purpose of paying for delivery, consistent with Sec.  
190.06(a)(3)(ii)(B)(1). The Commission is also adopting the definition 
in response to comments that requested that the Commission provide that 
in the case of a contract where one fiat currency is to be exchanged 
for another fiat currency, each currency will be considered cash 
delivery property to the extent that it is recorded in a delivery 
account.
---------------------------------------------------------------------------

    \51\ As discussed below, the proposal had specified a period of 
three calendar days; after consideration of the comments, that 
period has been changed to seven calendar days.
---------------------------------------------------------------------------

    Commenters generally supported separate subaccounts of the delivery 
account, and that cash delivery property should include cash or cash 
equivalents recorded in a customer's delivery accounts as of the filing 
date, along with any delivery property subsequently received in 
accepting a delivery. However, the Commission also received several 
comments on three aspects of the proposed definition of cash delivery 
property.
    First, the ABA Subcommittee, CME, ICE, FIA, and CMC recommended 
that the Commission remove the three-calendar day restriction proposed 
in the definition of cash delivery property in Sec.  190.01. While 
several of these commenters recognized the Commission's intention to 
encourage customers and their FCMs to hold cash in a segregated account 
where it is better protected until needed to pay for a delivery that is 
effected in the delivery account, the commenters were concerned that 
cash or cash equivalents might be posted to delivery accounts sooner 
than three days before the first notice date or exercise date, and 
therefore this property might be denied the cash delivery property 
protection.
    FIA stated that the Federal Register release did not explain why 
the Commission proposed to restrict cash delivery property to cash and 
cash equivalents received no earlier than three calendar days before 
the relevant first notice day or exercise date. FIA and ICE could not 
identify any justification as to why cash or cash equivalents that may 
be received by a debtor FCM and properly deposited in a cash delivery 
account prior to this period should receive different protections under 
part 190 than cash and cash equivalents received within the three-
calendar day time frame. The ABA Subcommittee noted that their 
Committee eliminated this provision in the Model Part 190 Rules to 
avoid unintended consequences.
    CME recognized that the three-day limitation is based on the 
limitation in current part 190, but stated that it does not make sense 
and if not eliminated from the definition, it could be detrimental to 
customers, which is contrary to the goal of enhancing customer 
protections. CME further explained that if a customer posts cash or 
cash equivalents to its delivery account in anticipation of paying for 
an upcoming delivery or to guarantee its obligation to take delivery, 
the timing of the payment should not matter. If the parties intend to 
make and take delivery, CME believed the trustee should be able to 
follow the customers' intention. CME explained that a customer is 
unlikely to leave cash in an unsegregated delivery account with an FCM 
for any extended time, without reason, when it would be better

[[Page 19334]]

protected by holding the cash in a segregated account or withdrawing 
the cash if not needed to meet upcoming delivery obligations. CME noted 
that there can be times, though, when a customer will legitimately post 
cash to its delivery account sooner than the definition would allow, 
for example, out of caution to assure that the necessary funds are 
available to pay for a delivery when the first notice date or exercise 
date immediately follows a weekend or holiday, or to meet payment 
deadlines imposed by the FCM, or based on market convention. CME noted 
that some FCMs may require customers to post cash sooner than three 
days prior to the relevant notice or exercise date, as applicable, to 
satisfy a delivery-related obligation. CME believed it could be 
potentially disruptive to the delivery process to deny the customer the 
protection of having its funds classified as cash delivery property 
because it posted the cash or cash equivalents needed to complete an 
upcoming delivery too soon.
    CME also believed the three-day timing element does not make sense 
with respect to cash recorded in a customer's delivery account as of 
the filing date, which the customer had previously received as payment 
for delivering a commodity under an expired or exercised contract. CME 
believed the Commission intended for the timing limitation to apply to 
this situation, but the proposed definition does not exclude such cash 
from the requirement.
    CME understood that the Commission proposed to keep the timing 
limitation to encourage FCMs and their delivery customers to hold cash 
intended to pay for a delivery in a segregated account until bilateral 
delivery obligations are near at hand. However, CME questioned whether 
the limitation was effective in encouraging the desired behavior, in 
particular when it is contained in bankruptcy regulations and parties 
with delivery obligations may not necessarily be aware of it. As a 
result, CME recommended that the Commission address the protection of 
customer property held in delivery accounts in a more direct and 
transparent matter, through a separate rulemaking. Specifically, CME 
recommended that the Commission revise the ``cash delivery property'' 
definition to remove the limitation that cash delivery property must be 
recorded in the delivery account no sooner than three calendar days 
before the first notice date or exercise date.
    The Commission notes that part 190 currently contains the three-day 
limitation, which serves to limit delivery property to property that is 
transferred into a delivery account shortly before the notice or 
exercise date.\52\ Thus, the Commission considered whether a change in 
the current standard is warranted. As discussed further below, the 
Commission concludes that while the case has been made to extend the 
limitation from three calendar days to seven calendar days, the case 
has not been made to remove the limitation in its entirety at this 
time.
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    \52\ See current Sec.  190.05(a)(2) (tying delivery account to 
portions of the definition of specifically identifiable property in 
Sec.  190.01); Sec.  190.01(ll)(4) and (5) (limiting recognition of 
cash as specifically identifiable property to cases where it is 
identified on the books and records of the FCM as being received 
from or for the account of a particular customer on or after three 
calendar days before the first notice date or exercise date 
specifically for the purpose of a delivery or exercise).
---------------------------------------------------------------------------

    While delivery accounts provide some customer protection, in that 
they benefit from favorable treatment in bankruptcy, they lack the 
protection of segregation requirements, in contrast to futures account, 
foreign futures account, and cleared swaps accounts. In the case of the 
latter types of accounts, the FCM must maintain in accounts, protected 
from the claims of creditors of the FCM other than the customers for 
whom they are segregated, sufficient funds to repay the claims of such 
customers in full, at all times. Such segregation protections are a 
very important means of ensuring that sufficient funds are in fact 
available to pay customers in full in the (highly unlikely) event of 
the insolvency of an FCM.
    Accordingly, the Commission is of the view that changing current 
part 190 to completely remove any time limitation for protecting 
property transferred into a delivery account would, in light of this 
lack of segregation protection, carry the risk of significant 
unintended consequences, e.g., customers being encouraged to transfer 
funds prematurely into an account without such protection, and thus a 
bankruptcy where a greater number of customers receive less than the 
full amount of their claims, and greater total shortfalls in repayment 
of such claims.
    CME, while noting their preference for simply deleting the three-
day limitation, observed that protection of customer property held in 
delivery accounts should be addressed in a direct and transparent 
manner through a separate rulemaking. The Commission concludes that 
deleting entirely the time limitation on posting cash delivery property 
should only be undertaken, if at all, in the context of a separate, 
dedicated, and explicit rulemaking, in which moving property more 
quickly to a delivery account is considered in conjunction with 
segregation protection for property in such an account.
    However, the Commission believes CME's concerns about long weekends 
raise important issues. For example, in the context of an FCM's global 
business, there could be a bank holiday on a Friday in the jurisdiction 
where a customer is based, a Federal holiday on the following Monday in 
the U.S., and the exercise or notice date might be on a Tuesday; in 
which event three calendar days may be too short. Similarly, in the 
vein of CME's comment, there may be legitimate reasons to transfer the 
funds a day or two in advance of when they are needed, to account for 
the possibility of a failure in the transfer process.
    Weighing the concerns of having funds for an extended time in an 
account that is not protected by segregation against the need to 
provide a modest amount of flexibility in the process, the Commission 
has determined that a reasonable balance can be achieved by changing 
the three-day (before notice or exercise date) period to a seven-day 
period. The Commission believes this extended time period will address 
completely the concern that a delivery date may come after a holiday 
weekend, and should mitigate concerns about FCM funding requirements 
that extend beyond three days. If and when a separate rulemaking 
results in additional protection for delivery accounts, it will be 
appropriate to revisit this aspect of part 190 as part of such a 
rulemaking.
    Second, the ABA Subcommittee, CME, and CMC recommended that the 
Committee revise the definition of cash delivery property to allow for 
the possibility that cash or cash equivalents could be posted after the 
filing date for the purpose of paying for a delivery, and to provide 
protection for such deposits. The commenters requested that the 
Commission expand the definition to allow for the rare possibility that 
a customer may be unable to post funds needed to pay for a delivery in 
advance of the filing date so that the definition should also cover 
cash delivery property received after the filing date in anticipation 
of taking delivery of a commodity. CME noted that as has been seen with 
other FCM bankruptcies, the days prior to actual filing can be chaotic 
and customers may not have had the opportunity to meet such a deadline. 
To allow the delivery to be completed reduces a potential disruptive 
situation to commodities markets during an otherwise tumultuous time.
    This issue is illuminated by considering the interplay of other

[[Page 19335]]

regulations that affect delivery. The Commission notes that while Sec.  
190.04(c) continues the preference for the trustee to liquidate 
contracts moving into delivery position before they do so, and Sec.  
190.06(a)(2) continues the preference, in cases where the trustee is 
unable to do so, for the trustee to arrange for delivery to occur 
outside the estate, Sec.  190.06(a)(3) acknowledges that there may be 
cases where the trustee will need to facilitate the making or taking of 
delivery. Regulation Sec.  190.06(a)(3)(ii)(B)(1) refers to cases where 
the trustee pays for delivery (in whole or in part) with cash 
transferred by the customer to the trustee on or after the filing date 
for the purpose of paying for delivery.
    Thus, the Commission agrees with the arguments made by the 
commenters who suggested that the Commission expand the definition of 
``cash delivery property'' in this context, and consequently is adding 
an explicit reference to the cash transferred from a customer to the 
trustee after the filing date, consistent with Sec.  
190.06(a)(3)(ii)(B)(1). Moreover, for consistency, the Commission will 
amend Sec.  190.08(c)(1)(ii) as proposed to explicitly give such post-
petition transfers treatment as 100% funded.
    Finally, the ABA Subcommittee suggested that the Commission clarify 
that the delivery of two different fiat currencies for foreign currency 
commodity contract constitutes cash delivery property. CME suggested a 
similar technical change to clarify in the definition that for a 
commodity contract that settles by delivery of a foreign currency as 
the underlying commodity or by an exchange of a pair of currencies, the 
USD or foreign currency recorded to a delivery account in connection 
with either side of the delivery constitutes cash delivery property.
    In response to the ABA Subcommittee comment regarding the delivery 
of two fiat currencies, ``[g]iven the fungible nature of cash, 
regardless of currency denomination,'' the Commission has determined to 
amend further the definition of ``cash delivery property'' to clarify 
that for foreign exchange contracts, i.e., contracts where one fiat 
currency is exchanged for another fiat currency, both fiat currencies 
will be treated as cash delivery property, and neither currency will be 
considered physical delivery property.
    Accordingly, in consideration of the comments and the reasons 
discussed above, the Commission will adopt the definition of ``cash 
delivery property'' in Sec.  190.01 as modified, with the additions 
referred to above.
    The Commission is adopting the definition of ``physical delivery 
property'' in Sec.  190.01 as proposed with modifications, as described 
below. The Commission is adopting the definition of ``physical delivery 
property'' to include, 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.\53\ The Commission is adopting the definition to 
include warehouse receipts, other documents of title, or shipping 
certificates (including electronic versions of the forgoing), for the 
commodity, or the commodity itself.
---------------------------------------------------------------------------

    \53\ The current definition is found in Sec.  190.01(ll)(3), and 
focuses on documents of title and physical commodities.
---------------------------------------------------------------------------

    The Commission is amending the physical deliver property definition 
to address changes in delivery practices since the 1980s. The reference 
to electronic versions of warehouse receipts, other documents of title, 
or shipping certificates explicitly recognizes 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.\54\
---------------------------------------------------------------------------

    \54\ See ABA Cover Note at 10, 12-13.
---------------------------------------------------------------------------

    For purposes of analytical clarity, the Commission is adopting the 
definition of physical delivery property as subdivided into four 
categories:
    First, the commodities or warehouse receipts, other documents of 
title, or shipping certificates (including electronic versions of any 
of the foregoing) for the commodity 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.\55\
---------------------------------------------------------------------------

    \55\ 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 class.
---------------------------------------------------------------------------

    Second, the commodities or warehouse receipts, other documents of 
title, or shipping certificates (including electronic versions of any 
of the foregoing) for the commodity 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.\56\
---------------------------------------------------------------------------

    \56\ 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 definition the Commission is 
adopting explicitly codifies 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.\57\ This 
property would be considered physical delivery property solely for the 
purpose of the obligations, pursuant to Sec.  190.06, to make or take 
delivery of physical delivery property. The 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).
---------------------------------------------------------------------------

    \57\ As the ABA Cover Note explained at 13, ``[w]hen 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 Sec.  190.06(a)(2) (either by itself in the case of an 
FCM bankruptcy or in conjunction with 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 Sec.  
190.06. 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.
    The Commission is also adding a special case to correspond with the 
special case for cash delivery property, which states that where one 
fiat currency is exchanged for another, neither such currency, to the 
extent that it is recorded in the delivery account, will be considered 
physical delivery property. The Commission is also, as discussed 
further below, additionally amending the physical delivery property 
definition to address the possibility of a negative delivery price

[[Page 19336]]

where the party obliged to delivery physical delivery property under an 
expiring contract or an expired options contract is also obliged to 
make a cash payment to the buyer, as such cash or cash equivalents 
constitute physical delivery property.
    CME and CMC agreed that physical delivery property should include 
any cash delivery property received subsequent to the filing date in 
exchange for making a delivery.
    In light of the evolving nature of intangible assets, and of the 
manner in which they may be held, custodied or transferred, ICE 
suggested that the definition of physical delivery property include, as 
examples (and not by way of limitation), other electronic 
representations of commodities (whether or not technically ``an 
electronic title document'') or any property entitlement to a commodity 
(such as for a commodity held as a financial asset in a securities 
account under Article 8 of the Uniform Commercial Code (whether or not 
a security) or similar structure).
    ICE strongly agreed with the Commission's proposal to clarify that 
intangible property received or held for purposes of delivery is 
appropriately regarded as subject to the delivery account, without 
regard to whether it is ``physical'' as under the current rule. ICE 
argued that any asset, tangible or intangible, that can be delivered in 
settlement of a contract should be eligible to be treated as delivery 
property, as set out in the proposed definition of ``physical delivery 
property.'' ICE believed this proposed definition would avoid questions 
that may otherwise arise in connection with the delivery of digital 
currencies or other novel digital assets. CME also supported the 
decision to expand the delivery account class to cover intangible 
commodities.
    Additionally, CME supported modernizing the definition of physical 
delivery property to recognize the use of electronic delivery documents 
in effecting deliveries under physical delivery commodity contracts. 
CME recommended that the Commission further expand the physical 
delivery property definition to cover within its scope any cash or cash 
equivalents that a seller may deposit in its delivery account when its 
obligation to deliver physical delivery property under an expiring 
futures or exercised options contract also includes an obligation to 
make a cash payment to the buyer, as could arise if the contract's 
final settlement price is negative. CME acknowledged that this scenario 
would be unprecedented and may never occur, but believed it prudent to 
contemplate the possibility in light of events in April 2020 where 
certain physical-delivery oil futures contracts traded below zero in 
the days prior to establishment of the final settlement prices.
    CME also recommended a technical correction to the definition 
relating to the fact that shipping certificates are not electronic 
title documents, and instead represent the contractual obligation of a 
facility to deliver the underlying commodity to the buyer. Thus, for 
clarity CME recommended that the Commission revise the phrase 
``including warehouse receipts, shipping certificates or other 
documents of title (including electronic title documents) for the 
commodity'' to read ``including warehouse receipts, shipping 
certificates or other similar documents (including electronic versions 
thereof).'' The Commission is not amending the examples to explicitly 
address additional ``electronic representations of commodities'' within 
the definition of physical delivery property because the definition 
already broadly covers ``a commodity, whether tangible or intangible, 
held in a form that can be delivered to meet and fulfill delivery 
obligations under a commodity contract. . . .''
    The Commission is amending the definition of physical delivery 
property to address the technical correction recommended by CME by 
acknowledging that shipping certificates are not documents of title 
while avoiding the phrase ``similar documents'' by instead amending the 
last phrase to read ``including warehouse receipts, other documents of 
title, or shipping certificates (including electronic versions of any 
of the foregoing) for the commodity, or the commodity itself.''
    The Commission is also adding a special case, corresponding to the 
special case for cash delivery property, stating that where one fiat 
currency is exchanged for another, neither such currency would be 
considered physical delivery property.
    The Commission is further amending the physical delivery property 
definition with a second special case in response to CME's suggestion 
to address the possibility of a negative delivery price. While negative 
prices for deliverable commodities are rare, they are not unprecedented 
(e.g., the price of crude oil briefly went negative in April 2020). 
While a negative price for actual delivery may be even rarer, it is 
theoretically possible. Thus, the Commission is amending the definition 
of ``physical delivery property'' to address this special case by 
adding the following: In a case where the final settlement price is 
negative, i.e., where the party obliged to deliver physical delivery 
property under an expiring futures contract or an expired options 
contract is also obliged to make a cash payment to the buyer, such cash 
or cash equivalents constitute physical delivery property.
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting the definition of 
``physical delivery property'' as proposed with the appropriate 
modifications to the structure, as set forth above, to correspond to 
``(1) In general.'' and to address two special cases in ``(2) Special 
cases.'' The Commission is adopting the definition of ``allowed net 
equity'' as proposed in Sec.  190.01 and as modified to become ``funded 
net equity'' as described below. The Commission proposed ``allowed net 
equity'' to update cross-references and allow for two definitions of 
the term (as used in subparts B and C of part 190).
    The ABA Subcommittee expressed concern in their comment letter that 
the definition and the use of the term ``allowed net equity'' as 
proposed in Sec. Sec.  190.01 and 190.08(a) could create 
inconsistencies and confusion between part 190 and the settled 
bankruptcy law terminology in which ``allowed'' typically refers to the 
fixed amount of a creditor's claim rather than the amount distributable 
on such claim. The ABA Subcommittee recommended three modifications to 
address this potential confusion, including the deletion of the 
definition of ``allowed net equity'' in proposed Sec. Sec.  190.01 and 
190.08(a), as the ABA Subcommittee believes the remainder of proposed 
Sec.  190.08 would address how to calculate a customer's net equity 
claims and the funded balances for each such claims.\58\
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    \58\ The ABA Subcommittee also recommended that the Commission 
further amend Sec.  190.02 by adding new paragraph (g) to proposed 
Sec.  190.02 to state that the term `allowed' in this part shall 
have the meaning ascribed to it in the Bankruptcy Code. The ABA 
Subcommittee believed that this would confirm that ``allowed'' under 
part 190 equates with the use of ``allowed'' under the Bankruptcy 
Code. The ABA Subcommittee also recommended that the Commission add 
``funded balance of'' before ``such customer's allowed net equity 
claim'' in proposed Sec.  190.09(d)(3). The Commission agrees that 
these recommended amendments would avoid confusion with the meaning 
of ``allowed'' in Sec.  190.02(g) and is therefore making these 
suggested changes.
---------------------------------------------------------------------------

    The Commission agrees with the ABA Subcommittee that the inclusion 
of ``allowed'' in the defined term ``allowed net equity'' could cause 
confusion in the broader context of established bankruptcy law, where 
``allowed'' refers to the trustee's measure of the proper amount of a 
claim, rather than to the

[[Page 19337]]

portion of a claim that is funded (in pro rata distribution).
    Accordingly, after consideration of the comments, including the ABA 
Subcommittee's suggestion regarding the funded portion of a customer's 
allowed claim throughout part 190, and for the reasons stated above, 
the Commission is changing the defined term ``allowed net equity'' to 
``funded net equity,'' and adopting the definition as so modified. The 
Commission is also adding Sec.  190.02(g) (as discussed below) and 
adding ``funded balance of'' before ``such customer's allowed net 
equity claim'' in Sec.  190.09(d)(3) as suggested.
    The Commission is adopting the definition of ``commodity contract'' 
in Sec.  190.01 as proposed, in order to amend the definition to 
incorporate and extend in context (through references to current 
Commission regulations) the definition in section 761(4) of the 
Bankruptcy Code.\59\
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    \59\ It should be noted that, consistent with 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.
---------------------------------------------------------------------------

    ICI strongly supported the proposed amendments to the definition of 
``commodity contract'' to include any ``futures contract'' and any 
``swap'' thereby permitting transactions carried in a futures or 
cleared swaps account in accordance with the Commission's regulations 
to be eligible for the protections that part 190 affords.
    Accordingly, after consideration of the comment and for the reasons 
stated above, the Commission is adopting the definition of ``commodity 
contract'' as proposed.
    The Commission is adopting the definition of ``customer property 
and customer estate'' as proposed to update the definition to clarify 
cross-references within part 190 and to note that customer property 
distribution is addressed in section 766(i) of the Bankruptcy Code in 
addition to section 766(h).
    ICE supported the Commission's decision to include forward 
contracts that are traded on a DCM and cleared by a DCO as customer 
property.
    Accordingly, after consideration of the comment, and for the 
reasons stated above, the Commission is adopting the definition of 
``Customer property, customer estate'' in Sec.  190.01 as proposed.
    The Commission is adopting the definition of ``house account'' with 
modifications, as set forth below to modify the existing definition to 
(a) clarify 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 define the term in relation to an FCM, a foreign futures 
commission merchant, and a DCO.
    The ABA Subcommittee and CME agreed with expanding the current 
definition to cover the house accounts that DCOs maintain for clearing 
members. However, the commenters noted that ``house account'' is used 
in only three places for an FCM proceeding: (i) Proposed Sec.  
190.06(a)(5), which addresses deliveries made or taken with respect to 
the debtor FCM's house account under open commodity contracts; (ii) 
proposed Sec.  190.07(c), which prohibits transfer of the debtor FCM's 
house account after the filing date; and (iii) proposed Sec.  
190.08(b)(2)(ix), which provides that when a non-debtor FCM maintains 
an omnibus account and a house account with a debtor FCM, it holds the 
accounts in a separate capacity for purposes of calculating its net 
equity claims against the debtor FCM. Assuming the Commission intended 
to expand the scope of these provisions in each case, the ABA 
Subcommittee and CME suggested that the Commission modify the three 
provisions to clarify that they apply to proprietary accounts of FCMs, 
and to limit the defined term to house accounts maintained by a DCO for 
clearing members. The ABA Subcommittee believed it was unnecessary, 
potentially confusing, and could preclude porting of proprietary 
accounts.
    The Commission agrees with the commenters' recommendation to 
streamline the ``house account'' definition and amend the respective 
subpart B provisions to limit the use of ``house account'' to the 
context of clearing organization bankruptcies to avoid any potential 
confusion regarding the ability to port proprietary accounts. 
Accordingly, after considering the comments, and for the reasons stated 
above, the Commission is adopting the definition of ``house account'' 
in Sec.  190.01, as modified.
    The Commission is adopting the definitions of ``non-public 
customer'' and ``public customer'' as proposed to define who is 
considered a public versus a non-public customer separately for FCMs 
and for clearing organizations. These definitions are complements 
(i.e., every customer is either a ``public customer'' or a ``non-public 
customer,'' but never both).
    In the case of a customer of an FCM, the Commission is adopting the 
definition of ``public customer,'' \60\ which 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 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. The Commission is tying 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 
non-public customers are customers that are not public customers.
---------------------------------------------------------------------------

    \60\ This is in contrast to the current definition 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 change is not substantive, but rather fosters 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 Commission is 
differentiating between public and non-public customers such that 
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 a proprietary member, then the 
customer would be treated as a non-public customer.
    Vanguard agreed that the proposed definition of public customer in 
Sec.  190.01 included any customer of an FCM whose commodity contract 
is subject to the Commission's segregation

[[Page 19338]]

requirements, and for a DCO, a person whose account with the FCM is not 
classified as a proprietary account. CME also supported the proposed 
definitions of public customer and non-public customer as it believed 
they are more understandable than the prior part 190 definitions.
    CME, however, asked the Commission to reconsider the recommendation 
of the ABA Subcommittee to include non-U.S. customers of foreign broker 
clearing members of a DCO within the public customer definition. CME 
noted that it previously considered admitting foreign brokers as 
clearing members to clear trades of their non-U.S. customers in futures 
or options on futures listed on the CME or the other designated 
contract markets (``DCMs'') owned by CME Group, which would be 
analogous to a foreign clearing organization admitting FCMs as members 
to clear trades of their public customers in futures or options on 
futures listed by a foreign board of trade. While that model does not 
currently exist for U.S. DCOs and the DCMs for which they provide 
clearing services, CME believed it is appropriate to include that 
flexibility in part 190 to accommodate that possibility. OCC also 
requested clarification as to whether customers of foreign brokers that 
access a DCO through an FCM clearing member affiliated with the foreign 
broker would be treated as public customers.
    The Commission is of the view that including non-U.S. customers of 
foreign-broker clearing members as public customers should be 
considered as part of a comprehensive review of the issues at such time 
as the model of admitting foreign brokers as clearing members for U.S. 
DCOs becomes empirical. Such a review of the issues, including issues 
related to both bankruptcy and risk management, can be more reliably, 
and more efficiently, be conducted in the context of empirical rather 
than hypothetical circumstances.
    In response to OCC's request for clarification, the Commission 
notes that where a foreign broker clears the trades of its (foreign) 
customers through an affiliated FCM that is a clearing member, those 
trades would be cleared on an omnibus basis through the FCM's customer 
account, and would be required to be kept separate from the proprietary 
trades of the affiliated foreign broker. Thus, those customers would be 
treated as public customers. If a foreign broker clears its own 
proprietary trades through an unaffiliated FCM (i.e., there is no 
proprietary relationship between the foreign broker and the FCM as set 
forth in Sec.  1.3), those trades would be considered as public 
customer trades at the FCM, but would not be part of the customer 
omnibus account of the foreign broker at the FCM.
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting the definitions of 
``non-public customer'' and ``public customer'' as proposed in Sec.  
190.01.
    The Commission is adopting the definitions of ``variation 
settlement'' as proposed to define the payments that a trustee may make 
with respect to open commodity contracts. The definition of variation 
settlement includes ``variation margin'' as defined in Sec.  1.3, and 
also includes ``all other daily settlement amounts (such as price 
alignment payments) that may be owed or owing on the commodity 
contract'' to cover all of the potential obligations associated with an 
open commodity contract.
    CME supported defining variation settlement and generally agreed 
with the substance of the definition, but recommended that the 
Commission adopt one self-contained definition that does not rely on 
cross-reference to another Commission definition. CME suggested that 
the Commission adopt the ABA Subcommittee's variation settlement 
definition which would cover ``any amount paid or collected (or to be 
paid or collected) on an open commodity contract relating to changes in 
the market value of the commodity contract since the trade was executed 
or the previous time the commodity contract was marked to market along 
with all other daily settlement amounts (such as price alignment 
payments) that may be owed or owing on the commodity contract.''
    The ABA Subcommittee believed that the definition of variation 
settlement was not used consistently in the Proposal and identified two 
places in proposed Sec.  190.14(b) where the term ``variation'' is used 
instead of ``variation settlement.'' The ABA Committee recommended 
using ``variation settlement'' in both places, to avoid any confusion 
as to whether ``variation'' refers to the Commission's variation margin 
definition or variation settlement definition.
    The Commission notes that the cross-references in Sec.  190.01 to 
definitions in other parts of the Commission's rules is intentional to 
clarify the relationships with those other definitions, and thus the 
Commission declines to make the change proposed by the commenters.\61\ 
Accordingly, after consideration of the comments and for the reasons 
stated above, the Commission is adopting the definition of ``variation 
settlement'' in Sec.  190.01 as proposed.
---------------------------------------------------------------------------

    \61\ The technical correction suggested by the ABA subcommittee 
to Sec.  190.14(b) (change ``variation'' to ``variation 
settlement'') will be adopted in one case; the subsection where the 
second case was found has been removed entirely by the supplemental 
notice of proposed rulemaking.
---------------------------------------------------------------------------

    The Commission did not receive comments on the remaining 
definitions in Sec.  190.01 and is therefore adopting them as proposed.
    The Commission is adopting the definition of ``Act'' in Sec.  
190.01 to refer to the Commodity Exchange Act.
    The Commission is amending the definition of ``Bankruptcy Code'' in 
Sec.  190.01 to update cross-references.
    The Commission is amending the definition of ``Business day'' to 
define what constitutes a Federal holiday and clarify that the end of a 
business day is one second before the beginning of the next business 
day.
    The Commission is amending the definition of ``Calendar day'' to 
include a reference to Washington, DC as the reference location for the 
Calendar day.
    The Commission is adopting the definition of ``Cash delivery 
account class'' to cross-reference it to the new definition in 
``Account class.''
    The Commission is adopting the definition of ``Cash equivalents'' 
to define assets that might be accepted as a substitute for United 
States dollar cash.
    The Commission is amending the definition of ``Cleared swaps 
account'' in Sec.  190.01 to cross-reference it to the new definition 
in ``Account class.''
    The Commission is adopting the amended definition of ``Clearing 
organization'' to update cross-references.
    The Commission is amending the definition of ``Commodity broker'' 
to reflect the current definition of commodity broker in the Bankruptcy 
Code and the relevant cross-references.
    The Commission is adding the definition of ``Commodity contract 
account'' to refer to accounts of a customer based on commodity 
contracts in one of the four account classes, as well as, for purposes 
of identifying customer property for the foreign futures account class 
(subject to Sec.  190.09(a)(1)), accounts maintained by foreign 
clearing organizations or foreign futures intermediaries reflecting 
foreign 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.
    The Commission is amending the definition of ``Court'' to clarify 
that the court having jurisdiction over the

[[Page 19339]]

debtor's estate may not be a bankruptcy court (e.g., in the event of a 
withdrawal of the reference).\62\
---------------------------------------------------------------------------

    \62\ Cf. 28 U.S.C. 157(d).
---------------------------------------------------------------------------

    The Commission is amending the definition of ``Cover'' to improve 
clarity without any substantive change to the current definition.
    The Commission is amending the definition of ``Customer'' 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.
    The Commission is amending the definition of ``Customer claim of 
record'' to improve clarity without any substantive changes to the 
current definition.
    The Commission is amending the definition of ``Customer class'' to 
reflect the revisions to part 190 through this rulemaking, specifically 
emphasizing the difference between public customers and non-public 
customers.
    The Commission is deleting the definition of ``Dealer option'' as 
this term is no longer used.
    The Commission is amending the definition of ``Debtor'' 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.
    The Commission is newly adopting a definition of ``Distribution'' 
to include the 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.
    The Commission is amending the definition of ``Equity'' to update a 
cross-reference.
    The Commission is adding definitions for ``Exchange Act'' and 
``FDIC'' to incorporate the statute and regulator, respectively, in 
part 190.
    The Commission is revising the definition of ``Filing date'' to 
include the commencement date for proceedings under SIPA or Title II of 
the Dodd-Frank Act.\63\
---------------------------------------------------------------------------

    \63\ 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 rulemaking does not define the term 
``filing date'' to occur earlier in such a case, although it would 
(in Sec.  190.02(f) as discussed below) authorize such a to receiver 
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., Sec. Sec.  
190.00(c)(4), 190.06(a)(1) and (b)(1), 190.08(b)(4), and 
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 ff-2(b), (c)(1), (d), and 78fff-
3(a)(3).
---------------------------------------------------------------------------

    The Commission is revising the definition of ``Final net equity 
determination date'' stylistically, to provide updated cross-
references, and to further clarify who the parties involved are 
intended to be.
    The Commission is adding the definition of ``Foreign board of 
trade'' and adopting by reference the definition in Sec.  1.3 (which is 
consistent with Sec.  48.2(a)).
    The Commission is adding the definition of ``Foreign clearing 
organization'' 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.
    The Commission is retaining the definitions of ``Foreign future'' 
and ``Foreign futures commission merchant'' as proposed to be 
unchanged.
    The Commission is adopting the definition of ``Foreign futures 
intermediary'' 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.
    The Commission is revising the definition of ``Funded balance'' to 
the definition in Sec.  190.08(c). That definition is discussed further 
below in section II.B.6.
    The Commission is adding a definition for ``Futures'' and ``Futures 
contract,'' used interchangeably, to clarify what these terms mean for 
purposes of part 190.
    The Commission is deleting the definition of ``In-the-money 
amount'' as the term will no longer be used and replacing it with ``in-
the-money,'' a term that is Boolean, and is used in Sec.  190.04(c).
    The Commission is amending the definition of ``Joint account'' to 
reflect that a commodity pool must be a legal entity.\64\ Thus, the 
Commission is removing the reference to a commodity pool that is not a 
legal entity.
---------------------------------------------------------------------------

    \64\ See Sec.  4.20(a)(1).
---------------------------------------------------------------------------

    The Commission is deleting the definitions of ``Leverage contract'' 
and ``Leverage transaction merchant'' consistent with the discussion 
above with respect to Sec.  190.00(d)(1)(i)(B).
    The Commission is removing the definition of ``Member property'' 
from current Sec.  190.09(a) and addressing it in Sec.  190.01, and 
clarifying that member property is the property that may be used to pay 
net equity claims based on both the members' house account as well as 
claims on behalf of non-public customers of the member.
    The Commission is revising the definition of ``Net equity'' to 
update cross-references, including the difference between bankruptcy of 
an FCM and of a clearing organization.
    The Commission is revising the definition of ``Open commodity 
contract'' to improve clarity without any substantive changes to the 
definition.
    The Commission is revising the definition of ``Order for relief'' 
to update cross-references and incorporate stylistic, non-substantive 
changes.
    The Commission is adding the definition of ``Person'' to clarify 
what this term means in the context of part 190.
    The Commission is adding the definition of ``Physical delivery 
account class'' to be cross-referenced to the new definition in 
``Account class.''
    The Commission is deleting the definition of ``Premium'' as that 
term is no longer used.
    The Commission is revising the definition of ``Primary liquidation 
date'' to reflect the removal of the concept of accounts being held 
open for later transfer. As a result of such removal, the Commission is 
also deleting current Sec.  190.03(a), which set forth provisions 
regarding the operation of accounts held open for later transfer, since 
there will no longer be any such accounts.
    The Commission is deleting the definition of ``Principal contract'' 
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.
    The Commission is adding the definition of the ``Securities 
account'' and ``SIPA'' 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.
    The Commission is amending the definition of ``Security'' to update 
the cross-reference to the Bankruptcy Code without any substantive 
changes to the definition.
    The Commission is removing the definition of ``Short term 
obligation'' from Sec.  190.01 as the term is no longer used within the 
definition of ``specifically identifiable property.'' The Commission is 
instead amending the ``specifically identifiable property''

[[Page 19340]]

definition with respect to securities, as discussed immediately below.
    The Commission is amending the definition of ``Specifically 
identifiable property'' to update and streamline the definition in 
current Sec.  190.01(ll). Paragraph (1)(i) focuses on ``futures 
accounts,'' ``foreign futures accounts,'' and ``cleared swaps 
accounts.'' Paragraph (1)(i)(A) corresponds in major part to paragraphs 
(ll)(1) and (6) of the current definition. For securities, paragraph 
(1)(i)(A)(1) substantially copies current paragraph (ll)(1)(i), but 
clarifies that a security, to be included as specifically identifiable 
property, must have ``a duration or maturity date of more than 180 
days.'' Paragraph (1)(i)(A)(2) reformats 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 
definition restates the corresponding portion of the current 
definition.
    Paragraph (1)(ii) of the definition furthers the approach of 
providing discretion to the trustee. It includes as specifically 
identifiable property commodity contracts that are treated as such in 
accordance with Sec.  190.03(c)(2). As discussed further below,\65\ the 
latter provision permits (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.
---------------------------------------------------------------------------

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

    The Commission is amending the definition of ``Strike price'' for 
brevity without any substantive change.
    The Commission is adding the definition of ``Substitute customer 
property'' 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.
    The Commission is adopting the definition of ``Swap'' to replace 
the current definition of ``Cleared swap'' \66\ in part 190. The 
definition of reflects the current definition and meaning of the term 
``swap'' in section 1a(47) of the CEA and Commission regulation Sec.  
1.3. The Commission is also adopting the definition to 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'').
---------------------------------------------------------------------------

    The Commission is amending the definition of ``Trustee'' to include 
the trustee in a SIPA proceeding.
    The Commission is adopting a definition of ``Undermargined'' for 
purposes of part 190 to mean when the funded balance of a debtor's 
futures account, foreign futures account, or cleared swaps 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-isneeded.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 Sec.  
190.04(b)(f). 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.
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    Accordingly, after consideration of the comments, and for the 
reasons discussed above, the Commission will adopt Sec.  190.01 as 
proposed, with the amendments discussed above.
3. Regulation Sec.  190.02: General
    Regulation Sec.  190.02 is being adopted as proposed, with the 
addition of paragraph (g) as described below. The Commission is 
adopting Sec.  190.02(a)(1) based on current Sec.  190.10(b)(1) with 
one substantive change to permit a trustee to request an exemption from 
the Commission 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. The 
Commission is adopting Sec.  190.02(a)(1) consistent with major theme 
7, discussed in section I.B. above regarding enhanced trustee 
discretion. Section 190.02(a)(1) allows the trustee to request to be 
permitted to extend a deadline or to amend a form.
    The Commission is also adopting Sec.  190.02(a)(2)(i) and (ii), 
(a)(3), and (b), as derived from current Sec. Sec.  190.10(b)(2), (3), 
and (4) and 190.10(d), respectively, with minor editorial and 
conforming changes.
    The Commission is adopting Sec.  190.02(b) to delegate the 
functions of the Commission set forth in part 190, other than the 
authority to disapprove pre-relief transfers pursuant to Sec.  
190.07(e)(1), to the Director of the Division of Clearing and Risk, 
after consultation with the Director of the Market Participants 
Division \70\ (with the possibility of further delegations to members 
of the respective Directors' staffs).
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    \70\ The Market Participants Division is the successor to the 
Division of Swap Dealer and Intermediary Oversight, the title of 
that division at the time of the Proposal.
---------------------------------------------------------------------------

    The Commission is adopting Sec.  190.02(c) to exclude from the 
definition of ``customer'' entities who hold claims against a debtor 
solely on account of uncleared forward contracts. The Commission is 
adopting Sec.  190.02(d) to provide that the Bankruptcy Code will not 
be construed to prohibit a commodity broker from doing certain 
combinations of business, or to permit any otherwise prohibited 
operation, trade or business. The Commission is adopting Sec.  
190.02(e) to provide that security futures products held in a 
securities account shall not be considered to be part of commodity 
futures or options accounts as those terms are used in section 761(9) 
of the Bankruptcy Code. The Commission is adopting Sec.  190.02(c) 
(forward contracts), (d) (other), and (e) (rule of construction) as 
transposed from current Sec.  190.10(e), (g), and (h), respectively.
    The Commission continues to believe, as stated in the proposal, 
that Sec.  190.02(f) should enhance customer protection in cases where 
a receiver has been

[[Page 19341]]

appointed (pursuant to e.g., section 6c of the CEA) for an FCM due to a 
violation or imminent violation \71\ 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). Section 
190.02(f) explicitly permits 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 to protect customers' interests in 
customer property.
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    \71\ 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 (emphasis supplied). 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.
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    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.02. In particular, the Commission requested comment 
as to whether it would be appropriate to permit trustees to request 
relief from procedural provisions such as requirements as to forms, in 
addition to requesting relief from deadlines; whether it would be 
appropriate to permit receivers for FCMs to file voluntary petitions in 
bankruptcy; and whether any portion of proposed Sec.  190.02 would 
likely to lead to unintended consequences, and, if so, how may these be 
mitigated.
    The Commission received two comments on proposed Sec.  190.02. CME 
generally supported proposed Sec.  190.02, including adding a provision 
that would allow the trustee to request an exemption from the 
procedural requirements of the rules. CME also favored adding the 
proposed provision to clarify that a receiver appointed for an FCM due 
to segregation or net capital violations may, in an appropriate case, 
file a petition for bankruptcy of the FCM pursuant to section 301 of 
the Bankruptcy Code. In contrast, FIA recommended that the Commission 
require a receiver to obtain the Commission's consent before the 
receiver may file a voluntary petition in bankruptcy on behalf of an 
FCM. FIA believed that any receiver that may be appointed by a court 
would be in response to a proceeding initiated by the Commission 
pursuant to section 6c of the Act, which authorizes the Commission to 
file an action in the appropriate U.S. District Court when it appears 
that a 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. FIA noted that there may 
be circumstances in which a receiver may determine that a voluntary 
petition under the Bankruptcy Code is warranted. However, in light of 
the fact that such a petition would effectively close the FCM, FIA 
believed that Sec.  190.02(f) should provide that the receiver may file 
a voluntary petition only with the prior consent of the Commission.
    The Commission notes that Sec.  190.02(f) is limited to cases where 
the receiver was appointed due to concerns about either protection of 
customer property, or of capital inadequacy, and the appointment would 
be in response to a proceeding initiated by the Commission. In such a 
case, the Commission believes that it would be appropriate and most 
effective to defer to the judgment of the appointed receiver as to the 
necessity of the filing of a petition in bankruptcy.
    As a technical point, the ABA Subcommittee recommended (consistent 
with their recommendation in the definitions section, Sec.  190.01, to 
more precisely use the term ``allowed net equity'') \72\ that the 
Commission further amend Sec.  190.02 by adding new paragraph (g) to 
proposed Sec.  190.02 to state that the term ``allowed'' in this part 
shall have the meaning ascribed to it in the Bankruptcy Code. The ABA 
Subcommittee believed that this would confirm that ``allowed'' under 
part 190 equates with the use of ``allowed'' under the Bankruptcy Code. 
The Commission agrees, and is making the change.
---------------------------------------------------------------------------

    \72\ See section II.A.2. (recommending that the Commission 
instead use ``funded net equity'' as the defined term in the Sec.  
190.01 definitions.)
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    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is adopting Sec.  190.02 as 
proposed, with the addition of paragraph (g).

B. Subpart B--Futures Commission Merchant (FCM) as Debtor

    The Commission is adopting subpart B (Sec. Sec.  190.03-190.10) to 
address debtors that are FCMs.
1. Regulation Sec.  190.03: Notices and Proofs of Claims
    The Commission is adopting Sec.  190.03 as proposed with 
modifications to Sec.  190.03(c)(2), as set forth below.
    The Commission is adopting Sec.  190.03 to set forth requirements 
for the notices and proofs of claim that are applicable to subpart B of 
part 190. It reorganizes and revises much of current Sec.  190.02, and 
incorporates some portions of current Sec.  190.10.
a. Regulation Sec.  190.03(a): Notices--Means of Providing
    The Commission is adopting Sec.  190.03(a) to set forth the means 
by which notices required under subpart B of part 190 are to be 
provided. Section 190.03(a)(1) is substantially similar to current 
Sec.  190.10(a), but, in an effort to modernize part 190, the 
Commission is deleting the requirement that notices be given to it via 
overnight mail (i.e., in hard copy). The Commission is retaining the 
requirement that all such notices be sent via electronic mail. The 
Commission believes that overnight hard copy delivery is unnecessary 
and that removing the requirement to send notices to the Commission via 
overnight mail will result in cost savings.
    The Commission is adopting Sec.  190.03(a)(2) to provide a 
generalized approach for giving notice to customers under part 190. In 
light of evolving technology, Sec.  190.03(a)(2) replaces the specific 
procedures for providing notice to customers that appear in current 
Sec.  190.02(b) with the requirement that the trustee must establish 
and follow procedures ``reasonably designed'' for giving notice to 
customers under subpart B of part 190. 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 and is consistent with the manner in which bankruptcy 
trustees in recent FCM bankruptcy cases have provided notice to 
customers. The Commission also believes that adopting a generalized 
notice requirement in lieu of retaining more specific notice 
obligations (e.g., newspaper publication) will result in both cost 
savings for the debtor's estate, and more efficient and effective 
notification of customers.
    The Commission requested comment on the approach to the notice 
requirements set forth in proposed Sec.  190.03(a). The Commission 
specifically asked whether the proposed changes would be helpful; would 
be likely to lead to unintended consequences; and how any unintended 
consequences could be mitigated. CME supported providing trustees with 
the flexibility, in consultation with the Commission, to establish 
appropriate procedures for giving notice to customers and moving away 
from outdated and impractical notice requirements. CME also agreed that 
the changes align with how trustees in recent FCM cases have 
communicated with the FCM's customers and are more customer-friendly.

[[Page 19342]]

b. Regulation Sec.  190.03(b): Notices to the Commission and Designated 
Self-Regulatory Organizations
    Section 190.03(b)(1) is derived from current Sec.  190.02(a)(1), 
but includes revised notice requirements that are designed to ensure 
that the Commission and the relevant designated self-regulatory 
organization (``DSRO'') \73\ will be aware of a voluntary or 
involuntary bankruptcy filing or SIPA application as soon as is 
practicable and to codify the practices observed in recent bankruptcy 
and SIPA cases.\74\ First, Sec.  190.03(b)(1) provides that, in the 
event of a voluntary bankruptcy filing, the commodity broker must 
notify the Commission and the appropriate DSRO as soon as practicable 
before, and in any event no later than, the time of filing. Second, 
Sec.  190.03(b)(1) provides that, in the event of an involuntary 
bankruptcy filing or an application for a protective decree under 
SIPA,\75\ the commodity broker must notify the Commission and the 
appropriate DSRO immediately upon the filing of such petition or 
application. The Commission notes that, as a practical matter, a 
decision to file for bankruptcy takes measurable time, as does the 
preparation of the necessary papers. In previous FCM voluntary 
bankruptcy filings, the commodity broker has provided the Commission 
and its DSRO with notice ahead of the bankruptcy filing. Section 
190.03(b)(1) merely codifies the expectation that such advance notice 
should, in fact, occur to the extent practicable. Section 190.03(b)(1) 
allows 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.
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    \73\ For further detail regarding SROs and DSROs see generally 
Sec.  1.52.
    \74\ 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). 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.
    \75\ A SIPA proceeding is commenced when the Securities 
Investors Protection Corporation (``SIPC'') files a petition for a 
protective order. See generally SIPA section 5, 15 U.S.C. 78eee.
---------------------------------------------------------------------------

    Section 190.03(b)(2) sets forth the requirements for the provision 
of notice to 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 part 190. It is derived 
from current Sec.  190.02(a)(2). While Sec.  190.03(b)(2) retains the 
requirement that such notice be provided ``[a]s soon as possible,'' it 
removes the requirement that such notice be provided no later than 
three days after the order for relief. The Commission believes that the 
three-day deadline set forth in current Sec.  190.02(a)(2) 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 
the 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 the 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 Commission staff. Thus, a 
specified deadline for such notification would not appear to be 
helpful. Section 190.03(b)(2) also clarifies that notification should 
be made with respect to a transfer of customer property.
    The Commission requested comment on proposed Sec.  190.03(b). 
Specifically, the Commission asked whether proposed Sec.  190.03 would 
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. LCH expressed support for the requirement that FCMs 
notify DSROs, in addition to the CFTC, of involuntary bankruptcy 
filings. LCH also requested that the Commission consider ways in which 
this information could be quickly transmitted to the DCOs that may be 
impacted, given the interconnectedness of the derivatives market. 
While, as noted above, staff would be in contact with DCOs that might 
be impacted by a bankruptcy proceeding involving an FCM as a matter of 
supervisory practice, this practice does not need to be incorporated 
into regulation. Moreover, the Commission notes that many DCOs, 
including LCH, require as part of their own rules and procedures that 
their clearing members provide prompt notice of a bankruptcy filing 
affecting the clearing member.\76\
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    \76\ See, e.g., LCH Ltd.: FCM Procedures of the Clearing House 
1.6(b)(G) (``All FCM Clearing Members must provide the Clearing 
House in a prompt and timely manner with: . . . notice if the FCM 
Clearing Member becomes the subject of a bankruptcy petition.'').
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c. Regulation Sec.  190.03(c): Notices to Customers; Treatment of 
Hedging Accounts and Treatment of Specifically Identifiable Property
    The Commission is adopting Sec.  190.03(c) to address notices to 
customers and the treatment of hedging accounts and specifically 
identifiable property.
    Section 190.03(c)(1) requires 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, other than open commodity contracts, which has 
not been liquidated, that such 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 part 190. It also requires that the 
trustee's notice to customers with specifically identifiable property 
include, where applicable, a reference to substitute property.
    Section 190.03(c)(1) is derived from current Sec.  190.02(b)(1), 
but replaces the requirement that the trustee publish such notice to 
customers in a newspaper for two consecutive days prior to liquidating 
the specifically identifiable property with the requirement that the 
trustee notify customers in accordance with Sec.  190.03(a)(2). This 
change is intended to provide the trustee with flexibility in notifying 
customers regarding specifically identifiable

[[Page 19343]]

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. The timeframe in which the Commission would allow the trustee 
to commence liquidation of specifically identifiable property has been 
modified to reflect the revised notice requirements. Because Sec.  
190.03(c)(1) does not require newspaper publication of customer notice, 
the Commission is allowing 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.
    The Commission is adopting Sec.  190.03(c)(2) to address how a 
bankruptcy trustee may treat open commodity contracts carried in 
hedging accounts. This regulation moves from the bespoke approach of 
current Sec.  190.02(b)(2) to a categorical approach, in light of the 
practical difficulties of treating large numbers of customers with 
similar open contracts on a bespoke basis.\77\ The Commission notes 
that recent commodity broker bankruptcies have involved 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. Therefore, the Commission is giving the trustee the 
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. To the extent the trustee exercises such authority, 
the trustee is required to notify each relevant public customer in 
accordance with Sec.  190.03(a)(2). As proposed, Sec.  190.03(c)(2) 
would have required the trustee, in all cases, to request that the 
customer provide instructions as to whether to transfer or liquidate 
the relevant open commodity contracts.\78\ As discussed further below, 
in response to a comment, the Commission is modifying this proposal to 
address cases where, in the judgment of the trustee, the books and 
records of the debtor reveal a clear preference by the public customer 
with respect to transfer or liquidation of open commodity contracts.
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    \77\ See major theme 7 in section I.B. above.
    \78\ The Commission is also making 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 Sec.  1.41. 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 Sec.  1.41(c).
---------------------------------------------------------------------------

    Section 190.03(c)(2) also delineates certain information that the 
trustee must include in the notice. As proposed, the notice must inform 
the customer that (1) 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; (2) any transfer of the open commodity contracts 
is subject to the terms for distribution contained in Sec.  
190.09(d)(2); (3) absent compliance with any terms imposed by the 
trustee or the court, the trustee may liquidate the open commodity 
contracts; and (4) providing instructions may not prevent the open 
commodity contracts from being liquidated. The Commission is making 
conforming changes to this portion of proposed Sec.  190.03(c)(2) to 
reflect the modification referenced above. 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 must 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.\79\ The Commission is making these changes to 
reflect the policy preference to port all positions of public 
customers. Requiring a trustee to identify hedging accounts and provide 
hedging account holders the opportunity to keep their positions open 
may be a resource and time intensive process, which the Commission 
believes 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. The Commission believes that allowing the FCM to rely 
on representations made by customers during business-as-usual will 
alleviate this concern. In cases where it may be practical, the trustee 
may elect to provide special hedging account treatment.
---------------------------------------------------------------------------

    \79\ See Sec.  190.00(c)(4).
---------------------------------------------------------------------------

    The Commission is adopting Sec.  190.03(c)(3) to make minor 
modifications to the notice of the commencement of an involuntary 
proceeding that the trustee may provide to customers prior to entry of 
an order for relief, and upon leave of the court. Such modifications 
include clarifying that such notice must be in accordance with the 
notice provisions set forth Sec.  190.03(a)(2), amending certain 
terminology, and removing unnecessary references.
    Section 190.03(c)(4) requires the bankruptcy trustee to notify 
customers that an order for relief has been entered and instruct 
customers to file a proof of customer claim. The regulation is derived 
from current Sec.  190.02(b)(4), but adds that the notice must be 
provided in accordance with Sec.  190.03(a)(2). Section 190.03(c)(4) 
replaces the term ``customer of record'' with the term ``customer,'' as 
``customer of record'' is not a defined term in part 190 and all 
customers should receive notice that an order of relief has been 
entered. Section 190.03(c)(4) also provides that the trustee shall 
cause the proof of customer claim form to set forth the bar date for 
its filing consistent with the current Sec.  190.03(a)(2).
    The Commission requested comment on proposed Sec.  190.03(c). It 
specifically asked whether the proposed changes to the notice 
requirements would be helpful; whether the discretion granted to the 
trustee concerning the treatment of hedging accounts as specifically 
identifiable property is appropriately tailored; whether the proposed 
revisions appeared likely to lead to unintended consequences; and how 
such consequences; if any, could be mitigated.
    The Commission received three comments on proposed Sec.  190.03. 
CME fully endorsed the policy preference that the trustee should use 
their best efforts to transfer all public customer positions and 
related customer property from the debtor FCM to one or more other 
FCMs. Accordingly, CME supported the provisions in Sec.  190.03(c) that 
grant the trustee the discretion to not treat customer positions 
carried in hedge accounts as specifically identifiable property, unless 
the trustee determines that doing so would be practicable under the 
circumstances, following consultation with the Commission. CME asserted 
that this discretion will allow the trustee to devote their attention 
to transferring open positions of all public customers, along with 
their proportionate share of the customer property, in the aggregate.

[[Page 19344]]

SIFMA AMG/MFA also generally agreed with Sec.  190.03(c)(2) in that it 
grants to the trustee the authority (that is, the option but not the 
obligation) to treat open commodity contracts of public customers held 
in hedging accounts designated as such in the debtor's record as 
specifically identifiable property. SIFMA AMG/MFA stated that 
permitting the trustee this flexibility would serve the interest of 
customers as a whole by facilitating a more rapid transfer of customer 
positions and property. SIFMA AMG/MFA recommended, however, that the 
Commission explicitly clarify that Sec.  190.03(c)(2) is not intended 
to affect the treatment of hedging accounts under part 39 of the 
Commission's regulations and that, to the extent reasonably 
practicable, the trustee's goal will be to maximize value to the public 
customer.\80\ Additionally, in the context of the treatment of hedging 
accounts, SIFMA AMG/MFA recommended that, if the trustee exercises the 
authority as granted in this provision, the trustee should be first 
required to consult the instructions (regarding preferences with 
respect to transfer or liquidation of open commodity contracts) 
provided by a public customer to the debtor at the time of opening the 
relevant hedging account, and only if such instructions are missing or 
unclear should the trustee require such customer to provide it with 
written instructions as contemplated by proposed Sec.  190.03(c)(2). 
SIFMA AMG/MFA noted that the notice sent by the trustee to the customer 
can still provide that existing or previously provided instructions may 
not prevent the open commodity contracts from being liquidated. SIFMA 
AMG/MFA asserted that adding this first step would further the goal of 
expediency.
---------------------------------------------------------------------------

    \80\ This last point is addressed with the addition of Sec.  
190.00(c)(3)(i)(C).
---------------------------------------------------------------------------

    The Commission agrees with the suggestion by SIFMA AMG/MFA that it 
is more efficient to endeavor to follow clear instructions previously 
provided rather than to request new instructions. Moreover, this 
approach mitigates the risk that a customer who has already made their 
preference patent will fail to reply to the request and thus be treated 
in a manner contrary to that previously expressed preference.
    Accordingly, the Commission is amending and reorganizing Sec.  
190.03(c)(2) to implement that suggestion. Specifically, Sec.  
190.03(c)(2)(ii)(B) is being amended to provide, in pertinent part 
that: (1) Where, in the judgment of the trustee, the books and records 
of the debtor reveal a clear preference by a relevant public customer 
with respect to transfer or liquidation of open commodity contracts, 
the trustee shall endeavor, to the extent reasonably practicable, to 
comply with that preference; and (2) Where, in the judgment of the 
trustee, the books and records of the debtor do not reveal a clear 
preference by a relevant public customer with respect to transfer or 
liquidation of open commodity contracts, the trustee will 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.
    Other conforming changes are being made to Sec.  190.03(c)(2). With 
respect to SIFMA AMG/MFA's request that the Commission explicitly 
clarify that proposed Sec.  190.03(c)(2) is not intended to affect the 
treatment of hedging accounts under part 39, the Commission notes that 
Sec.  190.03(c)(2) governs the trustee's actions, and does not govern 
the actions a DCO may take under its default rules or otherwise.
    ACLI recommended that the Commission amend proposed Sec.  
190.03(c)(2) to require a trustee to transfer a public customer's hedge 
positions where the customer has requested the transfer and met the 
required terms unless, in consultation with the Commission, it is 
determined that it would be unreasonable to transfer such positions. 
ACLI further recommended that the Commission add a threshold such as 
``impossibility'' or ``exigent circumstances'' to limit a trustee's 
ability to liquidate a customer's hedge position in lieu of a requested 
transfer. ACLI asserted that the Commission's oversight should be 
specifically mandated. In response to ACLI's comment, the Commission 
notes that Sec.  190.00(c)(4) sets forth a preference for the porting 
of all open commodity contract positions of public customers, along 
with all or a portion of such customers' account equity, and Sec.  
190.04(a)(1) instructs the trustee promptly to use its best efforts to 
effect a transfer of such positions and property in accordance with 
Sec.  190.07(c) and (d) not later than seven calendar days after the 
order for relief. The discretion granted to the trustee in Sec.  
190.03(c)(2) is based on the reality that, in light of limited time and 
administrative resources, achieving porting to the maximum extent is 
fostered by treating customers on an omnibus, rather than an 
individualized, basis. For these reasons, the Commission declines to 
adopt ACLI's specific suggestions.
d. Regulation Sec.  190.03(d): Notice of Court Filings
    Section 190.03(d) addresses notices of court filings. It is derived 
from current Sec.  190.10(f), but makes modernizing changes to the 
terminology and method of providing notice to the Commission. The 
Commission requested comment on proposed Sec.  190.03(d). The 
Commission specifically asked whether the proposed revisions appeared 
likely to lead to unintended consequences, and, if so, how such 
consequences could be mitigated. The Commission did not receive any 
comments on proposed Sec.  190.03(d).
e. Regulation Sec.  190.03(e): Proof of Customer Claim
    The Commission is adopting Sec.  190.03(e) to require a trustee to 
request that customers provide information sufficient to determine a 
customer's claim in accordance with the regulations contained in part 
190. Section 190.03(e) lists certain information that customers shall 
be requested to provide, to the extent reasonably practicable, but 
grants the trustee discretion to adapt the request to the facts of the 
particular case. Such discretion is being granted to the trustee in 
order to enable the trustee to tailor the proof of claim form to the 
information that 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). Section 
190.03(e) is generally derived from current Sec.  190.02(d), although 
certain items on the list of information to be requested of customers 
have been revised and reorganized to: Inter alia, improve clarity; tie 
the questions to definitions of terms in part 190; give the claimant an 
opportunity to provide a more complete picture of its claims; and 
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.
    The Commission requested comment on proposed Sec.  190.03(e). 
Specifically, the Commission asked whether the proposed changes would 
be helpful; whether the discretion granted to the trustee was 
appropriately tailored; whether the proposed revisions appeared likely 
to lead to unintended consequences; and how such consequences, if any, 
could be mitigated. The Commission received one comment on proposed 
Sec.  190.03(e). CME noted that the proposed regulation

[[Page 19345]]

is a major improvement over the current regulation.
f. Regulation Sec.  190.03(f): Proof of Claim Form
    Regulation Sec.  190.03(f) provides that a template proof of claim 
form is included as appendix A to part 190.\81\ The Commission 
substantially revised the customer proof of claim form in order to 
streamline it and better map it to the information listed in Sec.  
190.03(e). The revised customer proof of claim form now includes, in 
each section, citations to the location in the text of Sec.  190.03(e) 
where such information is listed.
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    \81\ Appendix A is discussed in section II.D below.
---------------------------------------------------------------------------

    Section 190.03(f)(1) provides 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. For example, this would be the case if all open 
commodity contracts had been transferred or liquidated before the proof 
of claim form is sent. Section 190.03(f)(2) makes clear that the 
trustee has discretion as to 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 
Sec.  190.03(f), taken together, are meant to provide bankruptcy 
trustees with appropriate flexibility to determine the best and most 
efficient way to compose the customer proof of claim.
    The Commission requested comment on proposed Sec.  190.03(f). 
Specifically, the Commission asked whether the proposed changes to the 
treatment of the proof of customer claim form would be helpful; whether 
they would lead to unintended consequences; and how such consequences, 
if any, could be mitigated. The Commission also asked whether the 
discretion granted to the trustee was appropriately tailored and, if 
not, what changes should be made. CME commented that the proof of claim 
form had been improved and supported the flexibility provided to the 
trustee.
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.03 as 
proposed, with modifications to Sec.  190.03(c)(2), as set forth above.
2. Regulation Sec.  190.04: Operation of the Debtor's Estate--Customer 
Property
    The Commission is adopting Sec.  190.04 as proposed with 
modifications, as set forth below to address the collection of margin 
and variation settlement, as well as the liquidation and valuation of 
positions. The Commission is adopting Sec.  190.04 to clarify and 
update portions of Sec. Sec.  190.02, 190.03, and 190.04.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.04 including: Whether the revisions create any 
unintended conflicts with customer protection regulations set forth in 
parts 1, 22, and 30; how any such conflicts may be resolved; whether 
there are any proposed clarification changes that are likely to create 
unintended consequences; and, if so, how might those be avoided or 
mitigated.
a. Regulation Sec.  190.04(a): Transfers
    The Commission is adopting Sec.  190.04(a) as proposed. Section 
190.04(a) largely retains the current provisions in current Sec.  
190.02(e) regarding transfers for customers in a bankruptcy proceeding. 
It also retains the policy preference \82\ 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.\83\ Regulation Sec.  190.04(a)(1) provides 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 ``must immediately'' do so. This revision signals that the trustee 
must take action to transfer open commodity contracts as soon as 
practicable, while avoiding potential pressure of the term 
``immediately'' in light of the challenges presented in an FCM 
bankruptcy. Regulation Sec.  190.04(a)(2) replaces the term ``equity'' 
with ``property'' to 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 is also adding the word ``public'' before ``customers'' to 
clarify that the transfers discussed in Sec.  190.04(a)(1) relate to 
the open commodity contracts and property of the debtor's public 
customers.\84\
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    \82\ The Commission discussed the rationale for this policy 
preference in the discussion of Sec.  190.00(c)(4). See section 
II.A.1. See also ABA Cover Note at 14 (recommending explicitly 
identifying in Sec.  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).
    \83\ The Commission is also adopting cross-references in Sec.  
190.04(a) to other provisions within proposed part 190 that discuss 
transfers of customer property.
    \84\ The Commission is adopting the same change--addition of the 
word ``public'' before ``customers''--to Sec.  190.04(a)(2), as 
discussed below.
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    The Commission is adopting Sec.  190.04(a)(2), as derived from 
Sec.  190.02(e)(2), to remove the liquidation-only trading limitations 
on an FCM that is subject to an involuntary bankruptcy petition unless 
otherwise directed by the Commission, by any applicable self-regulatory 
organization, or by court. The Commission is instead adopting 
limitations on the business of an FCM in bankruptcy in Sec.  190.04(g) 
to more generally address involuntary proceedings.\85\
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    \85\ The Commission is deleting the reference to ``liquidation'' 
in Sec.  190.02(e)(4) accordingly since the limitation to trading 
for liquidation only is being deleted from Sec.  190.04(a)(2).
---------------------------------------------------------------------------

    The Commission is adopting Sec.  190.04(a)(2), as derived from 
current Sec.  190.02(e)(2), to provide that if such 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 is 
retaining this provision because 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 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, similar to Sec.  190.04(a)(1), as discussed above, the 
Commission is replacing the term ``equity'' with ``property'' to 
clarify that the transfers discussed in 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, the Commission is 
adding the word ``public'' before ``customers'' to clarify in Sec.  
190.04(a)(2) that the transfers discussed in Sec.  190.04(a)(1) relate 
to the open commodity contracts and property of the debtor's public 
customers.
    The Commission did not receive any comments on this aspect of the 
Proposal. Accordingly, for the reasons stated above, the Commission is 
adopting Sec.  190.04(a) as proposed.
b. Regulation Sec.  190.04(b): Treatment of Open Commodity Contracts
    The Commission is adopting Sec.  190.04(b) as proposed to clarify 
and update the provisions in current Sec.  190.02(g)(1), which allow a 
trustee to make ``variation and maintenance margin payments'' on behalf 
of the

[[Page 19346]]

debtor FCM's customers. The Commission is adopting Sec.  190.04(b) to 
be generally consistent with the current regulation but with a number 
of substantive changes.
    First, the Commission is adopting Sec.  190.04(b) to permit the 
trustee to make margin payments pending transfer or liquidation; not 
just pending liquidation as required by current Sec.  190.02(g)(1). The 
amendment is consistent with the Commission's longstanding policy 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.
    Second, the Commission is adopting Sec.  190.04(b)(1) to delete the 
phrase ``required to be liquidated under paragraph (f)(1) of this 
section'' in current Sec.  190.02(g)(1) to eliminate a complete 
prohibition against paying margin on open contracts. 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 Commission 
is deleting the phrase ``required to be liquidated under paragraph 
(f)(1) of this section'' and thus will instead apply more broadly to 
any open commodity contracts.
    The Commission is also adopting several technical amendments. 
Third, the Commission is replacing 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 Commission is replacing 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 Commission is replacing the 
phrase ``specifically identifiable to a particular customer'' with 
``specifically identifiable property of a particular customer'' in 
order to be consistent with the definitions in part 190, which includes 
as a defined term ``specifically identifiable property.''
    The Commission is adopting Sec.  190.04(b)(1)(i), as derived from 
current Sec.  190.02(g)(1)(i), to 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 is 
including the phrase ``to the extent within the trustee's control'' to 
recognize 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 is including a proviso 
to note that 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. This proviso is intended 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.
    The Commission is adopting Sec.  190.04(b)(1)(ii) as a new 
provision to prohibit the trustee from making an upstream margin 
payment with respect to a specific customer account that would exceed 
the funded balance of that account. This restriction is consistent with 
the pro rata distribution principle discussed in 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.
    The Commission is adopting some non-substantive clarifications in 
Sec.  190.04(b)(1)(iii), as derived from current Sec.  
190.02(g)(1)(ii), to retain 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.
    The Commission is adopting Sec.  190.04(b)(1)(iv)-(v) to clarify 
and expand upon current Sec.  190.02(g)(1)(iii),\86\ to require that 
margin is used consistent with the requirements of section 4d of the 
CEA.\87\ First, the Commission is adopting Sec.  190.04(b)(1)(iv) to 
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,\88\ the trustee must use such payments to make margin payments 
for the open commodity contract positions of such customer. Second, the 
Commission is adopting Sec.  190.04(b)(1)(v) to 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), the Commission believes it may in 
some cases be impracticable for a trustee to follow paragraph 
(b)(1)(iv). In such a situation, therefore 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.\89\
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    \86\ 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.
    \87\ See 7 U.S.C. 6d.
    \88\ The phrase ``to the extent within the trustee's control'' 
recognizes the reality that certain accounts are held on an omnibus 
basis. See discussion of Sec.  190.04(b)(1)(i) above.
    \89\ See Sec.  190.08(c)(1)(ii).
---------------------------------------------------------------------------

    Regulation Sec.  190.04(b)(1)(vi) builds upon current Sec.  
190.02(g)(1)(iv), which provides that no payments need to be made to 
restore initial margin, thus noting that such payments are not required 
but implicitly allowed to be made. Revised Sec.  190.04(b)(1)(vi) 
explains in this in more detail and provides more comprehensive 
guidance to the trustee about when such payments may be made. 
Specifically, Sec.  190.04(b)(1)(vi) provides 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 undermargined, but not in deficit, and 
sets conditions around such use.
    Regulation Sec.  190.04(b)(2) updates current Sec.  190.02(g)(2), 
which concerns margin calls made by trustee with respect to 
undermargined accounts of public customers. The Commission is removing 
the current requirement in Sec.  190.02(g)(2) that the trustee issue 
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. Revised 
Sec.  190.04(b)(d) recognizes that an FCM in bankruptcy will be 
operated in crisis mode, and may be pending wholesale transfer or 
liquidation of open positions.\90\ Therefore, the Commission is 
allowing for the possibility that the trustee may issue margin calls. 
The specification of

[[Page 19347]]

highly prescriptive conditions for issuing such calls is no longer 
appropriate, given the Commission whether or not to make a margin call 
is now based on the trustee's discretion.
---------------------------------------------------------------------------

    \90\ See generally major theme 7 discussed in section I.B. 
above.
---------------------------------------------------------------------------

    Regulation Sec.  190.04(b)(3), as derived from current Sec.  
190.02(g)(3) with updated cross-references, retains 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. As these post-petition payments made by the customer are fully 
counted toward the customer's funded net equity claims under Sec.  
190.04(b)(3), they are not subject to pro rata distribution (in 
contrast to the treatment of the debtor commodity broker's pre-petition 
obligations to customers).
    Regulation Sec.  190.04(b)(4) is derived from a combination of 
current Sec. Sec.  190.03(b)(1) and (2) and 190.04(e)(4), and addresses 
the trustee's obligation to liquidate certain open commodity contracts; 
in particular, those in deficit and those where the customer has failed 
to promptly meet a margin call. 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.\91\ 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.\92\ These ongoing requirements are intended to protect other 
customers with positive account balances.
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    \91\ See, e.g., Sec. Sec.  1.22(i)(4), 1.23(a)(2).
    \92\ 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.\93\ The Commission intends for Sec.  
190.04(b)(4) to mitigate the risk to those other customers by directing 
the trustee to liquidate such accounts.
---------------------------------------------------------------------------

    \93\ While the trustee may seek to recover any debit balance 
from a customer, see Sec.  190.09(a)(1)(ii)(E), 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, 
Sec.  190.04(b)(4), in contrast to many of the other proposed changes 
to part 190, curtails the trustee's discretion. Specifically, Sec.  
190.04(b)(4), as derived from current Sec.  190.03(b)(1) and (2), 
provides 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. 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.\94\ Revised Sec.  190.04(b)(4) adds 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 Commission is 
revising the language to 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'' calculations 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 trustee should begin the liquidation process 
immediately upon gaining that awareness, rather than delaying until the 
time when a margin payment is due.
---------------------------------------------------------------------------

    \94\ 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.
---------------------------------------------------------------------------

    Regulation Sec.  190.04(b)(4) also provides 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.\95\ This language is largely reflective of current Sec.  
190.04(e)(4), but adds 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 Commission intends this revision to 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.
---------------------------------------------------------------------------

    \95\ 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 under-margined 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 under-margined account without 
notice).
---------------------------------------------------------------------------

    The Commission is deleting current Sec.  190.03(b)(3) to 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. The 
Commission is adopting this change as part of 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.\96\
---------------------------------------------------------------------------

    \96\ Cf. major theme 7 in section I.B above.
---------------------------------------------------------------------------

    The Commission is adopting new Sec.  190.04(b)(5) to provide 
guidance to the trustee in assigning liquidating positions \97\ to the 
debtor FCM's customers when only a portion of the open commodity 
contracts in an omnibus account are liquidated. The new guidance is 
designed 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 Sec.  190.04(b)(4), at the risk of 
other customers. To mitigate the risk of such losses, Sec.  
190.04(b)(5) establishes 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 undermargined; \98\ and finally to 
liquidate any remaining open commodity contracts. Where there are 
multiple accounts in any of these groups, the trustee is instructed to, 
as practicable, to allocate such liquidating transactions pro rata. The 
term ``risk-reducing manner'' is measured by the margin methodology and 
parameters

[[Page 19348]]

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.''
---------------------------------------------------------------------------

    \97\ 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.
    \98\ And thus are next at risk of going into deficit.
---------------------------------------------------------------------------

    The Commission requested comment on whether the revised approach in 
proposed Sec.  190.04(b)(4) regarding the required liquidation of 
certain open commodity contract accounts would provide the trustee with 
an appropriate amount of discretion and is practicable; whether 
customers, who believe they did not benefit from those decisions, would 
likely challenge the trustee's choices given the level of discretion 
provided; whether such challenges could materially slow down the 
distribution of customer property relative to a context where the 
trustee was granted less discretion; and whether the proposed approach 
in Sec.  190.04(b)(5) for the assignment of liquidating positions to 
debtor FCM customers in a ``risk-reducing manner'' is practicable when 
only a portion of the open commodity contracts in an omnibus account 
are liquidated.
    SIFMA AMG/MFA supported most of the substantive amendments in 
subpart B of part 190 and believed such changes are generally helpful 
for purposes of reducing risk for market participants and allowing the 
trustee to act as efficiently as possible. SIFMA AMG/MFA approved of 
the inclusion of transfers in addition to liquidation, and the 
clarification to apply the proposed regulation to any open commodity 
contracts in proposed Sec.  190.04(b).
    CME agreed with the general concept of providing the trustee for a 
debtor FCM with significant flexibility to operate the FCM and favored 
any provision that encourages the transfer of customer positions and 
property and continuation of margin payments on behalf of the debtor 
FCM pending transfer or liquidation of positions. ICE suggested that 
the Commission should clarify that any trustee discretion proposed in 
Sec.  190.04 for managing a failed FCM should be subject to the 
obligations of the defaulting clearing member and the rights of the DCO 
as provided by the DCO's rules.
    ICE supported the Commission's proposal in Sec.  190.04(b)(1) to 
clarify that a trustee may make variation margin payments on open 
contracts, pending their liquidation or transfer. ICI agreed with 
proposed Sec.  190.04(b)(1)(ii), which prohibits a trustee from making 
any margin payments with respect to a customer account that would 
exceed the funded balance for that account.
    ICI and Vanguard agreed with the preservation of the existing 
requirement within proposed Sec.  190.04(b)(3) that the trustee fully 
credit the customer's funded balance for any margin payment made by a 
customer in response to trustee's margin call. Vanguard noted that any 
customer concerns as to the ability to fully recover margin would 
surely de-incentivize customers to post additional margin in critical 
times.
    SIFMA AMG/MFA generally supported proposed Sec.  190.04(b), but had 
concerns regarding the calculation of whether a customer is 
undermargined, and the timing of margin calls. SIFMA AMG/MFA questioned 
whether the trustee would be able to calculate accurately whether a 
customer is undermargined, particularly if the FCM's books and records 
do not accurately reflect margin amounts transferred by such customer 
to the FCM. SIFMA AMG/MFA requested that the Commission clarify how the 
trustee will try to protect customers from being called upon to provide 
duplicate margin amounts. SIFMA AMG/MFA recommended that the Commission 
amend proposed Sec.  190.04(b) to provide customers with the 
opportunity to demonstrate that a margin payment was made even if the 
FCM's books and records do not yet reflect its receipt.
    SIFMA AMG/MFA disagreed 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, as the trustee may determine in its sole discretion. 
SIFMA AMG/MFA stated that the necessary assets may not be readily 
available to customers and urged the Commission to require the trustee 
to defer to the margin call timings present in the applicable 
underlying agreements entered into by the customer pursuant to Sec.  
39.13 when determining a reasonable time for meeting margin calls. 
SIFMA AMG/MFA opined that this is a reasonable level of deference, 
since the trustee will have access to these agreements, which are 
already in place with the Commission regulations, and will allow for 
customers to satisfy margin calls without causing needless market 
panic.
    ICI and Vanguard agreed with proposed Sec.  190.04(b)(4), which 
would require the trustee to liquidate any customer account in deficit. 
ICI supported maintaining the existing requirement that the trustee 
promptly liquidate any customer account when a customer fails to meet a 
margin call in a reasonable time or where any payment of margin from 
the account would result in an account deficit. ICI agreed with the 
proposal that a debtor FCM will generally not have capital available to 
protect other customers by covering account deficits, so any loss 
suffered by customers whose accounts are in deficit will be at risk of 
those other non-defaulting customers. As a result, ICI noted that it is 
vital that the trustee be required to swiftly crystallize, and 
therefore cap the losses resulting from, such deficits by promptly 
liquidating accounts in deficit or for which a customer has failed to 
meet a margin call. ICI cautioned that if the accounts were allowed to 
remain open, additional losses on the delinquent customers' 
transactions would be borne by the FCM's non-defaulting customers, 
which could dissuade non-defaulting customers from continuing to meet 
their margin obligations post-petition.
    OCC was concerned that the proposed definition of ``undermargined'' 
in Sec. Sec.  190.01 and 190.04(b)(2) and (4) could create a situation 
in which a trustee offers one public customer an opportunity to deposit 
additional margin that ultimately prevents an account deficit and 
resulting liquidation of the public customer's account, but exercises 
discretion not to offer another public customer the same opportunity to 
deposit margin and subsequently must liquidate the account because it 
is in deficit, notwithstanding the customer's willingness to post 
additional margin to keep its positions open. OCC was concerned that 
the use of such trustee discretion would expose a trustee to challenge 
by a public customer that asserts, though it was similarly situated to 
a public customer that was given this opportunity, it was not given 
this opportunity and received inequitable treatment.
    In response to SIFMA AMG/MFA's comment, the Commission notes that, 
in the case of an FCM in bankruptcy, any deficit in the account of one 
customer may come at the expense of distributions to other customers. 
As ICI noted, the normal buffer of the capital of an FCM in continuing 
operation cannot be relied upon. Accordingly, where a trustee believes, 
based on the records and limited time available to them, that a 
customer is undermargined, it is important that they act on that belief 
in order to protect other customers. Similarly, in a case where a 
customer fails to meet a margin call within what the trustee 
determines, in their sole discretion, is a reasonable time, the trustee 
should liquidate the contracts of that customer to protect other 
customers. Forcing the trustee to defer to margin call timings in pre-
bankruptcy agreements, or to give the customer an opportunity to 
demonstrate that a margin payment was made, as requested by the 
comment, may

[[Page 19349]]

increase: (1) The risk that such customer would default; (2) the risk 
that delaying liquidation of such a customer's positions increases the 
potential for and likelihood that they would do so with a debit 
balance; and (3) the risk that the size of that debit balance would 
increase as a result of that delay, thereby reducing the funded 
balances of other customers. The Commission is of the view that 
timeframes that may have been acceptable during business-as-usual 
cannot bind the trustee in addressing the context of an FCM in 
bankruptcy, because any post-petition losses incurred by a customer 
will be at the cost of other customers (without the normal buffer of 
the capital of a going-concern FCM). Moreover, the Commission agrees 
with the view championed by ICI and Vanguard that the trustee should be 
required to swiftly crystallize and therefore cap the losses resulting 
from deficit balances by promptly liquidating accounts in deficit and 
those for which a customer has failed to meet a margin call. OCC's 
concerns about treating customers equitably inter se are 
understandable, but, in the Commission's view, ensuring complete equity 
may not be practicable. A trustee must make decisions within a severely 
limited timeframe in a situation that is likely to be chaotic and with 
information that is limited and may be imperfect. In these 
circumstances, the Commission is of the view that it is appropriate to 
defer to the trustee's discretion to make the best decisions they can 
under the circumstances. Accordingly, the Commission believes that, 
where a trustee makes in good faith decisions with regard to margin and 
liquidation of accounts, that are, in retrospect, inequitable, the 
Commission's regulations should discourage challenges to such a 
decision (and, if such a challenge is made, should reduce the 
likelihood that it is successful).
    While the trustee retains discretion, as specified in, inter alia, 
proposed Sec.  190.04, to manage the affairs of the debtor FCM, the 
Commission can confirm, as requested by ICE, that a DCO of which that 
FCM is a member retains its rights to act under its rules.\99\
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    \99\ See, e.g., Sec.  190.04(b)(1) (while trustee shall, to the 
extent within its control, not make payments on behalf of an account 
in deficit, this shall not be construed to prevent a clearing 
organization from exercising its rights to the extent permitted 
under applicable law).
---------------------------------------------------------------------------

    SIFMA AMG/MFA recommended that the Commission amend proposed Sec.  
190.04(b) to clearly state that, to the extent gains-based haircutting 
has been utilized by a DCO in respect of customer positions, the 
trustee should give customers of an FCM credit for any gains that were 
haircut during such gains-based haircutting. With respect to this 
suggestion, the Commission notes that, where a DCO at which a debtor 
FCM is a member applies gains-based haircutting under that DCO's rules, 
the measure of the claim of a customer whose account at the debtor FCM 
contains contracts cleared on that DCO will be based on the customer 
agreement between that customer and the debtor FCM. If, outside of the 
FCM's bankruptcy and pursuant to that customer agreement, the 
customer's gains would have been reduced by X% or $Y, then the amount 
of the customer's claim in bankruptcy would be adjusted 
accordingly.\100\ Accordingly, the Commission does not accept that 
suggestion.
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    \100\ Moreover, there are other reasons to forego an approach 
that would reverse the effects of gains-based haircutting. As 
discussed in more detail in section II.C.7 below, there is a limited 
amount of customer property available. Any increase in some 
customers claims (and thus their distributions) due to the reversal 
of gains-based haircutting would thus come at the expense of a 
reduced share of that limited customer property, and thus reduced 
distributions, to other customers.
---------------------------------------------------------------------------

    ICI and Vanguard agreed with proposed Sec.  190.04(b)(5) which 
prohibits a trustee from making margin payments that would exceed the 
customer's funded account balance or transfer a customer's transactions 
or property and thereby increase the exposure of other customers. 
Vanguard supported addressing situations where the trustee could allow 
certain customers to avoid the core customer protection of pro rata 
treatment at the expense of other customers.
    Accordingly, after consideration of the comments, and for the 
reasons stated above, Sec.  190.04(b) will be adopted as proposed.
c. Regulation Sec.  190.04(c): Contracts Moving Into Delivery
    The Commission is adopting Sec.  190.04(c), as proposed, to direct 
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. The 
Commission is adopting Sec.  190.04(c) based on its analog in current 
Sec.  190.03(b)(5) and is incorporating 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. The Commission intends Sec.  
190.04(c) to have the same purpose as its predecessors, but uses more 
explicit language regarding physical delivery to refer to ``any open 
commodity contract that settles upon expiration or exercise via the 
making or taking of delivery of a commodity,'' and that is moving into 
the delivery position. The Commission also intends Sec.  190.04(c) to 
expand current Sec.  190.03(b)(5), with the incorporation of some 
aspects of current Sec.  190.02(f)(1)(ii), to include an explicit 
reference to how options on commodities move into delivery position.
    CME supported proposed Sec.  190.04(c), which directs the trustee 
to use their best efforts to liquidate open physical delivery commodity 
contracts that have not been transferred before the contracts move into 
a delivery position as CME believed this would avoid unnecessary 
disruptions to the delivery process by customers that did not intend to 
participate in making or taking delivery. ICI supported adding 
provisions that clarify the standards applicable to an FCM's 
liquidation of a debtor FCM's transactions and the way a trustee must 
assign liquidating transactions in the context of a partial 
liquidation.
    According, after consideration of the comments, and for the reasons 
stated above, the Commission is adopting Sec.  190.04(c) as proposed.
d. Regulation Sec.  190.04(d): Liquidation or Offset
    The Commission is adopting Sec.  190.04(d) as proposed with 
modifications, as set forth below. Regulation Sec.  190.04(d), as 
derived from current Sec. Sec.  190.02(f) and 190.04(d), sets 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 the 
market or by book entry offset, promptly, and in an orderly 
manner.\101\
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    \101\ The Commission is also adopting three non-substantive 
changes in the header language to proposed Sec.  190.04(d) from that 
in current Sec.  190.02(f): (1) The addition of 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; (2) the 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) the deletion of 
the phrase ``subject to limit moves and to applicable procedures 
under the Bankruptcy Code.''
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    Importantly, the Commission is retaining the requirement, present 
in the header language to current Sec.  190.02(f), that the trustee 
must effect such

[[Page 19350]]

liquidation ``in an orderly manner.'' Regulation Sec.  190.04(d) 
recognizes 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.''
    Section 190.04(d)(1), as derived from Sec.  190.02(f)(1), requires 
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.\102\ In the former 
case (specifically identifiable property), the Commission is adopting 
Sec.  190.04(d)(1) to revise the language of current Sec.  
190.02(f)(1)(ii) to add references to the provisions of Sec.  
190.03(c)(2) (concerning the trustee's option to treat hedging accounts 
as specifically identifiable property) and 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).\103\ The latter exception, for open commodity contract 
positions that are in a delivery position is new, and provides that 
such positions should be treated in accordance with Sec.  190.06, which 
concerns delivery.\104\
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    \102\ Regulation Sec.  190.04(d)(1) deletes the reference in 
current Sec.  190.02(f)(1)(i) to dealer option contracts since such 
term is no longer used.
    \103\ The Commission is incorporating part of current Sec.  
190.02(f)(1)(ii) into Sec.  190.04(c), and therefore that will not 
appear in Sec.  190.04(d)(1).
    \104\ As noted in section II.A.1 above in the discussion of 
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.
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    Regulation Sec.  190.04(d)(2) describes when specifically 
identifiable property, other than open commodity contracts or physical 
delivery property, must be liquidated. The Commission derived Sec.  
190.04(d)(2) from current Sec.  190.02(f)(2), with a number of 
revisions.
    First, the provision applies 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. The Commission intends 
for this change 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,\105\ 
Sec.  190.04(d)(2)(i) changes that standard to 75% of the fair market 
value, in order to provide greater discretion to the trustee to forego 
or postpone liquidation in appropriate cases.
---------------------------------------------------------------------------

    \105\ See current Sec.  190.02(f)(2)(i).
---------------------------------------------------------------------------

    Third, revised Sec.  190.04(d)(2)(ii) adds an additional condition 
that will 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, Sec.  190.04(d)(2)(iii), which is similar to current Sec.  
190.02(f)(2)(ii), includes updated cross-references to the provisions 
in proposed part 190 that discuss the return of specifically 
identifiable property.
    Regulation Sec.  190.04(d)(3) is a new provision that codifies 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.\106\ Accordingly, customers who post letters of credit as 
margin will be treated no differently than other customers and thus 
would suffer the same pro rata loss.
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    \106\ 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; \107\ the codification of this policy in Sec. Sec.  
190.00(c)(5) (clarifying policy), 190.04(d)(3) (treatment in 
bankruptcy), and 1.43 (treatment during business-as-usual) are intended 
to implement the policy effectively and to forestall any future 
challenge.
---------------------------------------------------------------------------

    \107\ See ConocoPhillips v. Giddens, No. 12 Civ. 6014, 2012 WL 
4757866 (S.D.N.Y. 2012).
---------------------------------------------------------------------------

    Regulation Sec.  190.04(d)(3) provides 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 applies 
whether the letter of credit is held by the trustee on behalf of the 
debtor's estate, a DCO, 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. Regulation Sec.  190.04(d)(3)(i) provides 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.
    Regulation Sec.  190.04(d)(3)(ii) addresses 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 is 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 will 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 of the letter of credit 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.
    Regulation Sec.  190.04(d)(3)(iii) confirms 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.
    Regulation Sec.  190.04(d)(4), as derived from current Sec.  
190.02(f)(3), provides for the liquidation of all other property not 
required to be transferred or returned pursuant to customer 
instructions and which has not been liquidated. Regulation Sec.  
190.04(d)(4) excepts from the liquidation requirement any ``physical 
delivery property held for delivery in accordance with the provision 
of'' Sec.  190.06, in order to avoid interfering with the physical 
delivery process.

[[Page 19351]]

    Several commenters supported proposed Sec.  190.04(d)(3). SIFMA 
AMG/MFA, ICI, and Vanguard strongly supported proposed Sec.  
190.04(d)(3) because it permits a trustee to demand substitute margin 
so that other customers' margin need not be accessed to meet any 
shortfall occasioned by the inability to draw on the letters of credit. 
SIFMA AMG/MFA noted that the addition of proposed Sec.  190.04(d)(3) 
would ensure that customers using letters of credit to meet original 
margin obligations will be treated no differently from customers 
depositing other forms of non-cash margin or excess cash margin 
deposits. SIFMA AMG/MFA ``agree[d] that most letters of credit 
currently in use by the industry follow the Joint Audit Committee forms 
[and believed] that the impact of these additional requirements 
concerning letters of credit will result in clearer guidance for more 
equitable treatment of customers within each account class.'' However, 
SIFMA AMG/MFA ``questione[d] the one-year transition period and urge[d] 
the Commission to shorten it in the interest of investor protection. 
For example, if an FCM were to enter bankruptcy proceedings during the 
one-year transition period,'' SIFMA AMG/MFA inquired as to how the 
letters of credit would be treated in such proceeding.
    OCC also supported proposed Sec.  190.04(d)(3) and the pro rata 
loss policy objective. OCC stated that it ``expects that it would 
generally, to the extent permitted by OCC's rules and default 
management arrangements, draw on a defaulted member's letter of credit 
collateral as soon as practicable after a declaration of default. OCC 
would attempt to do so, whether or not it has immediately identified a 
need to draw on a letter of credit to meet the defaulted member's 
settlement obligations, as a protective action in anticipation of any 
potential increase in the credit risk associated with the letter of 
credit. In such cases, a trustee would obtain any remaining proceeds 
from the drawn-down letter to distribute pro rata among the FCM's 
customers as appropriate.''
    However, several commenters including CME, FIA, and CMC believed 
the policy reasons for the trustee's general right to demand substitute 
collateral do not exist with respect in the narrow context of a 
delivery letter of credit.
    CME agreed ``that a letter of credit posted to secure obligations 
under open commodity contracts (whether drawn upon or not) must be 
deemed as part of the customer's property, in addition to any 
additional collateral posted by the customer, for purposes of 
distribution calculations. [CME agreed] that it is prudent to make 
clear that the trustee in either an FCM or DCO bankruptcy can draw upon 
posted letters of credit.'' CME supported ``granting the trustee the 
power to require a customer to deliver substitute customer property to 
the estate and allowing the trustee to draw on the letter of credit if 
the customer does not post additional collateral, provided that those 
conditions apply only to letters of credit letter that are received, 
acquired, or held to guarantee or secure a customer's obligations under 
open commodity contracts, and do not apply to delivery letters of 
credit.''
    With respect to a delivery letter of credit posted as collateral to 
secure the customer's obligation to pay for delivery of a commodity it 
will receive, CME and CMC believed it was ``critically important that 
the letter of credit be available to draw upon if the customer defaults 
or is expected to default on its obligation to pay the seller.'' 
However, CME, CMC, and FIA recommended that the Commission revise 
proposed Sec.  190.04(d)(3) to confirm that the authority of the 
trustee to require a customer that posts a letter of credit to deliver 
substitute customer property does not extend to letters of credit 
posted to a delivery account.
    CME argued that ``[c]ustomers routinely post letters of credit in 
connection with delivery obligations under certain physical delivery 
futures contracts held to maturity.'' CME noted that this is the case 
for deliveries under certain oil futures listed on the New York 
Mercantile Exchange. ``The buyers are required to post collateral for 
the full payment amount owed because actual delivery is effected via 
physical transfer of oil and thus is typically completed 30 days or so 
after buyers and sellers are matched for bilateral delivery 
obligations. Given the substantial dollar amounts involved, often 
hundreds of millions, letters of credit are often posted as 
collateral.'' CMC emphasized that ``unlike other situations, a delivery 
[letter of credit] simply serves as collateral for delivery of a 
futures contract after expiry but before delivery is taken and while 
the seller still has possession of the commodity for delivery.'' CME 
stated that ``[t]he value available to CME under such a letter of 
credit is wholly independent from the solvency of an FCM, unlike a 
letter of credit posted as performance bond, which decays when utilized 
to meet margin or variation calls post-FCM bankruptcy.'' CME posited 
that the delivery letter of credit does not pose the same issues that 
the Commission encountered in the MF Global bankruptcy. FIA argued that 
``[a] purchaser that takes delivery under a commodity contract 
frequently is not required to take delivery for a significant period of 
time after the purchaser and seller have been matched. In these 
circumstances, the purchaser may be required to post a letter of credit 
as security for full payment when delivery is made.''
    CME, CMC, and FIA warned that a trustee's decision to request 
substitute collateral of cash or cash equivalents for a delivery letter 
of credit or risk having the letter of credit drawn down prior to the 
time that delivery is made would create a sudden and unexpected 
liquidity need for the delivery participant and introduce unnecessary 
strain into physical and derivatives markets. The commenters were 
concerned that because the parties' obligations under the delivery 
account arise from a commodity account, a trustee's authority under 
proposed Sec.  190.04(d)(3) could be interpreted to apply to letters of 
credit held in a delivery account. Accordingly, CME and CMC recommended 
``that the Commission limit or eliminate the trustee's powers to 
request that a market participant substitute other forms of collateral 
for a delivery letter of credit upon which the DCO is a beneficiary.'' 
Specifically, CME and FIA recommended that the Commission revise 
proposed Sec.  190.04(d)(3) to exclude delivery letters of credit, 
i.e., letters of credit posted by buyers to guarantee their payment for 
commodities that they are contractually obligated to purchase under an 
expired futures or exercised commodity option contract.
    CME also requested clarity in the context of Sec.  190.06 ``that 
when a customer posts a delivery letter of credit directly with the DCO 
or with its delivery counterparty, and not with or through the FCM, the 
letter of credit is outside the delivery account class, i.e., it does 
not constitute cash delivery property (or property of the debtor's 
estate), and the provisions in other parts of the proposed revisions 
regarding treatment of letters of credit posted with or through the 
debtor FCM do not apply.''
    The Commission notes that, despite the comments of CME, CMC, and 
FIA, there are reasons to forego excluding delivery letters of credit 
as a class from the application of Sec.  190.04(d)(3), and to adopt 
Sec.  190.04(d)(3) as proposed, as supported by ICI, SIFMA AMG/MFA, and 
Vanguard: If, at the end of the bankruptcy proceeding, there are 
shortfalls in customer property in the cash delivery account class, 
those

[[Page 19352]]

shortfalls will necessarily be borne by public customers. If public 
customers posting letters of credit (including in the delivery account) 
are shielded from such losses, they will be borne in greater proportion 
by other public customers. That result would be inconsistent with the 
Commission's longstanding policy, embodied in section 766(h) of the 
Bankruptcy Code, to treat all customers on a pro rata basis.\108\
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    \108\ Pursuant to Sec.  190.08(c)(1)(ii), the customer's funded 
balance includes 100% of margin posted after the order for relief. 
Accordingly, this principle would not apply to a delivery letter of 
credit posted after the order for relief (unless the letter of 
credit was delivered in substitution for a pre-bankruptcy letter of 
credit).
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    However, the concerns raised by commenters regarding sudden and 
unexpected liquidity needs are important ones. They are important both 
in the context of delivery letters of credit, as discussed by some 
commenters, and more broadly as well.\109\ The Commission agrees that 
these concerns can and should be mitigated. Specifically, the trustee 
has discretion in managing this process with respect to letters of 
credit, and should exercise that discretion with the goal of achieving 
pro rata treatment among customers in a manner that mitigates, to the 
extent practicable, the adverse effects upon customers that have posted 
letters of credit.
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    \109\ Moreover, and for the avoidance of doubt, as delivery is 
simply a stage in the life of a commodity contract, Sec.  
190.04(d)(3) applies to letters of credit in connection with 
delivery obligations under a commodity contract.
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    First, with regard to timing, the commenters expressed concern that 
requests for substitute property would cause ``sudden'' liquidity 
needs. Regulation Sec.  190.04(d)(3)(i) states that the trustee may 
draw upon the letter of credit if the customer fails to provide 
substitute customer property within a reasonable time specified by the 
trustee. If the expiry date of the letter of credit is not imminent, 
the Commission expects that a ``reasonable time'' would be sufficiently 
long to enable the customer to mitigate liquidity concerns (consistent 
with the trustee's plans to make distributions). If the expiry date of 
the letter of credit is imminent, and the customer can and does arrange 
to have that expiry date extended, the parties could work in the 
context of that extended expiry date. However, if the expiry date is 
imminent, and cannot be extended, then the trustee will need to take 
promptly whatever steps are, in their discretion, necessary to ensure 
pro rata treatment among customers.
    Second, with regard to the amount requested, Sec.  190.04(d)(3) 
provides that the trustee may request that a customer deliver 
substitute customer property with respect to a letter of credit, and 
that the amount of the request 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, consistent with 
Sec. Sec.  190.08 and 190.09. Thus, the amount of the substitute 
customer property requested (or, if substitute customer property is not 
provided, the amount of the letter of credit drawn upon (if partial 
draws are permitted)) should be proportionate to the amount required or 
may be required, in the trustee's discretion, to ensure pro rata 
treatment among customer claims. If the amount of the shortfall in the 
relevant account class (whether cash delivery property or otherwise) is 
estimated to be a small percentage, the amount of substitute customer 
property requested would also be a small percentage (subject to the 
trustee adding an appropriate buffer for later corrections in 
estimates, and taking into account any need to use the letter of credit 
as ongoing performance bond for the customer's obligations).
    To re-enforce these concepts, the Commission is adding a new Sec.  
190.04(d)(3)(iv), which provides that the trustee shall, in exercising 
their discretion with regard to addressing letters of credit, including 
as to the timing and amount of a request for substitute customer 
property, endeavor to mitigate, to the extent practicable, the adverse 
effects upon customers that have posted letters of credit in a manner 
that achieves pro rata treatment among customer claims. The Commission 
intends that this new paragraph will confirm to trustees that they 
should steer their discretion in the specified manner, and will provide 
assurance to customers that have posted letters of credit that the 
trustees will exercise their discretion in that manner. The Commission 
believes that this provision will appropriately address concerns 
regarding the manner in which the trustee ensures that customers that 
have posted letters of credit are treated economically in the same 
manner as customers who have posted other forms of collateral
    Moreover, in the context of Sec.  190.06, CME requested that the 
Commission confirm that ``when a customer posts a delivery letter of 
credit directly with the DCO or with its delivery counterparty, and not 
with or through the FCM, the letter of credit is outside the delivery 
account class, i.e., it does not constitute cash delivery property (or 
property of the debtor's estate), and the provisions in other parts of 
the proposed revisions regarding treatment of letters of credit posted 
with or through the debtor FCM do not apply.''
    For example, the Commission understands that upon expiry of certain 
deliverable contracts and assignment of delivery obligation, the long/
buyer of the contract must post collateral to the DCO against its final 
payment obligation on the delivery. In certain cases, collateral in the 
form of a delivery letter of credit collateral is posted by the 
customer directly to the DCO. The delivery letters of credit in these 
cases are subject to uniform terms that name the DCO as the sole 
beneficiary on the instrument. These delivery letters of credit do not 
create an obligation of or to a customer's FCM as they are posted 
directly to the DCO and the FCM is not a named beneficiary on the 
instrument.\110\
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    \110\ Similarly, CMC's concerns focus on ``a delivery LOC upon 
which the DCO is beneficiary.''
---------------------------------------------------------------------------

    In the context of a delivery letter of credit that is posted 
directly with the DCO or with the delivery counterparty, rather than 
with or through the FCM, and for which the FCM is not a named 
beneficiary, the Commission confirms that the letter of credit is 
outside the delivery account class, i.e., it does not constitute cash 
delivery property (or property of the debtor's estate), and the 
provisions in other parts of the proposed revisions regarding treatment 
of letters of credit posted with or through the debtor FCM do not 
apply.\111\
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    \111\ The Commission was not requested to opine on whether this 
approach vis-[agrave]-vis letters of credit is permissible outside 
of the context of the delivery account class, and expresses no view 
on that question.
---------------------------------------------------------------------------

    The Commission believes that this clarification, in combination 
with the new provision directing the trustee's discretion in the 
context of letters of credit, will ameliorate the commenters concerns 
regarding delivery letters of credit.
    The foregoing applies to the trustee. DCOs remain free to exercise 
any of the rights and powers in their rules vis-[agrave]-vis their 
clearing members, in particular with respect to risk management, 
limited only by requirements within the Commission's regulations.\112\ 
However, in this context, the Commission would encourage DCOs holding 
letters of credit posted by customers of FCMs in bankruptcy to exercise 
their rights under such letters of credit in a

[[Page 19353]]

measured fashion, in order to achieve risk management goals fully but 
in a manner that mitigates, to the extent practicable, adverse effects 
upon customers that have posted letters of credit.\113\
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    \112\ See, e.g., Sec.  190.04(e) (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.)
    \113\ In this connection, the Commission notes that OCC Rule 
1104(a)(ii) permits OCC, if the issuer of a letter of credit agrees 
to extend the irrevocability of its commitment thereunder in a 
manner satisfactory to OCC, to ``demand only such amounts as it may 
from time to time deem necessary to meet anticipated 
disbursements.''
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    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.04(d) as 
proposed, with the addition of new Sec.  190.04(d)(3)(iv) as set forth 
above.
e. Regulation Sec.  190.04(e): Liquidation of Open Commodity Contracts
    The Commission is adopting Sec.  190.04(e) as proposed to provide 
details regarding the liquidation and valuation of open positions.\114\ 
Paragraph (e) is derived from current Sec.  190.04(d), subject to a 
number of changes.
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    \114\ The Commission is amending Sec.  190.08(d) to 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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    The Commission is adopting Sec.  190.04(e)(1)(i), as derived from 
current Sec.  190.04(d)(1)(ii), to describe the process of liquidating 
open commodity contracts when the debtor is a member of a clearing 
organization. Regulation Sec.  190.04(e)(1)(i), like its predecessor, 
emphasizes 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-certifications 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 adopting Sec.  190.04(e)(1)(i) 
to delete the requirement contained 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.
    Section 190.04(e)(1)(i) also adds 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 the new provision is analogous to the existing provision but would 
extend to cases where the debtor FCM is a member of a foreign clearing 
organization.
    Section 190.04(e)(1)(ii) provides 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, Sec.  190.04(e)(1)(ii) 
provides 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 is adding this provision to account for 
those circumstances where the trustee must liquidate open commodity 
contracts for a debtor that is not a clearing member.
    As with Sec.  190.04(e)(1)(i), the Commission is adopting Sec.  
190.04(e)(2) to delete the rule approval requirement, for the same 
reasons stated above. Regulation Sec.  190.04(e)(2) is derived from 
current Sec.  190.04(d)(1)(ii) which requires 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.
    The Commission is adopting Sec.  190.04(e)(3) to 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. New Sec.  190.04(e)(3) 
confirms that the upstream intermediary may exercise such rights. 
However, 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, DCM, SEF 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 would be the 
trustee's sole available remedy as the regulation makes clear that 
``[i]n no event shall any such liquidation be voided.''
    The Commission is adopting Sec.  190.04(e)(4)(i) and (ii) based on 
current Sec.  190.04(d)(2) and (3), respectively, with some minor non-
substantive language changes and updated cross-references.
    The Commission requested comment in particular on the treatment of 
letters of credit in bankruptcy, as set forth in proposed Sec.  
190.04(e). The Commission did not receive any comments on this aspect 
of the Proposal. Accordingly, for the reasons stated above, the 
Commission is adopting Sec.  190.04(e) as proposed.
f. Regulation Sec.  190.04(f): Long Option Contracts
    The Commission is adopting Sec.  190.04(f) as proposed to contain 
only minor non-substantive changes from the current Sec.  190.04(e)(5), 
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 did not receive any comments on this aspect of the 
Proposal. Accordingly, for the reasons stated above, the Commission is 
adopting Sec.  190.04(f) as proposed.
3. Regulation Sec.  190.05: Operation of the Debtor's Estate--General
    The Commission is adopting Sec.  190.05 to revise parts of current 
Sec.  190.04 and add 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 obligation with respect to residual interest. The 
Commission requested comment with respect to all aspects of proposed 
Sec.  190.05.
    The Commission is adopting Sec.  190.05(a) to amend the requirement 
in current Sec.  190.04(a) that the trustee ``shall'' comply with all 
provisions of

[[Page 19354]]

the CEA and of the regulations thereunder as if it were the debtor, 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 with 
some flexibility in making decisions in an emergency bankruptcy 
situation, subject to the requirements of the Bankruptcy Code. 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. The Commission did not receive any comments on proposed 
Sec.  190.05(a).\115\
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    \115\ To the extent that ICI's comment raising concerns about 
trustee discretion applies here, the Commission notes that the 
addition of Sec.  190.00(c)(3)(i)(C), which directs the trustee to 
use their discretion with the overarching goal of protecting public 
customers, should mitigate that concern.
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    The Commission is adopting Sec.  190.05(b) to address the 
computation of funded balances. It is derived from, and makes several 
revisions to, Sec.  190.04(b). The Commission's objective in making 
such revisions is to provide the bankruptcy trustee with the latitude 
to act reasonably given the circumstances with which the trustee is 
confronted, 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.\116\ First, whereas current Sec.  190.04(b) 
provides that a trustee ``must'' compute a daily funded balance for the 
relevant customer accounts, Sec.  190.05(b) requires the trustee to use 
``reasonable efforts'' to make such computations. Such computations are 
required to be ``as accurate as reasonably practicable under the 
circumstances, including the reliability and availability of 
information.'' Second, Sec.  190.05(b) increases the scope of customer 
accounts for which the bankruptcy trustee is obligated to compute a 
funded balance from accounts that contain open commodity contracts to 
accounts that contain open commodity contracts or other property. In 
the Commission's view, 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. Third, Sec.  190.05(b) revises the length of time that 
the trustee is obligated to compute the funded balance of customer 
accounts from ``until the final liquidation date'' to 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, the specific deadline by which the computation must be 
completed is being removed. The Commission does not believe that the 
deadline in current Sec.  190.04(b) (by noon the next business day) is 
crucial in a bankruptcy context (as it is with respect to an FCM 
conducting ongoing daily business).\117\ Such computation would, 
however, inherently need to be accomplished prior to performing any 
action where knowledge of funded balances is essential, such as 
transfers of accounts or property.
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    \116\ See major theme 7 discussed in section I.B above.
    \117\ See, e.g., Sec.  1.32(d).
---------------------------------------------------------------------------

    The Commission received one comment regarding proposed Sec.  
190.05(b). CME agreed that allowing the trustee to compute the funded 
balance for customers' accounts before transferring or liquidating 
customer positions or property using ``reasonable efforts'' to be ``as 
accurate as reasonably practicable under the circumstances, including 
the reliability and availability of information'' ``should allow the 
trustee to act more promptly to transfer the positions of public 
customers and their pro rata share of the customer property than if the 
trustee were held to a strict standard of precision in calculating 
funded balances before it could undertake such transfers.'' This is 
consistent with the Commission's view. The Commission is adopting Sec.  
190.05(c)(1) to amend the record retention requirements in current 
Sec.  190.04(c) to be more comprehensive. Section 190.05(c)(1) expands 
the referenced records from ``computations required by this [p]art'' to 
``records required under this chapter to be maintained by the debtor, 
including records of the computations required by this part.'' To 
enable the trustee to mitigate the expenses of record retention, 
however, it reduces 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.'' Section 190.05(c)(2) simplifies the 
corresponding portion of current Sec.  190.04(c)(2) by omitting the 
requirement that the records required in Sec.  190.05(c)(1) be 
available to the Court and parties in interest. The requirement that 
such records be available to the Commission and the United States 
Department of Justice is being retained. A court generally will 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. The Commission did not receive any comments on proposed 
Sec.  190.05(c).
    The Commission is adopting new Sec.  190.05(d) 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. 
Section 190.05(d) requires 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. Section 190.05(d) also requires 
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.
    The Commission sought comment on the practicability of the proposed 
requirements regarding the issuance of account statements. ICI 
commented in support of the account statement requirements.
    The Commission is adopting Sec.  190.05(e)(1) to amend the 
requirement in current Sec.  190.04(e)(2) that a trustee must obtain 
court approval to make disbursements to customers, to specifically 
carve out transfers of customer property made in accordance with Sec.  
190.07. The Commission is making this change to reflect the policy 
preference to transfer as many public customer positions as practicable 
in the event of an FCM insolvency.\118\ The Commission notes, however, 
that this

[[Page 19355]]

carve out does not detract from the trustee's ability to, in their 
discretion, nonetheless seek and obtain court approval for certain 
transfers of 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 
Sec.  190.05(e)(1) strikes the right balance between these competing 
objectives.\119\
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    \118\ 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 is deleting this 
provision in favor of allowing transfers without court approval for 
the reasons stated above.
    \119\ The concept of prioritizing cost effectiveness and 
promptness over precision is discussed in detail in major theme 7 in 
section I.B above and in overarching concept three in the cost-
benefit considerations, section III.A.2.iii below.
---------------------------------------------------------------------------

    Section 190.05(e)(2) addresses how a bankruptcy trustee may invest 
the proceeds \120\ from the liquidation of open commodity contracts and 
specifically identifiable property, and other customer property. It is 
derived from, and retains much of, current Sec.  190.04(e)(3), but it 
expands the provision 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.'' 
It continues to limit the permissible investments to obligations of, or 
fully guaranteed by, the United States, and to limit the location of 
permissible depositories to those located in the United States or its 
territories or possessions. The Commission did not receive any comments 
on proposed Sec.  190.05(e).
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    \120\ Section 190.05(e)(2) uses the term ``proceeds'' rather 
than the term ``equity,'' which is used in current Sec.  
190.04(e)(3). This change in wording is not meant to be a 
substantive.
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    The Commission is adopting new Sec.  190.05(f) to 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.'' \121\ The Commission 
requested comment with respect to all aspects of proposed Sec.  190.05. 
Specifically, the Commission sought comment on the practicability and 
appropriateness of proposed Sec.  190.05(f).
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    \121\ Section 1.11(e)(3)(i)(D).
---------------------------------------------------------------------------

    The Commission received supportive comments from CME, SIFMA AMG/
MFA, ICI, and Vanguard. CME supported adding clarity that the trustee 
should use reasonable efforts to operate the debtor FCM's estate in 
compliance with the CEA and CFTC regulations governing FCMs, including 
to apply the residual interest provisions in Sec.  1.11, in a manner 
appropriate to the context of their responsibilities and in light of 
the existence of a surplus or deficit in customer property available to 
pay customer claims. ICI and Vanguard supported the clarification in 
proposed Sec.  190.05(f) that an FCM's residual interest is to be 
applied to public customer claims. Vanguard noted its belief that ``FCM 
residual interest is a valuable buffer to insulate FCM customers from 
the risk of delayed or failed margin transfers from other customers.'' 
Vanguard was ``pleased that the Commission has confirmed that, while 
residual interest is fronted by FCMs, it must be used to support 
customers through an FCM insolvency,'' noting that its ``purpose is to 
enhance core customer protections.'' SIFMA AMG/MFA also believed that 
``the proposed use of residual interest as contemplated by proposed 
Sec. Sec.  190.05(f) and 190.09 is appropriate,'' and agreed with the 
Commission that ``the residual interest provisions contained in Sec.  
1.11 remain important.''
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.05 as 
proposed.
4. Regulation Sec.  190.06: Making and Taking Delivery Under Commodity 
Contracts
    The Commission is adopting Sec.  190.06 as proposed. The Commission 
is adopting Sec.  190.06 to provide more specificity regarding making 
and taking deliveries on commodity contracts in the context of an FCM 
bankruptcy and to reflect current delivery practices. Section 190.06 is 
derived from current Sec.  190.05, but implements new concepts (with 
respect to delivery practices, intangible commodities, and separation 
of physical and cash delivery property), as discussed further below.
    Generally, open positions may enter a delivery position where the 
parties incur bilateral contractual delivery obligations.\122\ 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.
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    \122\ 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 influence 
whether a delivery issue may arise. Additionally, during business as 
usual, market participants typically offset contracts before 
incurring delivery obligations.
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    The delivery provisions in the current regulations 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 oil or gas 
futures) the party with the contractual obligation to make delivery 
will physically transfer a tangible commodity to meet its obligations. 
In other cases, intangible commodities may be delivered, including 
virtual currencies. As noted previously, in the definitions section 
(Sec.  190.01), the Commission is dividing the delivery account class 
into physical delivery and cash delivery account subclasses to 
recognize the differing issues that apply to physical delivery property 
versus cash delivery property. The Commission is also recognizing that, 
consistent with current practice, physical deliveries \123\ may be 
effected in different types of accounts.\124\ 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. \125\
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    \123\ Current Sec.  190.05 applies to the delivery of a physical 
commodity, or of documents of title to physical commodities. Section 
190.06 applies to any type of commodity that is subject to delivery, 
whether tangible or intangible. This is captured in the definition 
of physical property. 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 and 
fourth categories under the definition of physical delivery property 
in Sec.  190.01 in section II.A.2 above.
    \124\ See also Sec.  1.42.
    \125\ See also Sec.  1.42.
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    Section 190.06(a) applies 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.\126\ The Commission is

[[Page 19356]]

adopting Sec.  190.06(a)(2) to address 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). It replaces 
current Sec.  190.05(b). 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.\127\
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    \126\ As discussed above, 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.
    \127\ The requirement for registered entity rules to be 
submitted for approval in accordance with section 5c(c) of the Act 
has been deleted for reasons discussed in section II.B.2 above with 
respect to Sec.  190.04(e)(1) and (2).
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    Section 190.06(a)(2)(i) \128\ directs 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 adopting a ``reasonable efforts'' standard 
rather than (as in current Sec.  190.05(a)(1)) ``best efforts,'' the 
Commission is recognizing 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 an inordinate amount of 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.
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    \128\ The Commission notes that 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. 
Section 190.06(a)(2) applies where the trustee is unable to do so.
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    Section 190.06(a)(2)(ii) addresses 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 current 
Sec.  190.05(b)(2), Sec.  190.06(a)(2)(ii) 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.
    Section 190.06(a)(3) applies when it is not practicable to effect 
delivery outside the estate. Section 190.06(a)(3) clarifies that which 
was implied, but was not addressed, in current Sec.  190.05(c)(1)-(2), 
by providing additional details for when delivery is made or taken 
within the debtor's estate. It contains 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. The regulation also includes 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.
    The Commission is adopting new Sec.  190.06(a)(4) to 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. 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. Such a 
transfer may not be made if the customer is undermargined or has a 
deficit balance in any other commodity contract accounts.
    Section 190.06(a)(5), as proposed, addressed deliveries made or 
taken on behalf of ``a house account of the debtor.'' It was derived 
from current Sec.  190.05(c)(3), with some clarifying wording. 
Consistent with the suggestion from the ABA Subcommittee, as discussed 
in section II.A.2 above, the Commission is deleting in this final rule 
the definition of house account as it applies to FCMs. The reference in 
the provision as proposed to ``a house account of the debtor'' is being 
replaced in the final rule with a reference to ``the debtor's own 
account or the account of any non-public customer of the debtor.'' No 
substantive change vis-[agrave]-vis either the current regulation or 
the regulation as proposed is intended.
    The Commission is adopting new Sec.  190.06(b) to 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. 
Because claims in each subclass are fixed as of the filing date, Sec.  
190.06(b)(1)(i) provides 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., cash received after the filing date, in 
exchange for physical delivery property on which delivery was made), 
and Sec.  190.06(b)(ii) provides 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., in exchange for cash delivery property paid 
after the filing date) on behalf of a customer in accordance with Sec.  
190.06(a)(3).
    Section 190.06(b)(2) describes the customer property included in 
the cash delivery account class and in the physical delivery account 
class. Section 190.06(b)(2) provides 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 also includes any other property that 
is (A) not segregated for the benefit of customers in the futures, 
foreign futures, or cleared swaps account classes) and (B) traceable 
(through, e.g., account statements) as having been received after the 
filing date as part of taking delivery.
    Section 190.06(b)(2) also provides, 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

[[Page 19357]]

physical delivery account class also includes any other property that 
is (A) not segregated for the benefit of customers in the futures, 
foreign futures, or cleared swaps account classes) and (B) 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 requested comment on all aspects of proposed Sec.  
190.06. In particular, the Commission sought comment on the 
implications of subdividing the delivery account class into separate 
physical delivery and cash delivery account subclasses, including any 
additional challenges or benefits that the Commission did not consider. 
CME expressed support for specific aspects of proposed Sec.  190.06, 
such as: (1) The proposed enhancements to the delivery account class, 
including separating the account class into physical and cash delivery 
account classes; (2) the additional detail provided to the trustee on 
how to facilitate the completion of deliveries including, in 
particular, the requirement for the trustee to use reasonable efforts 
to allow delivery to occur outside administration of the debtor FCM's 
estate when the rules of the relevant exchange or DCO prescribe a 
process for allowing deliveries to be accomplished as set forth in the 
proposal; and (3) the clarification that cash or cash equivalents held 
by the debtor FCM in an account maintained at a bank, DCO, foreign 
clearing organization or elsewhere constitutes customer property when 
it is held under a name or in a manner clearly indicating the property 
in the account relates to deliveries. As to the latter, CME believes 
that this will facilitate identifying cash delivery property available 
to distribute to customers in the cash delivery account class.\129\
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    \129\ CME noted that its support was ``subject to CME's comments 
which request changes to the cash delivery property and physical 
delivery property definitions.'' Specifically, CME requested that 
the Commission adopt more formal requirements with respect to 
delivery accounts through a separate rulemaking. That request is 
addressed in section II.G below.
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    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.06 as 
proposed, with modifications to Sec.  190.06(a)(5) as set forth above.
5. Regulation Sec.  190.07: Transfers
    Regulation Sec.  190.07 was proposed to set forth detailed 
provisions governing transfers, consistent with the policy preference, 
explained in Sec.  190.00(c)(4), for transferring (or ``porting'') 
public customer commodity contract positions, as well as all or a 
portion of such customers' account equity. It is being adopted as 
proposed with modifications to Sec.  190.07(b), (d), and (e), as set 
forth below.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.07, and raised particular questions with respect to 
the proposed six-month post-transfer period to complete customer 
diligence, partial transfers, and estimates of customer claims.
    Section 190.07(a) addresses rules that clearing organizations and 
SROs may ``adopt, maintain in effect, or enforce'' that may affect 
transfers.
    In Sec.  190.07, paragraphs (a)(1) and (2) states that these 
organizations may not have such rules that, respectively, ``are 
inconsistent with the provisions of'' part 190 or that interfere with 
the acceptance by their members of commodity contracts and collateral 
from FCMs that are required to transfer accounts pursuant to Sec.  
1.17(a)(4). These provisions are derived from current Sec.  
190.06(a)(1) and (2), with technical changes. No comments were received 
with respect to these provisions.
    Section 190.07(a)(3) is intended to promote transfers, to the 
extent consistent with good risk management. It provides that no 
clearing organization or other SRO may adopt, maintain in effect, or 
enforce rules that ``interfere with the acceptance by its members of 
transfers of commodity contracts, and the property margining or 
securing such contracts, from [an FCM that is a debtor] if such 
transfers have been approved by the Commission . . .'' Paragraph (a)(3) 
includes a proviso, however, that it shall not (i) ``[l]imit the 
exercise of any contractual right of a clearing organization or other 
registered entity to liquidate or transfer open commodity contracts''; 
or (ii) ``[b]e interpreted to limit a clearing organization's ability 
adequately to manage risk.''
    FIA supported the proviso, and CME ``agree[ed] that transfers 
should be made consistent with sound risk management principles, and in 
that regard welcome[d] the proposed clarification that the requirements 
under the proposed rule do not limit the rights of a DCO (or a DCM or 
swap execution facility as ``registered entities'' as defined in the 
CEA) to liquidate or transfer open commodity contracts.'' ICE, by 
contrast, was concerned that the term ``interfere with'' is overly 
broad, and requested that the Commission ``clarify that a clearing 
organization is not precluded from managing the risks presented by any 
such transfer, including through bona fide changes in margin 
requirements and guarantee fund contributions for transferee clearing 
members.''
    As discussed immediately above, the provision already states that 
``this paragraph (a)(3) shall not . . . be interpreted to limit a 
clearing organization's ability adequately to manage risk.'' Moreover, 
recognizing the different or additional margin requirements or 
guarantee fund contribution requirements resulting from the additional 
positions carried by a transferee clearing member is not a rule that 
interferes with the acceptance of a transfer of commodity 
contracts.\130\ Accordingly, the Commission concludes that Sec.  
190.07(a)(3) appropriately meets the goal of promoting transfers to the 
extent consistent with good risk management.
---------------------------------------------------------------------------

    \130\ The Commission understands ICE's reference to ``bona fide 
changes in margin requirements and guarantee fund contributions'' to 
mean changes that are not based on the fact that positions were 
acquired by transfer.
---------------------------------------------------------------------------

    Regulation Sec.  190.07(b) concerns requirements for transferees. 
Paragraph (b)(1) clarifies that it is the duty of the transferee--not 
of anyone else--to assure that the transfer will not cause the 
transferee to be in violation of the minimum financial requirements. 
Paragraph (b)(2) notes that the transferee accepts the transfer subject 
to any loss arising from deficit balances that cannot be recovered from 
the customer, and, in the case of customer accounts, must keep such 
counts open for at least one business day (unless the customer fails to 
respond to a margin call within a reasonable time) and may not collect 
commissions with respect to the transfer.
    As stated in the proposal, the Commission understands 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. Regulation Sec.  190.07(b)(3) thus 
provides 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. This provision is consistent 
with past practice in FCM bankruptcies.
    CME supported this provision as a ``practical change'' that should 
assist in finding willing transferees, while ICI believed that it will 
help mitigate or

[[Page 19358]]

eliminate ``speed bumps'' to porting. Vanguard supported the 
flexibility advanced by the Commission here, but urged the Commission 
to work to harmonize that flexibility across other regulatory regimes 
applicable at FCMs, particularly for those dually registered as broker-
dealers.
    FIA supported the policy underlying paragraph (b)(3), and noted 
that it is essential to realize the policy of favoring porting over 
liquidation of customer accounts. FIA also agreed that six months is a 
reasonable period of time for this process, subject to the Commission's 
authority to grant additional time in particular circumstances. FIA 
was, however, of the view that this regulation should ``provide 
transferee FCMs more specific relief from applicable law relating to 
`customer diligence.' ''
    FIA encouraged the Commission to specify the customer diligence 
rules from which transferee FCMs will have temporary relief. FIA stated 
that

``such rules may include, but not be limited to: (i) rules relating 
to anti-money laundering requirements (including rules requiring 
FCMs to implement customer identification programs and know your 
customer requirements and all corresponding self-regulatory 
organization (``SRO'') requirements); (ii) rules relating to risk 
and other disclosures (Sec. Sec.  1.55, 30.6, 33.7 and similar SRO 
disclosure requirements); (iii) rules relating to capital and 
residual interest requirements (Sec. Sec.  1.11, 1.17, 1.22, 1.23, 
22.2, 22.17, 30.7 and 41.48 and related SRO requirements); (iv) 
rules relating to account statements required under Sec.  1.33 in 
the event positions transfer with inadequate contact information 
(Sec.  1.33 and related SRO requirements); and [(v)] rules relating 
to margin in the event accounts transfer without adequate margin 
(Sec. Sec.  1.17, 39.13, 41.42-41.49 and related SRO 
requirements).''

    The Commission has considered each of the five types of 
requirements discussed by FIA:
    With respect to anti-money laundering requirements, the Commission 
notes that, for purposes of the Customer Identification Program 
(``CIP'') requirements applicable to futures commission merchants 
pursuant to 31 CFR 1026.220, the term ``account'' is defined to exclude 
``[a]n account that the futures commission merchant acquires through 
any acquisition, merger, purchase of assets, or assumption of 
liabilities.'' 31 CFR 1026.100(a)(2)(i). Thus, transferred accounts are 
not subject to the CIP requirements.
    However, the Customer Due Diligence (``CDD'') requirements of 31 
CFR 1026.210(b)(5) do appear to apply. These include a requirement for 
``[a]ppropriate risk-based procedures for conducting ongoing customer 
due diligence, to include . . . [u]nderstanding the nature and purpose 
of customer relationships for the purpose of developing a customer risk 
profile . . . .'' 31 CFR 1026.210(b)(5)(i). The Commission is of the 
view that Sec.  190.07(b)(3) would inform the determination of what 
constitutes appropriate risk-based procedures in the exigent context of 
an FCM accepting a transfer of accounts from an FCM that is a debtor in 
bankruptcy.
    While FIA appears to request a reference to the account opening 
disclosure requirements in Sec. Sec.  1.55, 30.6, and 33.7, these would 
appear to be addressed by the bulk transfer provisions of Sec.  1.65. 
The Commission is amending Sec.  190.07(b)(3) to include a 
parenthetical statement that explicitly refers to ``the risk 
disclosures referred to in Sec.  1.65(a)(3).'' This will modify the 
sixty-day requirement of that paragraph.
    The Commission declines to amend the regulation to extend the time 
to comply with capital and residual interest requirements. To do so 
would risk permitting a transfer of accounts to result in contagion of 
financial weakness. The Commission reiterates the importance of Sec.  
190.07(b)(1), which provides that ``it is the duty of each transferee 
to assure 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.''
    However, to the extent that shortfalls in compliance with these 
requirements are due to errors or shortfalls in the data received by 
the transferee from the transferor FCM, and the transferee acts with 
reasonable and appropriate diligence in seeking to detect such errors 
or shortfalls in data, and, where detected, in investigating and 
correcting them, such shortfalls in compliance would not be considered 
violations of such requirements.
    Similarly, where account statements required by Sec.  1.33 do not 
reach the customer due to errors or shortfalls in the contact 
information provided to the transferee, there would be no violation so 
long as the transferee takes reasonable steps to detect such errors or 
shortfalls (e.g., by reacting promptly to rejected email or returned 
postal mail, or to complaints by a transferred customer that they are 
not receiving such statements) and to correct the situation once 
detected. The proposed regulation does not need to be amended to 
achieve this result.
    Finally, with respect to FIA's request for relief with respect to 
regulations ``relating to margin in the event accounts transfer without 
adequate margin,'' the Commission believes that the determination of 
whether a transferee FCM is promptly collecting such margin should be 
informed by the exigencies of the situation. There is, however, no 
basis for a general exemption for transferee accounts from the 
requirements of Sec.  39.13(g)(8)(iii), providing that a DCO shall 
require that its members do not permit customers to withdraw funds from 
their accounts unless the accounts would be fully margined after such 
withdrawal. If the transferee FCM is not confident of the information 
it has regarding the transferred account, it would seem appropriate to 
risk manage with caution. Once the transferee FCM is confident that it 
fully understands the situation, the transferee can act in accordance 
with its normal procedures.\131\ Similarly, there is no basis to 
provide a general exemption from undermargined account capital charges 
in accordance with Sec.  1.17.
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    \131\ Such normal procedures would include the ``ordinary course 
of business'' referred to in Letter 19-17, or any successor letter 
or regulation. See CFTC Letter 19-17, https://www.cftc.gov/node/217076.
---------------------------------------------------------------------------

    In all of these cases, the Commission encourages DCOs and SROs to 
take similar approaches.
    While the Commission has declined, in many of the above cases, to 
provide general relief by regulation, this is without prejudice to the 
possibility that more targeted relief may be appropriate in particular 
cases. Specifically, any further relief that might be appropriate in a 
particular situation could be requested by, e.g., the transferee, in 
light of the relevant facts and circumstances.
    The Commission observes that its staff have traditionally responded 
to requests for relief in emergency situations with great dispatch, and 
expects, and thus instructs staff, to continue to do so in this context 
in the future.\132\
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    \132\ For the avoidance of doubt, the nature of the expectation 
and the instruction is that staff will provide a response to such 
requests with great dispatch. The nature of the response, whether 
affirmative, affirmative in part, or negative, will depend on the 
relevant facts and circumstances.
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    OCC recommended that ``the Commission adopt a parallel regulation 
permitting a DCO to postpone any due diligence the DCO would typically 
have to perform on an FCM member accepting transferred positions from a 
bankrupt FCM.'' This would include the requirements of, e.g., Sec.  
39.12, requiring a DCO to have ``continuing participation requirements 
for clearing members of the [DCO] that are objective, publicly 
available, and risk-based.''
    The Commission does not agree that the situations are parallel: An 
FCM is required to perform individualized due

[[Page 19359]]

diligence on each of its customers, which in the case of a transfer 
such as was seen in historical situations such as MF Global, would 
amount to hundreds or even thousands of customers. By contrast, the 
focus of a DCO is on the financial and operational capability of each 
of its clearing members that is a transferee to manage, in the 
aggregate, the customer portfolios of which it accepts transfer. The 
number of transferee FCM clearing members is likely to be no more than 
a dozen.
    In any event, the Commission expects that a DCO would, and would be 
permitted to, conduct its due diligence procedures in a manner 
consistent with balancing risk management requirements (see, e.g., 
Sec.  190.07(a)(3)(ii) (restrictions on a DCO interfering with the 
acceptance of transfers from a debtor FCM ``shall not be interpreted to 
limit a clearing organization's ability adequately to manage risk'') 
with the exigencies of the situation.
    Section 190.07(b)(4) is designed to clarify what the account 
agreement between the transferred customer and the transferee is at and 
after the time the transfer becomes effective. This includes situations 
where an account is partially transferred. As proposed, it provides 
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. It also 
provides that a breach of the agreement prior to a transfer does not 
constitute a breach on the part of the transferee. CME, ICI, and 
Vanguard supported this provision.
    FIA appreciated the need for legal certainty as to the terms of the 
relationship between a transferee FCM and each transferred customer, 
but was concerned that the transferee FCM might be disadvantaged by 
being subject to an account agreement between the transferred customer 
and the transferor (debtor) FCM. There are two possible situations with 
respect to each customer: Either the customer does, or does not, have a 
pre-existing account agreement with the transferee FCM.
    FIA noted that many large customers, in particular, may maintain 
accounts at more than one FCM, and thus it may be the case that the 
customer already has an account agreement in place with the transferee 
FCM. FIA asked the Commission to confirm their view that, in this 
context, the transferee would not be required to manage the ported 
account(s) in accordance with the agreement with the transferor FCM. 
The Commission agrees with this view, and is modifying proposed Sec.  
190.07(b)(4) to state this explicitly: The proposed text will be 
renumbered as Sec.  190.07(b)(4)(i), and paragraph (b)(4)(ii) will be 
added to provide that paragraph (b)(4)(i) shall not apply where the 
customer has a pre-existing account agreement with the transferee 
futures commission merchant. In such a case, the transferred account 
will be governed by that pre-existing account agreement.
    However, where the transferred customer does not have a pre-
existing account agreement with the transferee FCM, FIA conceded that 
``the account agreement [between the transferor and the customer] 
should stay in place for a short defined interim period during which 
the parties may renegotiate. . . .'' FIA did not specify how long that 
``short defined interim period'' should last, nor what should happen at 
the end of that period if the parties fail to reach agreement. The 
Commission notes that nothing prevents either the transferee FCM or 
customer from negotiating at any time to change the (in this case, 
assigned) account agreement between them, and that, aside from Sec.  
190.07(b)(2)(ii)(A) (requiring the transferee to keep the customer's 
commodity contracts open at least one business day after their receipt 
unless the customer fails to meet promptly a margin call), nothing in 
the Commission's regulations prevents either the transferee or customer 
from terminating their relationship if they cannot reach agreement as 
to the terms under which that relationship should continue, on what 
either party believes is a timely basis. Accordingly, the Commission 
declines to modify Sec.  190.07(b)(4) in this context.
    Lastly, FIA observed that a customer's account may not always be 
able to be physically transferred from the debtor FCM to the transferee 
FCM. The Commission notes that the reference in Sec.  190.07(b)(4) to 
assignment of account agreements does not refer to the movement of 
physical documents.\133\ As requested by FIA, the Commission can thus 
confirm that assignment of the agreement does not depend upon such 
movement.
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    \133\ To be sure, a transfer agreement would likely include 
transfers of records or at least copies of records as a matter of 
good practice.
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    Regulation Sec.  190.07(b)(5) provides 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, which shall comply therewith 
to the extent practicable (if the transferee subsequently enters 
insolvency).
    Regulation Sec.  190.07(c) addresses eligibility of accounts for 
transfer under section 764(b) of the Bankruptcy Code. This provision 
states that ``[a]ll commodity contract accounts (including accounts 
with no open commodity contract positions) are eligible for transfer. . 
. .'' This language recognizes that accounts can be transferred even if 
they are intended for trading commodities but do not include any open 
commodity contracts at the time of the order for relief.\134\
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    \134\ 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.
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    Regulation Sec.  190.07(d) addresses special rules for transfers 
under section 764(b) of the Bankruptcy Code. Paragraph (d)(1) instructs 
the trustee to ``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 of record, no 
later than the seventh calendar day after the order for relief.'' The 
Commission will correct a typographical error in the proposal, and 
refer to ``customer claims of record'' rather than ``customer claims or 
record.''
    Regulation Sec.  190.07(d)(2) addresses cases of partial transfers 
and multiple transferees. It includes 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 is intended to caution against 
partial transfers that would break netting sets and make the customer 
worse off. The Commission has also decided to state 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.'' This language is 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,

[[Page 19360]]

Sec.  190.07(d)(2)(ii) states that ``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 is intended 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.
    Regulation Sec.  190.07(d)(3) provides details regarding the 
treatment and transfer of letters of credit used as margin, consistent 
with other proposed provisions related to letters of credit. In 
particular, this provision states that a transfer of a letter of credit 
cannot be made if it would result in a recovery that exceeds the amount 
to which the customer is entitled in Sec. Sec.  190.08 and 190.09. 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.\135\
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    \135\ See also discussion of treatment of letters of credit in 
bankruptcy under Sec.  190.04(d)(3) in section II.B.2.
---------------------------------------------------------------------------

    Regulation Sec.  190.07(d)(4) requires 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.
    Regulation 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 available to 
make equivalent percentage distributions to all equity claim holders in 
the applicable account class. It clarifies that the trustee should make 
determinations in this context 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.
    Regulation Sec.  190.07(e) addresses the prohibition on avoidance 
of transfers under section 764(b) of the Bankruptcy Code. It explicitly 
approves specific types of transfers, unless such transfers are 
disapproved by the Commission.
    Section 190.07(e)(1) approves (i) transfers that were made before 
the order for relief in compliance with Sec.  1.17(a)(4) (FCM fails to 
meet capital requirements); (ii) pre-relief transfers, withdrawals or 
settlements at the request of public customers, unless the customer 
acted in collusion with the debtor to obtain a greater share than it 
would otherwise be entitled to; and (iii) pre-relief transfers of 
customer accounts or commodity contracts and other related property, 
either by a clearing organization or a receiver that has been appointed 
for the FCM that is now a debtor. 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).
    Regulation Sec.  190.07(e)(2) pertains to post-relief transfers. 
Section 764(b) of the bankruptcy code permits the Commission to 
approve, and thus protect from avoidance, transfers that occur up to 
seven days after the order for relief. Section 190.07(e)(2)(i) approves 
transfers of eligible commodity contract accounts or customer property 
made by the trustee or any clearing organization. Section 
190.07(e)(2)(ii) approves transfers made at the direction of the 
Commission upon such terms and conditions as the Commission may deem 
appropriate and in the public interest.
    Regulation Sec.  190.07(e)(3) was referred to in preamble to the 
proposal as derived from current Sec.  190.06(g)(3). It was 
inadvertently omitted from the rule text in the proposal.
    Section 190.07(e)(3) pertains to pre-relief withdrawals by 
customers (in contrast to the transfers dealt with previously in Sec.  
190.07(e)(1)(ii)). It states (in terms analogous to Sec.  
190.07(e)(1)(ii)) that notwithstanding the provisions of paragraphs (c) 
and (d) of this section, the following transfers are approved and may 
not be avoided under sections 544, 546, 547, 548, 549 or 724(a) of the 
Bankruptcy Code: The withdrawal or settlement of a commodity contract 
account by a public customer, including a public customer which is a 
commodity broker, prior to the filing date unless: (i) The customer 
making the withdrawal or settlement acted in collusion with the debtor 
or its principals to obtain a greater share of the bankruptcy estate 
than that to which such customer would be entitled in a bankruptcy 
distribution; or (ii) The withdrawal or settlement is disapproved by 
the Commission.
    Regulation Sec.  190.07(f) provides that, notwithstanding the other 
provisions of this section (with exceptions discussed below), the 
Commission may prohibit the transfer of a particular set or sets of the 
commodity contract accounts and customer property, or permit the 
transfer of a particular set or sets of commodity contract accounts and 
customer property that do not comply with the requirements of the 
section. 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).
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.07 as 
proposed with modifications to Sec.  190.07(b), (d), and (e), as set 
forth above.
6. Regulation Sec.  190.08: Calculation of Funded Net Equity
    Section 190.08 is being adopted as proposed with a number of 
technical modifications, as set forth below.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.08, and raised particular questions with respect to 
the revisions to the calculation of the equity balance of a commodity 
contract set forth in proposed Sec.  190.08(b)(1), and 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).
    As proposed, Sec.  190.08(a) stated that 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.'' 
As discussed above, the ABA Subcommittee urged that there should be 
more precise use of the term ``allowed claim.'' \136\ The Commission 
agrees with this recommendation. Accordingly, the Commission is 
amending the language in the proposal to replace the term ``allowed net 
equity'' with the term ``funded net equity'' in the final rule in both 
Sec.  190.08(a) and in the title of Sec.  190.08.\137\
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    \136\ See discussion of ``funded claim'' in section II.A.2 
above.
    \137\ Proposed Sec.  190.08(a) is derived from current Sec.  
190.07(a), but reflects 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. Since no (relevant) operations will occur subsequent to the 
liquidation date, provisions that address how to deal with commodity 
contracts after that time are moot.

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[[Page 19361]]

    Section 190.08(b) sets forth the steps for a trustee to follow when 
calculating each customer's net equity.\138\ Section 190.08(b)(1), 
equity determination, sets forth the steps for a trustee to follow when 
calculating the equity balance of each commodity contract account of a 
customer. When calculating the customer's claim against the debtor, the 
basis for calculating such claim is the data that 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. There 
were no comments directed specifically to this provision.
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    \138\ 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.
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    Section 190.08(b)(2), customer determination (aggregation), 
provides 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 regulation sets forth how to determine 
whether accounts are held in the same capacity or in separate 
capacities. There were two comments applicable to this provision.
    As proposed, Sec.  190.08(b)(2)(ix) referred to the fact that an 
omnibus customer accounts is held in a separate capacity from the 
``house account.'' As noted above,\139\ the ABA Subcommittee has 
suggested the deletion of the term ``house account'' in the context of 
FCM bankruptcies, and the Commission has accepted this suggestion. 
Consistent with that approach, the Commission is accepting the ABA 
Subcommittee's revised drafting for this provision: An omnibus customer 
account for public customers of a futures commission merchant 
maintained with a debtor shall be deemed to be held in a separate 
capacity from any omnibus customer account for non-public customers of 
such futures commission merchant and from any account maintained with 
the debtor on its own behalf or on behalf of any non-public customer 
(emphasis added only for illustration).
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    \139\ See section II.A.2 above.
---------------------------------------------------------------------------

    As proposed, Sec.  190.08(b)(2)(xii) provided that 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.
    SIFMA AMG/MFA urged the Commission to amend this provision to 
``treat accounts of the same principal or beneficial owner maintained 
by different agents or nominees as separate accounts,'' noting that 
this approach would ``reduce the administrative difficulties the 
trustee would face in consolidating all accounts of the same principal 
or beneficial owner'' and would ``avoid[] any confusion as to the 
treatment of separate accounts that could arise with the overlay of the 
time-limited relief provided by Letter 19-17.'' \140\ SIFMA AMG/MFA 
asserted that this change would be similar to the approach taken by the 
Commission in proposed Sec.  190.08(b)(2)(xiv), which provides that 
accounts held by a customer in separate capacities shall be deemed to 
be accounts of different customers.
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    \140\ See CFTC Letter 19-17, https://www.cftc.gov/node/217076.
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    The Commission notes that CFTC Letter 19-17 conditioned such relief 
on the FCM performing ``stress testing and credit limits . . . on a 
combined account basis'' and ``provid[ing] each beneficial owner using 
separate accounts with a disclosure that under CFTC [p]art 190 rules 
all separate accounts of the beneficial owner will be combined in the 
event of an FCM bankruptcy.'' \141\ Thus, treating separate accounts of 
the same beneficial owner on a combined basis is entirely consistent 
with the approach taken in Letter 19-17. Nor is the situation of 
separate accounts for the same beneficial owner analogous to a customer 
holding accounts in separate capacities, as referred to in Sec.  
190.08(b)(2)(xiv) (e.g., in their personal capacity versus in their 
capacity as trustee for X, or in their capacity as trustee for Y versus 
their capacity as trustee for Z.). In those latter cases, the same 
legal owner is acting for separate beneficial owners. Accordingly, the 
Commission is declining to amend Sec.  190.08(b)(2)(xii).
---------------------------------------------------------------------------

    \141\ Id. at 5 (emphasis supplied).
---------------------------------------------------------------------------

    Section 190.08(b)(3), setoffs, sets forth instructions regarding 
how and when to set off positive and negative equity balances.
    Section 190.08(b)(4), correction for distributions, provides that 
the value of property that has been transferred or distributed must be 
added to the net equity amount calculated for that customer after 
performing the steps contained in Sec.  190.08(b)(1) through (3). 
Section 190.08(b)(4) also includes a proviso that clarifies that the 
calculation of net equity for any late-filed claims (in cases where all 
accounts for which there are customer claims of record as of the filing 
date are transferred with all of the equity pertaining thereto) will be 
based on the allowed amount of such claims.
    Section 190.08(b)(5), correction for ongoing events, provides that 
the calculation of net equity will 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.
    As proposed, Sec.  190.08(c) set forth the method for calculation 
of a customer's funded balance, i.e., ``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.'' Section 
190.08(c)(1) sets forth instructions for calculating the funded balance 
of any customer claim, while Sec.  190.08(c)(2) requires the funded 
balance to be adjusted to correct for ongoing events.
    One change is being made to paragraph (c)(1), as a result of 
addressing a comment that affected a prior section. As proposed, Sec.  
190.08(c)(1)(ii) addressed giving customers credit for 100% of margin 
payments made after the order for relief.
    As discussed above,\142\ a number of commenters (ABA Subcommittee, 
CME, CMC), suggested that the definition of cash delivery property be 
expanded to address the possibility of post-filing-date payments made 
by customers to the FCM to pay for delivery. Such payments should be 
credited in full to the customer's funded balance. Indeed, Sec.  
190.06(a)(3)(ii)(B)(2) provides that the trustee could issue payment 
calls in this context and that ``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.''
---------------------------------------------------------------------------

    \142\ See discussion of cash delivery property in section 
II.A.2, above.
---------------------------------------------------------------------------

    In order to be consistent with the principle that 100% of post-
filing-date payments are credited to a customer's funded balance, 
proposed Sec.  190.08(c)(1)(ii) is being amended, with the proposed 
language addressing post-filing-date margin payments to be codified as 
Sec.  190.08(c)(1)(ii)(A), and the addition of Sec.  
190.08(c)(1)(ii)(B) to address post-filing-date payments for 
deliveries, to read as follows: ``[then adding 100% of] . . . [f]or 
cash delivery property, any cash transferred to the trustee on or after 
the filing date for the purpose of paying for delivery.''
    Section 190.08(d), valuation, sets forth instructions about how to 
value

[[Page 19362]]

commodity contracts and other property for purposes of calculating net 
equity as set forth in the rest of Sec.  190.08.
    Section 190.08(d)(1) sets forth instructions regarding how to value 
commodity contracts, separately addressing: (i) Open commodity 
contracts, and (ii) liquidated commodity contracts.
    As proposed, Sec.  190.08(d)(1)(i), regarding the valuation of open 
commodity contracts, states 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.'' The Commission 
noted in the proposal that ``[t]his would allow the value of the open 
commodity contract to be known prior to the transfer,'' \143\ and, as 
discussed above, specifically sought comments on this issue.
---------------------------------------------------------------------------

    \143\ 85 FR 36028.
---------------------------------------------------------------------------

    The Commission received contrasting comments on this provision. ICE 
``d[id] not believe that valuation is the right one, particularly 
because the market may move significantly on the date of transfer.'' By 
contrast, CME ``agree[d]'' with valuation as of the end the last 
settlement cycle on the day preceding transfer, because it aligns with 
calculations of funded balances under proposed Sec.  190.08(c), and 
noted that ``any mark-to-market gains or losses on the date of the 
transfer should be reflected by the receiving FCM(s) in the customer 
account statements as a result of that day's settlement cycle.'' The 
Commission is persuaded by the latter comment, and will adopt the 
provision as proposed, both for the reasons stated by the latter 
commenter, and because of concerns regarding practicability. Markets 
move on a continuous basis so long as they are open and, considering 
markets around the world, some markets on which futures, foreign 
futures, or cleared swaps are traded are moving at all times other than 
over a weekend.
    Section 190.08(d)(1)(ii)(A) allows 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.
    Section 190.08(d)(1)(ii)(B) provides 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. As 
proposed, this provision 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. ICE disagreed with 
this approach, stating that ``the price achieved in the auction should 
be used.'' However, as the Commission noted in the proposing release, 
the units being auctioned will often be a heterogenous (though risk-
related) set of products, tenors (e.g., contract months), and 
directions (e.g., long or short). Different auctioned portfolios may 
contain the same or similar contracts. In this context, setting the 
price of a particular contract based on the auction price for a 
portfolio would require considerable interpretation. Accordingly, the 
Commission will implement the approach from the proposal.
    Section 190.08(d)(2) sets forth the approach for valuing listed 
securities, and incorporates the same weighted average concept 
discussed above with respect to Sec.  190.08(d)(1)(ii)(A).
    Section 190.08(d)(3) sets forth the approach for valuing 
commodities held in inventory, directing the trustee to use fair market 
value. If such fair market value is not readily ascertainable from 
public sources of prices, the trustee is directed to use the approach 
in Sec.  190.08(d)(5), discussed below.
    Section 190.08(d)(4) addresses the valuation of letters of credit. 
The trustee is directed to use the face amount (less amounts, if any, 
drawn and outstanding). However, if the trustee makes a determination 
in good faith that a draw is unlikely to be honored on either a 
temporary or permanent basis, they are directed to use the approach in 
paragraph (d)(5).
    Section 190.08(d)(5) provides the trustee with pragmatic 
flexibility in determining the value of customer property by allowing 
the trustee, in their sole discretion, to enlist the use of 
professional assistance to value all other customer property.\144\ This 
provision further notes that, if such property is sold, its value for 
purposes of the calculations required by this part is equal to the 
actual value realized on sale of such property (the trustee, of course, 
retains discretion to engage professional assistance to allocate such 
value among a heterogenous set of items sold as a unit). Finally, the 
provision notes that any such sale shall be made in compliance with all 
applicable statutes, rules, and orders of any court or governmental 
entity with jurisdiction thereover.
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    \144\ The trustee's employment of professionals remains subject 
to the requirements of section 327 of the Bankruptcy Code.
---------------------------------------------------------------------------

    Accordingly, after consideration of the comments and for the 
reasons stated above, Sec.  190.08 is being adopted as proposed, with 
modifications to the title and to Sec.  190.08(a), (b), and (c), as set 
forth above.
7. Regulation Sec.  190.09: Allocation of Property and Allowance of 
Claims
    Section 190.09 is being adopted to set forth rules governing the 
scope of customer property, the allocation of customer property between 
customer and account classes, and distribution of customer property. It 
was derived from current Sec.  190.08. It is being adopted as proposed 
with modifications to Sec.  190.09(d)(3), as set forth below.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.09. The Commission also raised particular questions 
with respect to: Whether the proposed revisions to Sec.  190.09(a)(1) 
would appropriately preserve customer property for the benefit of 
customers; whether proposed Sec.  190.09(a)(1)(ii)(G), concerning 
property that other regulations require to be placed into segregation, 
and Sec.  190.09(a)(1)(ii)(L), concerning remaining shortfalls, are 
appropriately crafted; whether it is advisable to permit customers to 
post ``substitute customer property'' rather than ``cash'' in proposed 
Sec.  190.09(d); and whether it is 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?''
    There are three substantive changes in new Sec.  190.09, as 
compared to current regulations:
    Section 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).
    Section 190.09(a)(1)(ii)(G) is a new category of property that 
constitutes customer property. It includes 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 undermargined amounts as provided in Sec. Sec.  
1.20, 1.22, 22.2 and, 30.7. 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

[[Page 19363]]

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.
    CME stated that this new provision is a ``substantial improvement 
over the current rule,'' and it was also supported by ICI and Vanguard.
    Section 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 states 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.\145\
---------------------------------------------------------------------------

    \145\ ICE notes that the issues with respect to this provision 
may be complicated, and that it may warrant further consideration, 
but ultimately expresses no view on it.
---------------------------------------------------------------------------

    A new second sentence of Sec.  190.09(a)(1)(ii)(L) notes 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 of the 
debtor.\146\ 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.
---------------------------------------------------------------------------

    \146\ See generally SIPA section 8(c)(1), 15 U.S.C. 78fff-
2(c)(1).
---------------------------------------------------------------------------

    Section 190.09(d) governs the distribution of customer property, 
and has its analog in current Sec.  190.08(d). Section 190.09(d)(1)(i) 
and (ii) and (d)(2) require customers to deposit ``substitute customer 
property,'' to obtain the return or transfer of specifically 
identifiable property. ``Substitute customer property'' is defined in 
Sec.  190.01 to mean (in relevant part) ``cash or cash equivalents.'' 
``Cash equivalents,'' in turn, are 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.''
    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 Sec.  190.00(d)(5). 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.
    As a technical point, the ABA Subcommittee recommended (consistent 
with their recommendation in the definitions section, Sec.  190.01, to 
more precisely use the term ``allowed net equity'') that the reference 
in proposed Sec.  190.09(d)(3) to the amount distributable on a 
customer's claim be amended to add ``[the] funded balance of'' before 
the phrase ``such customers allowed net equity claim.'' The Commission 
agrees, and is making the change.
    The remaining provisions of revised Sec.  190.09 include only 
technical changes to the current regulations.
    Accordingly, after consideration of the comments, and for the 
reasons stated above, Sec.  190.09 will be adopted as proposed, with 
the modification to Sec.  190.09(d)(3) referred to above.
8. Regulation Sec.  190.10: Provisions Applicable to Futures Commission 
Merchants During Business as Usual
    The Commission proposed Sec.  190.10 to contain new and relocated 
provisions that set forth an FCM's obligations during business as 
usual. The Commission requested comment with respect to all aspects of 
proposed Sec.  190.10, and specifically with respect to (1) the impact 
of proposed Sec.  190.10(b) regarding the designation of hedging 
accounts, (2) the impact of proposed Sec.  190.10(c) regarding the 
establishment of delivery accounts during business as usual, (3) the 
changes in proposed Sec.  190.10(d) to the business as usual 
requirements for acceptance of letters of credit, and in particular (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, 
and (4) the disclosure statement for non-cash margin set out in 
proposed Sec.  190.10(e) (whether the statement is helpful, legally or 
practically, whether it should be changed, or whether it should be 
deleted).
    Section 190.10 will be adopted as proposed with modifications. In 
particular, the ABA Subcommittee and CME suggested that the provisions 
in proposed Sec.  190.10 be codified in part 1, along with other 
regulations that pertain to an FCM's business as usual. The ABA 
Subcommittee stated that, while they had originally suggested that 
these provisions belong in Sec.  190.10, ``[u]pon further reflection, 
the Committee believes that such a rule more logically belongs in the 
Commission's Part 1 Regulations, along with other rules that apply to 
FCMs during business as usual. Compliance and legal personnel could 
inadvertently overlook obligations that are not located in the 
Commission rule set where they would expect to find them.''
    The Commission agrees with the commenters that transparency would 
be fostered by putting the ``business as usual'' requirements proposed 
for Sec.  190.10 into part 1 of the Commission's regulations. 
Accordingly, as discussed further below, most of the paragraphs of the 
regulation that was proposed as Sec.  190.10 are being renumbered and 
will be codified in specified places in part 1. The provisions of 
proposed Sec.  190.10 will otherwise be adopted as proposed.
    The provision proposed as Sec.  190.10(a) notes that an FCM is 
required to maintain current records relating to its customer accounts, 
pursuant to Sec. Sec.  1.31, 1.35, 1.36, and 1.37, 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 recognizes 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. Nonetheless, it does not add to an FCM's 
obligations under the specified regulations, but rather is useful as a 
reference for the trustee. Accordingly, this provision will not be 
moved to part 1.
    No comments were received with respect to the substance of proposed 
Sec.  190.10(a). As the remaining paragraphs of proposed Sec.  190.10 
will be moved to part 1, this provision will be codified as Sec.  
190.10.
    The provision proposed as Sec.  190.10(b) concerns the designation 
of hedging accounts. It incorporates concepts contained in current 
Sec. Sec.  190.04(e) and 190.06(d) and the current Bankruptcy appendix 
form 3 instructions. As it sets

[[Page 19364]]

forth obligations for an FCM during business as usual, it will be moved 
to part 1. As it does not fit under any existing part 1 regulation, it 
will be moved under the miscellaneous heading of part 1, and codified 
as Sec.  1.41.
    For purposes of Sec.  1.41, a customer will not need to provide, 
and an FCM will not be required to judge, evidence of hedging intent 
for purposes of bankruptcy treatment. Rather, Sec.  1.41 will 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 will not be 
determinative for any other purpose.
    Section 1.41(a) will 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). This provision will also require that the FCM indicate 
prominently in its accounting records for each customer account whether 
the account is designated as a hedging account.
    Section 1.41(b) will 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 regulation or rule of a DCO, DCM, SEF, or FBOT. CME 
supported this approach, and the clarity it adds.
    In order to avoid the significant burden that would be associated 
with requiring FCMs to re-obtain hedging instructions for existing 
accounts, Sec.  1.41(c) will provide that the requirements of Sec.  
1.41(a) and (b) do not apply to commodity contract accounts opened 
prior to the effective date of these revisions. Rather, the provision 
will 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, Sec.  1.41(d) will 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 Sec.  1.41(b).
    The provision proposed as Sec.  190.10(c) addresses the 
establishment of delivery accounts during business as usual.\147\ As it 
sets forth obligations for an FCM during business as usual, it will be 
moved to part 1. As it does not fit under any existing part 1 
regulation, it will be moved under the miscellaneous heading, and 
codified as Sec.  1.42.
---------------------------------------------------------------------------

    \147\ See Sec.  190.06 regarding the making and taking of 
deliveries during bankruptcy.
---------------------------------------------------------------------------

    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. Section 1.42 recognizes 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 clarifies that the property must be held in one 
of these types of accounts. ICE and CME generally support this 
provision.\148\
---------------------------------------------------------------------------

    \148\ CME again recommended that the Commission consider 
adopting customer protection requirements with respect to delivery 
accounts via a separate rulemaking.
---------------------------------------------------------------------------

    The provision proposed as Sec.  190.10(d) addresses letters of 
credit that an FCM accepts as collateral. As it sets forth obligations 
for an FCM during business as usual, it will be moved to part 1. As it 
does not fit under any existing part 1 regulation, it will be moved 
under the miscellaneous heading, and codified as Sec.  1.43.
    Section 1.43 will prohibit an FCM from accepting a letter of credit 
as collateral unless certain conditions (1) are met at the time of 
acceptance and (2) remain true through its date of expiration.
    First, pursuant to Sec.  1.43(a), 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, pursuant to Sec.  1.43(b), 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.
    The Commission has considered the impact that implementation of 
this regulation would have on FCMs and their customers, since letters 
of credit are currently in use by the industry.\149\ The Commission 
proposed that, upon the effective date of the regulation, what is now 
codified as Sec.  1.43 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 proposed a transition period of one year 
from the effective date until Sec.  1.43 will apply to existing letters 
of credit and customer agreements.
---------------------------------------------------------------------------

    \149\ The Joint Audit Committee (``JAC'') forms for an 
Irrevocable Standby Letter of Credit (both Pass-Through and Non 
Pass-Through) appear to be consistent with the requirements of Sec.  
1.43.
---------------------------------------------------------------------------

    CME supported this one-year transition period. By contrast, SIFMA 
AMG/MFA urged the Commission to shorten it in the interest of investor 
protection. They asked how letters of credit would be treated if an FCM 
were to go into bankruptcy during the transition period?
    The provisions in this rulemaking regarding letters of credit are 
intended to codify the Commission's longstanding policy that 
``customers using a letter of credit to meet original margin 
obligations [sh]ould be treated no differently than customers 
depositing other forms of non-cash margin or customers with excess cash 
margin deposits.'' \150\ This is the policy that has been advanced by 
the Commission, including in litigation,\151\ under the current rules. 
Moreover, this policy is supported by the provision in revised Sec.  
190.04(d)(3)(ii) that, for a letter of credit posted as collateral, 
``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.'' That provision is not 
subject to the one-year transition period.
---------------------------------------------------------------------------

    \150\ See, e.g., 48 FR 8716, 8718 (March 1, 1983) (Adopting 
release for part 190); Proposal, 86 FR at 36019 & n. 103.
    \151\ See, e.g. Brief of the Commodity Futures Trading 
Commission In Support Of The Trustee's Motion To Confirm in 
ConocoPhillips v. Giddens, Case No. 1:12-cv-06014-KBF, Document 33.
---------------------------------------------------------------------------

    While the Commission will decline to shorten the one-year 
transition period for existing letters of credit, trustees will be 
expected to treat such letters of credit in accordance with the 
Commission's policy.
    The provision proposed as Sec.  190.10(e) concerns the disclosure 
statement for non-cash margin. No comments were received specific to 
this provision.

[[Page 19365]]

    As it sets forth obligations for an FCM during business as usual, 
it will be moved to part 1. This provision does fit under existing 
Sec.  1.55 (Public disclosures by futures commission merchants), and 
will be added at the end, codified as Sec.  1.55(p).
    Accordingly, after consideration of the comments, and for the 
reasons stated above, Sec.  190.10 will be adopted as proposed, with 
modifications: Proposed Sec.  190.10(a) will be codified as Sec.  
190.10, proposed Sec.  190.10(b) will be codified as Sec.  1.41, 
proposed Sec.  190.10(c) will be codified as Sec.  1.42, proposed Sec.  
190.10(d) will be codified as Sec.  1.43, and proposed Sec.  190.10(e) 
will be codified as Sec.  1.55(p).

C. Subpart C--Clearing Organization as Debtor

    The Commission is adopting a new subpart C of part 190 (proposed 
Sec. Sec.  190.11-190.19), with certain modifications discussed below, 
to address the currently unprecedented scenario of a clearing 
organization as debtor.\152\
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    \152\ After considering comments that were received on the 
original Proposal, the Commission subsequently issued a Supplemental 
Proposal that withdrew Sec.  190.14(b)(2) and (3), and proposed 
other revisions to Sec.  190.14. Bankruptcy Regulations, 85 FR 60110 
(Sept. 24, 2020).
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    The customers of a clearing organization are its members, 
considered separately in two roles: (1) Each member may have a 
proprietary (also known as ``house'') account at the clearing 
organization, on behalf of itself and its non-public customers (i.e., 
affiliates). The property that the clearing organization holds in 
respect of these accounts is referred to as ``member property.'' (2) 
Each member may have one or more accounts (e.g., futures, cleared 
swaps) for that members' public customers. The property that the 
clearing organization holds in respect of these accounts is referred to 
as ``customer property other than member property.'' Many clearing 
members will have both such types of accounts, although some may have 
only one or the other.
1. Regulation Sec.  190.11: Scope and Purpose of Subpart C
    The Commission is adopting Sec.  190.11 as proposed, but designated 
as new paragraph (a), and adding a new paragraph (b), as set forth 
below. The Commission is adopting Sec.  190.11 to establish that 
subpart C of part 190 will apply to proceedings under subchapter IV to 
chapter 7 of the Bankruptcy Code where the debtor is a clearing 
organization.
    When originally proposing part 190 in 1981, the Commission proposed 
to (and ultimately did) forego providing generally applicable rules for 
the bankruptcy of a clearing organization.\153\ 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.\154\
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    \153\ 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.
    \154\ 46 FR 57535, 57545 (Nov. 24, 1981).
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    Much has changed in the intervening 39 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.\155\ 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.
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    \155\ Commodity Futures Modernization Act of 2000 Public Law 
106-554 section 1(a)(5); Appendix E, section 112(f).
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    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.\156\ 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.\157\
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    \156\ 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.
    \157\ 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).
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    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 \158\ 
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) \159\ 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.\160\ 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

[[Page 19366]]

organization under chapter 7 (subchapter IV) of the Bankruptcy Code.
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    \158\ 12 U.S.C. 5390(a)(7)(B).
    \159\ 12 U.S.C. 5390(d)(2).
    \160\ 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.
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    Although the Commission believes that the potential--albeit 
unprecedented--scenario of a clearing organization as debtor would 
require significant flexibility, the Commission also believes it 
necessary and appropriate to establish an ex ante set of regulations 
for such a scenario.
    The Commission requested comment regarding the proposed scope of 
subpart C, as set forth in proposed Sec.  190.11. The Commission also 
specifically asked commenters whether they supported or opposed the 
establishment of an explicit, bespoke set of regulations for the 
bankruptcy of a clearing organization.
    The Commission received two comments that raised concerns about how 
the proposed subpart C regulations would apply in the case of a debtor 
clearing organization that is organized and/or domiciled in a foreign 
country. SIFMA AMG/MFA commented that ``Part 190 should include a clear 
statement of public policy . . . that if an insolvency proceeding is 
commenced in respect of a DCO located outside the United States, such 
home country proceeding should take precedence over any case under the 
[U.S.] Bankruptcy Code.''
    ICE commented that such a clearing organization, if insolvent, ``is 
likely to be subject to an insolvency proceeding in its home 
jurisdiction.'' ICE also commented that many such DCOs ``have 
significant assets (including for this purpose, the assets of clearing 
members and their customers.'' In particular, ICE stated that ``a 
foreign DCO may have, in addition to the customer account classes 
contemplated by the CEA and CFTC regulations (and the Part 190 
regulations), one or more classes of customer accounts that are 
required to be segregated or separately accounted for under applicable 
foreign law, generally for the protection of foreign clearing members 
and their customers.'' ICE further commented that, ``[t]o the extent 
the Part 190 rules mandate a distribution scheme for property of the 
[DCO in bankruptcy] that would be inconsistent with foreign law 
applicable to the DCO, and that could disadvantage foreign members or 
their customers, significant conflicts may arise . . . .'' ICE 
suggested two alternative approaches for the Commission to consider: 
(1) The ``Commission could provide that the new Part 190 regulations 
would not apply to a foreign DCO;'' or (2) ``[a]lternatively, the 
Commission could provide that the new Part 190 regulations, including 
the distributional regime, would apply only to the separate customer 
account class structure provided for under U.S. law (futures, cleared 
swaps and foreign futures), to the extent carried through FCM clearing 
members.''
    After considering the comments, the Commission is adopting Sec.  
190.11 with modifications. With respect to the protection of customer 
property in connection with foreign DCOs, the Commission has 
traditionally focused its efforts on the protection of the public 
customers of FCM members of such foreign DCOs. While protecting public 
customers of FCM members of foreign DCOs would not be well served by 
disapplying part 190 in the case of foreign DCOs, as suggested in ICE's 
first approach, as well as in the comment by SIFMA AMG/MFA, balancing 
the goal of protecting public customers of FCM members with the goal of 
mitigating conflict with foreign proceedings would appear to be 
supported by following ICE's second approach, and limiting the 
applicability of part 190, in the case of a foreign DCO subject to a 
proceeding in its home jurisdiction, to focus on the contracts and 
property of public customers of FCM members.
    In order to balance the goal of protecting public customers of FCM 
members with the goal of mitigating conflict with foreign proceedings, 
the Commission believes it to be appropriate that, in a situation where 
a debtor clearing organization is organized outside the United States 
and is subject to a foreign bankruptcy proceeding, part 190 should 
apply as follows. First, the Commission believes it to be appropriate 
that subpart A should apply to such proceedings, given that those 
provisions set forth core concepts, definitions and general provisions. 
Second, the Commission believes it to be appropriate that Sec.  190.12 
should apply to such proceedings, given that the regulation sets forth 
requirements for records and reporting, which are critical in such 
proceedings. And third, the Commission believes it to be appropriate 
that three regulations should be applicable in a limited fashion, to 
focus on the contracts and property of public customers of FCM members: 
\161\ (1) Sec.  190.13, setting forth the prohibition on avoidance of 
transfers, but only with respect to futures and cleared swaps contracts 
cleared by FCM clearing members on behalf of their public customers; 
(2) Sec.  190.17, setting forth the calculation of net equity; and (3) 
Sec.  190.18, setting forth the treatment of property. In such a 
scenario, Sec. Sec.  190.13, 190.17, and 190.18 would only apply with 
respect to: (1) Claims of FCM clearing members on behalf of their 
public customers; and (2) property that is or should have been 
segregated for the benefit of FCM clearing members' public customers, 
or that has been recovered for the benefit of FCM clearing members' 
public customers.
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    \161\ As noted above, the Commission has traditionally focused 
its efforts on the protection of the public customers of FCM members 
of such foreign DCOs. In a DCO bankruptcy, the Commission believes 
that the application of these three regulations would be critical to 
fulfilling the agency's mission to protect customers.
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    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is: (1) Adopting the language of 
Sec.  190.11 as proposed, but designated as new paragraph (a); and (2) 
modifying proposed Sec.  190.11 by adding the following as new 
paragraph (b): If the debtor clearing organization is organized outside 
the United States, and is subject to a foreign proceeding, as defined 
in 11 U.S.C. 101(23), in the jurisdiction in which it is organized, 
then only the following provisions of part 190 shall apply: (1) Subpart 
A; (2) Sec.  190.12; (3) Sec.  190.13, but only with respect to futures 
contracts and cleared swaps contracts cleared by FCM clearing members 
on behalf of their public customers and the property margining or 
securing such contracts; and (4) Sec. Sec.  190.17 and 190.18, but only 
with respect to claims of FCM clearing members on behalf of their 
public customers, as well as property that is or should have been 
segregated for the benefit of FCM clearing members' public customers, 
or that has been recovered for the benefit of FCM clearing members' 
public customers.''
2. Regulation Sec.  190.12: Required Reports and Records
    The Commission is adopting Sec.  190.12 to establish the 
recordkeeping and reporting obligations of a debtor clearing 
organization and/or trustee in a bankruptcy proceeding under subpart C.
    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. 
Similarly, the trustee that is appointed (as well as the Commission) 
must receive critical documents rapidly, and proper notice should be 
provided to the DCO's members.
    Regulation Sec.  190.12 sets forth the timing and content of 
notices that must be provided to the Commission and the DCO's members, 
as well as the timing and content of reports and records that

[[Page 19367]]

must be provided to the Commission and trustee.
    Section 190.12(a)(1) is analogous to Sec.  190.03(a), as amended 
herein, 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 part 190.\162\ 
Section 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).\163\ 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 number, if the docket number is not 
immediately assigned, that information would be provided separately as 
soon as available.
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    \162\ While Sec.  190.03(a)(2), as amended herein, applies to 
notice to an FCM's customers, and Sec.  190.12(a)(1)(ii) applies to 
notice to a clearing organization's members, the means of giving 
notice are identical. For a discussion of how these notice 
provisions differ from the prior iteration of part 190, please refer 
to the discussion of Sec.  190.03(a) above.
    \163\ 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, Sec.  190.12(b)(1) requires 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),\164\ 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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    \164\ See Sec.  39.19(c)(4)(xxiv).
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    Similarly, Sec.  190.12(b)(2) requires 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).
    Regulation 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, Sec.  190.12(c) requires the debtor 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.\165\
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    \165\ 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 requested comment with respect to all aspects of 
proposed Sec.  190.12. The Commission raised specific questions as to 
whether the reports and records identified in proposed Sec.  190.12 to 
be provided to the Commission are useful and appropriate, and whether 
additional reports and records should be included. The Commission also 
asked if the proposed time deadlines are appropriate.
    The Commission received two comments on proposed Sec.  190.12.
    CME expressed support for proposed Sec.  190.12, and agreed with 
the Commission that ``the reports and records identified in [the 
proposed regulation] would be useful for the trustee and the 
Commission.'' CME also agreed with the Commission that certain items, 
such as the DCO's default rules and recovery and wind-down plans, 
should be furnished as soon as possible.
    OCC ``generally support[ed] a requirement for a DCO to provide a 
trustee and the Commission with information they need for efficient 
resolution of the DCO,'' recognizing that ``time would be of the 
essence in such a proceeding.'' OCC also noted that, because the 
``information is periodically reported to, or filed with, the 
Commission,'' OCC did not ``foresee any challenge in identifying and 
providing this information without delay.'' However, OCC requested that 
proposed Sec.  190.12(b) be amended to require a DCO to provide the 
information delineated therein ``as soon as practicable.'' OCC 
``believe[d] that a specific deadline of three hours is overly 
prescriptive.''
    After considering the comments, the Commission is adopting Sec.  
190.12 as proposed. As the commenters observed, the information 
specified in Sec.  190.12 is

[[Page 19368]]

important for the trustee and the Commission, and time would be of the 
essence in a DCO bankruptcy. Moreover, the prescribed task in Sec.  
190.12 is to gather and transmit documents that already exist, rather 
than to generate new information. The documents to be sent to the 
trustee are documents that were recently sent to the Commission, and 
the documents to be sent to the trustee and to the Commission are 
documents that one would expect, as the commenter noted, to be readily 
accessible. In this context, the Commission believes that a deadline of 
``as soon as practicable and in any event no later than three hours 
following the commencement of the proceeding'' (or, where appropriate, 
the appointment of the trustee) is reasonable and will set clear 
expectations for relevant parties that will facilitate DCOs' 
contingency planning.
    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is adopting Sec.  190.12 as 
proposed.
3. Regulation Sec.  190.13: Prohibition on Avoidance of Transfers
    The Commission is adopting Sec.  190.13 as proposed, to implement 
section 764(b) of the U.S. Bankruptcy Code, protecting certain 
transfers from avoidance (sometimes referred to as ``claw-back'') with 
respect to a debtor clearing organization. Regulation Sec.  190.13 is 
analogous to new Sec.  190.07(e) (and current Sec.  190.06(g)), with 
certain changes. Specifically, while Sec.  190.07(e) allows FCM 
transfers unless they are explicitly disapproved by the Commission, 
Sec.  190.13 requires explicit Commission approval for DCO transfers. 
The difference in approach is rooted in the inherent difference between 
FCM transfers and DCO transfers: Whereas an FCM is capable of 
transferring only a portion of its customer positions, a DCO would be 
expected to transfer all of its customer positions (or at least all 
positions in a given product set) simultaneously in order to maintain a 
balanced book. Given the importance of transferring all open commodity 
contracts--and the property margining such contracts--in the event of a 
DCO bankruptcy, the Commission believes that any such transfer should 
require explicit Commission approval, either before or after such 
transfer.
    Thus, whereas Sec.  190.07(e)(1) provides that a pre-relief 
transfer by a clearing organization cannot be avoided as long as it is 
not disapproved by the Commission, Sec.  190.13(a) instead provides 
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, whereas Sec.  190.07(e)(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, Sec.  190.13(b) instead provides 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 requested comment with respect to all aspects of 
proposed Sec.  190.13, and in particular, the Commission asked whether 
commenters agreed with the proposed approach of requiring explicit 
Commission approval of transfers by debtor DCOs.
    The Commission received one comment on proposed Sec.  190.13. CME 
expressed support for proposed Sec.  190.13, particularly the allowance 
for Commission approval of transfers after such transfers have 
occurred. CME noted that porting customer positions to a DCO would be 
the preferred course of action in a bankruptcy, and a DCO may need to 
act quickly.
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.13 as 
proposed.
4. Regulation Sec.  190.14: Operation of the Estate of the Debtor 
Subsequent to the Filing Date
    The Commission is adopting Sec.  190.14 as proposed, with certain 
modifications discussed below.
    Section 190.14(a) provides discretion to the trustee to design the 
proof of claim form and to specify the information that is required. 
The Commission believes that broad discretion is appropriate in this 
context, given the bespoke nature of a clearing organization 
bankruptcy.
    Section 190.14(b) addresses the operation of a debtor clearing 
organization in bankruptcy and provides that, after the order for 
relief, the DCO shall cease making calls for either variation or 
initial margin.
    As originally proposed, Sec.  190.14(b) included additional 
provisions that were 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 Act, 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. Subsequent to the issuance of the Proposal, the Commission 
received several comments on proposed Sec.  190.14(b), and based on its 
consideration of those comments, the Commission determined it to be 
appropriate to issue the Supplemental Proposal. The Supplemental 
Proposal modified proposed Sec.  190.14(b) in several respects, 
including the withdrawal of proposed Sec.  190.14(b)(2) and (3) and the 
new proposal of an alternative approach.\166\ Further discussion of the 
Supplemental Proposal, including the Commission's consideration of 
comments received in response to the Supplemental Proposal, is set 
forth in section II.H below.
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    \166\ In withdrawing proposed Sec.  190.14(b)(2) and (3), the 
Commission determined, after considering the comments, that those 
provisions would not be a practicable and effective way to foster 
the transfer of clearing operations--to the extent that such an 
opportunity presents itself--at an acceptable cost. The Commission 
also endeavored to propose (in the Supplemental Proposal) a more 
cost-effective alternative to foster the resolution of a DCO--in 
particular, a systemically important DCO--under Title II of the 
Dodd-Frank Act. Specifically, as set forth in the Supplemental 
Proposal, the Commission proposed ``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 Commission sought comment on the Supplemental Proposal, and 
in particular, whether the new approach could reasonably be expected 
to achieve the Commission's stated goals, would be feasible, would 
be the best design for such a solution, and appropriately reflected 
consideration of benefits and costs.
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    Section 190.14(c)(1) requires 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, in the Proposal, paragraph (c)(1) also provided 
that such liquidation would not be required if the Commission (whether 
at the request of the trustee or sua sponte) determined that such 
liquidation would be inconsistent with the avoidance of systemic risk 
\167\ or, in the expert judgment of the Commission, would not be in the 
best interests of the debtor clearing organization's estate.\168\ In 
such a situation, the trustee would be directed to carry out such 
liquidation in accordance with the rules and procedures of the debtor 
clearing

[[Page 19369]]

organization, to the extent applicable and practicable.\169\
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    \167\ 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 . . . .'').
    \168\ 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 . . . .'').
    \169\ As discussed below, Sec.  190.14(c)(1) is being modified 
to remove language that commenters stated would raise uncertainties 
concerning the enforceability of close-out netting provisions in a 
DCO bankruptcy.
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    Section 190.14(c)(2) permits the trustee to 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, rather than liquidating securities and making 
distributions in the form of cash. Section 190.14(c)(2) is analogous to 
Sec.  190.09(d)(3), discussed above in section II.B.7.
    Section 190.14(d) requires 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.'' Section 190.14(d) is 
analogous to Sec.  190.05(b), discussed above in section II.B.3, but is 
modified for the context of a DCO bankruptcy. Similar to Sec.  
190.05(b), the Commission's objective in Sec.  190.14(d) 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. However, at a minimum, the trustee is required to calculate 
each customer's funded balance prior to distributing property, to 
achieve an appropriate allocation of property between customers.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.14. The Commission also raised specific questions 
regarding Sec.  190.14(b)(2).\170\ The comments received in response to 
those specific questions on Sec.  190.14(b)(2) have already been 
considered by the Commission in the Supplemental Proposal, wherein the 
Commission ultimately withdrew Sec.  190.14(b)(2) and (3). Although 
such comments on the Proposal relate to proposed paragraphs that were 
withdrawn in the Supplemental Proposal, the comments relating to 
proposed Sec.  190.14(b)(2) and (3) nonetheless are noted below.\171\
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    \170\ In particular, the Commission asked about 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 the 
Dodd-Frank Act. The Commission also asked whether there is a better 
way to frame either of those terms, and whether it is appropriate to 
provide for the possibility that the trustee may be permitted to 
delay liquidating contracts.
    \171\ For further discussion of the Supplemental Proposal and 
the Commission's consideration of comments received thereto, see 
section II.H below.
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    The Commission received some comments that related to Sec.  190.14 
generally. ICI commented in favor of the requirement proposed in Sec.  
190.14 that ``any decision to continue operating a DCO in liquidation 
must be made with [the Commission's] input and consent.'' ICI asserted, 
however, that the Commission should only approve an application from a 
trustee to continue operating a DCO in liquidation if the Commission 
determines that the trustee ``has the knowledge and experience to 
manage such operations.'' Noting that the continued operation of a DCO 
has the potential to result in significant continued losses for 
customers and exacerbate stress, ICI further asserted that, ``[i]n 
considering whether to grant a request to allow a failed DCO to 
continue operating, the Commission should consider the potential harm 
to customers and should request input from both DCO members and 
customers.'' OCC commented that additional considerations should be 
considered in determining ``whether continued operation of a DCO in 
bankruptcy would be practical.'' Specifically, OCC stated that ``a DCO 
may . . . maintain contractual arrangements with various counterparties 
. . . that are necessary for the DCO's continued operation,'' such as 
contract markets and other trade sources, other DCOs, banking and 
liquidity providers, and information technology vendors). OCC asserted 
that ``a trustee would need to review the DCO's recovery and wind-down 
plan[s] and/or consult with a DCO to determine whether such 
arrangements necessary for the DCO's continued operation would--or 
could--be terminated [by the counterparties] upon the DCO's entry into 
bankruptcy and, if so, determine whether the counterparties . . . would 
continue to provide those necessary services for a period of time.''
    The Commission also received comments on Sec.  190.14(a). CME 
commented in support of paragraph (a). ICE commented that Sec.  
190.14(a) did not clearly account for ``non-CFTC-regulated clearing or 
other activity occurring at a DCO, including security-based swaps and 
other securities, cleared forward contracts or spot contracts to the 
extent such instruments are not carried in a CFTC regulated futures or 
swap account.'' ICE recommended that while ``such activity may be 
outside the scope of the Part 190 regulations, claims of members with 
respect to such activity, whether for their proprietary or customer 
accounts, need to be properly accounted for in a DCO's bankruptcy and 
should not be disadvantaged.''
    Several commenters expressed concern that proposed Sec.  190.14(b) 
would inadvertently create legal uncertainty with respect to the 
enforceability of a DCO's close-out netting rules and related issues, 
and requested that the Commission address these concerns in varying 
ways.
    ICE did not object to proposed Sec.  190.14(b), but believed that 
the Commission ``should clarify that the rule does not interfere with 
either the automatic termination of contracts upon insolvency or 
clearing member rights to terminate contracts upon insolvency.'' Noting 
``that clearing member capital and accounting often take into account 
the ability of a clearing member to terminate, or the automatic 
termination of, its cleared positions in the event of a clearinghouse 
insolvency,'' ICE asserted that it would be important that the final 
rules ``not upset settled expectations of clearing members'' in this 
regard. ICE further noted that ``automatic termination is common,'' and 
thus, continuing the operations of a clearinghouse after insolvency 
would likely be infeasible, in practice.
    CME requested that the Commission add a provision to Sec.  190.14 
stating that: ``if the Commission permits the trustee to continue to 
operate the DCO, that the action is not in derogation of, and clearing 
members fully retain and may exercise, their right under the DCO's 
rules and procedures with respect to close-out netting.'' CME stated 
that ``[s]ome have expressed concern that proposed Regulation 190.14 
creates uncertainty around the enforceability of close-out netting 
rules if the trustee is allowed to continue the DCO's operations under 
the conditions as drafted.'' CME asserted that it would be ``critical 
that any decision to continue to operate the DCO not be contrary to the 
DCO's rules or be construed in any way to abrogate clearing members' 
close-out netting rights under the rules.'' CME noted that the 
enforceability of close-out rights is of ``paramount importance'' to 
clearing members as part of their contract with the DCO, and that CME 
and other DCOs have obtained detailed legal analyses on the 
enforceability of their close-out netting rules and other features of 
their default rules to assure clearing members of their rights. CME 
commented that it did not believe that

[[Page 19370]]

proposed Sec.  190.14 would create an issue with respect to its own 
close-out netting rules or netting opinions, because its own rules 
``would compel termination of open contracts upon a CME bankruptcy 
event and, thus the conditions of Regulation 190.14(b) would not be 
satisfied and the trustee could not continue CME's DCO operations.'' 
Nonetheless, CME speculated that other DCOs ``could potentially have 
rules that permit a clearing member to terminate open positions at 
their discretion without compelling termination.''
    ISDA supported the provision in proposed Sec.  190.14(b) that would 
``prevent the trustee from continuing operation of the DCO subsequent 
to the order for relief if the DCO's rules contain closeout netting 
provisions.'' However, ISDA also recommended that the Commission modify 
proposed Sec.  190.14(c)(1) to delete the second sentence and amend the 
first sentence to affirmatively provide that: ``notwithstanding 
anything else to the contrary in Subpart C, the trustee shall liquidate 
all open contracts in accordance with the close-out needing provisions 
in the DCO's rules (or bylaws) and, in any event, no later than seven 
calendar days after the entry of the order for relief.'' ISDA commented 
that it is ``critical'' that ``all aspects of [the] Part 190 
regulations . . . support, and in no event be inconsistent with, . . . 
exposure netting.'' ISDA noted that ``[e]nforceable close-out netting 
rights provide the legal basis for netting of exposures between 
derivative counterparties, which reduces costs, increases market 
liquidity and reduces credit and systemic risks.'' ISDA stated that a 
``firm's right to terminate outstanding transactions with a 
counterparty following an event of default and calculate the net amount 
due to one party by another is the primary means of mitigating credit 
risks associated with financial contracts.'' ISDA further argued that, 
[w]ithout enforceable close-out netting rights, firms would need to 
manage their credit risk on a gross basis, dramatically reducing 
liquidity and credit capacity.''
    OCC commented that ``the Commission should continue to consult with 
DCOs and market participants who rely on closeout netting opinions to 
ensure that the proposed rules[, including proposed Sec.  
190.14(b)(2),] do not raise uncertainty related to the enforceability 
of DCOs' closeout netting rules or have other unintended 
consequences.''
    FIA commented that proposed Sec.  190.14(b)(2) and proposed Sec.  
190.14(c) are ``fundamentally flawed and should not be adopted.'' FIA 
raised concerns that those provisions may inadvertently create ``an 
unacceptable level of legal uncertainty related to the enforcement of 
closeout netting provisions'' set out in DCO rulebooks, which all but 
four DCOs maintain. FIA asserted that, if proposed Sec.  
190.14(b)(2)(ii)(A) ``could be read to provide the trustee some level 
of discretion to determine whether or when DCO rules may `compel' the 
termination of contracts, such discretion, in turn, may call into 
question whether the DCO's rules constitute a `qualifying master 
netting agreement' as described in the rules of the several bank 
regulatory authorities.'' FIA also commented that the ``continued 
operation of a DCO after an order for relief would be ill-advised'' and 
impracticable. FIA stated that a trustee with no familiarity or 
understanding of central clearing would be highly unlikely to be able 
to manage effectively the operation of a bankrupt DCO. In the case of 
SIDCOs, FIA noted that ``the prospect of a bankruptcy trustee operating 
the DCO for even a brief interim period prior to commencement of Title 
II [resolution] proceedings could result in a loss of market confidence 
and a destabilizing rush to exit by clearing members and their clients, 
[thereby] potentially frustrat[ing] the successful resolution of the 
DCO.'' In the case of other DCOs, FIA commented that ``the post-filing 
transfer of . . . clearing operations to another DCO would be difficult 
at best,'' and ``clearing members and their clients should not be 
expected to take the execution risk of being forced to continue 
clearing through a bankrupt DCO when successful completion of a 
transfer to a new DCO in bankruptcy is not certain.'' FIA also stated 
its belief that ``non-defaulting clearing members or their clients 
would be [unwilling] to continue to pay margin to the estate of a 
bankrupt DCO.''
    The ABA Subcommittee requested that the Commission revise proposed 
Sec.  190.14(b) ``to clarify that the DCO's close-out netting rules 
remain in effect and are enforceable as written, notwithstanding any 
decision under [proposed Sec.  ] 190.14(b) by the Commission to allow 
the trustee to continue making calls for variation settlement and 
margin.'' The ABA Subcommittee raised a concern that proposed Sec.  
190.14(b) ``may create unintended ambiguity'' regarding the 
enforceability of such rules.
    After considering the comments, the Commission is adopting Sec.  
190.14(a) as proposed. The Commission notes that Sec.  190.14(a) 
provides that the trustee shall ``instruct each customer [a term that, 
in the context of a debtor DCO, includes members] to file a proof of 
claim containing such information as is deemed appropriate by the 
trustee.'' To the extent that the DCO is conducting non-CFTC-regulated 
activity that is outside the scope of the part 190 regulations, the 
proof of claim form should include an opportunity to claim for debts of 
the DCO related to activity that is not regulated by the CFTC. These 
would be payable from the general estate (outside of customer property) 
or, if secured, from the property securing the debts. Thus, such 
activity will be properly accounted for in the DCO bankruptcy, and 
members will not be disadvantaged. For those reasons, the Commission 
does not believe that Sec.  190.14(a) should be modified in the manner 
recommended by ICE.
    The Commission is adopting Sec.  190.14(b)(1) as proposed, with two 
modifications that reflect the Commission's previous withdrawal of 
paragraphs (b)(2) and (3) in the Supplemental Proposal: (1) Proposed 
paragraph (b)(1) is re-designated as paragraph (b); and (2) new 
paragraph (b) is modified to remove the phrase: ``except as otherwise 
explicitly provided in this paragraph (b).'' \172\
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    \172\ See 85 FR at 60112 n.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 [p]art 190 rule proposal.'').
---------------------------------------------------------------------------

    Several commenters expressed concern that proposed Sec.  190.14(b) 
inadvertently creates legal uncertainty with respect to the 
enforceability of a DCO's close-out netting rules and requested that 
the Commission address this concern in varying ways.\173\ The 
Commission considered those comments in advance of issuing the 
Supplemental Proposal, and determined that Sec.  190.14(b)(2) and (3) 
would not be a practicable and effective way to foster the transfer of 
clearing operations--to the extent that such an opportunity presents 
itself--at an acceptable cost. Consequently, the Commission withdrew 
Sec.  190.14(b)(2) and (3) in the Supplemental Proposal and instead 
proposed an alternative approach. The Supplemental Proposal, including 
the Commission's consideration of comments thereto, is discussed below 
in section II.H of this adopting release.
---------------------------------------------------------------------------

    \173\ See comment letters from ICE, CME.
---------------------------------------------------------------------------

    Commenters' concerns regarding the legal uncertainty of close-out 
netting rules in the context of Sec.  190.14(b) also apply to Sec.  
190.14(c), as proposed, specifically the language that states that the 
trustee shall liquidate all open positions no later than seven calendar 
days after the order for relief ``unless the

[[Page 19371]]

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'' (the ``Unless Clause''). Some commenters--including 
FIA and ISDA--explicitly raised this issue in the context of Sec.  
190.14(c), to the extent that the proposed language would afford the 
trustee with some level of discretion to determine whether or when a 
DCO rule may ``compel'' the termination of contracts. Although the 
Commission believes that commenters' concerns were largely addressed in 
the Supplemental Proposal through the withdrawal of Sec.  190.14(b)(2) 
and (3), the Commission agrees that the Unless Clause raises similar 
concerns, in that it suggests that the Commission may decide that a 
DCO's contracts should not be terminated in bankruptcy, and accordingly 
that paragraph (c)(1) should be modified by removing the Unless Clause. 
Thus, after considering the comments, the Commission is adopting Sec.  
190.14(c) as proposed, with a modification to paragraph (c)(1) by 
deleting the phrase: ``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 
modification--when taken in conjunction with the Commission's prior 
withdrawal of Sec.  190.14(b)(2) and (3)--should remove any lingering 
uncertainties in Sec.  190.14 concerning the enforceability of close-
out netting provisions in a DCO bankruptcy.
    The Commission received no specific comments on the proposed 
language of Sec.  190.14(d) and, thus, is adopting that paragraph as 
proposed.
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.14 as 
proposed, with the deletion of paragraphs (b)(2) and (3) and 
modifications to paragraphs (b)(1) and (c)(1), as set forth above.\174\
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    \174\ The modifications to paragraph (b)(1) include both the 
addition of the language described above and the re-designation of 
proposed paragraph (b)(1) as new paragraph (b), in light of the 
withdrawal of proposed paragraphs (b)(2) and (3) in the Supplemental 
Proposal.
    For further discussion of the Supplemental Proposal and the 
Commission's consideration of comments thereto, see section II.H 
below.
---------------------------------------------------------------------------

5. Regulation Sec.  190.15: Recovery and Wind-Down Plans; Default Rules 
and Procedures
    The Commission is adopting Sec.  190.15 substantially as proposed 
(with a modification, as discussed below), to favor the implementation 
of a debtor clearing organization'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, [s]ubpart C DCOs, their clearing 
members, customers of clearing members, and the financial system more 
broadly by requiring SIDCOs and [s]ubpart C DCOs to have plans and 
procedures to address credit losses and liquidity shortfalls beyond 
their prefunded resources.'' \175\ Similarly, in adopting Sec.  39.39, 
the Commission explained that it was ``designed to protect the members 
of such DCOs and their customers, as well as the financial system more 
broadly, from the consequences of a disorderly failure of such a DCO.'' 
\176\
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    \175\ 78 FR 72476, 72492 (Dec. 2, 2013).
    \176\ Id. at 72494.
---------------------------------------------------------------------------

    Section 190.15(a) states that the trustee shall not avoid or 
prohibit any action taken by the debtor DCO 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 Bankruptcy Code. The Commission's intent is 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.
    Section 190.15(b) instructs 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, Sec.  190.15(c), as proposed, instructs the trustee, in 
consultation with the Commission, to 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. The 
Commission's intent is to provide the trustee, who will need to take 
prompt action to manage the DCO (and any member default), with a 
roadmap to manage such action. The Commission further intends that the 
roadmap be based on the rules, procedures, and plans that the DCO has 
developed in advance, and that are subject to the requirements of the 
Commission's regulations.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.15. The Commission also raised specific questions as 
to whether it is appropriate to steer the trustee towards 
implementation of the debtor DCO's default rules and procedures and 
recovery and wind-down plans, and whether the proposed language 
concerning discretion, reasonability, and practicability is appropriate 
and sufficient.
    The Commission received several comments on proposed Sec.  190.15. 
CME and ICE generally supported the proposal, although ICE raised 
concerns about the discretion afforded to the trustee. In contrast, 
Vanguard, FIA, ACLI, SIFMA AMG/MFA, and ICI expressed concerns with the 
proposed rule, in whole or in part.
    ICE, while generally supporting the proposal, objected to the 
language in Sec.  190.15 that a ``trustee's obligation to [follow a 
DCO's default rules and recovery and wind-down plans] is `subject to 
the reasonable discretion' of the trustee or is limited `to the extent 
reasonable and practicable.' '' While ICE acknowledged ``the need for 
some degree of flexibility in the conduct of a bankruptcy proceeding,'' 
it contended that ``the Commission should make clear that the trustee 
cannot override the DCO rules . . . [or] deviate from an approved 
recovery or wind-down plan.''
    Vanguard requested that proposed Sec.  190.15(a) be removed, 
arguing that it would be ``imprudent to give deference'' to a DCO's 
rules because such rules ``do not set forth a comprehensive roadmap to 
dealing with DCO insolvency.'' Vanguard noted that ``DCO rulebooks set 
forth a variety of powers the DCO may employ'' (e.g., ``assessments, 
variation margin gains haircutting, and tear-ups''), and that such 
rules ``lack [the] necessary specificity and detail to provide 
certainty to FCMs and customers, or to the trustee,'' with respect to 
what would follow in DCO insolvency. Vanguard was concerned that such 
uncertainty may ``contribute to further market stresses during a 
critical time,'' and that expressly instructing the trustee to 
implement a DCO's default rules and procedures ``where practicable,'' 
permits a DCO to ``override the fundamental customer protections 
intended by Part 190.''

[[Page 19372]]

    FIA did not support the adoption of proposed Sec.  190.15(b) and 
(c), commenting that the proposal's post-bankruptcy implementation of 
all DCO default rules and procedures and recovery and wind-down plans 
is ``inappropriate.'' FIA was concerned that the proposal's ``concept 
of `default rules and procedures' could encompass a number of different 
tools or actions, some of which would be inappropriate and risky for a 
bankruptcy trustee to attempt to execute.'' In addition, ``to the 
extent that the Commission would select some but not other default 
rules and procedures for a trustee to implement,'' uncertainty with 
respect to possible bankruptcy scenarios would increase. FIA stated 
that a DCO's default rules and procedures should not be used ``for any 
purpose other than to ensure enforcement of a DCO's closeout netting 
provisions,'' and that, ``[b]y their terms, the default rules and 
procedures . . . represent contractual arrangements between a DCO and 
its members whose purpose is to provide resources and tools to the DCO 
to prevent its bankruptcy.'' FIA argued that ``a fundamental term'' of 
these arrangements is that ``such resources and tools are only 
available prior to bankruptcy,'' and that instructing a trustee in 
bankruptcy to implement, with discretion, the DCO's default rules and 
procedures would ``undermine the long-standing and settled expectations 
of DCOs and their members.'' In the alternative, FIA recommended that 
the Commission revise proposed Sec.  190.15(b) ``to confirm that, in 
administering a proceeding under Subpart C, the trustee must implement 
any termination, close-out and liquidation provisions included in the 
rules (or bylaws) of the debtor'' (including loss allocation 
provisions). FIA raised further concerns about the treatment of a DCO's 
recovery plans in proposed Sec.  190.15. FIA asserted that such plans 
are intended to address ``actions to be taken prior to the DCO's 
bankruptcy and [are] not relevant post-filing.'' FIA also stated that 
such plans ``would provide no meaningful guidance to a trustee'' 
because they ``do not prescribe a particular course of action.'' 
Rather, they ``present a menu of options that a DCO might consider.'' 
FIA asserted that reliance on a DCO's recovery and wind-down plans is 
``particularly inappropriate'' because some of them ``have been 
developed with no input or opportunity for comment by clearing members 
and other market participants.''
    ACLI also expressed concern with the deference that a trustee in 
bankruptcy would be required to afford a DCO's rules and procedures and 
recovery and wind-down plans under proposed Sec.  190.15(a) and (c). 
ACLI claimed that ``DCO recovery and wind-down plans include such 
drastic measures as Variation Margin Gains Haircutting . . . and 
Partial Tear-Up . . . [that] are not subject to routine public input at 
the DCO level or at the Commission.'' ACLI identified several 
circumstances in which deference to the DCO's rules or recovery and 
wind-down plans should be reduced. ACLI asserted that: (a) A trustee 
should not be expected to defer to recovery and wind-down measures 
unless they were originally adopted with public input at the DCO level 
and made public for a reasonable period before the bankruptcy 
proceeding; (b) the trustee should ``have discretion to override a 
DCO's recovery or wind-down actions if they violate proposed [p]art 
190's goal of protecting customer property on no worse than a pro rata 
basis''; and (c) consistent with proposed Sec.  190.15(b), the trustee 
should be able to avoid or prohibit any DCO action that it determines, 
in consultation with the Commission, is not ``reasonable and 
practicable.''
    SIFMA AMG/MFA commented that requiring a trustee to defer to a 
DCO's recovery and wind-down plans as set forth in proposed Sec.  
190.15(a) and (c) is ``inadvisable'' and, in some cases, 
``unworkable,'' and recommended that the provisions be deleted. SIFMA 
AMG/MFA recommend that, if the Commission retains proposed Sec.  
190.15(a), the provision be amended to remove the words ``was 
reasonably in the scope of'' and replace references to the DCO's 
recovery and wind-down plans with references to the DCO's default rules 
and procedures. In support of their position, SIFMA AMG/MFA asserted 
that recovery and wind-down plans are insufficiently prescriptive, and 
that because they tend to be drafted as a menu of options, such plans 
are not likely to provide the trustee with clear direction, effectively 
causing the trustee to defer to the judgment of the debtor itself. 
SIFMA AMG/MFA also asserted that recovery and wind-down plans do not 
require Commission approval or reflect significant input from 
customers, and because DCOs are not required to make such plans public, 
the plans are not a fair reflection of the ex ante expectations of a 
DCO's stakeholders. SIFMA AMG/MFA further asserted that ``requiring the 
trustee . . . to defer to the debtor's resolution plans would be 
inconsistent with other regimes for the resolution of systemically 
important financial institutions.'' SIFMA AMG/MFA requested that the 
Commission add a new clause to proposed Sec.  190.15 requiring the 
trustee and Commission, in implementing Sec.  190.15, to ``consider 
whether implementation of the debtor's default rules and procedures 
[and recovery and wind-down plans] may undermine the core principles 
set forth in Sec.  190.00 or may pose additional systemic risk.'' \177\ 
If the trustee and Commission determine that such implementation would 
have that effect, SIFMA AMG/MFA suggested that the provision permit the 
trustee to override the rules, procedures, and plans. SIFMA AMG/MFA 
further commented that, in the event that deference to a DCO's default 
management rules and procedures and recovery and wind-down plans is 
mandated in subpart C of the proposal, the Commission should amend 
parts 39 and 40 of the Commission's regulations ``to ensure that 
customers have the opportunity to provide meaningful input during the 
development and application of such rules, procedures, and plans.''
---------------------------------------------------------------------------

    \177\ Alteration in original.
---------------------------------------------------------------------------

    ICI did not support the proposal's deference to a DCO's loss 
allocation, recovery, and wind-down rules in a DCO liquidation. ICI 
asserted that such rules are neither ``clear'' nor ``well-vetted.'' ICI 
stated that DCO rules ``do not provide the level of specificity and 
detail that is required to give certainty to market participants,'' but 
rather, they ``enumerate a wide variety of tools that a DCO may deploy 
to recover losses,'' some of which ``have the capacity to alter the 
entitlements of customers'' under part 190 (e.g., ``a customer would 
only be entitled to such a pro rata share of customer property to the 
extent the DCO rules did not modify the distribution of the DCO's 
assets'' through variation margin gains haircutting or partial tear-
up). ICI recommended that, ``[b]efore the Commission gives effect to 
any DCO loss allocation, recovery, and wind-down rules in a [p]art 190 
proceeding, . . . the Commission should develop and codify minimum 
principles that must be reflected in [those rules,] . . . review both 
existing DCO rules and proposed rule changes to ensure that they are 
consistent with the Commission's minimum principles . . . [, and] 
require DCOs to change their governance process for rule changes to 
give stakeholders greater opportunity for input.''
    As an initial matter, the Commission notes that some commenters, 
including ACLI, FIA, ICI, and SIFMA AMG/MFA, objected to the 
application of DCO recovery and wind-down plans and rules, in 
particular the application of

[[Page 19373]]

variation margin gains haircutting, because they believed that changes 
should be made to the process by which parts 39 and 40 permit DCOs to 
adopt such plans and rules.
    Amendments to parts 39 and 40 are beyond the scope of this 
rulemaking, and the Commission does not believe that these concerns 
with the content and operation of parts 39 and 40 should inhibit the 
use of such plans and rules in the context of part 190. However, the 
Commission continues actively to review these issues, in particular 
with respect to governance, as they relate to parts 39 and 40.
    The Commission also notes that other commenters, including FIA, 
believed that default rules and procedures and recovery plans are 
designed to avoid bankruptcy, and should not be applied if they fail in 
achieving that goal. However, the DCO's rules, procedures, and plans 
set forth ex ante the manner in which losses are allocated--that is, 
who is exposed to them, and to what extent. In the event that losses 
must be borne in bankruptcy, the Commission believes, as was noted in 
the preamble to the proposal, 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.'' The Commission does not believe that the 
comments offer a persuasive reason why the allocation of losses--who 
wins, who loses, and how much--should change on the basis of when a 
bankruptcy is filed.
    The Commission further notes that a number of commenters, including 
ACLI and Vanguard, were concerned with the application in bankruptcy of 
recovery tools such as variation margin gains haircutting and partial 
tear-up. Variation margin gains haircutting, to the extent set forth in 
DCO rules, will be applied in bankruptcy, in that it represents the ex 
ante manner in which losses are allocated.\178\ By contrast, partial 
tear-up of contracts will not be applied; rather, pursuant to Sec.  
190.14(c)(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'' 
(emphasis added).
---------------------------------------------------------------------------

    \178\ Moreover, as discussed in more detail in section II.C.7 
below, there is a limited amount of customer property available. Any 
increase in some customers claims (and thus, their distributions) 
due to the disapplication of gains-based haircutting would come at 
the expense of a reduced share of that limited customer property 
(i.e., reduced distributions) to other customers, which could total 
less than the amount of their claim arising from initial margin.
---------------------------------------------------------------------------

    Turning to SIFMA AMG/MFA's suggestion that ``the trustee and the 
Commission should explicitly be required to consider the core concepts 
set forth in proposed Sec.  190.00 and systemic risk in implementing a 
debtor DCO's rules procedures and plans'': With respect to the core 
concepts, Sec.  190.00(c) states that ``the specific requirements in 
[part 190] should be interpreted and applied consistently with these 
core concepts.'' In short, that requirement is already present. 
Moreover, the Commission has added Sec.  190.00(c)(3)(i)(C) to provide 
that where a provision in part 190 affords the trustee discretion, that 
discretion should be exercised in a manner that the trustee determines 
will best achieve the overarching goal of protecting public customers 
by enhancing recoveries for, and mitigating disruptions to, public 
customers as a class. Thus, in exercising their discretion to determine 
what is ``reasonable'' for purposes of Sec.  190.15, the trustee is 
already directed to focus on the ``core concepts'' in Sec.  190.00(c), 
and, in particular, the ``overarching goal of protecting public 
customers.''
    However, while a DCO's default rules and procedures are required to 
be made public, posted on the DCO's website,\179\ the same is not true 
for the DCO's recovery and wind-down plans. Thus, in implementing the 
DCO's default rules and procedures, the trustee would be implementing 
rules and procedures that, prior to the bankruptcy, were both subject 
to the supervision of the Commission and transparently available to 
both clearing members and their customers. By contrast, in implementing 
the DCO's recovery and wind-down plans, the trustee would be 
implementing plans that, prior to the bankruptcy, were subject to the 
supervision of the Commission,\180\ but may not have been transparently 
available to clearing members or their customers. In light of this 
distinction, a more customer-protective approach seems appropriate in 
the latter context.
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    \179\ See Sec.  39.21(c)(6).
    \180\ Note that Sec.  190.15(c) only applies to recovery and 
wind-down plans that were ``filed with the Commission pursuant to 
Sec.  39.39 of this chapter.''
---------------------------------------------------------------------------

    Accordingly, the Commission is modifying proposed Sec.  190.15(c), 
which reads that 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, to the 
extent reasonable and practicable--to add at the end the qualifier that 
these actions should also only be taken to the extent consistent with 
the protection of customers.\181\
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    \181\ The ``customers'' of a DCO are, as noted at the top of 
this section II.C, the clearing members with respect to their public 
customers, as well as the clearing members with respect to their 
proprietary or ``house'' accounts.
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    With respect to systemic risk, while the Commission, as a 
governmental agency, is attentive to considerations of mitigating 
systemic risk in all that it does,\182\ it may be difficult for a 
trustee to make meaningful determinations as to how to do so. Moreover, 
the trustee is the representative of the bankruptcy estate, see 11 
U.S.C. 323(a), with fiduciary duties to estate beneficiaries,\183\ 
rather than to the financial system as a whole. Accordingly, the 
Commission does not believe it appropriate to add an explicit 
requirement concerning considerations of systemic risk, as suggested by 
SIFMA AMG/MFA.
---------------------------------------------------------------------------

    \182\ See CEA section 3(b), 7 U.S.C. 5(b) (purposes of the CEA 
include ``the avoidance of systemic risk'').
    \183\ See U.S. Department of Justice, Executive Office for 
United States Trustees, Handbook for Chapter 7 Trustees Section 4.B, 
at 4-2.
---------------------------------------------------------------------------

    The Commission does not agree that FIA's observation that DCO 
recovery and wind-down plans may ``not prescribe a particular course of 
action but, rather, present a menu of options that a DCO may consider'' 
supports FIA's conclusion that ``these plans would appear to provide no 
meaningful guidance to a trustee.'' To the contrary, the Commission 
believes that providing a ``menu of options'' among which the trustee 
may select (and adapt) in a manner that is ``reasonable and 
practicable'' would provide the trustee--who would be stepping into a 
complex and difficult situation with little preparation--with a helpful 
roadmap to determine strategy and tactics, in order to act in a prompt 
and cost-effective manner.
    The Commission also declines to provide that the trustee cannot 
override the DCO's rules or deviate from an approved recovery or wind-
down plan. Even if part 39 were to require that such plans be 
``approved''--and it does not--they are designed in the context of 
operation of the DCO outside of bankruptcy. Thus, the Commission 
believes it to be appropriate for the trustee to apply them with 
flexibility to the extent reasonable and practicable.
    Accordingly, after consideration of the comments and for the 
reasons stated above, the Commission is adopting Sec.  190.15 as 
proposed, with the modification to Sec.  190.15(c) discussed above.

[[Page 19374]]

6. Regulation Sec.  190.16: Delivery
    The Commission is adopting Sec.  190.16 as proposed with a 
modification to paragraph (a), as set forth below.
    Regulation Sec.  190.16(a) instructs the trustee to use reasonable 
efforts to facilitate and cooperate with completion of delivery in a 
manner consistent with Sec.  190.06(a) (which instructs 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 in Sec.  
190.00(c)(5). The Commission believes that 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 is limited to requiring 
``reasonable efforts.''
    Regulation Sec.  190.16(b) carries 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 in Sec.  
190.06(b), as discussed above. Specifically, physical delivery property 
that is held in delivery accounts for the purpose of making delivery 
shall be treated as physical delivery property, as will 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 shall be treated as cash delivery property, as would any 
physical delivery property for which delivery is subsequently taken.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.16. The Commission raised specific questions 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, and if so, whether the physical delivery 
account class should be further sub-divided. The Commission also asked 
whether the delivery account class should be treated as a single, 
undivided account class.
    CME supported the requirement in proposed Sec.  190.16 that the 
trustee use reasonable efforts to facilitate deliveries of commodity 
contracts that have moved into delivery prior to the date and time of 
relief on behalf of a clearing member or customer, but asked that the 
Commission ``expand the rule to require the trustee to facilitate 
deliveries'' under contracts that move into delivery position after the 
filing and that the trustee is unable to liquidate. CME stated that 
``[i]t is equally important to protect deliveries under [such] 
contracts . . . to protect against disruption to commercial markets and 
operations,'' and that the trustee may not be able to terminate them.
    The ABA Subcommittee similarly expressed concern that proposed 
Sec.  190.16(a) ``does not address contracts that are unable to be 
liquidated and that then move into delivery position,'' noting that 
``it may be impossible or impracticable for a trustee to liquidate 
every'' physical-delivery commodity contract that is open at the date 
and time of the order for relief before the contract moves into 
delivery position. The ABA Subcommittee recommended that the Commission 
``remove the timing limitation in Proposed Rule 190.16(a),'' and add 
language stating that ``the trustee should use reasonable efforts to 
liquidate open physical delivery commodity contracts before they move 
into a delivery position.''
    The Commission agrees with comments raised by CME and the ABA 
Subcommittee that deliveries should be facilitated after the order for 
relief for contracts that are not otherwise terminated, liquidated, or 
transferred. The Commission believes that modifying the proposal to 
address that scenario is appropriate to avoid disruption to the cash 
market and to avoid adverse consequences to parties that may be relying 
on delivery taking place in connection with their business operations.
    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is adopting Sec.  190.16 with a 
modification to apply paragraph (a) to any contract that ``moves into 
delivery after [the date and time of the order for relief], but before 
being terminated, liquidated, or transferred.''
7. Regulation Sec.  190.17: Calculation of Net Equity
    The Commission is adopting Sec.  190.17 as proposed, with a 
modification to Sec.  190.17(b)(2), as discussed below. Section 190.17 
establishes net equity calculations to be used in determining the 
claims against the debtor DCO (and the allocation of losses) among 
members and their accounts.
    Section 190.17(a) with respect to net equity is parallel to Sec.  
190.18(a) with respect to the treatment of customer property. Section 
190.17(a)(1) confirms that a member of a clearing organization may have 
claims in separate capacities. Specifically, a member may have claims 
on behalf of its public customers (customer account) and claims on 
behalf of itself and its non-public customers (i.e., affiliates) (house 
account), and, within those separate customer classes, the claims may 
be further separated by account class. The member shall 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. Section 190.17(a)(2) directs that net 
equity shall be calculated separately with respect to each customer 
capacity and, within such customer capacity, by account class.
    Section 190.17(b) sets forth how a debtor DCO's pre-existing rules 
and procedures governing the allocation of losses--including the 
default rules and procedures--should be applied in a DCO bankruptcy.
    Section 190.17(b)(1) confirms that the calculation of members' net 
equity claims--and, thus, the allocation of losses among members and 
their accounts--shall be 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 the Commission believes that it 
is appropriate to give them effect regardless of the bankruptcy of the 
DCO or the timing of any such bankruptcy. In other words, the pre-
existing loss allocation rules and procedures (such as member 
assessments) should be given the same effect in a bankruptcy, 
regardless of whether default management or recovery tools were fully 
applied 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.
    Section 190.17(b) also addresses DCO rules that govern how 
recoveries on claims against defaulting members are allocated to non-
defaulting members' accounts,\184\ which effectively ``reverse

[[Page 19375]]

the waterfall'' by allocating recovered assets to member accounts in 
reverse order of the allocation of the losses to those member 
accounts.\185\ Section 190.17(b)(2) implements such DCO rules in 
bankruptcy, thereby adjusting members' net equity claims (and the basis 
for distributing any such recoveries) in light of such recoveries. The 
provision similarly implements 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.
---------------------------------------------------------------------------

    \184\ 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.
    \185\ 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.
---------------------------------------------------------------------------

    Section 190.17(c) adopts by reference the equity calculations set 
forth in proposed Sec.  190.08, to the extent applicable.
    Finally, Sec.  190.17(d) implements section 766(i) of the 
Bankruptcy Code, which: (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. To implement section 766(i), Sec.  190.17(d) defines 
``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 shall be calculated with respect to 
each account class available for distribution to customers of the same 
customer class. Moreover, given that the calculation of funded balance 
for FCMs is an analogous exercise, the Commission intends that such 
calculations under Sec.  190.17(d) will be made in the manner provided 
in Sec.  190.08(c), to the extent applicable.
    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.17. The Commission raised a specific question as to 
whether it is appropriate to base the calculations proposed Sec.  
190.17 on the full application of the debtors' loss allocation rules 
and procedures, including the DCO's default rules and procedures.
    Commenters addressed the proposed language of paragraph (b), or of 
Sec.  190.17 generally, but did not offer specific comments on the 
proposed language of paragraph (a), (c), or (d).
    CME commented in support of Sec.  190.17(b)(1)'s application of 
``the DCO's loss allocation rules and procedures, including the DCO's 
default rules and procedures, to the calculation of clearing members' 
net equity claims,'' but suggested a clarification to the proposed 
rule. Specifically, CME suggested that the Commission ``clarify that 
`full application' of the DCO's loss allocation rules and procedures to 
the calculation of clearing members' house net equity claims means that 
assessments or similar loss allocation arrangements thereunder are part 
of the calculation only if and to the extent that the DCO's rules and 
procedures provide for post-filing assessments and payments.'' CME 
noted that a ``DCO's rules are the contract between and among the 
members and the DCO,'' and that, ``[i]f the calculation of net equity 
claims deviates from the DCO's loss allocation under its rules, 
including determination of amounts owned under close-out netting rules, 
that could adversely affect CME's netting opinion as to the 
enforceability of its netting rules.'' CME also commented in support of 
``giving effect to provisions in the debtor DCO's loss allocation rules 
that entitle clearing members to return of guaranty fund deposits or 
other mutualized default resources that are not used, or to payments 
out of amounts that the DCO recovers on claims against a defaulting 
clearing member, through adjustments to clearing member's net equity 
claims against member property to reflect their entitlement to such 
payments.'' CME also commented in support of Sec.  190.17(b)(2).
    The ABA Subcommittee expressed concern with respect to perceived 
ambiguity in Sec.  190.17(b)(1) regarding ``how assessments that were 
not called for, or that were called for but not paid before the filing 
date, would impact the calculation of a clearing member's net equity 
claim with respect to its house account.'' The ABA Subcommittee 
requested that the Commission modify the proposed regulation to clarify 
that ``house account net equity claims would be adjusted to reflect 
post-filing obligations only if and to the extent that the DCO's rules 
and procedures impose obligations on clearing members to continue 
making such payments following the DCO's bankruptcy.'' Specifically, 
the ABA Subcommittee suggested that the following phrase be added to 
the end of Sec.  190.17(b)(1): If and to the extent that the debtor's 
loss allocation rules and procedures impose obligations on clearing 
members to make such payments on or after the filing date.
    FIA did not support the adoption of Sec.  190.17(b)(1). FIA stated 
that it would be ``inappropriate to require a clearing member to reduce 
the value of its net equity claim by the amount of an assessment that, 
under the rules of the relevant DCO, either may no longer be made or 
are not required to be paid.'' FIA asserted that a DCO's default fund 
is ``a multilateral indemnification arrangement between the DCO and its 
members pursuant to which members' contributions are used to cover the 
DCO's losses resulting from member default(s) and thereby prevent the 
DCO's bankruptcy.'' FIA stated that a ``DCO has no authority under its 
rules to request or to apply these funds for any other purpose, nor do 
we believe that a trustee would have any authority under the 
[Bankruptcy] Code to do so.'' FIA noted further that, ``by requiring 
that a clearing member's net equity claim must include the full 
application of the DCO's loss allocation rules and procedures, proposed 
Rule 190.17(b)(1) appears to have the effect of reducing a clearing 
member's potential recovery, even when the full application of the 
DCO's loss allocation rules is not necessary to meet the DCO's 
obligations to non-defaulting clearing members,'' thereby impermissibly 
benefitting the DCO's general creditors and shareholders to the 
detriment of clearing members.
    ICE commented that the Commission should refrain from adopting 
Sec.  190.17(b) or providing ``specific guidance as to what assumptions 
the CFTC would make and how the net equity claim is to be calculated 
hypothetically.'' ICE stated that, in determining a clearing member's 
net equity claim, it is neither appropriate nor feasible to consider a 
potential assessment that could have been called for before a 
bankruptcy filing but was not. ICE asserted that a DCO's determination 
of whether ``to call

[[Page 19376]]

for an assessment and/or implement other loss allocation arrangements'' 
accounts for many considerations that would not be appropriate to 
revisit in an insolvency. ICE also asserted that calculating the full 
application of loss allocation rules, or determining what would have 
happened in any full allocation, may not be possible. ICE noted, for 
example: (a) Because a DCO is not obligated to impose assessments 
against its clearing members, it is unclear how the CFTC or the trustee 
would determine how many assessments the DCO should have made; (b) in 
the event that ``clearing members have the right to cap their liability 
by terminating their membership in a DCO,'' it is unclear how the CFTC 
or the trustee would determine whether a clearing member should have 
terminated its membership; \186\ and (c) it ``may not be possible to 
determine definitively what the [DCO's] losses . . . would have been if 
additional loss allocation steps, such as variation margin gains 
haircutting or tear-up, had been taken.''
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    \186\ But see ICE Clear Credit Rules 806, 807. To mitigate the 
risk that their members will ``rush to the exits'' after a default, 
DCOs generally hold departing members liable for assessments due to 
the defaults that occurred before they withdrew from membership, as 
well as during a ``cooling-off'' period that extends past the date 
the member gives notice of intent to withdraw. The ICE Clear Credit 
rules cited, which include a ``cooling-off period'' of at least 30 
days, are examples of this phenomenon. Thus, the possibility that 
clearing members would withdraw is not likely to affect their 
liability for assessments in this context.
---------------------------------------------------------------------------

    SIFMA AMG/MFA commented that Sec. Sec.  190.17 and 190.18(b)(1) 
should be modified to explicitly state that any gains that were haircut 
during gains-based haircutting will be treated as customer property and 
included in the net equity claims of the clearing members and customers 
whose gains were haircut. SIFMA AMG/MFA further commented in support of 
Sec.  190.17(b) but suggested that the proposal be modified to provide 
that, if a debtor DCO either (i) does not have ``reverse the 
waterfall'' rules or (ii) has ``reverse the waterfall'' rules that do 
not address each level of the debtor DCO's waterfall, the net equity 
clams of the debtor DCO's clearing members and customers will be 
calculated as though the debtor DCO, in fact, ``has `reverse the 
waterfall' rules that address each level of the DCO's waterfall.
    Vanguard commented on Sec.  190.17(b)(1)'s requirement that a 
trustee's calculation of DCO members' net equity claims include the 
full application of DCO loss allocation rules and procedures. Vanguard 
expressed concern that the requirement would result in a customer being 
entitled to only ``a pro rata share to the extent the DCO rules did not 
modify the distribution of the DCO's asset, whether pre- or post-
petition, through measures such as variation margin gains haircutting 
or partial tear-up of transactions.'' Vanguard noted the possibility 
that, ``as the DCO begins to fail,'' the DCO's rules ``could be changed 
without the appropriate vetting by FCMs and customers who presently 
bear an inordinate share of the risk.'' Vanguard believed that ``any 
application of non-defaulting customer gains haircutting, or any other 
margin haircutting, should be prohibited as being fundamentally at odds 
with normal insolvency practice and highly counterproductive to 
incentivizing customers not to abandon a failing DCO.'' Vanguard 
asserted that, if haircutting is to be allowed, customers should 
``receive full compensation in the form of a credit or equity claim 
against the DCO [that is] superior to that of other creditors.'' 
Vanguard also suggested that Sec.  190.17(b)(2) be modified in the same 
manner as suggested by SIFMA AMG/MFA, with respect to situations in 
which a debtor DCO does not have ``reverse the waterfall'' rules, or 
has ``reverse the waterfall'' rules that do not address each level of 
the debtor DCO's waterfall.
    ICI expressed concern that Sec.  190.17(b)(1) would permit a DCO's 
loss allocation, recovery, and wind-down rules ``to override the 
fundamental customer protections that Part 190 and Subchapter IV [of 
the Bankruptcy Code] are meant to safeguard,'' because they would ``no 
longer guarantee to a customer a pro rata share of customer property 
based on its transactions and margin in accordance with Subchapter 
IV.'' In that scenario, ICI commented that ``a customer would only be 
entitled to such a pro rata share to the extent the DCO rules did not 
modify the distribution of the DCO's assets, whether pre- or post-
petition, through measures such as variation gains haircutting or 
partial tear-up of transactions.''
    Having received no specific comments on the proposed language of 
paragraphs (a), (c), and (d) of Sec.  190.17, the Commission is 
adopting those paragraphs as proposed.
    As described above, the Commission received several comments on 
paragraph (b). After considering the comments, the Commission notes 
that DCO default rules and procedures (also referred to as ``default 
waterfalls''), as a general matter, first use the resources of the 
defaulter (i.e., the defaulter's initial margin and contribution to the 
default fund) to cover a shortfall. Should those resources be 
insufficient to cover the shortfall, such default waterfalls generally 
proceed to use the DCO's own capital contribution, and only after those 
resources are extinguished is the remaining shortfall mutualized among 
the clearing members: (1) First, through the prefunded default fund 
contributions of non-defaulting clearing members; (2) then, through 
limited assessment powers against those non-defaulting clearing 
members, which are generally set as a multiple of each clearing 
member's prior contributions to the default fund; and (3) finally, 
through gains-based haircuts that affect both clearing members and 
(through customer agreements) the customers of clearing members (i.e., 
public customers).
    The Commission notes two important takeaways from the general 
structure of default waterfalls. First, each clearing member knows, in 
advance of a default, the maximum amount of its exposure to contribute 
to mutualized loss through the guarantee fund and the DCO's assessment 
powers. Second, should there be any reduction in the amount of funds 
collected through such assessments, then any losses in excess of the 
waterfall (i.e., up through the assessments) would instead be allocated 
to both clearing members and their public customers. In other words, if 
the losses are large enough, a reduced allocation of losses to clearing 
members would necessarily mean that their public customers would bear 
an increased allocation of losses.
    The Commission remains of the view that, as discussed in the 
proposal, ``[w]hile certain DCOs may have discretion, consistent with 
governance procedures, as to precisely when they call for members to 
meet assessment obligations, . . . 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.'' \187\ As discussed above, the losses in a DCO 
bankruptcy ultimately would be allocated between clearing members and 
customers, and clearing members' exposure to this allocation of losses 
is already capped by the ex ante limits on assessment powers. If the 
Commission were to modify the language of paragraph (b) in the manner 
suggested by multiple commenters, the modification would effectively 
decrease the allocation of losses that would be borne by clearing 
members--below the ex ante limits of which they are on

[[Page 19377]]

notice--and correspondingly increase the allocation of losses that 
would be borne by customers. In other words, in such a scenario, the 
Commission believes that the suggested language could harm customers 
and run counter to the Commission's policy that, with respect to 
customer property, public customers be favored over non-public 
customers. For those reasons, the Commission declines to adopt 
commenters' suggestions to modify the net equity calculations in Sec.  
190.17(b) by limiting (or eliminating) the allocation of assessments 
that were not exercised prior to a bankruptcy filing.
---------------------------------------------------------------------------

    \187\ 85 FR at 36038.
---------------------------------------------------------------------------

    By contrast, gains-based haircuts are also part of the pre-
bankruptcy arrangements for allocating losses. If that part of the 
``waterfall'' is reached, then that ex ante arrangement should be 
followed. Moreover, there is a limited amount of customer property 
available. Thus, to the extent the application of gains-based haircuts 
was to be reversed, and some customers would realize increases in the 
allowed amounts of their claims (and thus a greater share of customer 
property), other customers would suffer a decreased share of customer 
property; indeed, the latter customers may, as a result, receive less 
than the amount of their claims for initial margin. This could have the 
effect of reducing those customers' recoveries below the initial margin 
they have posted. The Commission stands firmly against initial margin 
haircutting as inimical to the principles of segregation. Thus, the 
Commission declines to adopt the suggestion by SIFMA AMG/MFA and 
Vanguard to reverse the application of gains-based haircutting in a DCO 
bankruptcy.
    FIA's comment letter raised two points that should be further 
addressed. First, FIA stated that a DCO, under its rules, lacks the 
authority to apply the DCO's default fund for any purpose other than 
preventing the DCO's bankruptcy, and a trustee would similarly lack the 
authority to do so under the Bankruptcy Code.\188\ FIA further argued 
that, as a result of that limitation, the DCO's authority to make new 
assessments or otherwise require that members contribute additional 
funds to a DCO's default fund would not continue into bankruptcy. 
Consequently, FIA argued that a clearing member's net equity claim 
should not be reduced in bankruptcy by the amount of an assessment that 
would no longer be required to be paid under the DCO's rules. However, 
the Commission notes that Sec.  190.17(b)(1) does not instruct the 
trustee to call any clearing member to pay in additional funds; rather, 
paragraph (b)(1) reduces the clearing member's net equity claim against 
the estate of the DCO, to account for uncalled or uncollected 
assessments. Pursuant to section 20(a)(5) of the CEA, the Commission 
has the power to provide, with respect to a commodity broker in 
bankruptcy, ``how the net equity of a customer is to be determined,'' 
\189\ and the Commission believes that by setting the net equity 
calculation as proposed, the rule would appropriately set such 
calculations in a manner that does ``not depend on the happenstance of 
when default management or recovery tools were used,'' as discussed 
more fully above.
---------------------------------------------------------------------------

    \188\ FIA at 9.
    \189\ In the bankruptcy of a clearing organization, clearing 
members are a species of customer.
---------------------------------------------------------------------------

    Second, FIA noted that, ``by requiring that a clearing member's net 
equity claim must include the full application of the DCO's loss 
allocation rules and procedures, proposed [Sec.  ] 190.17(b)(1) appears 
to have the effect of reducing a clearing member's potential recovery, 
even when the full application of the DCO's loss allocation rules is 
not necessary to meet the DCO's obligations to non-defaulting clearing 
members'' and that ``[s]uch a result would impermissibly benefit the 
DCO's general creditors and shareholders to the detriment of clearing 
members.'' The Commission did not intend for the potential outcome 
suggested by FIA; rather, in proposed Sec.  190.17(b)(2)(i), the 
Commission intended to provide that, where the full amount of 
assessment powers is not needed to cover a default, an appropriate 
adjustment shall be made to the net equity claims of clearing members. 
The Commission believes that the rule text should be modified in order 
to communicate its intent more clearly, and avoid the possibility of 
the unintended outcome raised by FIA. Accordingly, the Commission is 
modifying Sec.  190.17(b)(1) to clarify that the DCO's ``loss 
allocation arrangements shall be applied to the extent necessary to 
address losses arising from default by clearing members.''
    This modification separates paragraph (b)(1) into two separate 
parts. First, paragraph (b)(1)(i) will provide that 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.  39.16 and, if 
applicable, Sec.  39.35. Second, paragraph (b)(1)(ii) will provide that 
the calculation in paragraph (b)(1)(i) will include, 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. Such loss allocation arrangements shall be applied 
to the extent necessary to address losses arising from default by 
clearing members.
    The ABA Subcommittee, in its comment letter, was concerned that the 
proposed rule is ambiguous on whether assessments or similar loss 
allocation arrangements would be included in the calculation where the 
clearing organization's rules do not impose obligations on clearing 
members to make such payments on or after the filing date. The modified 
structure of paragraph (b)(1), as described above, should remove that 
ambiguity, albeit not in the direction that the ABA Subcommittee would 
prefer: The calculation ``will include, with respect to the clearing 
member's house account, any assessments or similar loss allocation 
arrangements that were not called for before the filing date . . . to 
the extent necessary to address losses arising from default . . .'' 
(emphasis added).
    CME's comment letter also raises a concern that should be 
addressed. In particular, CME is concerned that deviating from the 
DCO's rules with respect to loss allocation in this context could 
adversely affect the DCO's netting opinion as to the enforceability of 
its netting rules. The Commission notes that this argument conflates 
bank capital charge calculations for cleared transactions with capital 
charge calculations for default fund contributions. Pursuant to, e.g., 
12 CFR 217.133(a)(2), a clearing member that is (or is part of) a bank 
holding company regulated by the Federal Reserve Board and that uses 
the internal ratings and advanced measurement approaches to bank 
capital requirements is required to use the methodologies described in 
the applicable paragraph of 12 CFR 217.133 to calculate its risk-
weighted assets for a cleared transaction (that is, paragraph (c) of 
that section) and the methodologies described in a different paragraph 
to calculate its risk-weighted assets for its default fund contribution 
to a CCP (that is, paragraph (d) of that section).\190\ Netting 
opinions are necessary to treat cleared transactions

[[Page 19378]]

on a net basis,\191\ while assessments are related to default fund 
contributions. Thus, the treatment of assessment obligations is 
irrelevant to netting opinions for cleared transactions.
---------------------------------------------------------------------------

    \190\ There are analogous provisions for bank holding companies 
regulated by the Federal Reserve Board that use the standardized 
approach for calculating bank capital requirements (12 CFR 217.35) 
as well as banks regulated by the FDIC and the Office of the 
Comptroller of the Currency.
    \191\ See 12 CFR 217.3(d).
---------------------------------------------------------------------------

    The Commission also received comments on proposed Sec.  
190.17(b)(2) concerning the treatment of ``reverse the waterfall'' 
rules in the context of a DCO bankruptcy. After considering the 
comments, the Commission continues to believe that it is useful and 
appropriate to use ``reverse the waterfall'' rules for recoveries made 
by a clearing organization (including a debtor clearing organization). 
Some commenters suggested that proposed Sec.  190.17(b)(2) be modified 
to address situations where the debtor DCO lacks ``reverse the 
waterfall'' rules, or where such rules do not address each level of the 
debtor clearing organization's waterfall. Although the commenters did 
not provide specific language that could be used to apply to such 
situations, the Commission believes that such a complicated 
modification is beyond the bounds of what was proposed, and thus, the 
Commission declines to make the modification here. Nonetheless, the 
commenters' suggestion is well taken, and the Commission may consider 
further work on that issue in the future.
    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is: (1) Adopting Sec.  190.17(a), 
(b)(1), (c), and (d) as proposed; and (2) adopting Sec.  190.17(b)(2) 
with the modification discussed above.
8. Regulation Sec.  190.18: Treatment of Property
    The Commission is adopting Sec.  190.18 to establish the allocation 
of the debtor DCO's estate in order to satisfy claims of clearing 
members, as customers of the debtor. The Commission is adopting Sec.  
190.18 as proposed, with the following modifications: (1) Adding new 
paragraph (b)(1)(iv), as described below; and (2) removing paragraph 
(c)(1) and renumbering the remaining paragraphs of paragraph (c).
    Section 190.18(a) with respect to customer property is parallel to 
Sec.  190.17(a) with respect to net equity. Paragraph (a) provides that 
property of the debtor clearing organization's estate is allocated 
between member property, and customer property other than member 
property, in order to satisfy claims of clearing members as customers 
of the debtor. Such property 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.
    Section 190.18(b) sets out the scope of customer property for a 
clearing organization,\192\ and is based in large part on Sec.  
190.09(a). Specifically, in Sec.  190.18, paragraphs (b)(1)(i)(A) 
through (G) are based on Sec.  190.09(a)(1)(i)(A) through (G). Section 
190.18(b)(1)(i) does not include a provision that is parallel to Sec.  
190.09(a)(1)(i)(H), because loans of margin are not applicable to DCOs. 
In Sec.  190.18, paragraphs (b)(1)(ii)(A) through (D) are based on 
Sec.  190.09(a)(1)(ii)(A), (D), (E), and (F), while Sec.  
190.18(b)(1)(ii)(E) adopts 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. Section 190.18(b)(1)(ii) does not include 
provisions that are parallel to Sec.  190.09(a)(1)(ii)(B), (C), (G), 
and (L), because they would not be applicable due to the differences in 
business models, structures, and activities of DCOs and FCMs, 
respectively. Section 190.18(b)(1)(iii) is unique to clearing 
organizations, and includes 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. Section 190.18(b)(1)(iii) also includes 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. Finally, Sec.  190.18(b)(2), which 
identifies property that is not included in customer property, adopts 
by reference 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.
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    \192\ 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).
---------------------------------------------------------------------------

    Section 190.18(c) allocates customer property between customer 
classes, favoring allocation to customer property other than member 
property 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. Section 190.18(c)(1), as proposed (but 
not adopted herein, as discussed below), would allocate any property 
referred to in Sec.  190.18(b)(1)(iii) (guarantee deposits, 
assessments, etc.) first to customer property other than member 
property, to the extent that any account class therein is not fully 
funded, and then to member property. In proposing this provision, the 
Commission intended such treatment of property to favor public 
customers over non-public customers. Section 190.18(c)(2) allocates 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, Sec.  190.18(c)(3) allocates 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.
    Section 190.18(d) allocates customer property among account classes 
within customer classes. Section 190.18(d)(1) confirms 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). Section 190.18(d)(2) provides that customer 
property that cannot be allocated in accordance with paragraph (d)(1) 
shall be allocated in a manner that promotes equality of percentage 
distribution among account classes within a customer class. Thus, in 
such a scenario, 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

[[Page 19379]]

forth, until all account classes within the customer class are fully 
funded.
    Section 190.18(e) confirms, however, that where the debtor DCO 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.
    Section 190.18(f) reserves the right of the trustee to assert 
claims against any person to recover the shortfall of property 
enumerated in Sec.  190.18(b)(1)(i)(E) and (b)(1)(ii) and (iii). 
Paragraph (f) is analogous in the DCO context to Sec.  190.09(a)(3) in 
the context of FCMs. The purpose of paragraph (f), as with Sec.  
190.09(a)(3), is 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 requested comment with respect to all aspects of 
proposed Sec.  190.18. The Commission raised a specific question about 
the comprehensiveness of the scope of customer property for a clearing 
organization in proposed Sec.  190.18(b). The Commission also asked 
specifically about 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).
    The Commission received several comments on the proposal. Whereas 
some commenters supported the proposal, in whole or in part, others 
raised concerns particularly with respect to the scope of customer 
property in proposed Sec.  190.18(b) and the treatment of guarantee 
fund deposits and other payments in proposed Sec.  190.18(c)(1), among 
other issues.
    ICI commented in support of the proposal and agreed with the 
Commission that the proposal is necessary to further the policy in 
section 766(h) of the Bankruptcy Code of prioritizing the claims of 
public customers over the claims of non-public customers. ICI stated 
that public customers need the proposed protections because they 
``typically have no direct participation in the DCO's risk management 
and no insight into the transactions other customers have with the 
DCO.'' ICI also stated that public customers may have less access to 
information concerning the DCO's financial health, and may have fewer 
tools available to protect themselves against losses, when compared to 
DCO members.
    The ABA Subcommittee commented that the treatment of clearing 
members' guaranty fund deposits and similar payments in proposed Sec.  
190.18(c)(1) represents a ``significant policy change'' with 
``significant competing policy considerations and complex issues'' that 
warrant consideration outside of the Proposal. The ABA Subcommittee 
contended, for example, that such payments ``may be exposed to risk in 
asset classes in which [the clearing member] does not trade, and which 
the clearing member does not expect to assume based on the DCO's 
rules.'' Without taking a formal position on the proposal, the ABA 
Subcommittee identified issues that it believed warrant further 
attention by the Commission and market participants, including whether 
the language in paragraph (c)(1): (a) Should be implemented ``through a 
Part 190 rule that would have the effect of overruling inconsistent DCO 
rules,'' or through an amendment to part 39 to require DCOs ``to have 
loss allocation rules that align with [the] policy change''; (b) would 
place U.S. DCOs ''at a competitive disadvantage to non-U.S. DCOs''; (c) 
would ``discourage firms from becoming or remaining direct clearing 
members of a DCO for the purpose of clearing trades solely for their 
own account or for non-public customers''; and/or (d) would ``create a 
risk that U.S. banking regulators will want to revisit the methodology 
for determining the amount of regulatory capital that bank and bank-
affiliated clearing members must hold with respect to cleared 
derivatives.'' The ABA Subcommittee therefore recommended that the 
Commission maintain the status quo by revising proposed Sec.  
190.18(c)(1) ``to confirm that customer property described in Rule 
190.09(b)(1) will be allocated to member property after such property 
is applied to cover losses in accordance with the DCO's rules . . . 
[until] the Commission separately considers the merits of the 
[proposed] policy change.''
    SIFMA AMG/MFA requested that the Commission amend proposed Sec.  
190.18(b)(1) to provide explicitly ``that customer property includes 
property a debtor DCO contributes to its default waterfall,'' as 
seemingly was intended by proposed Sec.  190.18(b)(1)(ii)(E).
    Consistent with its comments on proposed Sec.  190.17(b), FIA 
commented that customer property should not include guaranty fund 
deposits as set forth in proposed Sec.  190.18(b)(1)(iii) and 
recommended that the Commission remove that provision. FIA stated that 
a ``default fund represents a multilateral indemnification arrangement 
between the DCO and its members pursuant to which members' 
contributions are used to cover the DCO's losses resulting from member 
default(s) and thereby prevent the DCO's bankruptcy.'' FIA contended 
that a DCO has no authority under its rules, and a trustee has no 
authority under the Bankruptcy Code, ``to request or to apply these 
funds for any other purpose.''
    CME commented in support of the decision to set forth the elements 
that comprise customer property in proposed Sec.  190.18(b)(1). CME 
specifically agreed that the scope of customer property should include 
any guaranty fund deposit, assessment or similar 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 default 
rules and procedures to satisfy claims made by or on behalf of pubic 
customers of a member. For clarity and transparency, CME encouraged the 
Commission to expand the scope of customer property to explicitly 
include the amounts that the DCO commits to the financial resources in 
the waterfall under its rules, to the extent that those resources have 
not already been applied under the DCO's default rules. CME stated, 
however, that the Commission should eliminate the requirement set forth 
in proposed Sec.  190.18(c)(1) that the payments described in proposed 
Sec.  190.18(b)(1) be allocated to customer property other than member 
property for use ``to cover a shortfall in the funded balances for 
clearing members' customer accounts in any account class'' and, 
instead, ``reaffirm that guaranty fund deposits are to be applied to 
cover losses in accordance with the DCO's rules, with any remaining 
funds allocated to member property.'' In support of its view, CME 
stated that such requirement set forth in proposed Sec.  190.18(c)(1): 
(1) Would materially change ``the definition of member property in 
current Regulation 190.10, under which any guaranty funds remaining 
after payments in accordance with the DCO's rules would be returned to 
clearing members as member property''; (2) ``may significantly alter 
how clearing members assess the risks they have assumed in joining 
CME,'' by undermining CME's ``rules limiting use of clearing members' 
guaranty fund deposits to cover losses in the relevant product class to 
which they have contributed to the guaranty fund and in which they 
participate''; and (3) would ``compromise CME's ability under 
Regulation 39.27 to `operate pursuant to

[[Page 19380]]

a well-founded, transparent, and enforceable legal framework that 
addresses each aspect' of CME's obligations as a DCO, including netting 
arrangements and `other significant aspects' of CME's `operations, risk 
management procedures, and related requirements' as a DCO.'' \193\ CME 
also asserted that: (a) Proposed Sec.  190.18(c)(1) ``is vulnerable to 
legal challenge as exceeding the Commission's authority'' in section 20 
of the CEA, because such authority is not being exercised consistent 
with the Bankruptcy Code and other provisions of the CEA; \194\ (b) the 
Commission does not have the authority under the CEA ``to adopt rules 
that have the effect of directly rewriting a DCO's rules,'' and that 
doing so would be contrary to the reasonable discretion afforded to 
DCOs under section 5b of the CEA to comply with DCO core principles and 
Commission regulations; (c) the Commission may not alter or supplement 
the rules of a registered entity until it satisfies the requirement 
under section 8a(7) of the CEA to request that the registered entity 
amend its rules and provide the registered entity with notice and an 
opportunity for a hearing if it does not do so; (d) amending the 
contract between and among clearing members and the DCO through a 
Commission regulation ``would call into question . . . the 
enforceability of the DCO's rules''; and (e) ``a proposed rule 
impacting the manner in which bank or bank-affiliated clearing members' 
guaranty fund deposits and assessment obligations can be utilized may 
drive subsequent changes to the methodology and resulting amount of 
capital such members must hold for those exposures under the Cleared 
Transactions Framework in the Regulatory Capital Rules.''
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    \193\ Emphasis in original.
    \194\ CME commented that the proposal would be contrary to the 
Bankruptcy Code's definition of ``member property'' as ``customer 
property received, acquired, or held by or for the account of a 
debtor that is a clearing organization, from or for the proprietary 
account of a customer that is a clearing member of the debtor.''
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    ICE agreed with the Commission's approach not to propose ``that 
property in an insolvent DCO's general estate can be treated as 
customer property where customer property is otherwise insufficient to 
pay customer claims.'' ICE suggested that the Commission clarify ``that 
any ability to use residual assets should be only to the extent such 
assets are not required to be used for any other purpose under other 
applicable law (e.g.[,] for other classes of customers or for other 
products).'' ICE suggested that ``[t]he definition of customer property 
should also respect any express limitations on recourse that have been 
implemented under DCO rules.'' ICE did not believe that the 
distributional preference for public customers over clearing members 
and any non-public customers of clearing members, as established by 
proposed Sec.  190.18, is appropriate in the context of a DCO failure, 
because it could ``impose losses, or greater losses, on non-defaulting 
clearing members in a manner that overrides the negotiated and approved 
frameworks in the DCO's rules.'' ICE asserted that this ``change could 
require fundamental restructuring of DCO operations,'' and should be 
``part of a separate rulemaking that addresses the interaction [of the 
proposal] with the Part 39 requirements.'' ICE also noted that the 
liability caps that limit the overall amount of a clearing member's 
contributions and assessments--and the manner in which they may be used 
for a particular default--are important for the clearing members' risk 
management and are often necessary under such clearing members' capital 
requirements. ICE stated that requiring the use of contributions or 
assessments for purposes other than what is set forth in the DCO's 
rules ``would render such caps and limitations ineffective.'' ICE 
further posited that proposed Sec.  190.18 is ``unworkable for clearing 
houses that have separate guaranty funds for separate products, or 
other limited recourse provisions in their rulebooks [that are used] to 
designate particular default resources for particular products, and to 
ring-fence the liability of clearing members from particular products 
that they may choose not to clear.'' ICE also raised a concern that 
proposed Sec.  190.18's potential subordination of the claims of the 
self-clearing members of a defaulting DCO to customers of other 
clearing members could serve as a ``significant disincentive'' to self-
clearing, sponsored clearing, or direct clearing. ICE commented that 
proposed Sec.  190.18 ``should not be applied to require the use of 
clearing member guarantee fund, margin, or other resources in the 
context of a non-default loss where the rules of the DCO specifically 
do not contemplate (or expressly forbid) the use of such assets for 
such purposes.'' On that issue, ICE noted that many DCOs have sought to 
address separately the allocation of non-default losses through rules 
that ``may allocate certain losses, and not others, to clearing members 
and/or to the clearing organization itself, and/or provide for the 
sharing of certain losses in certain amounts.''
    After considering the comments, the Commission is adopting Sec.  
190.18 with modifications, specifically with respect to paragraphs 
(b)(1) and (c)(1).
    Multiple commenters suggested that the Commission modify Sec.  
190.18(b)(1) to make explicit that customer property includes the 
amounts of its own funds that a debtor DCO had committed as part of its 
loss allocation rules. Given that the DCO's commitment, in DCO rules, 
of a specified amount of its own funds to loss allocation sets a 
market-wide understanding and expectation that such an amount will be 
used for such a purpose, the Commission agrees that this clarification 
is warranted. Therefore, the Commission is modifying Sec.  190.18(b)(1) 
by adding a new paragraph (b)(1)(iv), which will explicitly include in 
customer property: ``Amounts of its own funds that the debtor had 
committed as part of its loss allocation rules, to the extent that such 
amounts have not already been applied under such rules.''
    Multiple commenters addressed proposed Sec.  190.18(c)(1)(i), which 
assigned guarantee funds to customer property other than member 
property (i.e., to the benefit of members' public customers) if and to 
the extent that a shortfall existed in the funded balance for such 
customers. The proposal was supported by ICI, but opposed by CME, FIA, 
and ICE, while the ABA Subcommittee also noted potential issues.
    The Commission separately considered each of the arguments raised 
by the commenters in opposition to proposed Sec.  190.18(c)(1). In the 
discussion below, the Commission reviews the arguments raised by the 
commenters and explains why it is modifying the proposal by not 
adopting proposed Sec.  190.18(c)(1), and renumbering the remaining 
paragraphs of proposed Sec.  190.18(c).
    In response to concerns that the Commission lacks the authority to 
implement this provision, the Commission notes that it has the 
authority under section 20(a)(1) of the CEA to determine, 
``[n]otwithstanding title 11 of the United States Code'' (i.e., the 
Bankruptcy Code) both ``(1) that certain . . . property [including, 
e.g., guarantee fund deposits] [is] to be included in or excluded from 
. . . member property'' and ``(5) how the net equity of a customer is 
to be determined.'' Thus, Sec.  190.18(c)(1) is legally sound because 
of the ``notwithstanding title 11'' clause in section 20 of the CEA.
    Moreover, proposed Sec.  190.18(c)(1) would allocate guarantee fund 
deposits to customer property other than member

[[Page 19381]]

property only where the funded balance is less than one hundred percent 
of net equity claims for members' public customers in an account class, 
i.e., where the DCO had failed to maintain in segregation sufficient 
funds to pay members' public customer account balances in full. In 
other words, in that scenario, the debtor DCO would be non-compliant 
with Commission regulations. This is not a re-writing of the DCO's 
rules,\195\ nor a re-writing of the contract between the DCO and its 
members, nor an undermining of the DCO's ``well-founded, transparent, 
and enforceable legal framework,'' but an allocation of shortfall in a 
bankruptcy case where the DCO is non-compliant with Commission 
regulations.
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    \195\ And, thus, does not require the Commission to invoke or 
follow the procedures of CEA section 8(a)(7).
---------------------------------------------------------------------------

    The use of guarantee funds in the manner specified in proposed 
Sec.  190.18(c)(1) would not be an ``unexpected loss'' to non-
defaulting clearing members, given that the regulation would be 
transparently available to all. To the extent that the consequences of 
the application of the regulation (re-allocation of their default fund 
contributions to cover a shortfall in customer property for members' 
public customers) would be unexpected by clearing members, and 
unpredicted by their risk management systems, it is equally the case 
that the public customers of clearing members would be surprised by a 
shortfall in customer property, which their risk management systems 
would also see as unexpected.\196\ Thus, the choice is not simply 
whether to impose an unexpected loss to clearing members or not, but 
rather a choice of who should bear that unexpected loss, clearing 
members (as a group) or their customers (as a group). To that point, in 
addition to the statutory authority that is provided in the CEA, the 
Commission agrees with the comment from ICI that Sec.  190.18(c)(1) 
would further the policy goal--stated in section 766(h) of the 
Bankruptcy Code, but also running throughout the Commission's approach 
to part 190--of prioritizing the claims of public customers over the 
claims of non-public customers.
---------------------------------------------------------------------------

    \196\ Indeed, the risk would be even more unexpected by public 
customers: Clearing members are entirely aware that their default 
fund contributions are at risk of use to cover a mutualized default. 
Their customers, on the other hand, expect that their customer funds 
are fully protected by the CEA's and the Commission's segregation 
requirements.
---------------------------------------------------------------------------

    However, despite the foregoing analysis supporting adoption of 
Sec.  190.18(c)(1), the Commission is concerned about bank regulators' 
potential analysis of Sec.  190.08(c)(1). In particular, the Commission 
has considered that bank regulators may conclude that, because Sec.  
190.08(c)(1) directs the use of DCO default funds for reasons other 
than addressing mutualized member defaults, member contributions to DCO 
default funds do not fit within the definition (in bank capital 
regulations) of ``default fund contribution,'' see, e.g., 12 CFR 217.2. 
Specifically, such member contributions may not constitute ``funds 
contributed or commitments made by a clearing member to a CCP's 
mutualized loss sharing arrangement,'' see, e.g., id. If this were the 
case, members' default fund contributions would be subject to more 
onerous capital treatment than they would receive if such contributions 
did fit within the definition of ``default fund contributions.'' \197\ 
That more onerous capital treatment would have a direct, negative 
impact on normal day-to-day activities for bank-affiliated clearing 
members, and not merely in the uncertain future event of a DCO 
bankruptcy. In other words, as discussed further below in section 
III.D.8, while the benefits to public customers of Sec.  190.18(c)(1) 
in case of bankruptcy would be balanced by the costs to clearing 
members, the present-day costs to (bank-affiliated) clearing members of 
more onerous capital treatment would not be offset by significant 
benefits to public customers.
---------------------------------------------------------------------------

    \197\ That treatment could be significantly more onerous: For 
example, under the FDIC's regulations, the capital requirement for a 
clearing member's prefunded default fund contribution to a 
qualifying CCP can be as low as 0.16% of that default fund 
contribution. See 12 CFR 324.133(d)(4). By contrast, the capital 
requirement for a clearing member's prefunded default fund 
contribution to a non-qualifying CCP is 100% of that default fund 
contribution. See 12 CFR 324.10(a)(1)(iii), (b)(3) (requiring 
capital of 8% of risk-weighted asset amount, 324.133(d)(2) (setting 
risk-weighted asset amount for default fund contributions to non-
qualifying CCP at 1,250% of the contribution). (1,250% * 8% = 100%). 
The Federal Reserve and Office of the Comptroller of the Currency 
have similar regulations.
    Default fund contributions to DCOs total many billions of 
dollars. While not all default fund contributions to DCOs come from 
bank-affiliated clearing members, the majority of them do.
---------------------------------------------------------------------------

    The Commission acknowledges that the decision not to adopt proposed 
Sec.  190.18(c)(1) differs from the Commission's approach to Sec.  
190.17(b)(1). In Sec.  190.17(b)(1), uncalled or unmet assessments 
would be applied to address default losses, with the only difference 
being the timing of the bankruptcy relative to the timing of the calls 
for, or payment of, the assessments. In short, the Commission concludes 
in that context that the default fund contributions would be treated as 
such for bank capital purposes, and thus would not be subject to more 
onerous capital treatment. In contrast, proposed Sec.  190.18(c)(1) 
would apply guarantee funds to cases that are distinct from a member 
default. As discussed above, it seems entirely plausible that doing so 
would take such contributions outside of the definition (in bank 
capital regulations) of ``default fund contribution,'' and thus subject 
them to more onerous capital treatment. The Commission believes that 
this distinction is significant and forms the basis for the difference 
in the Commission's respective approaches to Sec.  190.17(b)(1) and 
proposed Sec.  190.18(c)(1).
    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is adopting Sec.  190.18 as 
proposed, with the following modifications, as set forth above: (1) 
Adding new paragraph (b)(1)(iv), as described above; and (2) by 
removing paragraph (c)(1) and renumbering the remaining paragraphs of 
paragraph (c).
9. Regulation Sec.  190.19: Support of Daily Settlement
    The Commission is adopting Sec.  190.19 as proposed, with a 
modification to paragraph (b)(1), as discussed below.
    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.'' \198\ Indeed, 
Congress confirmed this by requiring that each DCO complete money 
settlements not less frequently than once each business day.\199\
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    \198\ 76 FR 3608, 3708 (Jan. 11, 2011).
    \199\ See Core Principle E(i), 7 U.S.C. 7a-1(c)(2)(E)(i).
---------------------------------------------------------------------------

    In the ordinary course of business, variation settlement payments 
are, at a set time or times each day,\200\ 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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    \200\ 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).
---------------------------------------------------------------------------

    There is no necessary relationship between the aggregate amount of 
payments to the DCO from all clearing

[[Page 19382]]

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.\201\ 
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.\202\ 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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    \201\ 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.
    \202\ 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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    The Commission believes that 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.
    The Commission is adopting Sec.  190.19(a), pursuant to section 
20(a)(1) of the CEA,\203\ to provide that, upon and after an order for 
relief, variation settlement funds shall be included in the customer 
property of the DCO, and that they shall be considered traceable to--
and shall promptly be distributed to--member and customer accounts 
entitled to payment with respect to the same daily settlement.\204\ 
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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    \203\ 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 of the 
United States Code, by rule or regulation . . . that certain cash, 
securities, other property, or commodity contracts are to be 
included in or excluded from customer property or member 
property.'').
    \204\ Because deposits of initial margin described in Sec.  
39.14(a)(1)(iii) are separate from the variation settlement process, 
they are treated separately in 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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    The Commission is adopting Sec.  190.19(b) to address cases where 
there is a shortfall in funds received pursuant to paragraph (a) (i.e., 
settlement payments received by the DCO), such as in the case of a 
member default. Paragraph (b)(1) sets forth how such a shortfall shall 
be supplemented, to the extent necessary, and further states that such 
funds shall be allocated in the same proportion as referred to in 
paragraph (a). Paragraph (b)(1) provides that four types of property 
shall 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; \205\ (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 paragraph (a) (i.e., the debtor DCO's 
``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 debtor DCO's default rules and procedures. 
Paragraph (b)(2) provides 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.
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    \205\ This is 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 of the Commission's regulations, which include 
provisions restricting the use of customer margin.
---------------------------------------------------------------------------

    The Commission requested comment with respect to all aspects of 
proposed Sec.  190.19.
    CME expressed support for proposed Sec.  190.19, commenting that 
the provisions in the proposal ``are appropriate to support the daily 
settlement cycle when the trustee obtains the Commission's approval to 
continue operating the DCO.'' FIA commented that it did not support 
proposed Sec.  190.19(b), stating that the provision's reliance on a 
debtor DCO's recovery and wind-down plans post-bankruptcy would be 
inappropriate.\206\ SIFMA AMG/MFA requested that the Commission modify 
proposed Sec.  190.19(b)(1) to clarify the Commission's presumed intent 
that ``the debtor's recovery and wind-down plans shall only apply with 
respect to proposed Sec.  190.19(b)(1)(ii)--the debtor's ``skin in the 
game'' [(i.e., its own capital contributions)]--and not with respect to 
the other'' categories of customer property that are enumerated in 
Sec.  190.19(b)(1). The Commission agrees that its intent should be 
clarified to reflect the comment from SIFMA AMG/MFA,\207\ and is 
modifying the language of Sec.  190.19 to reflect that clarification.
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    \206\ FIA's concerns with the language in Sec.  190.19(b) are 
the same as its concerns with Sec.  190.15(b) and (c), discussed in 
greater detail above. See supra section II.C.5. However, for the 
reasons noted in section II.C.5, the Commission believes that 
providing a ``menu of options'' among which a trustee may select 
(and adapt) in a manner that is ``reasonable and practicable'' would 
provide the trustee with a helpful roadmap to determine strategy and 
tactics, given that the trustee will likely face a complex and 
difficult situation with little preparation.
    \207\ As SIFMA AMG/MFA correctly suggested, the Commission 
intends for the debtor DCO's recovery and wind-down plans to apply 
to the property described in Sec.  190.19(b)(1)(ii), and not to the 
property described in paragraph (b)(1)(i), (iii) or (iv), in the 
manner and to the extent described in paragraph (b)(1). As noted in 
the preamble to the proposal, and as found in the regulation itself, 
Sec.  190.19(b)(1)(ii) contains an explicit reference to ``recovery 
and wind-down plans,'' whereas Sec.  190.19(b)(1)(i), (iii) and (iv) 
do not contain such references.
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    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is adopting Sec.  190.19 as 
proposed, with a modification to clarify that the reference to the 
debtor's recovery and wind-down plans in paragraph (b)(1) applies only 
to paragraph (b)(1)(ii), as set forth above.

D. Appendix A Forms

    The Commission is deleting forms 1 through 3 contained in appendix 
A and is replacing form 4 with a streamlined proof of claim form. 
Current forms 1 through 3 contain outdated provisions that require 
unnecessary information to be collected. The Commission believes these 
changes will provide a trustee with flexibility to act based on the 
specific circumstances of the case, while still acting consistently 
with the rules.
    As noted in Sec.  190.03(f), the trustee will be permitted, but not 
required, to use the revised template proof of claim form included as 
new appendix A. That

[[Page 19383]]

template is intended to implement Sec.  190.03(e), and includes cross-
references to the detailed paragraphs of that section. Similarly, the 
instructions for this template form that are included in appendix A are 
also 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 received one comment with respect to appendix A, 
from CME, which opined that ``the proposed template proof of claim form 
included as Appendix A [is a] major improvement[ ] over the current . . 
. proof of claim template. CME also support[ed] giving the trustee the 
flexibility to tailor the proof of claim form to request information of 
customers as appropriate under the circumstances.''
    Accordingly, after consideration of this comment, and for the 
reasons stated above, appendix A to part 190 will be adopted as 
proposed.

E. Appendix B Forms

    Appendix B to part 190 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.
    The Commission proposed clarifying changes to framework 1. No 
comments were received with respect to framework 1. Accordingly, and 
for the reasons stated above, the Commission is adopting appendix B, 
framework 1 as proposed.
    The Commission proposed to retain framework 2 with some clarifying 
changes to the opening paragraph, but without proposing any substantive 
change. It proposed to retain the current instructions and examples 
following the first paragraph in appendix B, framework 2 entirely 
unchanged. It requested comment with respect to framework 2. The 
Commission received two comments on framework 2: From the ABA 
Subcommittee, and from a number of individual members of that 
subcommittee writing on their own behalf.
    The ABA Subcommittee expressed the concern that ``[f]ramework 2 
creates some ambiguity on when and how the special distribution 
framework it prescribes should apply.'' First, the ABA Subcommittee 
stated that ``framework 2 could be read to apply whenever there is a 
loss resulting from a sovereign action, even if there is sufficient 
customer property to otherwise pay all customer net equity claims in 
full.'' The ABA Subcommittee suggested that an additional sentence be 
added to the opening paragraph of framework 2 clarifying that it 
applies only when there is a loss due to sovereign action and there is 
insufficient customer property to pay all customer net equity claims in 
full. Second, the ABA Subcommittee (in conjunction with a clarifying 
comment from the Subcommittee Members) noted that framework 2 uses the 
term ``reduction in claims'' in a potentially confusing manner--
framework 2 is intended to reduce distributions allocated to those 
customers who are allocated losses due to sovereign risk; those 
customers claims are not reduced. If the sovereign action is later 
reversed or modified, those customers whose distributions were reduced 
will receive increased distributions on their claims.
    Third, the existing instructions to framework 2 ``establish the 
`Final Net Equity Determination Date' as the date for both converting 
customer claims to U.S. dollars and determining the amount of the 
Sovereign Loss.'' However, in prior bankruptcies of FCM/commodity 
brokers, ``claims stated in foreign currencies were either valued on 
the date of transfer (where porting was available), or converted to 
U.S. dollars as of either as of the petition date or the date on which 
the foreign currency reflected in the customer's account was liquidated 
(and thus the customer bore the risk of interim currency 
fluctuations).'' Furthermore, ``a sovereign action could take place at 
any time after the petition date, and the trustee is required to make 
funded balance calculations throughout the course of the bankruptcy 
case for purposes of porting and/or making interim distributions.''
    The Commission finds the comments on framework 2 of the ABA 
Subcommittee, as clarified by the comment of the Subcommittee Members, 
persuasive. First, framework 2 is indeed only intended to address cases 
where there is insufficient customer property to pay all customer net 
equity claims in the relevant account class in full (if there is no 
shortfall, then there is no need to allocate losses), and that point 
should be made clear. Second, it is correct that framework 2 is 
intended to reduce distributions, it is not intended to reduce claims, 
and it is indeed appropriate to change the language used in framework 2 
to clarify this fact.\208\ Third, the relevant date is the date of the 
calculation, not the ``Final Net Equity Determination Date,'' and this 
should be clarified as well.
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    \208\ The fact that sovereign action reduces distributions 
rather than claims means that, if the sovereign action is later 
reversed or modified (e.g., by appeal in the foreign courts, or due 
to recovery of assets in the foreign insolvency proceeding) 
resulting in reduced losses due to sovereign action in a particular 
jurisdiction, those customers whose distributions have been reduced 
due to sovereign action in that jurisdiction will receive increased 
distributions on their claims (with those distributions adjusted to 
reflect the revised amount of losses due to sovereign action). Thus, 
in this case, the claims remain constant, while the distributions 
increase.
---------------------------------------------------------------------------

    Accordingly, the Commission is:
    (1) Modifying the first paragraph of framework 2 to include the 
statement that: ``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, and a 
sovereign action of a foreign government or court has occurred that 
contributes to shortfalls in the amounts of futures customer funds or 
Cleared Swaps Customer Collateral, the trustee shall use the following 
allocation procedures'' (emphasis added solely for illustration).
    (2) Amending the instructions and examples within the whole of 
framework 2 to replace references to ``reduction in claims'' with 
references to ``reduction in distributions,'' and with conforming 
changes to other text.
    (3) Deleting the phrase ``Final Net Equity Determination Date'' 
from current section II.B.2.b of framework 2, and replacing it with the 
phrase ``date of the calculation.''
    Accordingly, after consideration of the comments, and for the 
reasons stated above, the Commission is adopting appendix B, framework 
2 as proposed, with the modifications described above.

F. Technical Corrections to Other Parts

1. Part 1
    The Commission is making as proposed 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 will revise the 
cross-reference to specifically identifiable property, since the 
definition will be updated in Sec.  190.01.
     In Sec.  1.55(d) introductory text and (d)(1) and (2), 
references to current Sec.  190.06 will be removed consistent

[[Page 19384]]

with the revisions to new Sec.  1.41 (which was proposed as Sec.  
190.10(b) and renumbered).
     In Sec. Sec.  1.55(f) and 1.65(a)(3) introductory text and 
(a)(3)(iii) the Commission will update references to the customer 
acknowledgment in Sec.  1.55(p) (which was proposed as Sec.  190.10(e) 
and renumbered).
2. Part 4
    In part 4, the Commission is making as proposed 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 will change the cross-references to 
the defined term for ``in-the-money-amount.''
3. Part 41
    In part 41, the Commission is making as proposed one technical 
correction. In Sec.  41.41(d), the Commission will delete the cross-
reference to the recordkeeping obligations in current Sec.  190.06, 
pursuant to the revisions to Sec.  1.41 (which was proposed as Sec.  
190.10(b) and renumbered).
    No comments were received with any of these technical corrections 
and accordingly, for the reasons stated above, they are being adopted 
as proposed.

G. Additional Comments

    In addition to the comments discussed above, the Commission 
received several general comments that addressed matters outside the 
scope of the Proposal. The Commission appreciates the additional 
feedback. Because these comments do not address proposed changes and 
are therefore outside the scope of this rulemaking, the Commission may 
take the comments under advisement for future rulemakings.
    ISDA encouraged the Commission to continue working on DCO recovery 
and resolution issues alongside the Federal Deposit Insurance 
Corporation (FDIC) in the United States, and with global standard 
setters such as CPMI-IOSCO and the Financial Stability Board and other 
CCP supervisors and resolution authorities internationally. The 
Commission notes that staff are actively doing each of those things.
    ISDA also noted that it would be advisable to engage in workshops 
with both market participants (including DCOs, FCMs and other clearing 
members and customers) and the FDIC prior to finalizing the Proposal to 
develop examples that illustrate both how net equity claims would be 
calculated in a hypothetical DCO insolvency under various loss 
scenarios and how the claims of creditors and equity would be treated 
in a resolution of the DCO under Title II of the Dodd-Frank Act. ISDA 
observed that the Proposal's treatment of a DCO's insolvency contains 
significant subtleties and nuances that could have implications for the 
counterfactual in a DCO resolution. ISDA suggested that further 
engagement could help ensure that these subtleties and nuances would 
not result in any unintended consequences, and that they are broadly 
understood by all entities that could be impacted by a DCO's insolvency 
or resolution.
    While the Commission is finalizing the Proposal, it agrees that 
workshops and similar interactions between staff and other agencies, as 
well as with industry participants, are an excellent way to expose 
subtleties and nuances, build common understanding, and enhance 
planning.
    CME and CMC commented on various issues relating to delivery, and 
requested that ``the Commission consider, in a separate rulemaking, the 
merits of imposing custody requirements or other customer protection 
requirements with respect to delivery accounts, along with the 
possibility of further subdividing delivery accounts and delivery 
account classes by underlying asset class or delivery mechanism, e.g., 
electronic transfer versus physical load-out.'' \209\ CME recommended 
that the separate rulemaking consider requirements such as whether FCMs 
should hold such property in custody accounts or limitations on how 
long cash or cash equivalents should be held in delivery accounts that 
are not subject to custody requirements.\210\ CME believed that any 
such rules would fit best in the Commission's part 1 regulations and 
not in part 190 as parties with delivery obligations may not 
necessarily be aware of requirements in the bankruptcy regulations. CME 
recommended that the part 190 provisions relating to the delivery 
account class should be consistent with any such rules the Commission 
may ultimately adopt. Thus, CME believed that the Commission may have 
to revisit the delivery account class definition, and any appropriate 
subdivisions within the account class, along with the definitions of 
cash delivery property and physical delivery property definitions, 
based on the outcome of such a rulemaking.
---------------------------------------------------------------------------

    \209\ See CMC, CME.
    \210\ See CME. CME believed that the Commission has authority to 
adopt such a rule pursuant to its anti-fraud authority under CEA 
section 4b and its plenary authority to regulate commodity options 
under CEA section 4c(b).
---------------------------------------------------------------------------

    As noted above, the Commission recognizes the importance of 
addressing deliveries and delivery accounts, in order to protect 
customer funds in delivery accounts, to avoid disruptions to cash 
markets for delivered commodities, and to avoid adverse consequences to 
parties that may be relying on delivery taking place in connection with 
their business operations. The Commission notes that there potentially 
would be benefits to requiring segregation for delivery accounts, but 
there would be corresponding costs as well. The Commission expects to 
continue its consideration of such delivery and delivery account issues 
in the future.
    SIMFA AMG/MFA understood the Commission's decision, due to limited 
resources, not to amend certain key definitions and concepts outside 
part 190, as proposed by the ABA Subcommittee in its model set of part 
190 rules, within this rulemaking. These amendments include, e.g., the 
definitions of foreign option and variation margin, as well as 
regulations concerning non-swap and non-futures over-the-counter 
transactions cleared by a DCO and concerning leverage transaction 
merchants. However, SIFMA AMG/MFA recommended that the Commission make 
these amendments as soon as possible, given the beneficial impact such 
changes will have on the administration of an FCM or DCO insolvency. 
The Commission may consider these proposed changes in the future.
    ICI and Vanguard encouraged the Commission to work with other 
regulators to minimize existing barriers to porting, particularly for 
FCMs dually registered as broker-dealers, FCMs within consolidated 
groups that are subject to certain due diligence requirements, and FCMs 
that are subject to the FDIC's Orderly Liquidation Authority 
proceedings. The commenters encouraged the Commission to work with 
regulators to permit similar six-month grace periods and remove the 
requirement to port ``all or none'' of the positions instead of 
allowing partial transfers of customer positions, including those of 
separately managed accounts.
    ICI also recommended that the Commission engage with SIPC or the 
relevant bankruptcy court to ensure that any selected trustee has the 
experience and knowledge to act in accordance with the duties contained 
in part 190 and Subchapter IV of the Bankruptcy Code.
    Commission staff have and will continue to work with staff of other 
regulators to minimize barriers to

[[Page 19385]]

porting, and have worked and will, if and when necessary in future, 
work with SIPC and the office of the U.S. Trustee, to promote the 
appointment of the most knowledgeable trustees available in the context 
of SIPA or Chapter 7 proceedings, respectively, involving a commodity 
broker.
    ICI recommended that the Commission continue its portfolio 
margining harmonization efforts with the SEC to further facilitate 
portfolio margining, including with respect to security-based swaps and 
swaps. The Commission notes that the two Commissions are actively 
engaging in such efforts, and, on October 22, 2020, held a joint 
meeting during which they jointly approved a ``Request for Comment: 
Portfolio Margining of Uncleared Swaps and Non-Cleared Security-Based 
Swaps.'' \211\
---------------------------------------------------------------------------

    \211\ 85 FR 70536 (November 5, 2020).
---------------------------------------------------------------------------

    ICI and Vanguard recommended that the Commission extend the 
``legally segregated operationally commingled'' (``LSOC'') model 
applied to cleared swaps contracts (and associated collateral) within 
part 22 to also apply to futures, foreign futures, and options thereon 
(and associated collateral) to limit non-defaulting customer exposure 
to defaulting customers.
    ICI also requested that the Commission or Commission staff provide 
guidance, such as an interpretive letter, that interprets part 22 to 
require that OTC transactions cleared by DCOs and carried in a cleared 
swaps account be treated as cleared swaps subject to part 22.\212\
---------------------------------------------------------------------------

    \212\ Such an interpretation may be superfluous. Previously, the 
Commission issued an ``Interpretative Statement Regarding Funds 
Related to Cleared-Only Contracts Determined To Be Included in a 
Customer's Net Equity.'' 73 FR 57235 (October 2, 2008). At the time, 
prior to Dodd-Frank, there were questions as to whether cleared-only 
transactions were commodity contracts. The Commission noted that, in 
cases where such contracts are held in a futures account at an FCM 
and margined as a portfolio with exchange-traded futures, assets 
margining that portfolio are likely to be includable within ``net 
equity'' even if such contracts were found not to be commodity 
contracts: Where the assets in an entity's account collateralize a 
portfolio containing both commodity contracts and other contracts, 
the entirety of those serves as performance bond for each type of 
contracts. See id. at 57236. See also 17 CFR 22.1 (defining 
``Cleared Swaps Customer Collateral,'' in relevant part, as all 
property that ``[i]s intended to or does margin, guarantee, or 
secure a Cleared Swap . . . .'').
---------------------------------------------------------------------------

    ICI and Vanguard recommended that the Commission prohibit non-
defaulting customer gains haircutting, or any other margin haircutting, 
and if such gains haircutting is allowed at all, it should be limited 
in scope and duration, overseen by the DCO's resolution authority and/
or the systemic risk authority, and the customer must receive full 
compensation in the form of a credit or equity claim against the DCO, 
superior to that of other creditors.
    ICI and Vanguard also requested that the Commission require DCOs to 
increase their ``skin-in-the-game'' as a foundational incentive for the 
DCO to set appropriate margin levels and avoid clearing illiquid or 
highly volatile products. Vanguard also recommended that a DCO's 
capital should be required to backstop clearing risk, should the assets 
available for DCO recovery prove inadequate.
    FIA requested that the Commission confirm that amendments to part 
190, including to appendix B, framework 2, would not prohibit the 
Commission from amending Sec.  1.49 at a later date to expand the 
definition of ``money center currency.''
    The Commission confirms that the amendments to part 190 that are 
being made herein will not prohibit the Commission from amending any 
other regulation, including Sec.  1.49, in the future. If future 
amendments to other parts of the Commission's regulations lead to a 
situation where it would be advisable to make conforming changes to 
part 190, the Commission will consider such conforming changes along 
with those amendments.

H. Supplemental Proposal

    In the Supplemental Proposal, the Commission noted a problem to be 
solved: There is a possibility that a SIDCO could file for bankruptcy 
before the process for placing that SIDCO into Title II resolution is 
complete. Due to closeout netting rules adopted by many DCOs, including 
the SIDCOs, that filing could have the consequence of terminating all 
of the SIDCO's cleared contracts. Terminating those contracts could 
undermine the success of any subsequent Title II resolution.
    The Supplemental Proposal suggested one approach to solve the 
problem, and requested comment, inter alia, on better ways to do so. In 
light of concerns raised in the comments received in response to the 
Supplemental Proposal, and for reasons discussed below, the Commission 
has determined not to finalize the alternative that was proposed in the 
Supplemental Proposal.
    The process for placing a financial company into Title II 
Resolution is deliberate and intricate.\213\ By contrast, a voluntary 
petition in bankruptcy commences the case, which in turn constitutes an 
order for relief. 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. While the appointment of the 
FDIC as receiver under Title II would automatically result in the 
dismissal of the prior bankruptcy, if the bankruptcy filing were to 
necessarily 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.
---------------------------------------------------------------------------

    \213\ 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. 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. (The FDIC, Federal Reserve, and Secretary of the 
Treasury are often referred to as the ``key turners'' for Title II 
resolution). 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.
---------------------------------------------------------------------------

    To address the problem, the Commission proposed, in the 
Supplemental Proposal, to adopt a provision that would stay the 
termination of SIDCO contracts for a brief time after bankruptcy in 
order to provide advance notice to the Commission (and, thus, to enable 
the Commission to notify the key turners) of the point at which the 
SIDCO's contracts could be terminated, in order to foster the success 
of a Title II resolution by avoiding that termination, if the FDIC is 
appointed receiver in such a Resolution within that time. During this 
stay, variation margin would neither be collected nor paid. Due to 
concerns raised by commenters to the original Proposal regarding the 
effect of any restriction on termination of DCO contracts on treatment, 
under the capital regulations of Prudential Regulators of the banks 
that many clearing members are affiliated with, of SIDCO rules, the 
proposal provided that this provision would become effective only if 
the Commission were to find that the Prudential Regulators (i.e., the 
Federal Reserve, the FDIC, and the Office of the Comptroller of the 
Currency) have taken steps to make such a stay consistent with SIDCO 
rules retaining status as QMNAs.\214\
---------------------------------------------------------------------------

    \214\ Any stay (in bankruptcy) on the termination of the SIDCO's 
derivatives contracts would--under the regulations of the Prudential 
Regulators of the banks and bank holding companies that SIDCO 
clearing members may be affiliated with or part of--be inconsistent 
with the status of a DCO's rules as a qualifying master netting 
agreement (``QMNA''). Qualification of DCO rules as a QMNA is 
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. If they cannot net such exposures, 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. See generally 
Supplemental Proposal, 85 FR 60110, 60112 (Sept. 24, 2020).

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[[Page 19386]]

    The Commission requested comment on all aspects of the Supplemental 
Proposal, including as to whether the approach proposed ``is the best 
design for such a solution.''
    The Commission received five comments on the Supplemental Proposal, 
each of which was from an entity that commented on the Proposal.\215\
---------------------------------------------------------------------------

    \215\ Comments on the Supplemental Proposal were submitted by: 
CME Group Inc. (``CME (2)''); Futures Industry Association (``FIA 
(2)''); Intercontinental Exchange Inc. (``ICE (2)''); Investment 
Company Institute (``ICI (2)''), and Securities Industry and 
Financial Markets Asset Management Group and Managed Funds 
Association (``SIFMA AMG/MFA (2)'').
---------------------------------------------------------------------------

    Many of the commenters argued that the proposed stay is 
unnecessary, because the Commission would inevitably have received 
notice of the impending bankruptcy. For instance, ICI (2) commented 
that:

    Although it may indeed take some time for the relevant agencies 
to ``turn the three keys,'' a DCO's recovery tools should give the 
agencies more than enough time. DCOs have clearing fund provisions, 
operational default provisions, and a variety of other risk 
management tools at their disposal. In practice, these tools may not 
be completely effective to preclude an insolvency. However, it seems 
extraordinarily unlikely that they would be so ineffective as to 
fail to give the FDIC, Federal Reserve Board, and Secretary of the 
Treasury enough time to decide whether to trigger OLA proceedings.

    Similarly, SIFMA AMG/MFA (2) stated that ``the possibility of a 
surprise bankruptcy filing [is] implausible given the regulatory 
oversight framework.''
    FIA (2) agreed, stating that:

    A determination with regard to invoking Title II will almost 
certainly be made before a SIDCO is subject to an order for relief. 
. . . [W]e fully anticipate that the Commission, the FRB, the FDIC, 
and the Department of the Treasury will be making an assessment 
regarding the necessity and feasibility of recommending that the 
President invoke Title II and taking appropriate action before the 
SIDCO concludes that it must file a petition for bankruptcy.

    CME (2) argued that:

under the CEA oversight framework, including a SIDCO's reporting 
obligations, surely it is reasonable to expect that the Commission, 
FDIC, FRB and Treasury will be well aware of any circumstances that 
could portend a SIDCO's failure, whatever the cause, and will be 
closely monitoring the situation. If the relevant parties are 
contemplating placing the SIDCO into a Title II resolution 
proceeding, and doing so is feasible, it is hard to imagine that a 
SIDCO could file a voluntary petition for relief under subchapter IV 
of Chapter 7 of the Bankruptcy Code without their prior knowledge.

* * *
    In the highly unlike event a SIDCO were to face a decision 
whether to file for bankruptcy, it would be one of last resort, 
taken only after careful deliberation. The decision to file a 
voluntary petition for relief is certainly not one that CME, or any 
DCO, would take lightly.

    The Commission agrees that, pursuant to the DCO oversight 
framework, including a SIDCO's reporting obligations under Sec.  39.19, 
the Commission would promptly be notified of a DCO's financial 
distress. Upon learning of such distress--whether through notification 
by the DCO or by risk surveillance by Commission staff--the Commission 
and staff would monitor the situation closely, and, in appropriate 
cases, promptly contact and act in coordination with fellow regulators, 
including the Federal Reserve and FDIC (and, as appropriate, the 
Department of the Treasury). Moreover, DCOs have strong and effective 
``clearing fund provisions, operational default provisions, and other 
risk management tools at their disposal,'' as noted in the comment 
letter from ICI (2). The Commission believes it to be ``extraordinarily 
unlikely'' that these tools would fail, let alone fail before the ``key 
turners'' have time to act.
    It is also true that, given prior experience with discussions with 
DCOs concerning defaults of clearing members (none of which resulted in 
financial distress to the DCOs), the Commission fully expects that any 
DCO that is in financial distress would be in close contact with 
Commission staff. The Commission also appreciates the sentiment 
expressed by CME and quoted above, implying that ``it is hard to 
imagine'' that a SIDCO would not provide the Commission with prior 
knowledge of a voluntary bankruptcy filing. Finally, the Commission is 
confident that the decision to file a voluntary petition for relief in 
bankruptcy is ``not one that . . . any DCO would take lightly.''
    Nevertheless, given the destructive impact that termination of the 
derivatives contracts of a SIDCO would cause, the Commission remains 
concerned about the effects that a bankruptcy filing would have on the 
ability to resolve the SIDCO pursuant to Title II successfully. In this 
context, it is not enough that such an event is ``implausible,'' ``hard 
to imagine,'' or ``extraordinarily unlikely.'' Knowledge of the SIDCO's 
financial distress is distinct from knowledge of the timing of a 
potential bankruptcy filing. While the Commission would most likely be 
aware of the SIDCO's distress, it is at this point not certain that 
there would be clear communication of the SIDCO's intention to file for 
bankruptcy sufficiently in advance that the key turners would have time 
to act.
    As noted in the Supplemental Proposal, the destructive impact of a 
full tear-up of a SIDCO's contracts would be significant. The FSOC has 
found that a significant disruption or failure of either SIDCO 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 each 
SIDCO. A failure or disruption of either SIDCO would likely have a 
significant detrimental effect on the liquidity of the futures and 
options markets (for CME) or swaps markets (for ICC), and on clearing 
members, which include large financial institutions, and other market 
participants. These significant effects would, in turn, likely threaten 
the stability of the broader U.S. financial system.\216\ For those 
reasons, inter alia, the Commission continues to be concerned about 
avoiding a circumstance where the derivatives contracts of a SIDCO are 
irrevocably terminated because the SIDCO files for bankruptcy before a 
process to place that SIDCO into a Title II Resolution.
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    \216\ See 2012 FSOC Annual Report, Appendix A, at 163, 178.
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    However, the comments expressed strong concerns about achieving 
those goals through the use of a bankruptcy stay, especially in light 
of the fact that variation margin would neither be collected nor paid 
during that period.
    The Supplemental Proposal acknowledged that risk levels would 
increase during the stay period. Commenters argued that such increase 
in risk exposures during the stay period would pose unacceptable risks. 
For example, CME (2) stated that ``permitting the accumulation of 
uncovered risk for 48 hours during an extremely volatile time would 
pose a risk to financial stability.'' Similarly, SIFMA AMG/MFA (2) 
warned that the proposed part 190 stay, in conjunction with the Title 
II stay, ``would result in extraordinary market exposures to market 
participants during highly volatile market conditions. The non-payment 
of margin could also result in a multiple day liquidity problem for

[[Page 19387]]

market participants clearing at the SIDCO.''
    The Supplemental Proposal also acknowledged that there is a 
significant cost to the proposed stay, in that ``[f]or 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.'' Again, commenters 
agreed that this cost would ensue, and argued that it would be 
unacceptable. For example, ICI (2) observed that during the stay:

the price of the relevant underlying assets could (and if a SIDCO is 
insolvent, likely would) move dramatically. However, customers would 
be precluded from entering into risk-reducing or replacement 
transactions to stem potential losses, since they will not know 
whether their contracts will be terminated or reinstated. Such a 
freeze not only threatens to cause public customers significant 
losses that they cannot mitigate; it would also create a liquidity 
event because customers will need to preserve as much liquidity as 
possible during the pendency of the stay in order to meet potential 
margin calls.

    Commenters also raised issues relating to legal uncertainty. For 
instance, FIA (2) acknowledged that section 20 ``authorizes the 
Commission to adopt rules `[n]otwithstanding title 11 of the United 
States Code' '' (i.e., the Bankruptcy Code). However, FIA observed that 
``[w]hether a stay contemplated under the Supplemental Proposal would 
conflict with section 404(a) of FDICIA . . . is unclear.''
    In light of the persuasive arguments of the commenters, the 
Commission concludes that a bankruptcy stay is not an appropriate means 
of achieving the goal of fostering the success of a Title II Resolution 
by avoiding the possibility that the SIDCO could file for bankruptcy 
before a process to place that SIDCO into a Title II Resolution would 
have completed with the result that all of the SIDCO's contracts were 
terminated. This would be true even if action was taken by the 
Prudential Regulators to avoid having such a stay undermine the QMNA 
status of SIDCO rules. Thus, while the goal remains important, the 
Commission will not adopt such a stay.
    A number of the comments answered the Commission's call for a 
better way of achieving that goal. SIFMA AMG/MFA(II) stated that ``[a]s 
an alternative to the proposed stay, the Commission could require, as 
part of its Part 39 or Part 190 rules, that a SIDCO provide a 1 or 2 
day notice to the Commission of any bankruptcy petition by a SIDCO. We 
believe this notice requirement would achieve the same goal in a 
materially less detrimental manner.''
    CME (2) suggested the same alternative approach to achieve the same 
regulatory goal, in somewhat more detail. CME (2) urged that the 
Commission should address the problem:

in a more direct manner, consistent with its rulemaking authority. 
For example, the Commission could require a DCO to notify the CFTC 
in advance of its plan to file a voluntary petition for relief under 
subchapter IV of Chapter 7 of the Code, to allow Treasury time to 
determine whether to appoint the FDIC as receiver before the SIDCO 
files its petition. We note that before a commodity broker may file 
a voluntary petition for relief under subchapter IV, its board of 
directors must approve a resolution authorizing the debtor to take 
that step.

    The Commission agrees that the alternative suggested by the 
commenters in response to the Commission's request--providing the 
advance notice sought by the Commission, but before a bankruptcy filing 
rather than thereafter--is one that, as FIA (2) observed, ``deserves 
the Commission's strong consideration.'' It appears that it may achieve 
the regulatory goals specified in the Supplemental Proposal while 
avoiding the concerns raised by the commenters: By providing advance 
notice to the Commission, it appears that it may allow the Commission, 
which will be coordinating with the ``key-turners,'' to advise those 
agencies of the imminence of a bankruptcy filing, and to provide them 
with warning at a time that may be sufficient to enable them to act 
with dispatch to complete the process.
    Because the alternative approach would not involve a post-
bankruptcy stay, it would appear to avoid affecting the QMNA status of 
SIDCO rules (and, thus, would appear not to require any action by the 
Prudential Regulators).\217\ Moreover, because this notice would occur 
in advance of a bankruptcy filing, the suspension of payments and 
collections of variation margin would not occur, and there would appear 
to be no ambiguity concerning the status of the cleared contracts of 
market participants. By avoiding the mechanism of a bankruptcy stay, 
the Commission would also appear to avoid the legal uncertainty issues 
raised by the commenters with respect to that mechanism. Instead, this 
notice approach would appear to be, as noted by CME, well within the 
Commission's rulemaking authority.\218\
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    \217\ This also avoids the issue, raised by ICE (2), that action 
by the Prudential Regulators with respect to QMNA status may not be 
sufficient to address netting issues for non-U.S. clearing members.
    \218\ See, e.g., CEA section 5b(c)(2)(J), 7 U.S.C. 7a-1(c)(2)(J) 
(reporting core principle); CEA section 3(b), 7 U.S.C. 5(b) (purpose 
of the CEA is to ensure the financial integrity of transactions 
subject to the CEA and the avoidance of systemic risk); CEA section 
8a(5), 7 U.S.C. 12a(5) (general rule-making authority).
---------------------------------------------------------------------------

    However, in light of the concerns raised with the previous 
approaches to addressing this problem, both the one advanced in the 
Supplemental Proposal as well as one advanced in the Proposal, the 
Commission concludes that, at this point, it should engage in further 
analysis and development before proposing this, or any other, 
alternative approach. Such further analysis and development might 
better enable the Commission to propose, in detail, a solution that is 
effective, and that mitigates any attendant costs. Thus, the Commission 
will, at present, keep this issue under advisement.

III. 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.\219\ 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'') below.
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    \219\ CEA section 15(a), 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    In the Proposal, the Commission 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 \220\ (``PRA-related costs''), where possible. In situations where 
the Commission was unable to quantify the costs and benefits, the 
Commission 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 was attributable in part to the 
nature of the proposed

[[Page 19388]]

rules. None of the comments identified quantifiable costs or benefits.
---------------------------------------------------------------------------

    \220\ 44 U.S.C. 3501 et seq.
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    In a number of cases, commenters suggested alternative approaches 
or modifications to the proposed provisions. The Commission has 
carefully considered these alternatives and modifications and in a 
number of instances, for reasons discussed in detail above, has adopted 
such alternative approaches or modifications where, in the Commission's 
judgment, the alternative or modified approach is more appropriate to 
accomplish the regulatory objectives. The rationale in these cases was 
discussed in detail above.
1. Baseline
    The baselines for the Commission's consideration of the costs and 
benefits of this 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 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.
2. Overarching Concepts
a. Changes to Structure of Industry
    The Commission is making several revisions to part 190 in order to 
reflect the changes to the structure of the industry since part 190 was 
originally published in 1983. In particular, 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, in part due to 
the advances in technology and the global nature of underlying markets.
    These changes include major structural changes in the financial 
markets, including regulatory reforms following the 2008 financial 
crisis and consequent changes to the structure of the derivatives 
markets, changes in the governance of the market utilities, such as 
DCOs, from non-profit organizations to public companies, and major 
reforms in the banking sector, followed by the creation of large, 
publicly held financial holding companies with different attitudes 
towards risk.
    As a result, several of the changes to part 190 will address these 
changed circumstances. The Commission believes that the revisions in 
proposed part 190 that address the computerized and fast-paced nature 
of the industry will benefit all parties involved in a bankruptcy 
proceeding, since the rules would reflect how the industry actually 
works today and will avoid unnecessary delay to the administration of a 
bankruptcy proceeding.
b. Trustee Discretion
    In several places in revised part 190, the Commission provides 
additional flexibility and discretion to the bankruptcy trustee in 
taking certain actions.\221\ This principles-based approach is in 
contrast to the customer notice procedures in current part 190, which 
are more prescribed and depend on the type of notice being given.
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    \221\ The alternative, to forego providing such flexibility or 
discretion, would invert the benefits and costs discussed below.
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    The Commission has concluded 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. 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.
    Granting the trustee discretion is expected to decrease, though it 
certainly does not eliminate, the number and extent of cases in which 
the trustee will petition the bankruptcy court for formal approval of 
an action. Each formal approval the trustee is required to obtain--
i.e., each time the trustee moves for an order from the bankruptcy 
court authorizing the trustee to take a particular action in a 
particular way--takes significant time and involves significant 
administrative costs--in particular, the time of professionals such as 
attorneys and financial experts to draft legal pleadings and analyses. 
These professionals charge significant hourly fees, and thus their time 
leads to significant administrative costs. As discussed further below, 
administrative costs can be charged against customer property, leading 
to reduced recoveries by public customers.
    Therefore, increased discretion of the trustee will benefit the 
estate by allowing the trustee to make principles-based decisions that 
are uniquely tailored to the facts and circumstances of the particular 
case, rather than compelling the trustee to follow a procrustean 
framework, or requiring the trustee to request formal approval from the 
bankruptcy court or the Commission before implementing those decisions. 
This approach leads to approaches that are better tailored to the 
specifics of the circumstances, reductions in administrative costs 
(leaving more funds available for distribution to public customers and/
or other creditors) and faster distributions of customer property (to 
the benefit of public 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.\222\
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    \222\ As discussed above, see section II.B.2, while the trustee 
has discretion as to how they administer the affairs of the 
bankruptcy estate, a DCO of which that FCM is a member retains its 
rights to act under its rules.
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    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 public customers as a class, or other creditors.\223\ 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 will be mitigated by (1) the high degree of informal 
(and, where necessary, formal) involvement of Commission staff in FCM 
and DCO bankruptcy matters,\224\ and (2) the fact that such discretion 
would not be unbounded and would apply only in particular 
circumstances, as discussed below.
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    \223\ Certain discretionary decisions a trustee may take, for 
example, the frequency with which the trustee provides information.
    \224\ 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.
---------------------------------------------------------------------------

    Moreover, in response to a comment by ICI, and as discussed further 
below, the Commission is adding a clarification in Sec.  190.00 that 
where a provision in part 190 affords the trustee discretion, that 
discretion should be exercised in a manner that the trustee determines 
will best achieve the overarching goal of protecting public customers 
as a class by enhancing recoveries for, and mitigating disruptions to, 
public customers as a class. The Commission is of the view that adding 
this principles-based provision will further clarify the duty of 
trustees in commodity broker bankruptcy proceedings to act in a

[[Page 19389]]

manner that adds benefits, and reduces costs, to public customers as a 
class by, respectively, enhancing their recoveries and mitigating 
disruptions to them.
    However, channeling the trustee's discretion towards protecting 
public customers as a class may well work to the detriment of (and thus 
impose costs upon) individual public customers, or classes of public 
customers, whose interests differ from that of the class in general. 
For example, certain customers may have a particular need for current 
and precise information about their account balances and 
positions.\225\ It is possible (though unlikely) that the trustee might 
determine that it is inordinately costly to do so for a particular 
time, looking at the interests of public customers as a class. Such a 
decision would not be a mistake or malfeasance, though one would expect 
the trustee to endeavor to avoid the necessity for doing so.
---------------------------------------------------------------------------

    \225\ See ICI at 22 (failure of trustee to provide account 
statements or information about funded balances could ``hinder the 
ability of a regulated fund to confirm the existence and value of 
its transactions and associated margin.'')
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    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 already have an opportunity to 
object) and (2) the likelihood that bankruptcy courts would respect the 
Commission's rules granting the trustee discretion, rendering such 
litigation less likely to succeed, and quicker to resolve. Litigation 
that is less likely to succeed is less likely to be brought, and 
litigation that is quicker to resolve is likely to cost less. Thus, by 
granting the trustee discretion, the Commission mitigates the cost of 
such litigation.
    Instances where the revisions to proposed part 190 will afford more 
flexibility or discretion to the bankruptcy trustee are discussed in 
further detail where they appear in each provision below.
c. Cost Effectiveness and Promptness Versus Precision
    In revising part 190, the Commission has endeavored 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. As a 
result of the policy choice made by Congress in section 766(h) of the 
Bankruptcy Code, part 190 proceeds from the principle 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 public 
customers as part of a class) than it is to value each customer's 
entitlements on an individual basis. The revisions to part 190 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. However, in response to ICI's comment, the Commission 
has clarified that where the trustee is directed to exercise 
``reasonable efforts'' to meet a standard, those efforts should only be 
less than ``best efforts'' to the extent that the trustee determines 
that such an approach would support the goal of protecting public 
customers by enhancing recoveries for, and mitigating disruptions to, 
public customers as a class.\226\ Thus, the Commission recognizes that 
there are limits to the extent to which cost effectiveness and 
promptness will be favored over precision as discretion must be 
exercised in furtherance of the overarching goal of protecting the 
interests of public customers as a class.
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    \226\ See comparison of best efforts to reasonable efforts in 
section II.A.1 above.
---------------------------------------------------------------------------

    The Commission believes that these revisions favoring cost 
effectiveness and promptness over precision further the policy embodied 
in section 766(h) of the Bankruptcy Code and benefit parties involved 
in a bankruptcy proceeding overall, in that they will in general lead 
to: (1) A faster administration of the proceeding; (2) public 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 public customers in that they may lose out on being treated 
precisely in terms of their individual circumstances (and, for example, 
may receive a smaller distribution of customer property than 
otherwise).
d. Unique Nature of Bankruptcy Events
    The Commission recognizes in revised 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 is 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, address the uniqueness of these bankruptcy events and 
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.\227\ History has shown that FCM bankruptcies play out in very 
different ways, and several of the Commission's revisions to part 190 
address that reality. These new provisions reflect the fact that each 
FCM and DCO bankruptcy presents individual circumstances, and that the 
proof of claim form will likely have to be modified to fit the unique 
facts and circumstances of each case. The Commission believes that the 
revisions of this type will 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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    \227\ 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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    However, by providing for a bespoke tailoring of the approach to 
commodity broker bankruptcy, the Commission inherently provides less 
transparency, and thus less certainty, of the particulars of the 
approach that will be followed.
e. Administrative Costs are Costs to the Estate, and Often to the 
Customers
    In many instances in this adopting release, the Commission is 
noting that a certain provision will impose or reduce administrative 
costs, that is, the actual and necessary costs of preserving the 
bankruptcy estate and administering the case. In each of these cases, 
administrative costs will be a cost to the estate of the debtor, since 
administrative expenses that the bankruptcy trustee incurs in 
administering the estate (including for the time of the trustee, 
accountants, counsel, consultants, etc.) \228\ will be passed onto the 
estate

[[Page 19390]]

itself. This means that, in the event of a shortfall, such costs will 
ultimately be borne by the public customers of the debtor, who will 
receive smaller dividends on their claims as the value of the debtor's 
estate decreases.\229\ By a parity of reasoning, reducing such 
administrative costs will reduce the shortfall, and increase recoveries 
by public customers.
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    \228\ Pursuant to section 503(b)(1) of the Code, administrative 
costs include the actual, necessary costs and expenses of preserving 
the estate; and pursuant to section 330(a)(1)(A) of the Code, the 
Court may award ``reasonable compensation for actual, necessary 
services rendered by the trustee . . . professional person, or 
attorney . . . .'' Factors that are considered in determining 
``reasonable compensation'' include the time spent on the services, 
the rates charged, the customary compensation charged by comparably 
skilled practitioners, and whether the services were necessary to 
the administration of the case. See generally 11 U.S.C. 330(a)(3).
    \229\ While such costs may 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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    To be sure, the actions taken to achieve these cost efficiencies 
that enhance the value of the estate for public customers as a whole 
may impose costs on individual public customers.
f. Preference for Public Customers Over Non-Public Customers and for 
Both Over General Creditors
    As noted repeatedly above, and consistent with the requirements of 
section 766(h) of the Bankruptcy Code and longstanding Commission 
policy, many provisions in part 190 favor public customers over non-
public customers, and both over general creditors, whenever there is a 
shortfall in customer property in any account class for public 
customers (or, with reference to general creditors, for non-public 
customers).
    The preference for public customers benefits them, and provides 
them with incentives to participate in transactions protected by part 
190, and to post collateral willingly. However, this preference 
correspondingly disfavors non-public customers. Accordingly, it 
arguably provides them with incentives to participate less in 
transactions protected by part 190--or, perhaps, to clear through 
unaffiliated FCMs (and thus, to do so as public customers of those 
FCMs).
    Similarly, the preference for both public and non-public customers 
over general creditors may incentivize general creditors to be less 
willing to extend credit to commodity brokers. However, in light of the 
fact that commodity brokers are highly regulated entities subject to 
stringent capital or resource requirements, this incentive effect with 
respect to general creditors is not likely to be strong.

B. Subpart A--General Provisions

1. Regulation Sec.  190.00: Statutory Authority, Organization, Core 
Concepts, Scope, and Construction: Consideration of Costs and Benefits
    Section 190.00 contains general provisions applicable to all of 
part 190. These provisions set forth the concepts that guide the 
Commission's bankruptcy regulations. All of Sec.  190.00 is new, in 
that current part 190 does not contain an analogous regulation. 
However, only certain provisions within Sec.  190.00 have cost-benefit 
implications, since the bulk of Sec.  190.00 is designed to explain 
concepts that are either (1) not different from those contained in 
current part 190, but are simply stated more explicitly in the revised 
rules, or (2) new, in that they are not contained in current part 190, 
but are 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 requested comment on all aspects of its cost and 
benefit considerations with respect to proposed Sec.  190.00.
    There are potential costs associated with Sec.  190.00(c)(4) which 
promotes the transfer or porting of the open commodity contract 
positions of a bankrupt FCM's public customers rather than the 
liquidation of these positions. For example, OCC commented that while 
liquidating customer positions may introduce market risk associated 
with closing out and reopening positions for certain customers, those 
risks should be weighed against the potential drawbacks of porting, 
especially if an FCM to accept the transfer is not immediately 
identified. Specifically, OCC identified three potential drawbacks with 
the proposed Sec.  190.00(c)(4). First, that it could be difficult for 
a trustee (or DCO) to identify a transferee to accept the open 
positions and collateral, which depending on the market conditions 
could be a difficult and time-consuming process. Second, a customer 
could face uncertainty as to how its position and associated collateral 
will be resolved until a transfer is complete and also may be unable to 
exit a position in a timely and efficient manner. Third, a customer 
might need to post additional collateral at a new FCM prior to or 
immediately after a transfer.
    In considering the costs and benefits of the preference for 
transfer versus liquidation, the Commission notes first that, as OCC 
forthrightly acknowledged, liquidating customer positions may introduce 
market risk associated with closing out and reopening positions for 
certain customers. Additionally, liquidating a mass of customer 
positions may roil the markets, if any, where those positions are 
concentrated.
    Furthermore, Sec.  190.00(c)(4) establishes a preference for 
transfer rather than a mandate. Thus, if after exerting their best 
efforts, the trustee finds that the process of transfer is indeed too 
``difficult and time-consuming,'' the trustee is not obligated to 
implement a transfer. Moreover, as a practical matter, there are narrow 
limits to how long a trustee will have to endeavor to transfer before 
being compelled to liquidate positions by the DCO at which they are 
held, or, if applicable, an FCM through which they are held. (Either 
the DCO or the FCM, whichever is applicable, will have the discretion 
to liquidate positions that are being cleared/carried for an FCM that 
is in bankruptcy).\230\ Pursuant to Sec.  190.04(d), if the trustee is 
not successful in transferring an open contract by the seventh calendar 
day after the order for relief consistent with Sec.  190.04(a), the 
trustee is directed to liquidate such contract promptly and in an 
orderly manner. Thus, while a customer could face uncertainty as to how 
its position and associated collateral will be resolved until a 
transfer is complete (or until the customer's positions are otherwise 
liquidated), the time of that uncertainty is both practically and 
legally limited. Finally, a customer who does not wish to post 
additional collateral at a new FCM would be entitled to have the new 
FCM liquidate their positions, and promptly receive any remaining 
transferred collateral. In this light, the Commission believes that the 
benefits of continuing the preference for transfer remain significant, 
while the costs of this preference are mitigated.
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    \230\ For example, as noted above in section II.A.1, OCC's own 
rules would appear to permit it to liquidate such positions.
---------------------------------------------------------------------------

    There are potential benefits arising from reduced uncertainty as a 
result of clarifications provided in several provisions. For example, 
Sec.  190.00(d)(1)(ii), clearly expresses that 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. Similarly, Sec.  190.00(e) clarifies how transactions and 
collateral that are portfolio margined are treated as an important 
prerequisite to an effective portfolio margining program. Cboe's 
comment letter expressed the view that the clarity provided in Sec.  
190.00(d)(1)(ii) will be beneficial to the entire

[[Page 19391]]

ecosystem, including customers of FCMs and broker-dealers, as it 
furthers the ability of market participants to utilize portfolio 
margining and the associated efficiencies. CME also saw benefits to 
``remov[ing] any doubt'' that part 190 applies to a SIPA proceeding 
involving an FCM that is also registered with the SEC as a broker-
dealer.
    Similarly, ICI's comment letter considered that the ``home field'' 
rule in Sec.  190.00(e) is highly beneficial.
    With respect to the remaining provisions within proposed Sec.  
190.00, the Commission has not received comment letters that identify 
costs or benefits explicitly attributed to these provisions, and does 
not believe that there are material cost-benefit implications with 
respect to them:
     Proposed Sec.  190.00(a), which sets forth the statutory 
authority pursuant to which the Commission is proposing to adopt 
proposed part 190.
     Proposed Sec.  190.00(b), which describes how the proposed 
rules are organized into three subparts. While the addition of DCO-
specific rules in this proposal is new, the cost-benefit implications 
of the DCO-specific provisions (Sec. Sec.  190.11 through 190.18) are 
discussed separately below.
     Section 190.00(c)(2), which provides that part 190 
establishes four separate account classes, each of which is treated 
differently under the regulations. In the Commission's view, this 
provision is a mere clarification, as current part 190 also establishes 
different account classes for different types of cleared commodity 
contracts, and treats each account class differently.
     Section 190.00(c)(5), which explains that part 190 applies 
the concept of pro rata distribution when it comes to shortfalls of 
property in a particular account class. This provision is merely 
explanatory.
     Section 190.00(d)(1)(i)(A), which provides 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 FCMs under the CEA 
and Commission regulations.
     Section 190.00(d)(2)(i), which states that the bankruptcy 
trustee may not recognize any account class that is not one of the 
account classes enumerated in proposed Sec.  190.01.
     Section 190.00(d)(3), which sets forth the transactions 
that are excluded from the definition of ``commodity contract.'' This 
provision explains and carries over concepts that are already embedded 
in current part 190.
    While the Commission has not received comment letters that identify 
costs or benefits explicitly attributed to the following provisions in 
Sec.  190.00, it believes that there will be cost-benefit implications 
to these provisions:
     Section 190.00(c)(1) states that 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 narrowing of the 
application of part 190 (by excluding the empty categories of commodity 
options dealers and leverage transaction merchants) benefits the 
bankruptcy estate, and the customers, by allowing the Commission to 
promulgate regulations that are less complex and better tailored to the 
narrower, set of commodity brokers that are covered by the revised 
regulations.\231\
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    \231\ 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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     Section 190.00(c)(3) explains the distinction between 
``public customers'' and ``non-public customers,'' and the priority 
that public customers (and, after them, non-public customers) enjoy 
over all other claimants with respect to distributions of customer 
property. Both of these concepts exist in current part 190 and are 
clarified and explained further in Sec.  190.00(c)(3). In its comment, 
ICI urged the Commission to take steps ``to help ensure that the 
trustee prioritizes the protection of [public] customers.'' In 
response, Commission has added a provision, Sec.  190.00(c)(3)(i)(C), 
directing the trustee to exercise its discretion (where it has such 
discretion) in a manner that will best achieve the overarching goal of 
protecting public customers by enhancing recoveries for, and mitigating 
disruptions to, public customers as a class.\232\ This approach has the 
benefit of guiding the trustee's discretion in a manner consistent with 
the Commission's regulatory and statutory goals. However, it has the 
limitation of still leaving the trustee with discretion. As noted above 
in section III.A.2 above, with discretion comes a risk of trustee 
mistake or misfeasance.
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    \232\ As noted above in section III.A.2.vi, the preference for 
public customers over non-public customers creates incentives for 
both groups.
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     Section 190.00(c)(6) addresses the treatment of commodity 
contracts that require delivery performance. The revised regulations, 
in allowing the trustee more flexibility in how a customer could effect 
delivery outside of the debtor's estate, will benefit customers by 
allowing for a more bespoke approach to effecting delivery when 
customers incur delivery obligations under their open commodity 
contracts. There will, however, be costs in acting in such a bespoke 
fashion in contrast to following standards established during business 
as usual.
     Section 190.00(d)(1)(i)(B) notes that while there are 
currently no registered leverage transaction merchants or commodity 
options dealers, the Commission intends to 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 forward-looking flexibility will generate benefits by 
fostering bankruptcy rules specifically tailored to leverage 
transaction merchants or commodity options dealers when and if an 
entity registers as such.
     Section 190.00(d)(1)(iii), provides that 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.\233\ This provision has the 
benefits associated with transparently providing to FDIC during 
business-as-usual the expertise and guidance of the agency with 
regulatory and supervisory responsibility for commodity brokers (i.e., 
FCMs and DCOs).\234\
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    \233\ Section 210(m)(1)(B) of title II,12 U.S.C. 5390(m)(1)(B), 
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.
    \234\ 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, Commission staff (in cooperation with 
FDIC staff) have engaged, and will continue to 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 clear guidance as 
to the distribution of customer property and member property in a 
DCO resolution proceeding.
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     Section 190.00(d)(2)(ii) provides 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. It 
prevents public customers from evading pro rata exposure to shortfalls 
in customer property by keeping their collateral in a trust structure. 
This provision has the

[[Page 19392]]

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 should mitigate costs in cases where 
particular customers might structure their relationships with their 
FCMs in order to establish such a trust for the purpose of thwarting 
their exposure to pro rata distribution, rather than structuring those 
relationships in ways that otherwise make sense for their business. It 
would also reduce those customers' incentives to do so, and would 
mitigate the costs of litigation within the bankruptcy proceeding over 
the effectiveness of such structures in achieving that goal. It also 
benefits the remaining customers, since if such litigation were 
successful, it would spread the pro rata shortfall over a smaller 
volume of customer claims.
     However, this approach will 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). Such customers may view the inability to protect their 
collateral under a trust concept as an incentive to reduce their use of 
transactions subject to part 190.
2. Regulation Sec.  190.01: Definitions: Consideration of Costs and 
Benefits
    Section 190.01 sets forth definitions as they are used for purposes 
of part 190. In the Commission's view, only certain of the definitions 
in proposed Sec.  190.01 will have cost-benefit implications, and these 
are discussed in more detail below, as are any definitions concerning 
which there were comments. The remainder of the definitions set forth 
in revised Sec.  190.01 do not, in the Commission's view, impose any 
costs or benefits, as the changes to the definitions are minor (in the 
vein of, for example, updating cross-references or updating language to 
reflect the changes in the rest of revised part 190) or merely clarify 
the current definition.
    Where, in the Commission's view, a definition in revised Sec.  
190.01 has cost-benefit implications, and/or where comments have 
identified costs or benefits concerning such a definition, those 
implications are discussed in more detail below:
     ``Account class,'' ``cash delivery property,'' and 
``physical delivery property'': The definition of the term ``account 
class'' is 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. The ABA 
Subcommittee recommended that the Commission clarify that these types 
of account classes apply to non-public customers in addition to public 
customers. The Commission agrees that it is appropriate to clarify this 
point, and to include a specific definition for each type of account 
class. Doing so will benefit all parties involved in a bankruptcy 
proceeding by ensuring that all have a common understanding of how 
these various types of accounts are defined for purposes of part 190. 
Accordingly, the Commission is adopting the ABA Subcommittee's 
recommendation.
     The definition of ``account class'' also removes the 
category in current part 190 of ``leverage account'' because, as noted 
above, there are currently no registered leverage transaction 
merchants. Rather, the Commission intends to 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 benefits market participants by allowing the Commission to 
promulgate bankruptcy rules specifically tailored to leverage 
transaction merchants (and, accordingly, to leverage accounts) in the 
event an entity registers as such.
     The definition of ``account class'' also splits ``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,\235\ this 
separate treatment of physical delivery property and cash delivery 
property should benefit customers with physical delivery property by 
allowing for more prompt distribution of such physical delivery 
property. This separation should also benefit the estate, because the 
trustee will 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 may be costs as a result of complications, since 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 than they 
would have if the delivery account had not been split into two 
subclasses, while others could obtain smaller recoveries.
---------------------------------------------------------------------------

    \235\ 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).
---------------------------------------------------------------------------

    The ABA Subcommittee and CME suggested changes to the definition of 
``cash delivery property.'' Under the current definition, cash falls 
within the delivery class if, inter alia, it is received on or after 
three calendar days before the first notice date or exercise date. The 
definition of cash delivery property in the Proposal continued that 
limitation. CME suggested that the three-day limitation should be 
removed to address cases where

``a customer will legitimately post cash to its delivery account 
sooner than the definition would allow, for example, out of caution 
to assure that the necessary funds are available to pay for a 
delivery when the first notice date or exercise date immediately 
follows a weekend or holiday, or to meet payment deadlines imposed 
by the FCM, or based on market convention.''

    The comments acknowledged that the Commission's policy objective is 
to ``encourage FCMs and their delivery customers to hold cash intended 
to pay for delivery in a segregated account until bilateral delivery 
obligations are near at hand'' (the segregation obligations that apply 
to futures, foreign futures, and cleared swaps accounts do not apply to 
delivery accounts), but express some doubt that the limitation is 
effective in encouraging the desired behavior, because parties with 
delivery obligations may not be aware of it.
    Thus, the benefit of retaining the three-calendar day limitation is 
mitigating the time during which cash delivery property is held in an 
account that is not subject to the protection of segregation 
requirements, and in encouraging business models that take that 
approach. The cost of doing so is the risk that funds may nonetheless 
be transferred earlier into a delivery account, and would then be 
denied protection as delivery property in an FCM bankruptcy.\236\
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    \236\ The Commission also notes CME's suggestion that it 
``consider adopting more formal requirements with respect to 
delivery accounts through separate rulemaking.''
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    As discussed above,\237\ the Commission has determined to take a 
middle-ground approach by expanding the three-calendar day limitation 
to a

[[Page 19393]]

seven-calendar day limitation. This approach has the benefit of 
addressing fully the possibility that delivery property is transferred 
slightly early because of, e.g., a holiday weekend (and especially 
cases where FCMs and their customers or contracts span across 
jurisdictions with different holidays). By expanding the period by four 
days, it should address most of the cases where there are legitimate 
reasons to transfer the funds in advance of when they are needed, to 
account for the possibility of a failure in the transfer process.\238\ 
Significantly, it avoids the cost of encouraging the use of the 
delivery account (that is not subject to segregation requirements) as a 
long-term place to hold cash.
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    \237\ See section II.A.2 above.
    \238\ The commenters have not identified any legitimate reason 
for an FCM to impose a payment deadline of more than seven days 
before first notice or exercise date, or any relevant market 
convention that would require earlier payment, which in either case 
would require that the funds be held in a delivery account.
---------------------------------------------------------------------------

    Commenters also suggested technical additions to the definitions of 
cash delivery property (to address cash provided post-petition to 
facilitate taking deliveries in cases where necessary) to physical 
delivery property (to address the possibility of a negative final 
settlement price), and (in the case of both cash delivery property and 
physical delivery property) to provide that, for contracts exchanging 
one fiat currency for another, both ends of the transaction would be 
considered cash delivery property. The Commission incorporated these 
suggestions in the definitions as adopted. The benefit of these 
approaches is to deal properly with these scenarios; there are no 
discernable material costs.
     Pursuant to section 4d of the CEA, certain contracts and 
associated collateral that would be associated with one account class 
may instead (pursuant to Commission regulation \239\ or order) be 
commingled with a different account class.\240\ The purpose of these 
arrangements, referred to as portfolio-margining, 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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    \239\ See Sec.  39.15(b)(2), which provides a mechanism for 
these arrangements to be implemented pursuant to clearing 
organization rules.
    \240\ 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 
these portfolio-margining 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 is to foster and incentivize 
such risk-reducing (and capital-efficient) arrangements during business 
as usual; there should be no associated costs in bankruptcy.
    Finally, paragraph (3) of the definition of account class addresses 
cases where a commodity broker's account for a customer is non-current, 
or otherwise inaccurate. These are situations over which public 
customers have, at best, limited control, and thus it is ineffective to 
endeavor to create incentives for public customers to police the 
behavior of their FCM. Paragraph (3) confirms 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 will 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 definitions of the terms ``public 
customer'' and ``non-public customer'' are being revised to include 
separate definitions of those terms for FCMs and DCOs. This change 
reflects the new organization of part 190, which includes separate 
provisions for when the debtor is (1) an FCM (subpart B) and (2) a DCO 
(subpart C). The ``public customer'' definition for FCMs is also being 
revised to define that term with respect to each of the relevant 
account classes.\241\
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    \241\ CME suggested that the Commission should include non-U.S. 
customers of foreign broker clearing members of a DCO within the 
public customer definition. As discussed above, the Commission has 
determined to consider this suggestion as part of a comprehensive 
review of the issues, to be conducted at such time as the model of 
admitting foreign brokers as clearing members for U.S. DCOs becomes 
empirical.
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    These changes will generate benefits as they bring clarity to the 
question of who qualifies as a ``public'' versus a ``non-public'' 
customer, and transparency to the distribution of property to which 
each customer is entitled. Furthermore, this clarity and transparency 
is likely to reduce the administrative costs to the estate, and the 
costs to claimants, associated with the claims allowance process, as 
well as the likelihood of litigation by dissatisfied claimants (and 
associated costs). These changes could, however, impose costs on 
customers for whom, under current part 190, it will not be clear which 
category they fall into. The pool of customer property would be 
different for public and non-public customers under the new policy 
regime. Thus, a hypothetical customer who could have been considered 
``public'' under current part 190 but will be categorized as ``non-
public'' under revised part 190 could receive less in the distribution 
of customer property (with other customers receiving more).
     ``Futures, futures contract:'' The Commission is adding a 
definition for the terms ``futures'' and ``futures contract'' to 
clarify what those terms mean for purposes of part 190. This 
clarification will lower administrative costs by providing clarity and 
transparency to the types of transactions that are considered 
``futures'' for purposes of proposed part 190 and therefore form part 
of the futures account or foreign futures account.
     ``House account:'' The definition of the term ``house 
account'' will be revised to include a definition of that term solely 
for DCOs. This change will reflect the new organization of part 190, 
which is revised to include separate provisions for when the debtor is 
(1) an FCM (subpart B) or (2) a DCO (subpart C). CME and the ABA 
Subcommittee urged that the term ``house account'' be deleted in the 
few cases where it was proposed to be used in subpart B in order to 
avoid the implication that the accounts of non-public customers could 
not be ported. This change would enhance clarity and transparency (and, 
thus, would reduce administrative costs) by (1) avoiding that incorrect 
implication, while (2) clarifying what precisely constitutes a house 
account for a DCO bankruptcy proceeding.
     ``Primary liquidation date:'' The definition of the term 
``primary liquidation date'' is being revised to delete references to 
holding accounts open for later transfer. This is consistent with the 
policy of transferring as many open commodity contracts as possible 
within seven calendar days after entry of an order for relief or, if 
that is not possible, liquidating such commodity contracts. \242\ This 
change in policy should benefit some customers, who will more quickly 
have clarity as to how their positions and associated collaterals will 
be resolved.\243\ There may, however, be costs to customers who might 
have preferred having their open commodity contracts held open for 
transfer after the primary liquidation

[[Page 19394]]

date. \244\ In the event that a larger number of contracts is 
liquidated rather than transferred, there will be costs resulting from 
additional downward pressure on prices.
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    \242\ See Sec.  190.04(a)(1).
    \243\ See discussion of Sec.  190.00(c)(4) in section II.B.1 
above for concerns about customers lacking such clarity for an 
extended time.
    \244\ 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 quite 
hypothetical.
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     ``Specifically identifiable property:'' The Commission is 
revising the definition of the term ``specifically identifiable 
property'' to clarify and streamline the current definition of that 
term. The use of definitions that are clearer should reduce 
administrative costs. Of course, increasing clarity may be to the 
detriment of those customers for whom such clarity results in 
assignment to a category that they view as less favorable.
     ``Substitute customer property:'' The definition of the 
term ``substitute customer property'' is being 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 will benefit customers who, in a 
bankruptcy event, seek to redeem their specifically identifiable 
property or letters of credit.\245\ Introducing the concept of 
substitute customer property may impose administrative costs, however, 
because the trustee may have to expend time and resources on tracking 
the substitute customer property and ensuring that such property ends 
up in the proper pool of customer property once received.
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    \245\ Benefits and costs associated with the use of substitute 
customer property are addressed further below in connection with 
Sec.  190.04(d)(3) in section III.C.2.
---------------------------------------------------------------------------

     ``Swap:'' The Commission is amending 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 should serve the goals of clarity and transparency (and, 
consequently, reducing administrative costs).
3. Regulation Sec.  190.02: General: Consideration of Costs and 
Benefits
    Section 190.02(a)(1) is revised to 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 
expanded mechanism for a trustee to request exemptions should benefit 
the estate and customers by allowing the trustee to request an 
exemption that lowers administrative costs and increases timeliness. 
This change, however, may 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 will be any cost-benefit 
implications to Sec.  190.02(a)(2) and (3), (b), (c), (d), and (e), as 
those provisions largely align with the provisions in current part 190 
from which they are derived.
    Regulation Sec.  190.02(f) is a new provision which addresses the 
context of a receiver for an FCM 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. In this context, the FCM 
has been found to be in precarious financial condition. This provision 
will permit the receiver to file a petition for bankruptcy of such an 
FCM in appropriate cases. This provision may benefit public customers, 
in that a bankruptcy proceeding may be necessary to protect those 
customers' interests in customer property from losses in value. 
However, this provision may have distributional effects as there may be 
some customers who do not receive as much in bankruptcy 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 
absent the power granted to the receiver under this regulation. These 
costs could possibly be greater than the costs of continuing to 
administer the FCM under receivership.
    Indeed, FIA suggested that the Commission should require that the 
receiver must receive permission from the Commission before filing a 
voluntary petition, given that this action ``would effectively close 
the FCM.'' Closing the FCM would impose significant costs on the FCM 
and, in a case where the Commission would have denied permission, those 
costs could be unnecessary.
    In considering the costs (discussed above) of what could be an 
unnecessary voluntary filing for bankruptcy in contrast to the benefits 
of avoiding delay in filing a necessary filing for bankruptcy, the 
Commission determines that the context where this rule would be 
applicable--only cases where a receiver has been appointed due to 
violation or imminent violation of customer property protection 
requirements, or of the FCM's minimum capital requirements--minimizes 
the likelihood that a filing would turn out to be unnecessary, and 
counsels in favor of avoiding delay.
4. Section 15(a) Factors--Subpart A
    No comments were received on the application of the section 15(a) 
factors to subpart A.
i. Protection of Market Participants and the Public
    Subpart A of the proposed rules should 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 is to 
promote an orderly and cost-effective resolution of the insolvency of 
an FCM or DCO, 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. However, as noted above, some of the provisions of 
subpart A provide discretion to the trustee. While enhanced discretion 
for the trustee has the benefit of permitting a more tailored approach, 
it also has the cost of increasing the possibility of trustee mistake 
or misfeasance.
ii. Efficiency, Competitiveness, and Financial Integrity
    Subpart A of the proposed rules should 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 should, 
in turn, enhance the competitiveness and financial integrity of U.S. 
FCMs and DCOs, by enhancing market confidence in the protection of 
public customer funds and positions entrusted to U.S. FCMs and DCOs, 
even if such an entity were to become insolvent.
iii. Price Discovery
    Price discovery is the process of determining the price level for 
an asset

[[Page 19395]]

through the interaction of buyers and sellers and based on supply and 
demand conditions. To the extent that the revised regulations should 
mitigate the need for liquidations in conditions of distress, they will 
help avoid negative impacts on price discovery.
iv. Sound Risk Management Practices
    Subpart A of the proposed rules should generally promote sound risk 
management practices by setting forth the core concepts to which the 
bankruptcy trustee must adhere in administering an FCM or DCO 
bankruptcy.
v. 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. A bankruptcy process 
that effectively facilitates the proceedings is likely to help to 
attenuate the detrimental effects of the bankruptcy on the financial 
marketplace and thus benefit the financial system and thus the public 
interest.

C. Subpart B--Futures Commission Merchant as Debtor

1. Regulation Sec.  190.03: Notices and Proofs of Claims: Consideration 
of Costs and Benefits
    Section 190.03(a)(1) replaces 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.\246\ This change is expected to result in a 
benefit to all parties required to provide notices to the Commission 
because they will be able to avoid the costs of sending such notice in 
hardcopy form via overnight mail. These revisions will also allow the 
Commission to receive such notices--and thus, to act--much more 
expeditiously.
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    \246\ See also Sec.  190.03(d), which is adopting this new 
method of providing notice to the Commission for any court filings 
filed in a bankruptcy.
---------------------------------------------------------------------------

    Section 190.03(a)(2) is a new, principles-based provision that 
replaces the more specific procedures for providing notice to customers 
that appear in current Sec.  190.02(b) by allowing the trustee to 
establish and follow procedures ``reasonably designed'' for giving 
adequate notice to customers. Paragraph (a)(2) also provides 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.'' A generalized and more modernized approach to notifying 
customers will benefit the debtor's estate, as the process allows the 
trustee to choose cost effective means of providing notice to customers 
within the more flexible bounds of the proposed regulation, resulting 
in savings of administrative costs. Similarly, it will 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 will carry the potential cost of trustee 
misfeasance and abuse of such discretion, as discussed above in section 
III.A.2.ii.
    Section 190.03(b)(1) will revise the time in which a commodity 
broker must notify the Commission of a bankruptcy filing. These 
revisions codify procedures whereby (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 will notify the 
Commission immediately upon the filing. These revisions will foster the 
ability of the Commission and its staff to perform their duties to 
protect customers by providing the Commission with notice of any 
bankruptcy proceeding as soon as possible.
    Section 190.03(b)(2) removes 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. It instead instructs such 
parties to give such notice of an intent to transfer ``[a]s soon as 
possible.'' To the extent that the three-day deadline was limiting 
transfer arrangements, this revision will benefit the estate and some 
customers by removing time constraints that could be construed to 
prohibit notification after expiration of the deadline (and thus, allow 
the trustee to form the intent to transfer after such time).
    The revision will also enhance the orderly functioning of the 
marketplace at a time of severe market disruption by facilitating 
prompt notice of 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 will 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 customers who would have benefited from an earlier 
transfer.\247\
---------------------------------------------------------------------------

    \247\ See discussion of Sec.  190.00(c)(4) in section III.b.1 
above.
---------------------------------------------------------------------------

    Section 190.03(c)(1) removes the requirement that the trustee must 
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 and instead 
establishes a requirement to notify the customers with specifically 
identifiable property in accordance with Sec.  190.03(a)(2). The 
Commission believes that this change will result in lower 
administrative costs, as the trustee will be relieved of the cost of 
identifying, and publishing notice in, such newspapers. Moreover, the 
trustee will no longer be required to wait seven days after the second 
publication date to commence liquidation of specifically identifiable 
property. Rather, the trustee will be free to commence liquidation of 
specifically identifiable property starting on the seventh day after 
entry of the order for relief. This will 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, in turn, is expected ultimately to result in a better price. 
Moreover, the provisions in Sec.  190.03(a)(2) that describe the 
notification of customers with specifically identifiable property will 
benefit public customers by allowing them to receive 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 enhancing their ability to request the return of 
their specifically identifiable property within the specified 
timeframe.
    Section 190.03(c)(2) provides 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.\248\ This is 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 will be required to liquidate

[[Page 19396]]

such contracts within a certain time period. To the extent the trustee 
exercises the authority derived from revised Sec.  190.03(c)(2), they 
will (subject to the revision discussed in the next paragraph) 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 will 
treat these open commodity contracts the same as other customer 
property and effect a transfer of such contracts. This new framework 
should 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.
---------------------------------------------------------------------------

    \248\ See proposed Sec.  190.10(b)(2) for the process of 
designating an account as a ``hedging account.''
---------------------------------------------------------------------------

    ACLI suggested that Sec.  190.03(c)(2) should express a preference 
for transfer over liquidation with respect to specifically identifiable 
property in the form of positions that are identified as hedging 
positions, and consult (on an individual basis) each customer's 
expressed preferences. However, Sec.  190.00(c)(4) sets forth a 
preference for porting (transfer) of all open commodity contract 
positions of public customers. Thus, while treating customers with 
hedging positions on a bespoke basis may benefit some of them, it may 
be at the cost of effectively transferring a larger group of customer 
positions. Some of those may be customers with hedging positions whose 
positions are not transferred due to limited time and resources 
available to be devoted to bespoke treatment. Indeed, SIFMA AMG/MFA 
noted that ``permitting the trustee this flexibility (subject to the 
additional customer protections [of consulting existing instructions, 
as described immediately below]) serves the interest of customers as a 
whole by facilitating a more rapid transfer of customer positions and 
property.''
    SIFMA AMG/MFA suggested that it would ``further the goal of 
expediency'' if the regulation would require the trustee to ``first 
consult the instructions (regarding preferences with respect to 
transfer or liquidation of open commodity contracts) provided by a 
public customer to the debtor at the time of opening the relevant 
hedging account, and only if such instructions are missing or unclear, 
to then require such customer to provide the trustee with written 
instructions as contemplated by proposed Sec.  190.03(c)(2).'' The 
Commission agrees, and has made corresponding changes to the 
regulation. While there is a cost involved in scanning to determine if 
there are instructions, there is a significant benefit in avoiding 
duplication, and in avoiding cases where the customer, having already 
provided instructions, does not reply to a duplicative request in time 
for that reply to be acted upon.
    The Commission does not believe that there are any cost-benefit 
implications to Sec.  190.03(c)(3) or (4) (other than those discussed 
above with respect to the new notice provision referenced in each) or 
to Sec.  190.03(d).
    Section 190.03(e), sets forth the information required from 
customers regarding their claims against the debtor. As revised, Sec.  
190.03(e), reorganizes and adds certain information items to those 
listed in the current regulation. 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 should 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 should 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 regulation 
should 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. 
CME sees Sec.  190.03(e) and (f), and the revised proof of claim form, 
as ``major improvements over the current rules and proof of claim 
template.''
    This regulation also provides that the specific items referred to 
are to be included ``in the discretion of the trustee.'' This 
discretion will 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 will 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 may 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 new and provides the trustee with 
flexibility to modify the customer proof of claim form set forth in 
appendix A to part 190. Specifically, Sec.  190.03(f) allows the 
trustee to modify the proof of claim form to take into account the 
particular facts and circumstances of the case. This provision should 
benefit the estate because the trustee will 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 no longer will be required to get an 
order from the bankruptcy court to make such modifications, thereby 
saving time and resources. This new provision should also benefit 
customers, who will be able to take advantage of the more streamlined 
and tailored proof of claim forms developed by the trustee, and should, 
therefore, spend less time filling out such forms. It should also 
benefit the estate, which should bear less administrative cost in 
evaluating such forms. Again, there may 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).
2. Regulation Sec.  190.04: Operation of the Debtor's Estate--Customer 
Property: Consideration of Costs and Benefits
    Regulation Sec.  190.04(a) explicitly provides a policy and a 
direction 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. This policy and direction is 
substantially similar to the policy and direction under current 
regulations.\249\ The changes set forth a clear policy for trustees to 
follow, which should benefit customers of the failed FCM in a 
streamlined description of the transfer process that is consistent with 
the core concepts set forth in this part. The costs and benefits of the 
preference for transfer are discussed in section III.B.1 above, in the 
context of Sec.  190.00(c)(4).
---------------------------------------------------------------------------

    \249\ See current Sec.  190.02(e).
---------------------------------------------------------------------------

    In Sec.  190.04(a)(1), the Commission is clarifying language; these 
clarifications should benefit customers of the failed FCM by minimizing 
the likelihood of future disputes concerning qualification of property 
for transfer. The Commission is also changing the direction in current 
Sec.  190.02(e) that the trustee ``must immediately use its best 
efforts to effect a transfer'' to a direction that the trustee ``shall 
promptly use its best efforts to effect a transfer.'' This modest 
change in focus will benefit public customers by recognizing that,

[[Page 19397]]

while effecting transfer is an extraordinarily high priority, it is 
possible that there may be higher priorities at the inception of the 
bankruptcy proceeding, e.g., it may be necessary to preserve some 
portion of customer property from an immediate threat.\250\ Once again, 
by enhancing the trustee's discretion as to how to manage the 
liquidation, there is the cost that the trustee will make a mistake.
---------------------------------------------------------------------------

    \250\ The Commission is implementing the same change--the 
addition of the word ``public'' before ``customers''--to Sec.  
190.04(a)(2). The anticipated cost and benefit analysis of the 
change is the same as in Sec.  190.04(a)(1).
---------------------------------------------------------------------------

    Section 190.04(a)(2) directs the FCM (or a trustee, if one has been 
appointed) in a case where an involuntary petition for bankruptcy is 
filed against the FCM to use best efforts to effect a transfer within 
seven calendar days. The current regulation limits the commodity broker 
to trading for liquidation unless otherwise directed by the Commission, 
by any applicable self-regulatory organization or by the court. Revised 
Sec.  190.04(a)(2) removes this limitation. Rather, revised Sec.  
190.04(e)(4) more generally covers limitations on the business of an 
FCM in bankruptcy. Similarly, any requirement to transfer customer 
positions would more properly be addressed by Sec.  1.17(a)(4). The 
Commission believes that these changes will benefit the estate and the 
public customers by mitigating the administrative costs by removing a 
redundant regulation. The Commission does not anticipate any resulting 
increase in cost.
    In Sec.  190.04(b)(1), the Commission is clarifying and updating 
conditions under which the trustee may make payments of variation 
settlement and initial margin. In sum, the revisions clarify that 
payments can be made prior to pending transfers or liquidation, not 
just pending liquidation. The revision should 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. The changes describe more accurately the types of payments 
that the trustee will be permitted to make and account specifically for 
the types of entities to which the trustee is permitted to make the 
types of payments referred to in this section. The revisions clarify 
the current regulatory text, which should benefit stakeholders. The 
Commission does not anticipate any increased cost from these changes.
    Section 190.04(b)(1)(i) prevents 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 revised 
provision recognizes 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 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. The proviso similarly will 
clarify that this prohibition on making margin payments on behalf of 
accounts in deficit is not intended to prohibit ``upstream'' entities 
(e.g., a CCP or an intermediary through which the debtor clears) from 
exercising legal rights to margin under applicable law. Due to the 
structure of omnibus accounts and the explicit requirement of lack of 
trustee control, any payments that are made under the revised provision 
would have been made pursuant to Commission authorization under the 
current regulation. Thus, neither provision should add any new 
regulatory burden and the Commission does not estimate that there will 
be any additional cost associated with the proposed changes.
    Section 190.04(b)(1)(ii) is a new regulation that adds 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. ICI agrees that this restriction supports the pro rata 
distribution principle, and should benefit the other customers of the 
FCM debtor--any payment of customer property in excess of a particular 
customer's funded balance is to the detriment of other customers.\251\
---------------------------------------------------------------------------

    \251\ While there will 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).
---------------------------------------------------------------------------

    Section 190.04(b)(1)(iii) is a minor, non-substantive clarification 
of current Sec.  190.02(g)(1)(ii), that should not create any changes 
from the status quo with regards to costs and benefits.
    In Sec.  190.04(b)(1)(iv)-(v), the Commission is clarifying that 
margin must only be used (i.e., paid to a clearing organization or 
upstream intermediary) consistent with section 4d of the CEA. Section 
190.04(b)(1)(vi) states 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 incentivize 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, should 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 are designed to clarify the statutory requirements 
applicable to funds in the customer account. While there may 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 should be any material additional costs 
associated with this change.
    Section 190.04(b)(2) allows the trustee discretion as to whether to 
issue margin calls to customers who are undermargined, deleting highly 
prescriptive conditions from the current rule. The revision should 
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 to Sec.  190.04(b) should cause no 
change to the related costs and benefits.
    Section 190.04(b)(3) retains the concept in current Sec.  
190.02(g)(3), with updated cross-references. The Commission does not 
anticipate that there will be any costs or benefits to the proposed 
minor revisions.

[[Page 19398]]

    Section 190.04(b)(4) addresses the trustee's obligation to 
liquidate accounts in deficit, or where a mark-to-market calculation 
would result in a deficit, or where the customer fails to meet a margin 
call within a reasonable time. The revision will clarify the 
applicability of current authority to a situation that is already 
implicit in the current rule. The regulation does not require the 
trustee to make additional calculations but, if a calculation made by 
the trustee reveals that the mark-to-market value of the account is a 
deficit, the trustee is 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 should be to liquidate accounts in deficit 
more promptly (thus mitigating potential further losses); the cost will 
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).\252\
---------------------------------------------------------------------------

    \252\ This change may also provide incentives for a customer 
whose account is in, or is approaching, deficit to make such 
payments promptly to avoid liquidation of their positions.
---------------------------------------------------------------------------

    Second, the Commission is adding 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.
    SIFMA AMG/MFA urged the Commission to curtail the trustee's 
discretion in Sec.  190.04(b)(4) in a number of ways: By requiring the 
trustee to defer to the margin call timings present in applicable 
underlying agreements between the customer and the (pre-bankruptcy) 
debtor, and by providing customers with the opportunity to demonstrate 
that a margin payment was made even if the FCM's books and records do 
not yet reflect its receipt. By contrast, ICI noted that it is vital 
that the trustee be required to swiftly crystallize, and therefore cap 
the losses resulting from, such deficits by promptly liquidating 
accounts in deficit or for which a customer has failed to meet a margin 
call. ICI further stated that if the accounts were allowed to remain 
open, additional losses on the delinquent customers' transactions would 
be borne by the FCM's non-defaulting customers.
    The Commission has determined not to make the requested changes. 
While making those changes would benefit those customers who are 
treated on a more bespoke it would be to the detriment of the FCM's 
other customers. Enhancing the trustee's discretion to determine how 
long a customer has to meet a margin call, and to rely on the FCM's 
books and records in doing--and refusing to curtail that discretion (by 
forcing the trustee to defer to margin call timings in pre-bankruptcy 
agreements, or to give the customer an opportunity to demonstrate that 
the a margin payment was made) as requested by the comment--will 
benefit other customers of the debtor FCM by giving the trustee 
flexibility to respond to market conditions following an FCM default. 
It is important to recognize that in stressed markets or in situations 
where communication protocols cannot practicably be followed, 
permitting a customer time to post margin in accordance with a pre-
bankruptcy agreement--or, in some cases, even notice of one hour--may 
be insufficiently prompt to mitigate appropriately (1) the risk that 
such customers would default, (2) the risk that delaying liquidation of 
such a customer's positions increases the potential for and likelihood 
that they would do so with a debit balance, and (3) the risk that the 
size of that debit balance would increase as a result of that delay, 
thereby reducing the funded balances of those other customers. However, 
customers who are required to make payments more promptly would bear 
associated costs, from making such payments in a reduced time frame, 
from having to make duplicate payments (while these would ultimately be 
returned in full, this would be without interest) or from having 
contracts liquidated that would otherwise not have been liquidated if 
the customer had more time to make payment.\253\
---------------------------------------------------------------------------

    \253\ SIFMA AMG and MFA also suggested that the regulation 
should be amended to give customers credit for any gains that were 
haircut due to gains-based haircutting by a DCO. Any such 
haircutting of a customer's gains is due to application of the 
customer's agreement with the FCM. Moreover, giving some customers 
credit despite such agreements would increase their recovery, but at 
the expense of other customers, as discussed in detail in section 
II.C.7 above.
---------------------------------------------------------------------------

    The Commission is adding 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. The benefit of this new 
provision is that it presents a clear and transparent mechanism by 
which the trustee is to allocate the positions. This mechanism will 
protect the customer account as a whole, by establishing a preference 
for assigning liquidating transactions to individual customer accounts 
in a risk-reducing manner. The allocation mechanism will, however, be 
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.
    Section 190.04(c) requires the trustee to use its best efforts to 
liquidate 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. These clarifications are 
likely to reduce administrative costs, to the benefit of the estate 
(and, ultimately, customers). CME believed that this provision would 
have the benefit of avoiding unnecessary disruptions to the delivery 
process by customers that did not intend to participate in making or 
taking delivery. There should be no cost associated with the revision 
because, while there may be some customers who would prefer to hold 
their contracts through delivery, the current regulations, just as the 
revised regulations, direct the trustee to liquidate contracts coming 
into delivery position.\254\
---------------------------------------------------------------------------

    \254\ See, e.g., current Sec.  190.03(b)(5).
---------------------------------------------------------------------------

    Section 190.04(d) will clarify requirements concerning the 
liquidation and valuation of open positions. Section 190.04(d)(1) and 
(2) clarify requirements for liquidating open commodity contracts and 
specifically identifiable property other than commodity contracts.
    Section 190.04(d)(3) codifies 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. Under the new provision, 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. The amount of the substitute customer property to be posted 
may, 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 Sec. Sec.  190.08 and 190.09. If 
necessary, 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. 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 may draw upon the full amount of the letter 
of credit or any portion thereof (if the

[[Page 19399]]

letter of credit has not expired). Under paragraph (d)(3)(ii), the 
trustee is 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 will 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, are to 
be considered customer property in the account class applicable to the 
original letter of credit.
    ICI, SIFMA AMG/MFA, and Vanguard supported Sec.  190.04(d)(3) on 
the grounds that it has the benefit of treating customers equitably by 
avoiding a more favorable treatment of customers who post letters of 
credit than those who post cash and securities.
    These proposed new provisions could impose costs on customers who 
use letters of credit as collateral for their positions. 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 a portion 
or possibly the full amount of the letter of credit.
    Moreover, a number of commenters,\255\ expressed the concern that 
requests for substitute customer property in the special context of 
delivery letters of credit could cause sudden liquidity needs, and 
substantial hardship to customers. For example, CME noted that, while 
they support Sec.  190.04(d)(3) outside the context of delivery letters 
of credit, they see difficulties in that context, specifically in the 
case of deliveries for certain energy contracts, often which take place 
over 30 days. The delivery letters of credit for these contracts can 
involve hundreds of millions of dollars in face amounts, and CME is of 
the view that it would cause substantial liquidity hardship for buyers 
to have to substitute cash in such amounts.
---------------------------------------------------------------------------

    \255\ CMC, CME, FIA.
---------------------------------------------------------------------------

    While the discussion above represents potentially important costs, 
the Commission is noting factors that can alleviate these costs, and is 
implementing provisions that it believes substantially mitigate these 
costs: First, the Commission is adding a new Sec.  190.04(d)(3)(iv), 
which provides that the trustee shall, in exercising their discretion 
with regard to addressing letters of credit, including as to the timing 
and amount of a request for substitute customer property, endeavor to 
mitigate, to the extent practicable, the adverse effects upon customers 
that have posted letters of credit, in a manner that achieves pro rata 
treatment among customer claims. Second, the Commission notes the 
likelihood that requests for substitute customer property may not apply 
to the particular delivery letters of credit the commenters have 
expressed concerns about: As requested by CME, the Commission confirms 
that (1) a delivery letter of credit that is posted directly with the 
DCO or with the delivery counterparty, rather than with or through the 
FCM, and for which the FCM is not a named beneficiary, is outside the 
delivery account class, i.e., it does not constitute cash delivery 
property (or property of the debtor's estate), and (2) the provisions 
in other parts of the part 190 regulations regarding treatment of 
letters of credit posted with or through the debtor FCM do not apply 
such a letter of credit.
    The Commission's priority in this context is 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.\256\ 
Moreover, if there are shortfalls in customer property in a particular 
account class, and public customers posting letters of credit are 
protected from sharing in those shortfalls, those public customers 
would benefit. However, the shortfalls would, inevitably, instead be 
allocated to other public customers, who would suffer corresponding 
losses. Regulation Sec.  190.04(d)(3) supports the policy of pro rata 
treatment of public customers embodied in 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 therefore avoids 
concentrating losses on those public 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. Moreover, by directing the trustee to exercise their 
discretion, including with respect to amounts and timing of requests 
for customer property, in a manner that mitigates adverse effects on 
those customers that have posted letters of credit, it will mitigate 
the liquidity costs to such customers.
---------------------------------------------------------------------------

    \256\ See, e.g., 48 FR at 8718-19.
---------------------------------------------------------------------------

    Section 190.04(e)(1) concerns liquidation of open commodity 
contracts in the market, while paragraph (e)(2) addresses liquidation 
by book entry offset. Both of these revised regulations delete the 
requirement in the current regulations that a clearing organization 
must obtain approval for its rules regarding liquidation of open 
commodity contracts, a requirement that is superfluous in light of the 
regulatory framework set forth in part 40 of the Commission's 
regulations, and in light of the notice-filing regime established by 
Congress in section 5c(c) of the CEA.\257\ This has the benefit of 
enabling clearing organizations to avoid the cost of filing a request 
for rule approval, pursuant to CEA section 5c(c)(4) and Regulation 
Sec.  40.5. There are potential costs, in that an ill-conceived rule 
could be more readily identified, and addressed, in a rule approval 
process. However, Commission staff, as a matter of practice, closely 
reviews all notice-filed clearing organization rules.
---------------------------------------------------------------------------

    \257\ 7 U.S.C. 7a-2(c).
---------------------------------------------------------------------------

    Section 190.04(e)(3) is new, and confirms that an FCM or foreign 
futures intermediary through which a debtor FCM carries open commodity 
contracts may exercise any enforceable contractual rights that the FCM 
or foreign futures intermediary has to liquidate such commodity 
contracts. It provides 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 are the only 
remedy; under no circumstance can the liquidation be voided.
    This new provision will benefit carrying FCMs by confirming 
explicitly that carrying FCMs are allowed to exercise enforceable 
contractual rights to liquidate contracts, which reduces ambiguity and 
thus will reduce administrative costs. At the same time, clarification 
of the availability of the damages remedy will help to protect 
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 (and thus will incentivize carrying FCMs to act in a 
commercially reasonable manner). Thus, the regulation itself provides 
the estate with a potential mitigant for the costs in the form of a 
damages remedy.
    The remainder of the revisions to Sec.  190.04(e)(4) and (f) are 
non-substantive language changes and

[[Page 19400]]

clarifications and updated cross-references and should not have 
associated costs or benefits.
3. Regulation Sec.  190.05: Operation of the Debtor's Estate--General: 
Consideration of Costs and Benefits
    In Sec.  190.05, the Commission is addressing general issues 
regarding the operation of the debtor's estate. In both Sec.  190.05(a) 
and (b), the Commission is making revisions providing the trustee with 
more flexibility to act in a bankruptcy situation. Section 190.05(a), 
for example, provides that the trustee ``shall use reasonable efforts'' 
to comply with the CEA and the Commission's regulations. Section 
190.05(b) requires 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 
will 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. CME noted that Sec.  
190.05(b) will have the benefit of allowing the trustee to transfer 
more promptly public customers' positions and property than if the 
trustee were held to a strict standard of precision. 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, may carry the potential cost of trustee mistake, 
misfeasance, or abuse of such discretion, as discussed above.
    Whereas current Sec.  190.04(b) requires a trustee to compute a 
funded balance only for those customer accounts with open commodity 
contracts, revised Sec.  190.05(b) expands the scope of customer 
accounts for which a trustee is 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 represents an administrative 
cost, as the trustee will 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 should 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 will, under the 
revised provision, receive daily computations of the funded balance of 
their accounts with the debtor.
    However, revised Sec.  190.05(b) also narrows the trustee's duty 
compared to current Sec.  190.04(b): While the current provision states 
that the trustee ``must compute a funded balance for each customer 
account . . . each day,'' the revised provision only requires the 
trustee to ``use reasonable efforts'' to do so. Regulation Sec.  
190.00(c)(3)(i)(C) provides that ``reasonable efforts'' should only be 
less than ``best efforts'' to the extent that this would benefit public 
customers as a class. Exercises of discretion by a trustee that, on a 
net basis, benefit public customers as a class may, on a net basis, 
impose costs on individuals or groups within that class. For example, 
there theoretically may be cases where, because the administrative cost 
of computing a funded balance would outweigh the benefit of doing so to 
public customers as a class, the trustee, in exerting ``reasonable 
efforts,'' determines not to do so on a particular day or for a 
particular time. As ICI points out in their comment letter, that 
decision would harm certain customers, i.e., regulated funds, who have 
a particular need to confirm the existence and value of their 
transactions and associated margin.
    Section 190.05(c) requires the debtor to maintain ``records 
required under this chapter to be maintained by the debtor, including 
records of the computations required by this part'' ``until such time 
as the debtor's case is closed.'' This revision expands the scope of 
records that must be maintained, thereby imposing certain 
administrative costs, but should benefit the estate, because it will 
limit the amount of time the trustee will have to maintain the relevant 
records.
    Section 190.05(d) requires 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 will likely result in 
administrative costs, as the trustee will have to expend time and 
resources issuing account statements to customers. It will benefit 
customers because it should help 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. ICI 
noted that this is of particular benefit to regulated funds, providing 
them with a basis to confirm the existence and value of their 
transactions and associated margin.
    Section 190.05(e)(1) allows a bankruptcy trustee to effect 
transfers of customer property in accordance with Sec.  190.07, but 
requires the trustee to obtain court approval prior to making any other 
disbursements to customers. This provision should 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.
    Section 190.05(e)(2) allows 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 revised regulation expands the scope of 
customer property that the trustee is permitted to invest in such a 
manner to include ``any other customer property.'' This change should 
benefit customers, in that additional customer property could be 
invested (in this limited manner).
    Section 190.05(f) requires 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 may result in 
administrative costs, since the trustee would require resources to do 
so. However, this provision should benefit customers by

[[Page 19401]]

making it more likely that they would receive what they are entitled to 
receive from the debtor's estate. Indeed, Vanguard noted that the 
residual interest requirement is a valuable buffer to protect 
customers.
4. Regulation Sec.  190.06: Making and Taking Delivery Under Commodity 
Contracts: Consideration of Costs and Benefits
    Section 190.06 addresses the making and taking of deliveries under 
commodity contracts.
    Specifically, Sec.  190.06(a)(2) requires the trustee to use 
``reasonable efforts'' (in contrast to the current ``best 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, 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 
this.
    Management of contracts in the delivery positions involves a 
significant degree of tailored administration. Under the best efforts 
standard, the trustee may spend more time (and thus incur higher costs) 
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'' should benefit 
creditors of the estate (as a whole) as the trustee should not need to 
provide a disproportionate amount of individualized treatment to such 
contracts.\258\ 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.
---------------------------------------------------------------------------

    \258\ As discussed above in section II.A.1, the trustee in 
exerting best efforts to meet a standard must diligently exert 
efforts to meet that standard ``to the extent of its own total 
capabilities.'' By contrast, in exerting ``reasonable efforts'' to 
meet a standard, the Commission expects that the trustee will work 
in good faith to meet the standard, but will also take into account 
other considerations, including the impact of the effort necessary 
to meet the standard on the overarching goal of protecting public 
customers as a class.
---------------------------------------------------------------------------

    Section 190.06(a)(3) provides 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 provide the trustee with the flexibility 
to act ``as it deems reasonable under the circumstances of the case,'' 
but set an outer bound to the trustee's discretion in requiring them to 
act ``consistent with the pro rata distribution of customer property by 
account class.'' This provision again will have the benefits and costs 
of enhanced discretion discussed above, but includes an outer bound to 
that discretion.
    In Sec.  190.06(a)(4), the Commission adds a new provision to 
reflect that delivery may need to be made in a securities account.\259\ 
The new provision should 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 should mitigate the risk of transferring too much value out 
of the commodity contract account (and creating a risk of an 
undermargin or deficit balance).
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    \259\ This is only relevant for debtor FCMs that are also 
broker-dealers.
---------------------------------------------------------------------------

    Section 190.06(b) is also new. It creates an account class for 
physical delivery property held in delivery accounts and the proceeds 
of such physical delivery property. This account class is further be 
sub-divided into separate physical delivery and cash delivery account 
subclasses. In general, creating the delivery account class should 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 
recognizes that cash is more vulnerable to loss, and more difficult to 
trace, as compared to physical delivery property. This will likely 
benefit those with physical delivery claims; customers in the cash 
delivery sub-class would be likely get a pro rata distribution that is 
less. 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.
5. Regulation Sec.  190.07: Transfers: Consideration of Costs and 
Benefits
    Section 190.07(a) works to promote transfers of commodity contracts 
from a debtor FCM. It does so by prohibiting any clearing organization 
or self-regulatory organization from adopting, maintaining in effect, 
or enforcing rules that interfere with 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.
    The revised regulation includes the provisos 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 modifies, 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. The clarification that 
the regulations do not limit contractual risk management rights should 
provide a benefit to clearing organizations and their members in 
clarifying that the regulation will not nullify the contracts in this 
regard, and will not have an associated cost.
    In Sec.  190.07(b)(1), the Commission clarifies 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. The Commission 
does not anticipate any material cost from this revision.
    Section 190.07(b)(3) permits 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 is intended to incentivize potential transferees to accept 
transfers by making it more practicable to do so. 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. CME, ICI and Vanguard agree that the 
proposal would provide a benefit to customers and transferee clearing 
members and trustees, by facilitating the transfer process.\260\ If 
such flexibility were not provided, under the current regulations, 
transfer might not be accomplished, or may not be accomplished 
promptly. The provision recognizes the importance of the account 
opening diligence

[[Page 19402]]

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.
---------------------------------------------------------------------------

    \260\ The customer diligence requirements in question focus on 
anti-money-laundering requirements and ensuring that risk 
disclosures have been provided to customers and acknowledgements of 
such disclosures have been received. The corresponding costs would 
arise from the possibility that the transferee's diligence would 
have revealed 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.
---------------------------------------------------------------------------

    FIA has requested that the Commission provide transferee FCMs with 
more specific relief from applicable law relating to ``customer 
diligence'' and to add specific references to certain rules, in order 
to provide certainty, and to mitigate regulatory risk, to a transferee. 
FIA requested various points of specific relief under five headings: 
(i) Rules relating to anti-money laundering requirements; (ii) rules 
relating to risk and other disclosures; (iii) rules relating to capital 
and residual interest requirements; (iv) rules relating to account 
statements; and (v) rules relating to margin.
    As discussed in more detail in Section II.B.5 above, the Commission 
has decided that, with respect to certain points of the requested 
relief, providing the relief is warranted, and there are no material 
associated costs from doing so. Thus, for example, Sec.  190.07(b)(3) 
is being amended to refer explicitly to the risk disclosure 
requirements in Sec.  1.65(a)(3).
    With respect to the other points of requested relief, the comment 
requests relief that the Commission has decided carries unacceptable 
costs. Thus, the Commission is not providing a general exemption from 
undermargined account capital charges in accordance with Sec.  1.17, 
nor is the Commission extending the time to comply with capital or 
residual interest requirements. While such relief might have the 
advantage of further incentivizing FCMs to accept transferred accounts, 
it would do so at the cost of potentially causing or accepting 
financial weakness at transferee FCMs.
    In a third group of points of requested relief, the Commission 
notes that interpretations of existing regulations should adequately 
address the concerns. Thus, transferred accounts are (based on the 
terms of the regulations) excluded from the Customer Identification 
Program requirements of 31 CFR 1026.220, while the provisions of Sec.  
190.07(b)(3) adequately inform what constitutes ``appropriate risk-
based procedures for conducting ongoing customer due diligence'' 
(emphasis supplied) in the context of 31 CFR 1026.210(b)(5)(i). While 
providing more specific regulatory provisions might enhance regulatory 
certainty (and thus redound to the benefit of transferee FCMs, and 
potentially incentivize FCMs to accept transferred accounts), it 
carries the risk of being under-inclusive or over-inclusive, and thus 
failing to achieve the regulatory goals.
    Moreover, as to both the second and third categories, there may be 
a more tailored approach to achieving the goal: As the Commission 
explicitly notes above, any further relief that might be appropriate in 
a particular situation can be requested by the transferee in light of 
the relevant facts and circumstances. The Commission observed that its 
staff have traditionally responded to requests for relief in emergency 
situations with great dispatch, and expects, and has instructed staff, 
to continue to do so in this context in the future.\261\ While this 
approach provides less certainty in advance, it has the benefit of 
making tailored relief available (and mitigating the possibility that 
relief leads to unintended consequences).
---------------------------------------------------------------------------

    \261\ See discussion in Section II.B.5 above.
---------------------------------------------------------------------------

    Section 190.07(b)(4) clarifies that account agreements governing a 
transferred account are deemed assigned to the transferee until and 
unless a new agreement is reached. At the request of FIA, the 
Commission is confirming that if there is a pre-existing account 
agreement between a transferred customer and the transferee FCM, that 
pre-existing agreement will govern the relationship rather than the 
agreement between the customer and the transferor (debtor) FCM. The 
provision also confirms that consequences for breaches pre-transfer are 
borne by the transferor rather than the transferee. Section 
190.07(b)(4) provides important transparency regarding the agreement 
between a transferred customer and a transferee FCM pending the 
negotiation of a new agreement between them, or, if such negotiation is 
unsuccessful, until either party decides to terminate the relationship.
    Section 190.07(b)(5) provides 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) are merely clarifications, and there should be no costs 
or benefits associated with such revisions.
    Section 190.07(c) provides that ``all commodity contract accounts 
(including accounts with no open commodity contract positions) are 
eligible for transfer. . . .'' This recognizes 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 clarifies the current 
language and will not change the types of accounts that can be 
transferred. Accordingly, the Commission does not anticipate that there 
will be material added cost associated with the revision.
    Section 190.07(d) revises special rules for transfers under section 
764(b) of the Bankruptcy Code. The revision is being made to promote 
transfer. Cost and benefit considerations related to transfer are as 
discussed above.\262\ The revised regulation permits partial transfers, 
but (to the extent practicable) not in cases where netting sets for 
spreads or straddles would be broken or where customers' net equity 
claims would increase. The revised regulation should provide a benefit 
to customers by codifying this limitation. This recognizes 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.
---------------------------------------------------------------------------

    \262\ See section III.B.1 above.
---------------------------------------------------------------------------

    The Commission has declined to adopt ICI's suggestion to provide 
guidance to the effect that the trustee should not effectuate a 
transfer that will result in a separately managed account having a 
significant deficit following the porting, in order to avoid a 
circumstance where ``the manager of that account would likely need to 
liquidate the bulk of the account's portfolio and other positions in 
order to eliminate or reduce the deficit.'' While adopting such a 
suggestion might benefit the beneficial owner by enabling the account 
manager to manage the separate account in accord with the account 
manager's investment program, it may instead have the opposite effect, 
in that it may prevent any transfer of the customer's positions before 
the seventh calendar day after the order for relief, in which event the 
trustee will be required to liquidate the entirety of the customer's 
account, promptly and in an orderly manner, causing the very 
disruptions that the transfer provisions (and ICI's suggestion) are 
designed to avoid. Moreover, many FCMs carry hundreds or even thousands 
of separately managed accounts. It may well not be practical for a 
trustee, in addition to their numerous other responsibilities (and in a 
context where they need to learn those responsibilities

[[Page 19403]]

in a compressed timeframe) to take ``due account'' of the particular 
circumstances of each of these separately managed accounts in the 
hours, or perhaps a small number of days, that the trustee may be 
allowed by the clearing organizations carrying the FCMs accounts to 
negotiate and effectuate a transfer. Endeavoring to do so might well 
have the cost of diverting the trustee and their assistants from 
carrying out more pressing tasks.
    Section 190.07(d)(3) permits 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 and the 
customer does not deliver substitute property, the provision will 
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 revised regulation ensures that letters of credit 
are treated in an economically similar fashion to other types of 
collateral and that customers using letters of credit will not receive 
any differential economic advantages, thus serving the goal of pro rata 
distribution. If the trustee does draw upon the letter of credit, there 
may be administrative costs incurred by the estate, as well as costs to 
the customer that posted the letter of credit as collateral. These 
costs may be mitigated if the customer delivers substitute property, as 
set forth in the proposed regulation. Moreover, consistent with Sec.  
190.04(d)(3)(iv), the trustee is directed to ``endeavor to achieve pro 
rata treatment among customer claims in a manner that mitigates, to the 
extent practicable, the adverse effects upon customers that have posted 
letters of credit.'' \263\
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    \263\ The costs and benefits of allowing the trustee to draw 
upon the letter of credit have been discussed above in section 
III.C.2 with respect to Sec.  190.04(d)(3).
---------------------------------------------------------------------------

    Section 190.07(d)(4) will 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 will 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 
should benefit) the delivery process. Therefore, the additional 
administrative cost from the revised regulation should be minimal.
    In Sec.  190.07(d)(5), the Commission prohibits the trustee from 
making a transfer that would result in insufficient remaining customer 
property to make an equivalent percentage distribution to all customers 
in the applicable account class (taking into account all previous 
transfers and distributions). The Commission is further clarifying that 
the trustee should make determinations in this context 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. This 
will support achieving the statutory policy of pro rata distribution 
and give the trustee discretion to make decisions based on the 
overarching principle set forth above, valuing cost effectiveness over 
precise values of entitlement. However, this is designed to work to the 
detriment of any customer who, absent the provision, would otherwise 
benefit from a larger distribution. Moreover, in giving the trustee 
discretion, it carries the risk of mistake or misfeasance.
    Section 190.07(e) will add language to clarify that certain 
transfers are approved by the Commission pursuant to the procedure set 
forth in the Bankruptcy Code (and thus protected from avoidance) and 
will prohibit the trustee from avoiding such transfers, unless the 
transfer is disapproved by the Commission. These include a transfer 
made by ``a receiver that has been appointed for the FCM that is now a 
debtor.'' The new provision is being 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 will 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, the revised provision will prevent the 
correction of such actions unless the Commission acts affirmatively to 
disapprove them.\264\
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    \264\ Regulation Sec.  190.02(b)(1) explicitly excepts from the 
delegation to the Director of the Division of Clearing and Risk the 
authority to disapprove a pre-relief transfer pursuant to Sec.  
190.07(e)(1).
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    Section 190.07(f) will 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 section. In addition, the Commission is clarifying that the 
transfers of the commodity contract accounts include the associated 
customer property. These revisions are clarifications and should not 
have any associated costs.
6. Regulation Sec.  190.08: Calculation of Funded Net Equity: 
Consideration of Costs and Benefits
    In Sec.  190.08, the Commission addresses calculation of funded net 
equity. Section 190.08(a) simply states that a customer's funded net 
equity claim is equal to the aggregate of such customers funded net 
equity claims for each account class.
    Section 190.08(b) sets forth the steps for a trustee to follow when 
calculating each customer's net equity. SIFMA AMG/MFA requested that 
the Commission amend proposed Sec.  190.08(b)(2)(xii) to treat accounts 
of the same principal or beneficial owner maintained by different 
agents or nominees as separate accounts and not all held in the 
individual capacity of such principal or beneficial owner, suggesting 
that this would have the benefit of reducing the administrative 
difficulties the trustee would face in consolidating all accounts of 
the same principal or beneficial owner, and it would have the further 
benefit of avoiding any confusion as to treatment of separate accounts 
that could arise with the overlay of the time-limited relief provided 
by Letter 19-17.
    The Commission declined to make this change. The change would not 
achieve those benefits and would have associated costs: First, the FCM, 
to the extent it does treat such accounts separately pursuant to the 
relief set forth in Letter 19-17, will already be consolidating (for 
purposes of certain calculations) all accounts of the same principal or 
beneficial owner, in that the Letter conditions its relief on the FCM 
applying credit limits and stress testing on a combined account 
basis.\265\ Second, given that Letter 19-17 also conditions relief on 
the FCM disclosing that ``under CFTC [p]art 190 rules all separate 
accounts of the beneficial owner will be combined in the event of an 
FCM bankruptcy,'' amending Sec.  190.08(b)(2)(xii) to treat them 
separately would be inconsistent with that disclosure, and would cause, 
rather than relieve, inconsistency with the approach taken under the 
Letter.
---------------------------------------------------------------------------

    \265\ See CFTC Letter 19-17, https://www.cftc.gov/node/217076 at 
4.
---------------------------------------------------------------------------

    While the Commission is making certain revisions in Sec.  
190.08(b)(3), (4), and (5), the Commission views such revisions as non-
substantive and merely clarifying the text in the current analogous 
provisions. Thus, the Commission does not expect these

[[Page 19404]]

changes to result in any costs or benefits.
    Section 190.08(c) sets forth instructions for calculating each 
customer's funded balance, while in Sec.  190.08(d), the Commission is 
in general implementing changes to provide more flexibility to the 
trustee in valuing commodity contracts and other property held by or 
for a commodity broker. For instance, in Sec.  190.08(d)(5), the 
Commission is deleting the requirement that the trustee seek approval 
of the court prior to enlisting professional assistance to value 
customer property. These changes should 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 should 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 carries 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 commodity contracts that have been transferred, 
Sec.  190.08(d)(1)(i) provides 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 should benefit both the estate and customers by 
making it practical to calculate the value of the transferred commodity 
contracts prior to the transfer.
    The Commission has declined to accept ICE's suggestion that it 
adopt a ``more flexible approach'' because ``the market may move 
significantly on the date of the transfer.'' While prices may move 
intra-day during the period between opening and the time of auction, 
they may also move between the time of auction and closing. Therefore, 
there is no ex ante reason to expect that the previous day's price is 
less reflective of the price at the time of the auction than the 
closing price on the auction day. Moreover, an alternative approach, 
using the price set in the auction as the price for individual 
contracts, is unlikely to be practicable. Units auctioned will 
frequently contain a heterogenous (though risk-related) set of 
products, tenors (e.g., contract months), and directions (e.g., long or 
short). Thus, it will often be impracticable to translate an auction 
price for a portfolio to prices for individual contracts within that 
portfolio.
7. Regulation Sec.  190.09: Allocation of Property and Allowance of 
Claims: Consideration of Costs and Benefits
    In Sec.  190.09, the Commission is addressing allocation of 
property and allowance of claims. Section 190.09(a)(1) defines the 
scope of ``customer property'' that is available to pay the claims of a 
debtor FCM's customers, and Sec.  190.09(a)(1)(i) sets 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. In Sec.  
190.09(a)(1)(i), the Commission is making certain substantive changes 
to the categories listed in current Sec.  190.08(a)(1)(i), as discussed 
below:
     First, Sec.  190.09(a)(1)(i)(D) is new and provides 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.'' Clarifying 
this point explicitly should benefit both the estate and customers by 
avoiding confusion or potential litigation.
     Second, Sec.  190.09(a)(1)(i)(F) provides that letters of 
credit, including proceeds of letters of credit drawn by the trustee, 
or substitute customer property, constitute ``customer property.'' This 
section is being revised to be consistent with the other letters of 
credit provisions that are being added throughout part 190. The 
Commission does not anticipate that this provision will result in any 
material costs or benefits, as current Sec.  190.08(a)(1)(i) already 
includes a provision regarding letters of credit.\266\
---------------------------------------------------------------------------

    \266\ 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 Sec.  
190.04(d)(3) in section III.C.2 above.
---------------------------------------------------------------------------

    Section 190.09(a)(1)(ii) sets forth the categories of ``[a]ll cash, 
securities, or other property'' that would be included in customer 
property. In Sec.  190.09(a)(1)(ii), the Commission is making certain 
substantive changes to the categories listed in current Sec.  
190.08(a)(1)(ii), as discussed below:
     First, Sec.  190.09(a)(1)(ii)(D) provides 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 revisions to this section will benefit the estate, by 
assuring that any property they recover will be included in the pool of 
customer property, rather than going to some other creditor (to be 
sure, those other creditors will receive correspondingly less).
     Second, Sec.  190.09(a)(1)(ii)(G) is new, and provides 
that any current assets of the debtor in the greater of (i) the amount 
that the debtor is obligated to be set aside as its targeted residual 
interest amount, pursuant to Sec.  1.11, or (ii) the debtor's 
obligations to cover debit balances or undermargined amounts, pursuant 
to Sec.  1.20, Sec.  1.22, Sec.  22.2, or Sec.  30.7, constitute 
customer property. This new provision will result in administrative 
costs, because the trustee will 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 should 
benefit public customers (and serve the policy of protecting customer 
collateral), however, because it will mitigate the risk of a shortfall 
in customer funds by ensuring that the trustee fulfills the 
Commission's regulations that require an FCM to put certain funds into 
segregation on behalf of customers. ICI and Vanguard agreed that this 
provision will benefit customers, while CME considered it a 
``substantial improvement over the current rule.'' This approach will 
result in such funds being included in the pool of customer property, 
rather than going to some other creditor. It will, to the same extent, 
operate to the detriment of general creditors.
     Third, Sec.  190.09(a)(1)(ii)(K) is also new, and provides 
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 should benefit customers (and, again, the 
policy of protecting customer collateral), since any insurance payment 
as described in this proposed section will enlarge the pool of customer 
property, rather than going

[[Page 19405]]

to general creditors.\267\ It could result in administrative costs, 
however, as the trustee will need to spend time and resources in order 
to determine whether any such insurance payments exist, and in 
prosecuting such insurance claims.
---------------------------------------------------------------------------

    \267\ It will, again, to the same extent, act to the detriment 
of general creditors.
---------------------------------------------------------------------------

     Fourth, the second sentence of Sec.  190.09(a)(1)(ii)(L) 
is new, and will provide 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 customer property constitutes customer 
property. This provision should benefit commodity customers (and act to 
the detriment of general creditors) because any securities customer 
property remaining after full allocation to securities customers will 
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.\268\
---------------------------------------------------------------------------

    \268\ The Commission further notes that the first sentence of 
Sec.  190.09(a)(1)(ii)(L), which provides 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 debtor's public customers, will impose no new costs or 
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.
---------------------------------------------------------------------------

    Section 190.09(a)(2) sets forth the categories of property that are 
not included in customer property. In Sec.  190.09(a)(2), the 
Commission has made certain substantive changes to the categories 
listed in current Sec.  190.08(a)(2), as discussed below:
     First, in Sec.  190.09(a)(2)(iii), the Commission is 
adding 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 will 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, Sec.  190.09(a)(2)(v) provides 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'' will eliminate any distinction 
between initial and variation margin; this deletion will benefit 
customers 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 requirements will be included in the pool of customer property. 
This provision would correspondingly act to the detriment of general 
creditors.
     Third, Sec.  190.09(a)(2)(viii), which is new, provides 
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.
    Section 190.09(a)(3), which is new, gives the trustee the authority 
to assert claims against any person to recover the shortfall of 
customer property enumerated in certain paragraphs elsewhere in 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 will, however, benefit customers, since it will ensure that 
the trustee is in a position to recover any such shortfalls and gives 
the trustee authority to act to do so. Moreover, since this provision 
makes explicit what is implicit in current part 190, an additional 
benefit of this provision may be reduced litigation costs over a 
trustee's authority to engage in attempts to recover shortfalls in 
customer property.\269\
---------------------------------------------------------------------------

    \269\ Of course, these recoveries are derived from persons 
against whom such claims are successfully asserted. The transfer to 
customers from these individuals advances the goal of pro-rata 
distribution.
---------------------------------------------------------------------------

    Section 190.09(b) adds the phrase ``or attributable to'' to the 
language that is in current Sec.  190.08(b), when describing how to 
treat property segregated on behalf of or attributable to non-public 
customers, namely, as part of the public customer estate; the addition 
of this phrase, as described above, will clarify that Sec.  
190.09(b)(1) applies 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 and general creditors), 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.\270\
---------------------------------------------------------------------------

    \270\ Section 190.09(c)(1) will 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 will present similar costs and benefits to those discussed 
above.
---------------------------------------------------------------------------

    Section 190.09(c)(1)(ii) is a new provision that instructs 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 sets forth the order of 
allocation for any customer property that cannot be traced to a 
specific customer account class. These provisions will benefit public 
customers who would otherwise face shortfalls (and then, non-public 
customers who would otherwise face shortfalls). Since these provisions 
make explicit what is implicit in current part 190, an additional 
benefit of these provisions will result from the increased clarity over 
what to do with any excess customer property. However, the provisions 
will act to the detriment of non-public customers (relative to public 
customers) and general creditors (relative to both) 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.\271\
---------------------------------------------------------------------------

    \271\ The incentive effects of such preferences are discussed in 
section III.A.2.vi, above.
---------------------------------------------------------------------------

    Section 190.09(d) governs the distribution of customer property. 
The only substantive change in Sec.  190.09(d) from its analog in 
current Sec.  190.08(d) is in Sec.  190.09(d)(1)(i) and (ii), which 
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, Sec.  
190.09(d)(1)(i) and (ii) allow the posting of ``substitute customer 
property.'' This term, which is defined in Sec.  190.01, means cash or 
cash equivalents. This revision will benefit customers because it makes 
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, 
will be required to

[[Page 19406]]

value (and potentially to liquidate) such cash equivalents. Moreover, 
while ``cash equivalents'' are required to be assets ``that are highly 
liquid such that they may be converted into United States dollar cash 
within one business day without material discount in value,'' it is 
possible that such assets could nonetheless decrease in value, 
potentially to the detriment of other customers.
8. Regulation Sec.  190.10: Provisions Applicable to Futures Commission 
Merchants During Business as Usual: Consideration of Costs and Benefits
    As proposed, Sec.  190.10 addresses provisions applicable to FCMs 
during business as usual. The ABA Subcommittee and CME recommended that 
these ordinary course provisions should be codified in part 1 of the 
Commission's regulations, to be more transparent to FCM compliance 
personnel. As discussed further below, the Commission has accepted that 
suggestion and is adopting in part 1 of its regulations the provisions 
that were proposed as Sec.  190.10 (b), (c), (d), and (e).
    In the regulation proposed as Sec.  190.10(a), the Commission notes 
that an FCM is required to maintain current records related to its 
customer accounts, consistent with current Commission regulations, and 
in a manner that will permit them to be provided to another FCM in 
connection with the transfer of open customer contracts and other 
customer property. This regulation does not impose new obligations, but 
rather informs the trustee regarding their duties by incorporating 
references to the Commission's existing regulations. Thus, this 
provision is remaining in part 190, and, as the sole remaining 
paragraph, will be codified as Sec.  190.10.
    The regulation proposed as Sec.  190.10(b) addresses designation of 
accounts as intended for the purpose of hedging. It is being codified 
as Sec.  1.41. An FCM will be permitted to rely upon a customer's 
written representation of hedging intent regarding the designation of a 
hedging account, without being required to look behind that 
representation, thus mitigating administrative costs.
    Section 1.41(a) requires 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 clear instruction to 
FCMs at the outset of the relationship. Clear instruction at the outset 
will facilitate the ability properly to account for customer property. 
There will be some disclosure and accounting costs associated with this 
provision. For those customers that do engage in hedging, it will be 
more cost effective to designate the account at opening 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 regulation should reduce the probability that the 
opportunity to designate the account as a hedging account will be 
missed.
    Section 1.41(b) sets forth the conditions for treating an account 
as a hedging account, permitting 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. There will be record-keeping costs for FCMs and customers 
associated with the provision.
    Section 1.41(c) provides that the foregoing requirements do not 
apply to commodity contract accounts opened prior to the effective date 
of this final rulemaking, and that an FCM can continue to designate 
such existing accounts as hedging accounts based on written hedging 
instructions obtained under current regulations. This provision should 
mitigate the impact of the changes to current requirements in Sec.  
1.41(a) and (b) by not applying those provisions to already opened 
hedging accounts, instead relying upon the information collected and 
maintained during the current regulatory framework.
    Section 1.41(d) will 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 will give FCMs and customers flexibility 
to apply the proposed regulations to existing accounts where the impact 
would not be overly burdensome.
    The regulation proposed as Sec.  190.10(c) addresses the 
establishment of delivery accounts during business as usual. It is 
being codified as Sec.  1.42, and recognizes 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. While there are costs 
associated with the opening and maintenance of delivery accounts, the 
Commission views that the use of such accounts is cost effective in 
facilitating delivery.\272\ The benefit of using such accounts is 
twofold: To protect customer assets during the delivery process, and to 
foster the well-functioning of the delivery process.
---------------------------------------------------------------------------

    \272\ 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 
should be mitigated.
---------------------------------------------------------------------------

    The regulation proposed as Sec.  190.10(d) addresses letters of 
credit, and will prohibit an FCM from accepting a letter of credit as 
collateral during business as usual unless certain conditions are met 
at the time of acceptance and remain true through the date of 
expiration. It is being codified as Sec.  1.43.
    The first condition is that 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 in fact is 
passed through to a clearing organization, the trustee for such 
clearing organization (or the FDIC) must be able to draw upon the 
letter of credit in full or in part in the event of a bankruptcy 
proceeding for such clearing organization (or where the FDIC is 
appointed as receiver).
    Section 1.43 will 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 Sec. Sec.  190.00(c)(5) and 190.04(d)(3). 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,\273\ and that these forms are consistent with these new 
requirements. Nevertheless, FCMs will 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.
---------------------------------------------------------------------------

    \273\ See section II.B.8 above.
---------------------------------------------------------------------------

    To mitigate the costs of this change, the Commission has considered 
the extent of the use of letters of credit in the industry and has 
determined that upon the effective date of the regulation, Sec.  1.43 
will apply only to new letters of credit and customer agreements. The 
Commission further is including a transition period of one year from 
the effective date until Sec.  1.43 will apply to existing letters of 
credit and customer agreements. The transition period is intended to 
give FCMs an adequate opportunity to conduct the necessary review of 
existing letters of credit and customer agreements, and to make any

[[Page 19407]]

necessary changes. SIFMA AMG/MFA have urged the Commission to shorten 
that one-year transition period, questioning how a (non-conforming) 
letter of credit would be treated if an FCM that is holding such a 
letter of credit went into bankruptcy during that period. Nonetheless, 
the Commission has concluded that the one-year time period 
appropriately balances the goals of mitigating burden on FCMs who are 
required to conduct such reviews, and make such changes, with the goal 
of mitigating the risk that an FCM that has accepted one or more 
letters of credit that do not conform to the new requirements becomes a 
debtor during that transition period. Even if such a situation occurs, 
the risk that the customer who posted that letter of credit would 
obtain treatment that is not consistent with (i.e., better than) pro 
rata treatment (at the expense of other public customers) is mitigated 
by the provision in Sec.  190.04(d)(3)(ii)--which is not subject to the 
one-year transition period--that, for a letter of credit posted as 
collateral, ``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.''
    It is possible that some letters of credit could become more 
expensive for customers to obtain, as there will be an increased 
likelihood that the letter of credit will be drawn upon. (As discussed 
above, this appears to not apply to the majority of existing 
arrangements). As noted in the discussion of Sec.  190.04(d)(3), the 
benefit of the regulation is ensuring that letters of credit are 
treated in an economically consistent manner with other types of 
collateral, thus promoting the goal of pro rata distribution. However, 
it could create incentives for customers who had, or who would prefer 
to, post letters of credit that could not be drawn upon unless the 
customer defaulted, to reduce their participation in transactions 
cleared through FCMs.
    The provision proposed as Sec.  190.10(e) concerns the disclosure 
statement for non-cash margin, and is being codified as Sec.  1.55(p). 
It largely aligns with the provisions in current part 190 from which it 
was derived; there will be no additional cost or benefit implications.
9. Section 15(a) Factors--Subpart B
a. Protection of Market Participants and the Public
    Subpart B of the revised regulations will increase the protection 
of market participants and the public by clarifying certain provisions 
(thereby promoting transparency for customers, other claimholders, and 
the general public), by providing, in certain other provisions, 
discretion to the trustee in determining how best to achieve the goal 
of protecting public customers as a class, by fostering transfer (and 
therefore mitigating the market risk associated with closing out and 
reopening positions for certain customers), by enhancing the likelihood 
that customer net equity claims will be fully funded, and by promoting 
fairness to customers as a class by achieving pro rata distribution.
b. Efficiency, Competitiveness, and Financial Integrity
    Subpart B of the revised regulations will 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 and well-thought-out instructions for a bankruptcy trustee to 
follow in the event of an FCM insolvency, and by ensuring that these 
instructions are and remain consistent with current market practices. 
Moreover, subpart B will provide the bankruptcy trustee with 
discretion, in certain circumstances, to react flexibly to the 
particulars of the insolvency proceeding, guided by the goal of 
protecting public customers as a class, thereby promoting cost-
effective administration of the proceeding. These effects will, 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. The revised regulations work to promote 
the transfer, rather than liquidation, of customer positions. To the 
extent that they therefore mitigate the likelihood of the need for 
liquidations of customer positions, particularly in conditions of 
market distress, they will mitigate the negative impacts of bankruptcy 
proceedings on price discovery.
d. Sound Risk Management Practices
    Subpart B of the revised regulations will promote sound risk 
management practices by facilitating the bankruptcy trustee' effective 
management of the risk of the debtor FCM. Subpart B will accomplish 
this by revising the bankruptcy regulations for an FCM insolvency to 
reflect current market practices and thereby make it easier for the 
trustee to act effectively to protect customer property in the event of 
such an insolvency.
e. Other Public Interest Considerations
    Subpart B of the revised regulations 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. A well-structured and effective bankruptcy 
process that efficiently facilitates the proceedings is likely to 
benefit the financial system (and thus the public interest), as that 
process will 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.

D. Subpart C--Clearing Organization as Debtor

    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. As 
discussed further below, while these regulations are fitted to the 
context of a commodity broker that is a clearing organization, they are 
principles-based rather than prescriptive, and flexible rather than 
rigid.
    The overarching benefits of this approach include the following. 
First, uncertainty will be reduced 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 to tailor their risk management practices 
(and use of clearing services) in light of this enhanced 
understanding). This better understanding may well foster greater trust 
in the cleared derivatives marketplace, and thus greater participation 
therein. To be sure, it is also possible that some market participants, 
upon achieving a greater understanding, may decide not to participate. 
There are other limitations to these benefits, noted below. Second, by 
developing a more detailed, yet flexible, framework and procedures for 
the bankruptcy of a DCO, the costs (to the estate, to clearing members, 
and to

[[Page 19408]]

public customers) of the case should be reduced.
    Third, 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, subpart C 
will: (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 can, to a certain extent, be costs imposed by proposed subpart C, 
in that there may be a corresponding reduction in flexibility with the 
addition of rules specifically tailored to address a DCO bankruptcy, 
but the Commission has drafted these proposed rules with the intent of 
maintaining significant flexibility, where warranted.
    It is apposite to note an important issue that affects incentives: 
A significant group of commenters have expressed strong concerns, both 
in comments to this rulemaking \274\ and elsewhere,\275\ that clearing 
members and their customers have no meaningful role in DCO risk 
governance, and, most relevant here, that DCOs' default rules and 
procedures and recovery and wind-down plans are developed without 
sufficient input from members and their customers. As discussed in 
detail in section II.C above and in this section II.D, subpart C is 
based, in large part, on a debtor DCO's ex ante default rules and 
procedures and recovery and wind-down plans, though applied flexibly by 
the trustee--that is, only to the extent they determine is 
``reasonable'' and ``practicable.''
---------------------------------------------------------------------------

    \274\ See ACLI, FIA, ICI, SIFMA AMG/MFA, and Vanguard.
    \275\ See, e.g., A Path Forward for CCP Resilience, Recovery, 
and Resolution (published by a group of prominent clearing members 
and money managers).
---------------------------------------------------------------------------

    Most of those concerns transcend the topic of this rulemaking: As a 
general matter, risk governance is intended to mitigate the possibility 
of default and, where default does occur, to foster the result that it 
is the defaulter that pays for all of the losses; skin-in-the-game 
provides an additional layer of loss-absorbency that (i) comes before 
mutualizing costs to non-defaulters and (ii) creates incentives for 
DCOs to engage in successful risk management. Default rules and 
procedures are intended to, inter alia, ensure that the DCO can take 
timely action to contain losses and liquidity pressures and to continue 
meeting its obligations in the event of a clearing member default. 
Recovery plans address credit losses that exceed the DCO's available 
resources, as well as the manifestation of other risks, as necessary to 
maintain the derivatives clearing organization's viability as a going 
concern, while wind-down involves the actions of the DCO to effect the 
permanent cessation or sale or transfer of one or more services.
    Commission regulations require DCOs to: Take steps to ensure their 
resilience, have effective rules and procedures to manage defaults, 
address fully any individual or combined default loss, and maintain 
viable plans for recovery in the event that they suffer a default loss 
or any other (non-default) loss.\276\
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    \276\ See generally part 39 of the Commission's regulations. 
Only SIDCOs, or other DCOs that have elected to become subject to 
the provisions of subpart C of part 39, are required to address 
fully any default loss, or to maintain recovery and wind-down plans. 
However, among DCOs based in the United States, the vast majority of 
activity is conducted on DCOs that fall within one of those two 
categories.
---------------------------------------------------------------------------

    DCOs' rules and arrangements for default management and their 
recovery plans work to allocate losses that are not covered by the 
resources of the defaulter between the DCOs themselves, their clearing 
members, and (in some cases such as gains-based haircutting), will have 
the effect (along with clearing agreements between FCMs and their 
public customers) of allocating certain losses to public customers. 
These include default losses that are not covered by margin posted by 
the defaulter (or the defaulter's own contribution to mutualized loss 
arrangements) or by the DCO's ``skin-in-the-game,'' as well as certain 
investment or custody losses. All of this would occur outside of 
bankruptcy.\277\
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    \277\ Moreover, among U.S. DCOs (and among all DCOs registered 
with the Commission), no loss has ever been so large that it was 
mutualized.
---------------------------------------------------------------------------

    Those rules, plans, and arrangements--and the extent to which they 
are considered helpful or noxious--thus influence the incentives of 
DCOs, their clearing members, and the customers of those clearing 
members. Accordingly, the concerns that these clearing members and 
money managers have raised with respect to their limited ability to 
influence these rules, plans, and arrangements that have effects 
outside of bankruptcy are likely to have important incentive effects on 
how, and the extent to which, clearing members and their public 
customers (including money managers) are willing to and do participate 
in cleared markets.
    To the extent that subpart C of part 190 applies those rules, plans 
and arrangements, even if flexibly, then the incentive effects 
described above may be felt more strongly by clearing members and their 
public customers, albeit only marginally so.\278\ The level of that 
enhanced incentive is difficult to measure, since it depends, in 
significant part, on the perception of those entities as to the effect 
of referring to those rules, plans, and procedures in bankruptcy under 
part 190, subpart C: Those rules, plans, and procedures, which they 
dislike, are and will be applicable in cases where the DCO engages in 
either default management or recovery outside of bankruptcy. The 
references to these rules, plans, and procedures in part 190 increases 
the likelihood that they will be used (because bankruptcy represents an 
additional circumstance in which they would be applicable). The 
incentive effects also depend on the perception of clearing members and 
their public customers on the effect of such use in bankruptcy.
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    \278\ The effects of those rules on incentives for DCOs is even 
more difficult to measure, since a chapter 7 liquidation (the only 
bankruptcy available to a commodity broker, see 11 U.S.C. 109(d)) is 
highly likely to reduce severely, if it does not eliminate, the 
DCO's value to its shareholders.
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    A note on terminology: As discussed above in section II.C, the 
customers of a clearing organization are its members, considered 
separately in two roles: (1) Each member may have a proprietary (also 
known as ``house'') account at the clearing organization, on behalf of 
itself and its non-public customers (i.e., affiliates). The property 
that the clearing organization holds in respect of these accounts is 
referred to as ``member property.'' (2) Each member may have an account 
for that members' public customers. The property that the clearing 
organization holds in respect of these accounts is referred to as 
``customer property other than member property.'' Many clearing members 
will have both such accounts, although some may have only one or the 
other.
1. Regulation Sec.  190.11: Scope and Purpose of Subpart C: 
Consideration of Costs and Benefits
    Section 190.11(a) will simply state that the new subpart C of part 
190 will 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 Sec.  190.11(a) are 
the overarching costs and benefits stated above.

[[Page 19409]]

    ICE and SIFMA AMG/MFA noted that, in the case of the bankruptcy of 
a DCO organized outside the United States, there may be conflicts with 
a bankruptcy proceeding in the home jurisdiction unless the 
applicability of part 190 is limited. For example, there may be 
differing--and irreconcilable--rules for distributing property. Such 
differing rules could incentivize, e.g. a customer of a non-FCM 
clearing member to bring litigation seeking to apply part 190's 
customer protection rules to what they might describe as the customer 
claims of their non-FCM clearing member.\279\
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    \279\ As noted immediately below, public customers of FCM 
clearing members will benefit from protection under part 190.
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    The Commission has determined to adopt a suggestion by ICE and, in 
a newly created Sec.  190.11(b), to limit the applicability of part 
190, in the case of a foreign DCO subject to a proceeding in its home 
jurisdiction, to provisions that (a) focus on the contracts and 
property of public customers of FCM members \280\ or (b) general 
provisions, and those that provide notice and reports to the Commission 
and a U.S. bankruptcy trustee.\281\ By limiting the applicability of 
part 190 in this manner, the Commission will foster the goal of 
mitigating such conflicts,\282\ while by including those provisions 
(rather than disapplying part 190 entirely to the bankruptcy of a 
foreign-based clearing organization), the Commission will foster the 
goal of protecting customers of U.S. FCM members of such a foreign-
based DCO.
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    \280\ I.e., Sec. Sec.  190.13, 190.17, and 190.18, but only with 
respect to: (1) Claims of FCM clearing members on behalf of their 
public customers; and (2) property that is or should have been 
segregated for the benefit of FCM clearing members' public 
customers, or that has been recovered for the benefit of FCM 
clearing members' public customers.
    \281\ I.e., subpart A, and Sec.  190.12.
    \282\ The Commission notes that conflicts involving a DCO based 
outside the United States with the insolvency law in that DCO's home 
jurisdiction as applied to claims of FCM clearing members on behalf 
of their public customers should be mitigated by the fact that, 
pursuant to Sec.  39.27(c)(3) and Exhibit R to appendix A to part 
39, the DCO is required to submit and to keep current a memorandum 
demonstrating, inter alia, the basis for the conclusion that the 
DCO's arrangements to ring-fence the customer funds of FCM clearing 
member are effective under the relevant non-U.S. law in the event of 
the insolvency of the DCO, and the basis for the conclusion that a 
local court or insolvency official in the DCO's jurisdiction of 
domicile would respect the choice of U.S. law in that context, and 
the basis for the conclusion that the DCO would be able to comply 
with relevant provisions of the Bankruptcy Code and Commission 
regulations with respect to pro rata distribution and relevant 
orders of a U.S. court regarding the distribution of customer funds.
---------------------------------------------------------------------------

2. Regulation Sec.  190.12: Required Reports and Records: Consideration 
of Costs and Benefits
    Section 190.12(a)(1) is analogous to Sec.  190.03(a), in that it 
provides instructions regarding how to give notice to the Commission 
and to a clearing organization's members, where such notice is required 
under subpart C. For a discussion of the costs and benefits of this 
section, please refer to the discussion of the cost and benefit 
implications of Sec.  190.03(a).
    Section 190.12(a)(2) will revise the time in which a debtor 
clearing organization must notify the Commission of a bankruptcy 
filing. In particular: (1) In the event of a voluntary bankruptcy 
filing, the debtor will 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 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 receiving notice of the filing, or within at the most 
three hours thereafter.
    With respect to a voluntary bankruptcy filing, the Commission 
expects that the DCO will have reported its financial distress in the 
lead-up to a bankruptcy filing in accordance with the mandatory 
reporting requirements in Sec.  39.19(c)(4); the revision in proposed 
Sec.  190.12(a) merely codifies the expectation that the clearing 
organization will 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, Sec.  190.12(a) also 
will allow a debtor clearing organization to provide the relevant 
docket number of the bankruptcy proceeding to the Commission ``as soon 
as available,'' while not delaying notifying the Commission of the 
filing itself, to account for the potential for a time lag between the 
filing of a proceeding and the assignment by the relevant court of a 
docket number. These revisions will 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.
    Section 190.12(b) and (c) involve the provision of certain reports 
and records to the trustee and/or the Commission by the debtor clearing 
organization. In particular: Sec.  190.12(b) sets forth the reports and 
records that the clearing organization will 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 Sec.  190.12(c) sets 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 
will impose administrative costs on the debtor clearing organization 
and/or the trustee, which will be obligated to spend time and resources 
transmitting copies of the required reports and records to the trustee 
and/or Commission. However, these provisions should 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.
    OCC indicated that, while they ``maintain[ ] this information in a 
readily accessible place and do[ ] not foresee any challenge in 
identifying and providing this information without delay,'' they 
believe that the three hour time period is ``overly prescriptive'' 
because of the possibility of ``unforeseen delays that could occur on 
the day in which a DCO enters bankruptcy.'' The Commission has declined 
to modify the proposal, because the Commission believes that setting 
this specific deadline will result in significant benefits: Providing 
this information to the trustee and the Commission with much-needed 
expediency, and facilitating DCOs' contingency planning. By comparison, 
the burden of providing the reports, which as the commenter notes, are 
already in existence and are readily accessible, appears modest.
3. Regulation Sec.  190.13: Prohibitions on Avoidance of Transfers: 
Consideration of Costs and Benefits
    Section 190.13 implements section 764(b) of the Bankruptcy Code 
with respect to DCOs, and prohibits the

[[Page 19410]]

avoidance of certain transfers made either before or shortly after 
entry of the order for relief. While the prohibition of avoidance of 
pre- and post-relief transfers in the context of FCM debtors in Sec.  
190.07(e) applies so long as the transfer is not disapproved by 
Commission, the same prohibition on avoidance of pre- and post-relief 
transfers in Sec.  190.13(a) and (b) will require the affirmative 
approval of the Commission (though such approval can be given either 
before or after the transfer is made). This distinction will impose 
administrative costs on the clearing organization or the trustee, who 
will 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,\283\ a clearing organization is mandated to maintain a 
``balanced book.'' Thus, a transferee clearing organization may only 
accept transfer of all of the transferor's customer positions (or at 
least all positions in a given product set).\284\ Any such transfer 
will have significant effects on the markets cleared, and on the 
broader financial system. There are important benefits from requiring 
the Commission's approval of such a significant transaction, and thus 
permitting the administrative agency responsible for oversight of the 
derivatives markets to maintain a level of discretion which will help 
accomplish the goal of an orderly functioning of the marketplace.
---------------------------------------------------------------------------

    \283\ See section II.C.3 above.
    \284\ If the transferor clearing organization does not have a 
balanced book, e.g., because of a member default, it could 
nonetheless only transfer a balanced book.
---------------------------------------------------------------------------

4. Regulation Sec.  190.14: Operation of the Estate of the Debtor 
Subsequent to the Filing Date: Consideration of Costs and Benefits
    Section 190.14(a) provides 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 should 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.
    ICE believed that the proposal did not clearly take into account 
non-CFTC-regulated clearing, and that claims of members with respect to 
such activity should be properly accounted for in bankruptcy and should 
not be disadvantaged. As the Commission noted above,\285\ to the extent 
that the DCO is conducting non-CFTC-regulated activity, the Commission 
expects that the proof of claim form will include the opportunity to 
claim for debts of the DCO related to activity that is not regulated by 
the CFTC. Thus, no change is necessary to address this concern.
---------------------------------------------------------------------------

    \285\ See section II.C.4.
---------------------------------------------------------------------------

    Section 190.14(b) provides that a debtor clearing organization will 
cease making calls for variation settlement or initial margin.\286\ 
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. Thus, Sec.  190.14(b) affirms current legal 
requirements and maintains the status quo. Section 190.14(c)(1) 
provides 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. This 
provision will impose administrative costs in that the trustee will 
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 will 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 may benefit the broader 
financial markets by mitigating uncertainty.
---------------------------------------------------------------------------

    \286\ As originally proposed, Sec.  190.14(b) also contained 
provisions that were 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 Act, 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. The Commission subsequently issued the 
Supplemental Proposal, which withdrew those proposed provisions--
Sec.  190.14(b)(2) and (3)--and proposed a new alternative to 
facilitate the potential resolution of a SIDCO pursuant to Title II 
of the Dodd-Frank Act. As discussed in section II.C.4 above, the 
Commission is not adopting the Supplemental Proposal.
---------------------------------------------------------------------------

    Section 190.14(c)(2), which is derived from current Sec.  
190.08(d)(3), will 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), 
Sec.  190.14(c)(2) will not allow the customer to request that the 
trustee purchase like-kind securities and distribute those instead of 
cash, but instead will leave it 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 will remove their option 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.
    Section 190.14(d) will 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.'' This requirement applies with respect to accounts of the 
customers of the clearing organization: That is, its members, 
separately in respect of each such member's (1) house account (on 
behalf of the member and its non-public customers and (2) customer 
account or accounts (on behalf of the member's public customers, one 
such account for each account class, to the extent relevant).
    This requirement will impose administrative costs due to the time 
and effort involved in making such calculations. However, the 
regulation gives the trustee a certain amount of discretion, and this 
calculation will be necessary to achieve the goal of making 
distributions that are consistent with each customer's proportionate 
share.
5. Regulation Sec.  190.15: Recovery and Wind-Down Plans; Default Rules 
and Procedures: Consideration of Costs and Benefits
    Section 190.15 provides that (1) the trustee shall not avoid or 
prohibit any

[[Page 19411]]

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, and consistent with the protection of 
customers, 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, 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.
    A number of commenters appeared to support the first alternative 
approach. Some (e.g., ACLI, FIA, ICI, SIFMA AMG/MFA, Vanguard) 
expressed concern that they lack transparency with regard to the DCO 
risk management decisions and DCOs' default rules and procedures and 
recovery and wind-down plans are developed without sufficient input 
from clearing members and their customers. For example, Vanguard argued 
that the existing DCO governance regime provides them with no 
meaningful voice in critical DCO risk management practices and new 
cleared product introductions; and since public customers have only a 
very limited ability to mitigate clearing risks contractually, they 
``rely heavily on the Commission to protect the interests of [their] 
investors in the mandated cleared market.'' Commenters also expressed 
the concern that there is a risk that, as a DCO begins to fail, 
otherwise prudent DCO rules could be changed without the appropriate 
vetting by clearing members and public customers who, given mutualized 
allocation of losses, bear the risk of poor risk management choices 
undertaken by the DCO.\287\
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    \287\ With respect to DCO rules adopted as the DCO is on the 
threshold of failure: DCO rules are subject to review by the 
Commission. In all cases, they are subject to review for consistency 
with the CEA and Commission regulations (see Sec.  40.6). In the 
case of SIDCOs, they are additionally subject to review for 
consistency with the purposes of the Dodd-Frank Act or any 
applicable rules, orders, or standards prescribed under section 
805(a) thereof. Moreover, to the extent commenters are concerned 
that such late-enacted rules will be unfair to clearing members or 
their customers, the Commission expects that such unfairness would 
affect the trustee's judgment of the extent to which it is 
``reasonable'' to apply those rules.
---------------------------------------------------------------------------

    The Commission has considered the potential interplay of the 
amendments to part 190 with other Commission regulations and applicable 
statutes. As noted above, these commenters' concerns predominantly 
relate to the economic interests of clearing members and their 
customers in contexts outside of bankruptcy.
    A DCO's operations and rules outside of bankruptcy are governed by 
parts 39 and 40 of the Commission's regulations. The Commission, in 
particular through its Division of Clearing and Risk, applies these 
regulations and conducts a rigorous program of oversight of DCOs 
designed to protect the interests of market participants and of the 
financial system, including through careful reviews of their rules 
(including default rules) and their recovery and wind-down plans, 
through detailed daily and periodic risk surveillance, and through in-
depth remote and on-site examinations addressing a wide spectrum of 
risk management issues.
    As noted by a commenter above, they ``rely heavily on the 
Commission to protect the interests of our investors in the mandated 
cleared market.'' Over the years, the Commission has taken seriously 
its responsibilities in this regard, through its regulatory, 
surveillance, and examinations programs.
    As discussed above, there are important costs to addressing, in the 
context of part 190, market participants' concerns regarding DCOs' 
rules, procedures, and plans for allocating losses that apply outside 
of a DCO bankruptcy: Establishing a bankruptcy regime where some market 
participants would be allocated a smaller amount of losses in 
bankruptcy than outside of bankruptcy would risk creating incentives 
for those participants to act in a manner that promotes the likelihood 
that the DCO will enter bankruptcy.
    In view of these considerations, the Commission believes the 
commenters' concerns are effectively mitigated by the existing 
provisions of parts 39 and 40 of its regulations and by the 
Commission's supervision of DCOs.\288\ Therefore, the adoption of part 
190, subpart C, which is applicable to a DCO's potential bankruptcy, 
appropriately complements parts 39 and 40 and the Commission's ongoing 
supervision, which apply to a DCO's operations and rules outside of 
bankruptcy.
---------------------------------------------------------------------------

    \288\ Nonetheless, the Commission is sensitive to the concerns 
raised by commenters with respect to the development and maintenance 
of DCO recovery and wind-down plans and default rules and 
procedures, and is actively reviewing these issues, in particular 
with respect to governance, as they relate to parts 39 and 40.
---------------------------------------------------------------------------

    Other commenters are concerned with the inclusion in those DCO 
rules and plans of ``drastic measures as Variation Margin Gains 
Haircutting (VMGH) and Partial Tear-Up (PTU) of open positions.'' Gains 
haircutting, however, is part of the ex ante allocation of losses, and 
thus is an inherent part of the way in which losses will be allocated 
in bankruptcy. Moreover, there is a limited amount of customer property 
available. Thus, to the extent the application of VMGH were to be 
disallowed, and some customers would realize corresponding benefits 
through increases in the allowed amounts of their claims (and thus a 
greater share of customer property), other customers would suffer 
corresponding costs, through a decreased share of customer property--
indeed, the latter customers may receive less than the amount of their 
claims for initial margin.\289\ Accordingly, the Commission concludes 
that it is inadvisable to prohibit VMGH, or to mandate that its effects 
be reversed, in cases of DCO bankruptcy.
---------------------------------------------------------------------------

    \289\ Cf. ISDA: Safeguarding Clearing: The Need for a 
Comprehensive CCP Recovery and Resolution Framework (2017) at 2 
(``Initial margin haircutting should never be permitted.'')
---------------------------------------------------------------------------

    Partial tear-up, on the other hand, is inapplicable in a clearing 
organization bankruptcy: Sec.  190.14(b) prohibits further collection 
of variation margin, while Sec.  190.14(c) requires the trustee to 
liquidate all open commodity contracts. Together, they effectively 
mandate full tear-up of open positions. Thus, the question of whether 
partial tear-up should be prohibited is moot.
    Other commenters were concerned that these plans do not prescribe a 
specific course of action, but rather ``present a menu of options.'' 
See, e.g., FIA, Vanguard. 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. By contrast, being 
presented with a ``menu of options'' among which the trustee may select 
(and adapt) in a manner that is ``reasonable and practicable'' provides 
the benefit of a helpful roadmap to determine strategy and tactics.
    The commenters, and potentially other clearing members and public 
customers who share the concerns of the commenters, appeared to view 
DCO default rules and procedures and recovery and wind-down plans that 
they believe have been adopted with

[[Page 19412]]

inadequate input from them as noxious, and thus they may already be 
incentivized to reduce their exposure to such DCOs. Those incentives 
may be (marginally) increased by the fact that the Commission is 
establishing in Sec.  190.15 a model for the trustee that is based on 
those rules, procedures, and plans.
    Other commenters (CME and ICE) supported the second alternative, 
specifically, a requirement that the trustee cannot override the DCO's 
default rules or deviate from the DCO's recovery or wind-down plans. 
However, given that these rules and plans are designed to operate 
outside of bankruptcy, a requirement to follow them in procrustean 
fashion would have the cost of compelling the trustee to adopt an 
approach that may be poorly tailored to the situation, and the 
Commission will accordingly not adopt such a requirement.
    Finally, given the differences between DCOs (and potential 
bankruptcy situations), a one-size-fits-all approach prescribed by the 
Commission is likely to prove too rigid, and thus will not be adopted.
    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 a menu of 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. Adding 
concepts of reasonability and practicability will give the trustee the 
discretion to modify those rules, procedures, and plans where and to 
the extent appropriate. 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, but have the 
discretion to vary them as appropriate, would be the most cost 
effective.
6. Regulation Sec.  190.16: Delivery: Consideration of Costs and 
Benefits
    Regulation Sec.  190.16 addresses delivery in the context of a 
clearing organization bankruptcy. Current part 190 does not contain any 
regulations specific to delivery in that context.
    Section 190.16(a) provides that a bankruptcy trustee is 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 has the benefit 
of mitigating disruption to the cash market for the commodity and 
mitigating adverse consequences to parties that may be relying on 
delivery taking place in connection with their business operations. 
While the exertion of such reasonable efforts will necessarily involve 
administrative costs (predominantly, time of the trustee or their 
agents), the Commission is of the view that this approach has 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.
    While proposed Sec.  190.16(a) applied this approach only to 
contracts that had moved into delivery position prior to the date and 
time of the order for relief, the ABA Subcommittee and CME suggested 
that this approach should be extended to contracts that move into 
delivery position after that date and time, with CME noting that ``it 
is equally important to protect deliveries under [such contracts] to 
avoid disruption to commercial markets and operations.'' The Commission 
has accepted this suggestion and notes that, if any contracts move into 
delivery position after the order for relief, but before being 
terminated, liquidated, or transferred, the benefits and costs of this 
approach are analogous to those of contracts that move into delivery 
position prior to the order for relief.
    Section 190.16(b) clarifies which property will be part of the 
physical delivery account class and which will be part of the cash 
delivery account class. It is analogous to Sec.  190.06(b) in the FCM 
context, and carries forward the concepts in that section, but has been 
modified for the context of a DCO bankruptcy. Clearly delineating 
between the physical delivery account class and the cash delivery 
account class will benefit customers because it will increase 
transparency in terms of which account class their property belongs in. 
Section 190.16(b) will likely impose administrative costs, since 
accounting separately for physical delivery property and cash delivery 
property will take the trustee's time and resources. As noted 
above,\290\ the sub-division of the delivery account class into the 
physical and cash delivery account classes will recognize that cash is 
more vulnerable to loss, and more difficult to trace, as compared to 
physical delivery property. Therefore, this sub-division will likely 
benefit those with physical delivery claims. Since cash is more 
vulnerable to loss and more difficult to trace, then under this 
approach, clearing members and customers with claims in the cash 
delivery sub-class will be more likely to get a pro rata distribution 
that would be less than those with claims in the physical delivery 
property sub-class.\291\
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    \290\ See discussion of Sec.  190.06(b) in section II.B.4 above.
    \291\ 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 Sec.  190.01, 
section II.A.2 above.
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7. Regulation Sec.  190.17: Calculation of Net Equity: Consideration of 
Costs and Benefits
    Section 190.17(a) clarifies 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 states 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 Sec.  190.17(a) 
are clarifications that reflect customer classifications set forth in 
section 766(i) of the Bankruptcy Code, and account classifications that 
have long been used in other contexts, and will not impose any costs or 
benefits on any parties.
    Section 190.17(b)(1) provides 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. It also provides that, with respect to a clearing 
member's house account, this will include 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.
    A number of commenters, including the ABA Subcommittee, CME, FIA, 
and ICE, objected to including assessments that had not been called for 
before the order for relief in the calculation of net equity claims 
where the debtor clearing organization's rules provide that assessments 
cannot be called for after bankruptcy. Taking these commenters' 
preferred approach would benefit the clearing members in circumstances 
where there are both uncalled

[[Page 19413]]

assessments, and remaining default losses. As FIA noted in its comment 
letter, the inclusion of uncalled assessments ``appears to have the 
effect of reducing a clearing member's potential recovery.'' However, 
all losses will ultimately be allocated, and if uncalled assessments 
are not taken into account, any remaining losses that haven't been 
covered by other default resources will be allocated through gains-
based haircutting. Thus, the commenters' preferred approach would be at 
the cost of the customers of clearing members, who would bear 
additional losses even as the clearing members would benefit.
    Relative to the alternative suggested by these commenters, the 
direct effect of Sec.  190.17(b)(1) is to ensure that the uncalled 
assessment will make up more of the default losses, and conversely that 
haircutting of the gains (of both clearing members and customers) will 
make up less of that loss. Hence, the rule could harm clearing members, 
and correspondingly benefit their customers. In addition, there can be 
indirect effects. While the maximum amount of assessments that clearing 
members are exposed to will not increase, there is a marginally \292\ 
increased likelihood that those assessments will be used.\293\ Because 
clearing members' potential assessments are more likely to be used, 
they will have a marginally increased incentive to reduce their level 
of exposure to assessments--for example, by reducing their clearing 
activity for themselves or on behalf of their customers. While it is 
conceivable that clearing members could work to influence DCOs to 
reduce their own assessment powers as a result of these incentives, 
there are mitigants in the Commission's regulations.\294\
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    \292\ ``Marginal'' because this happens only if (a) there is a 
DCO bankruptcy, (b) there is a default loss suffered by the DCO in 
connection with the bankruptcy, and (c) not all of the assessments 
necessary to address that default loss were called before that 
bankruptcy.
    \293\ While Sec.  190.17(b)(1) will not result in uncalled 
assessments being ``called''--the clearing members will not have to 
pay them to the estate--uncalled assessments will be ``used'' to 
reduce the clearing member's net equity claim.
    \294\ For example, Sec.  39.39(b)(1) requires SIDCOs and Subpart 
C DCOs to have viable plans for recovery necessitated by uncovered 
credit losses, and the extent of a DCO's assessment power 
contributes to the viability of its recovery plan. Moreover, the two 
SIDCOs, CME and ICE Clear Credit, already have significant 
assessment powers, and any proposed rule change to reduce those 
powers would need to withstand review under Sec.  40.10 for 
consistency with inter alia, the purposes of the CEA and the Dodd-
Frank Act, which include the mitigation of systemic risk and the 
promotion of financial stability.
---------------------------------------------------------------------------

    Section 190.17(b)(2) provides that where the debtor's loss 
allocation rules and procedures provide that clearing members are 
entitled to payments due to portions of mutualized default resources 
that are either prefunded, or assessed and collected, but in either 
case not used, or to the clearing organization's recoveries on claims 
against others (including recoveries on claims against defaulting 
clearing members), then ``appropriate adjustments shall be made to the 
net equity claims of clearing members that are so entitled.'' These 
provisions will benefit the estate by providing the trustee with tools 
to act promptly and efficiently, with lower administration costs. The 
trustee will have a clear roadmap to calculate net equity in the 
bankruptcy of a clearing organization and will not be obligated to come 
up with an ad hoc methodology for doing so. The provisions would also 
benefit clearing members (and, therefore, their customers) by providing 
transparency as to how their net equity will be calculated, as well as 
facilitating the efficient administration of the estate.\295\
---------------------------------------------------------------------------

    \295\ See also 17 CFR 39.16 (requiring 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 those cases where the debtor has excess mutualized default 
funds, or recovers on claims against defaulters, application of the 
debtor's ``reverse waterfall'' rules will benefit clearing members 
(and, in certain cases, their customers) by increasing the net equity 
claims of the entitled clearing members.
    In addition to the potential for these transfers between general 
creditors and clearing members and their customers, this rule can 
create incentives for clearing members and their customers. In 
particular, it makes clearing members' contributions to mutualized 
resources (and the possibility that gains-based haircutting will affect 
clearing members and their customers) less onerous, because they 
enhance the possibility that if the clearing member's contribution to 
mutualized default resources (or gains-based haircutting affecting 
clearing members or their customers) is used to meet a default, it 
ultimately will come back to the clearing member or their customers as 
it is recovered by the DCO (or the DCO's trustee) from the (bankruptcy) 
estate of the defaulter.
    Section 190.17(c) adopts by reference the net equity calculations 
set forth in proposed Sec.  190.08, to the extent applicable.\296\
---------------------------------------------------------------------------

    \296\ For a discussion of the cost and benefit considerations 
for Sec.  190.08, please see section IV.C.6 above.
---------------------------------------------------------------------------

    Section 190.17(d) sets forth a definition of the term ``funded 
balance'' that is taken directly from the relevant Bankruptcy Code 
provisions. Clarifying the meaning of the term ``funded balance'' in 
the context of a clearing organization bankruptcy will benefit clearing 
members, in that they will know ex ante what is and is not included in 
their funded balance and how that amount is calculated. In addition, 
Sec.  190.17(d) adopts by reference the methodology for calculating 
funded balance that is set forth in Sec.  190.08(c).\297\
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    \297\ For a discussion of the cost and benefit considerations 
for Sec.  190.08(c), please see section III.C.6 above.
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8. Regulation Sec.  190.18: Treatment of Property: Consideration of 
Costs and Benefits
    Section 190.18(a) is analogous to Sec.  190.17(a), in that it will 
provide that property of the debtor clearing organization's estate will 
be allocated between member property and customer property other than 
member property in order to satisfy the proprietary and customer 
claims, respectively, of clearing members. In the Commission's view, 
the provisions in Sec.  190.18(a) are mere clarifications and do not 
impose any costs or benefits on any parties.
    Section 190.18(b)(1)(i) and (ii) set out the scope of customer 
property for a clearing organization, and are largely based on Sec.  
190.09(a).\298\
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    \298\ For a discussion of the cost and benefit considerations 
for Sec.  190.09(a), please see section III.C.7 above.
---------------------------------------------------------------------------

    Section 190.18(b)(1)(iii) provides that customer property for a 
clearing organization includes 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 supports the goal of making customers of the clearing 
organization whole, since it clarifies that any property described in 
this section 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.

[[Page 19414]]

    A number of commenters (CME, SIFMA AMG/MFA) have suggested that the 
Commission make it explicit that customer property should include the 
amounts of its own funds a debtor DCO had committed as part of its loss 
allocation rules. The Commission has accepted this suggestion in the 
final rule, incorporating this provision in Sec.  190.18(b)(1)(iv). 
This will benefit customers, who will have additional funds allocated 
to their claims, thereby increasing the payment that they receive on 
their claims and/or increasing the likelihood of full payment of their 
claims (due to an increase in customer property). However, this benefit 
would accrue at the possible expense of general creditors, as there 
will be an equivalent reduction in assets in the general estate. An 
indirect consequence of this change might be to marginally incentivize 
customers to retain open positions in contracts that are cleared by a 
potentially-failing DCO, which might marginally contribute to 
preserving liquidity in those markets.
    Regulation Sec.  190.18(b)(2) adopts by reference, in the context 
of a DCO as a debtor, the exclusions from customer property applied in 
the context of debtor FCMs in 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.\299\
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    \299\ For a discussion of the cost and benefit considerations 
for proposed Sec.  190.09(a)(2), please see section III.C.7 above.
---------------------------------------------------------------------------

    Regulation Sec.  190.18(c) sets 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, applies the principle, consistent with the 
Commission's policy to favor public customers over non-public 
customers, 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, in the event and at the time it applied, benefit the public 
customers of the debtor's clearing members, since it makes clear that 
allocation to such customers is preferred over allocation to the 
clearing members' house accounts. It imposes corresponding costs on the 
debtor's clearing members and affiliates to the extent that, under the 
current regime, there is a possibility that more customer property 
would be allocated to their house accounts. Overall, this provision 
provides 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.
    However, the ABA Subcommittee, CME, FIA, and ICE objected to 
proposed Sec.  190.18(c)(1), which would apply the debtor's mutualized 
(and, in general, member-funded) default fund to customer property 
other than member property, that is, to the customer class for members' 
public customers, to the extent the funded balance is less than one 
hundred percent for members' public customers in any account class. CME 
raised a particularly trenchant point: Devoting member-funded guarantee 
funds to purposes other than mutualizing member defaults may result in 
more onerous capital treatment for the contributions of bank- or bank-
affiliated-members to such funds, increasing the capital charges for 
such exposures manifold.\300\
---------------------------------------------------------------------------

    \300\ As discussed in detail in a footnote in section II.C.8, 
those capital charges could increase by literally hundreds of times, 
for a total impact of billions of dollars in increased capital 
charges.
---------------------------------------------------------------------------

    As noted, the costs and benefits discussed above will only accrue 
if there is both a clearing organization bankruptcy and a shortfall in 
customer funds in one or more of the account classes for members' 
public customers for that clearing organization in that bankruptcy. The 
costs and benefits at that potential future time would be balanced, in 
that the costs to clearing members (whose guarantee funds were devoted 
to claims of the clearing members' customers) would be benefits to 
those customers. By contrast, less favorable capital treatment would 
have a present-day effect, in the form of higher capital costs for 
clearing members. Moreover, those higher costs would not create any 
direct benefit (present day or otherwise) for, e.g., customers. In 
light of these factors, the Commission has decided not to adopt 
proposed Sec.  190.18(c)(1) and to renumber the remaining paragraphs of 
Sec.  190.18(c).
    Section 190.18(d) sets forth the allocation of customer property 
among account classes. This provision is similar in concept to Sec.  
190.09(c). This provision will benefit clearing members and their 
customers, who will have increased transparency, ex ante, into how 
customer property will be allocated. Prescribing this allocation will, 
however, impose administrative costs, because the trustee will lose 
some amount of flexibility in terms of how to allocate customer 
property between account classes.
    Section 190.18(e) provides 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.\301\ This provision will 
benefit the estate in those cases, because the trustee will not be put 
to the considerable task of separating in bankruptcy that which was 
treated as a single account during business-as-usual. Paragraph (e) 
will also benefit the debtor's clearing members, who will have 
increased transparency as to how their member property will be treated.
---------------------------------------------------------------------------

    \301\ ``Account class'' is defined in Sec.  190.01 as meaning 
one or more of each of the following types of accounts, as described 
in greater detail in that provision: (1) Futures account; (2) 
foreign futures account; (3) cleared swaps account; and (4) delivery 
account.
---------------------------------------------------------------------------

    Section 190.18(f) gives the trustee the authority to assert claims 
against any person to recover the shortfall of customer property 
enumerated in certain paragraphs elsewhere in Sec.  190.18, analogous 
to Sec.  190.09(a)(3). This provision could impose administrative 
costs, since the trustee will need to expend time and resources to 
assert claims to make up for any shortfall in customer property. The 
provision will, however, benefit customers, since it will support the 
trustee's efforts to recover any such shortfalls by giving the trustee 
authority to act to do so. Moreover, since this provision will make 
explicit what is implicit in current part 190, an additional benefit of 
this provision is a reduction in potential litigation costs over a 
trustee's attempts to recover shortfalls in customer property.\302\
---------------------------------------------------------------------------

    \302\ As discussed above in section III.C.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.
---------------------------------------------------------------------------

9. Regulation Sec.  190.19: Support of Daily Settlement: Consideration 
of Costs and Benefits
    Section 190.19 deals with the treatment of variation settlement in 
a clearing organization bankruptcy, and sets forth the approach for the 
trustee to follow when there is a shortfall in variation settlement 
owed to a debtor clearing organization's clearing members and 
customers. Specifically, Sec.  190.19(a) provides 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. Section 190.19(b) deals with a situation 
where there is a shortfall in

[[Page 19415]]

variation settlement received by the clearing organization, and 
provides that such funds shall be supplemented with four specified 
categories of funds (margin, to the extent permissible under parts 1, 
22, and 30, assets of the debtor, to the extent dedicated to such 
purpose, prefunded guarantee funds, and assessments) in accordance with 
the clearing organization's default rules and procedures and (with 
respect to assets of the debtor) any recovery and wind-down plans 
maintained by the clearing organization.
    Section 190.19 will benefit clearing members and their customers 
because it will ensure that any variation settlement received by the 
clearing organization will 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). This approach will also benefit the financial system more 
broadly, by mitigating the effect of the bankruptcy of the debtor on 
settlement payments. There will be corresponding costs to general 
creditors of the clearing organization since, under current part 190, 
it is conceivable that, contrary to the Commission's interpretation of 
the current rules, 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, Sec.  190.19 
will also benefit clearing members and their customers by providing 
enhanced transparency.
10. Section 15(a) Factors--Subpart C
i. Protection of Market Participants and the Public
    Subpart C of the part 190 regulations will increase the protection 
of market participants and the public by setting forth a bespoke 
framework for 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, and by providing, in certain 
provisions, discretion to the trustee in determining how best to 
address the bankruptcy of the DCO, and to achieve the goal of 
protecting public customers as a class. Moreover, the addition in part 
190 of bespoke bankruptcy rules for a DCO bankruptcy will 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. 
Finally, provisions such as Sec.  190.18(c), which preferentially 
allocate excess property in any account class to the customer class 
that benefits public customers, to the extent there is a shortfall in 
any account class in that customer class, will further protect public 
customers.
ii. Efficiency, Competitiveness, and Financial Integrity
    Subpart C of the part 190 regulations will 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 will provide the bankruptcy trustee 
with discretion, in certain circumstances, to react flexibly to the 
particulars of the insolvency proceeding, guided by the goal of 
protecting public customers as a class, thereby promoting efficiency of 
the administration of the proceeding. These effects will, 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.
iii. 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. Because a DCO bankruptcy inevitably leads 
to full close-out of the positions carried at the DCO, the part 190 
regulations will not contribute to avoiding the resultant negative 
impacts on price discovery.
iv. Sound Risk Management Practices
    Subpart C of the part 190 regulations will promote sound risk 
management practices by facilitating the bankruptcy trustee's efforts 
to manage effectively the risk of the debtor DCO. Subpart C will 
accomplish this by adding bankruptcy regulations to part 190 for a DCO 
insolvency that reflect current market practices and thereby make it 
easier for the trustee to act effectively to protect customer property 
in the event of such an insolvency. Moreover, subpart C will 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, though subject to the trustee's discretion. Some 
portions of subpart C may make additional resources available to the 
trustee. On the other hand, some commenters expressed concern about 
changes (such as Sec.  190.15) that they believe might lead to 
inappropriate risk management choices by DCOs.
v. 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 part 190 regulations will 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 interest), as that process will help to attenuate the 
detrimental effects of the bankruptcy on the financial network.

E. Changes to Appendices A and B

    The Commission is deleting forms 1 through 3 contained in appendix 
A, which contain outdated provisions that require the collection of 
unnecessary information, and is replacing form 4 with a streamlined 
template proof of claim form, which the trustee can use in a flexible 
manner. CME considered the template proof of claim ``a major 
improvement'' over the current version. These changes have the benefit 
of reducing administrative costs, and there are no obvious increased 
costs.
    Similarly, the Commission is making clarifying changes to framework 
1 of appendix B, and making, consistent with the suggestions of the ABA 
Subcommittee and the Subcommittee Members, a significant set of 
clarifying changes to framework 2. These changes have the benefit of 
having framework 2 work in a more accurate, and less confusing manner, 
thus reducing administrative costs, and there are no obvious increased 
costs.

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

    The Commission is making technical corrections to parts 1, 4, and 
41 to

[[Page 19416]]

update cross-references. These corrections are clarifying and do not 
have any impact on the substantive obligations related to these 
sections. Thus, there are no increased costs associated with these 
minor technical updates.

IV. Related Matters

A. 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.\303\
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    \303\ 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 has 
considered this rulemaking to determine whether it might have 
anticompetitive effects, and has not identified any effect this 
rulemaking, which would apply only in the rare instance of an FCM or 
DCO bankruptcy, would have on competition. Accordingly, the Commission 
has not identified any less anticompetitive means of achieving the 
purposes of the CEA.

B. 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.\304\ The 
regulations being adopted by the Commission 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.\305\
---------------------------------------------------------------------------

    \304\ 5 U.S.C. 601 et seq.
    \305\ 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.\306\ 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. These regulations take into 
account existing trading practices and the logistical considerations of 
implementing the regulations.
---------------------------------------------------------------------------

    \306\ 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 rule adopted 
herein will not have a significant economic impact on a substantial 
number of small entities.

C. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \307\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring a collection of 
information as defined by the PRA. The regulations adopted herein would 
result in such a collection, as discussed below. A person is not 
required to respond to a collection of information unless it displays a 
currently valid control number issued by the Office of Management and 
Budget (OMB). The regulations include a collection of information for 
which the Commission has previously received control numbers from OMB. 
The title of this collection of information is: OMB Control Number 
3038-0021, ``Regulations Governing Bankruptcies of Commodity Brokers.''
---------------------------------------------------------------------------

    \307\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Information Collection 3038-0021 \308\ 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.\309\ The Commission 
promulgated part 190 pursuant to the authority of 7 U.S.C. 24. The 
Commission is amending Information Collection 3038-0021 as a result of 
these final regulations to (1) accommodate new information collection 
requirements for FCMs and DCOs, and (2) revise the existing information 
collection requirements for FCMs and DCOs. The Commission did not 
receive any comments regarding its PRA burden analysis in the preamble 
to the proposal.
---------------------------------------------------------------------------

    \308\ 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) 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 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 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). 
These requirements were proposed as Sec.  190.10(b) and (e) (which 
are analogs to current Sec. Sec.  190.06(d) and 190.10(c)), as well 
as a new third-party disclosure requirement provided for in Sec.  
190.10(d) (regarding letters of credit); however, the third-party 
disclosure requirements are being adopted as Sec. Sec.  1.41, 1.43, 
and 1.55(p).
    \309\ 11 U.S.C. 761 et seq.
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1. Reporting Requirements in an FCM Bankruptcy
    Regulation Sec.  190.03(b)(1) requires 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 further requires 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.
    Regulation Sec.  190.03(b)(2) requires 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.\310\ The Commission has 
estimated the burden hours for the reporting requirements in an FCM 
bankruptcy as follows:
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    \310\ 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.\311\
---------------------------------------------------------------------------

    \311\ The Commission estimates that (1) under 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 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 Sec.  190.03(b)(1), and 0.33 
notifications annually pursuant to Sec.  190.03(b)(2), for a total 
of one notification annually per respondent.

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[[Page 19417]]

    Estimated total annual number of responses for all respondents: 1.
    Estimated annual number of burden hours per respondent: 1.\312\
---------------------------------------------------------------------------

    \312\ The Commission estimates that (1) the notifications 
required under Sec.  190.03(b)(1) would take 0.5 hours to make, and 
(2) the notification required under Sec.  190.03(b)(2) would take 2 
hours to make. In terms of burden hours, this amounts to (0.5*0.67 
under Sec.  190.03(b)(1)) plus (2*0.33 under Sec.  190.03(b)(2)), or 
a total of one burden hour annually per respondent.
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    Estimated total annual burden hours for all respondents: 1.
2. Recordkeeping Requirements in an FCM Bankruptcy
    Regulation Sec.  190.05(b) requires 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.
    Regulation Sec.  190.05(d) requires 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.\313\ The Commission has 
estimated the burden hours for the recordkeeping requirements in an FCM 
bankruptcy as follows:
---------------------------------------------------------------------------

    \313\ 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.\314\
---------------------------------------------------------------------------

    \314\ The Commission estimates that (1) under Sec.  190.05(b), a 
trustee would compute a funded balance for customer accounts 40,000 
times; and (2) under 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 Sec.  190.05(b), and 13,333.33 records annually pursuant 
to 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.\315\
---------------------------------------------------------------------------

    \315\ The Commission estimates that each record required under 
Sec.  190.05(b) and 190.05(d) would take 0.01 hours to prepare. In 
terms of burden hours, this amounts to (0.01*13,333.33 under Sec.  
190.05(b)) plus (0.01*13,333.33 under Sec.  190.05(d)), or a total 
of 266.67 burden hours annually per respondent.
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    Estimated total annual burden hours for all respondents: 266.67.
3. Third-Party Disclosure Requirements Applicable to a Single 
Respondent in an FCM Bankruptcy
    Regulation Sec.  190.03(c)(1) requires 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 part 190.
    Regulation Sec.  190.03(c)(2) allows 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.\316\
---------------------------------------------------------------------------

    \316\ 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 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.
---------------------------------------------------------------------------

    Regulation Sec.  190.03(c)(4) requires 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 Sec.  190.03(e).
    Regulation Sec.  190.07(b)(5) requires the trustee, in the event 
that specifically identifiable property has been or will be 
transferred, 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.\317\ The Commission has 
estimated the burden hours for the third-party disclosure requirements 
applicable to a single respondent in an FCM bankruptcy as follows:
---------------------------------------------------------------------------

    \317\ 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.\318\
---------------------------------------------------------------------------

    \318\ The Commission estimates that a trustee would make the 
required disclosures under each of 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 Sec.  190.03(c)(1), (2), and (4). The Commission further 
estimates that a trustee would make the required disclosure under 
Sec.  190.07(b)(5) 10 times per bankruptcy. Dividing this number by 
three results in 3.33 disclosures annually pursuant to 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.\319\
---------------------------------------------------------------------------

    \319\ The Commission estimates that (1) each disclosure required 
under Sec.  190.03(c)(1) and (2) and (b) would take 0.1 hours to 
prepare; (2) each disclosure required under Sec.  190.03(c)(4) would 
take 0.2 hours to prepare; and (3) each disclosure required under 
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 Sec.  190.03(c)(1)) plus 
(0.1*3,333.33 under Sec.  190.03(c)(2)) plus (0.2*3,333.33 under 
Sec.  190.03(c)(4)) plus (1*3.33 under Sec.  190.07(b)(5)), or a 
total of 1336.66 burden hours annually per respondent.
---------------------------------------------------------------------------

    Estimated total annual burden hours for all respondents: 1,336.67.
4. Reporting Requirements in a Derivatives Clearing Organization (DCO) 
Bankruptcy
    Regulation Sec.  190.12(a)(2) requires 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 requires a 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.
    Regulation Sec.  190.12(b)(1) requires 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).
    Regulation Sec.  190.12(b)(2) requires 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.
    Regulations Sec.  190.12(c)(1) and (2) require the debtor clearing 
organization

[[Page 19418]]

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.\320\ The 
Commission has estimated the burden hours for the reporting 
requirements in a DCO bankruptcy as follows:
---------------------------------------------------------------------------

    \320\ 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.\321\
---------------------------------------------------------------------------

    \321\ The Commission estimates that (1) under Sec.  
190.12(a)(2), a clearing organization would make two notifications 
per bankruptcy; (2) under Sec.  190.12(b)(1), a clearing 
organization would provide 40 reports to the trustee; (3) under 
Sec.  190.12(b)(2), a clearing organization would provide 5 reports 
to the trustee and the Commission; (4) under Sec.  190.12(c)(1), a 
clearing organization would provide 100 records to the trustee and 
the Commission; and (5) under 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 Sec.  
190.12(a)(2); (2) 0.8 reports annually pursuant to Sec.  
190.12(b)(1); (3) 0.1 reports annually pursuant to Sec.  
190.12(b)(2); (4) 2 reports annually pursuant to Sec.  190.12(c)(1); 
and (5) 0.04 reports annually pursuant to Sec.  190.12(c)(2), for 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.\322\
---------------------------------------------------------------------------

    \322\ The Commission estimates that (1) each notification 
required under Sec.  190.12(a)(2) and (d)(2) would take 0.5 hours to 
make; (2) gathering the reports required under Sec.  190.12(b)(1) 
would take 0.2 hours; (3) gathering the reports required under Sec.  
190.12(b)(2) would take 0.2 hours; (4) gathering the reports 
required under Sec.  190.12(c)(1) would take 0.2 hours; and (5) 
gathering the reports required under Sec.  190.12(c)(2) would take 
0.2 hours. In terms of burden hours, this amounts to (0.5*0.04 under 
Sec.  190.12(a)(2)) plus (0.2*0.8 under Sec.  190.12(b)(1)) plus 
(0.2*0.1 under Sec.  190.12(b)(2)) plus (0.2*2 under Sec.  
190.12(c)(1)) plus (0.2*0.04 under 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
    Regulation Sec.  190.14(d) requires 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.\323\ The 
Commission has estimated the burden hours for the recordkeeping 
requirements in a DCO bankruptcy as follows:
---------------------------------------------------------------------------

    \323\ 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.\324\
---------------------------------------------------------------------------

    \324\ The Commission estimates that, under 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.\325\
---------------------------------------------------------------------------

    \325\ The Commission estimates that computing the funded balance 
of customer accounts pursuant to 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
    Regulation Sec.  190.14(a) allows 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.\326\ The 
Commission has estimated the burden hours for the third-party 
disclosure requirements applicable to a single respondent in a DCO 
bankruptcy as follows:
---------------------------------------------------------------------------

    \326\ 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.\327\
---------------------------------------------------------------------------

    \327\ The Commission estimates that, under 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.
---------------------------------------------------------------------------

    Estimated total annual number of responses for all respondents: 
0.9.
    Estimated annual number of burden hours per respondent: 0.18.\328\
---------------------------------------------------------------------------

    \328\ The Commission estimates that instructing customers to 
file a proof of claim pursuant to 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
    As discussed in Section II.B.8 above, the Commission is codifying 
the provisions proposed as Sec.  190.10(b), (d), and (e) in part 1, 
along with other regulations that pertain to an FCM's business as 
usual. Regulation Sec.  1.41, which was proposed as Sec.  190.10(b), 
requires 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.
    Regulation Sec.  1.43, which was proposed as Sec.  190.10(d), 
prohibits an FCM from accepting a letter of credit as collateral unless 
such letter of credit may be exercised under certain conditions 
specified in the regulation.
    Regulation Sec.  1.55(p), which was proposed as Sec.  190.10(e), 
requires an FCM to provide any customer with the disclosure statement 
set forth in Sec.  1.55(p) 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.\329\
---------------------------------------------------------------------------

    \329\ The Commission estimates that under Sec. Sec.  1.41, 1.43, 
and 1.55(p), an FCM would make the required disclosures 1,000 times 
per year. This amounts to a total of 3,000 responses annually per 
respondent.

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

[[Page 19419]]

    Estimated total annual number of responses for all respondents: 
375,000.
    Estimated annual number of burden hours per respondent: 60.\330\
---------------------------------------------------------------------------

    \330\ The Commission estimates that each disclosure required 
under Sec. Sec.  1.41, 1.43, and 1.55(p) would take 0.02 hours to 
make. In terms of burden hours, this amounts to (0.02*1,000 under 
Sec.  1.41) plus (0.02*1,000 under Sec.  1.43 plus (0.02*1,000 under 
Sec.  1.55(p)), or 60 burden hours annually per respondent.
---------------------------------------------------------------------------

    Estimated total annual burden hours for all respondents: 7,500.

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 amends 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. Add Sec.  1.41 to read as follows:


Sec.  1.41   Designation of hedging accounts.

    (a) 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.
    (b) 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.
    (c) The requirements set forth in paragraphs (a) and (b) 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 May 13, 2021. 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 former Sec.  
190.06(d) of this chapter.
    (d) A futures commission merchant may designate an existing futures 
account, foreign futures account or cleared swaps account of a 
particular customer as a hedging account, provided that it has obtained 
the representation set out in paragraph (b) of this section from such 
customer.

0
4. Add Sec.  1.42 to read as follows:


Sec.  1.42   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.

0
5. Add Sec.  1.43 to read as follows:


Sec.  1.43   Letters of credit as collateral.

    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:
    (a) 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) of this 
chapter.
    (b) 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) of this chapter.
    (c) 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 this section.

0
6. In Sec.  1.55:
0
a. Revise paragraphs (d) and (f);
0
b. Remove the parenthetical control number sentence and parenthetical 
authority citation following paragraph (h);
0
c. Remove the paragraph (k) heading; and
0
d. Add paragraph (p).
    The revision and addition 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. Sec.  1.33(g) and 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

[[Page 19420]]

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 
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), 1.55(p), and 1.65(a)(3), and Sec. Sec.  
30.6(a), 33.7(a), 155.3(b)(2), and 155.4(b)(2) of this chapter.
* * * * *
    (p)(1) Except as provided in Sec.  1.65, 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 
paragraph (f) of this section, to margin, guarantee, or secure a 
commodity contract unless the commodity broker first furnishes the 
customer with the disclosure statement set forth in paragraph (p)(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 
paragraph (c) of this section and set forth in appendix A to this 
section which the Commission finds satisfies the requirement of this 
paragraph (p)(1).
    (2) The disclosure statement required by paragraph (p)(1) of this 
section is as follows:

    THIS STATEMENT IS FURNISHED TO YOU BECAUSE REGULATION 1.55(p) 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 (p)(2) of this section 
need be furnished only once to each customer to whom it is required to 
be furnished by this section.

0
7. 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.  
33.7 of this chapter (domestic exchange-traded commodity options) and 
receive the required acknowledgments within sixty days of the transfer 
of accounts. 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. Sec.  
1.55(a)(1)(ii) and 33.7(a)(1)(ii) of this chapter and can establish 
compliance with Sec.  1.55(p).
* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
8. 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
9. 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.  190.01of this chapter may be 
excluded in computing such five percent; or
* * * * *

0
10. 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

[[Page 19421]]

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
11. 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
12. 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
13. 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). The rules in the preceding 
sentence 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
14. Revise part 190 to read as follows:

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
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 funded net equity.
190.09 Allocation of property and allowance of claims.
190.10 Current records during business as usual.
Subpart C--Clearing Organization as Debtor
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 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. This 
subpart contains general provisions applicable in all cases. Subpart B 
of this part 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 descriptions of core concepts in paragraphs (c)(1) 
through (6) of this section 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

[[Page 19422]]

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 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.
    (C) Where a provision in this part affords the trustee discretion, 
that discretion should be exercised in a manner that the trustee 
determines will best achieve the overarching goal of protecting public 
customers as a class by enhancing recoveries for, and mitigating 
disruptions to, public customers as a class. In seeking to achieve that 
overarching goal, the trustee has discretion to balance those two sub-
goals when they are in tension. Where the trustee is directed to 
exercise ``reasonable efforts'' to meet a standard, those efforts 
should only be less than ``best efforts'' to the extent that the 
trustee determines that such an approach would support the foregoing 
goals.
    (ii) Clearing organization bankruptcies: Member property and 
customer property other than member property. 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. Thus, 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).
    (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

[[Page 19423]]

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 in appendix B of this 
part for cross-margin accounts and framework 2 in appendix B of 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).
    (ii) 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).
    (iii) 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.
    (iv) 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.
    (v) 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 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 December 8, 2020.
    Note 1 to paragraph (b)(1)(i)(B). 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

[[Page 19424]]

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 or a 
mixed swap (as defined in 1a(47)(D) of the Act) that is, in either 
case, 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 or specific regulation refers to such 
section or regulation as the same may be amended or superseded.
    (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:
    (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 means:
    (A) With respect to public customers, the same definition as set 
forth in Sec.  1.3 of this chapter.
    (B) With respect to non-public customers:
    (1) With respect to a futures commission merchant, an account 
maintained on the books and records of the futures commission merchant 
for the purpose of accounting for a person's transactions in futures or 
options on futures contracts executed on or subject to the rules of a 
designated contract market registered under the Act (and related cash, 
securities, or other property); and
    (2) With respect to a clearing organization, an account maintained 
on the books and records of the clearing organization for the purpose 
of accounting for transactions in futures or options on futures 
contracts cleared or settled by the clearing organization for a member 
or a member's non-public customers (and related cash, securities, or 
other property).
    (ii) Foreign futures account means:
    (A) With respect to public customers:
    (1) With respect to a futures commission merchant, a 30.7 account, 
as such term is defined in Sec.  30.1(g) of this chapter; and
    (2) With respect to a clearing organization, an account maintained 
on the books and records of the 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).
    (B) With respect to non-public customers:
    (1) With respect to a futures commission merchant, an account 
maintained on the books and records of the futures commission merchant 
for the purpose of accounting for a person's transactions in futures or 
options on futures contracts executed on or subject to the rules of a 
foreign board of trade (and related cash, securities, or other 
property); and
    (2) With respect to a clearing organization, an account maintained 
on the books and records of the 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 or 
a member's non-public customers (and related cash, securities, or other 
property).
    (iii) Cleared swaps account means:
    (A) With respect to public customers, a cleared swaps customer 
account, as such term is defined in Sec.  22.1 of this chapter.
    (B) With respect to non-public customers:
    (1) With respect to a futures commission merchant, an account 
maintained on the books and records of the futures commission merchant 
for the purpose of accounting for a person's transactions in cleared 
swaps (as defined in Sec.  22.1 of this chapter) (and related cash, 
securities, or other property); and
    (2) With respect to a clearing organization, an account maintained 
on the books and records of the clearing organization for the purpose 
of accounting for transactions in cleared swaps (as defined in Sec.  
22.1 of this chapter) (or in other contracts permitted to be cleared in 
the account) cleared or settled by the clearing organization for a 
member or a member's non-public customers (including any property 
related thereto).
    (iv)(A) Delivery account means (for both public and non-public 
customers, considered separately):
    (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

[[Page 19425]]

    (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.
    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 seven 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.
    (4) Cash delivery property also includes any cash transferred by a 
customer to the trustee on or after the filing date for the purpose of 
paying for delivery, consistent with Sec.  190.06(a)(3)(ii)(B)(1).
    (5) In the case of a contract where one fiat currency is exchanged 
for another fiat currency, each such currency, to the extent that it is 
recorded in a delivery account, will be considered cash delivery 
property.
    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;
    (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.
    (5) Notwithstanding paragraphs (1) through (4) of this definition, 
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

[[Page 19426]]

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).
    Funded net equity means, for purposes of subpart B of this part, 
the amount calculated as funded net equity in accordance with Sec.  
190.08(a), and for purposes of subpart C of this part, the amount 
calculated as funded net equity in accordance with Sec.  190.17(c).
    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
    (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, 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

[[Page 19427]]

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:
    (1) In general. 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, other documents of title, or shipping 
certificates (including electronic versions of any of the foregoing) 
for the commodity, or the commodity itself:
    (i) 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;
    (ii) 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; or
    (iii) 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.
    (iv) 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.
    (2) Special cases. (i) In the case of a contract where one fiat 
currency is exchanged for another fiat currency, neither such currency, 
to the extent that it is recorded in a delivery account, will be 
considered physical delivery property.
    (ii) In a case where the final settlement price is negative, i.e., 
where the party obliged to deliver physical delivery property under an 
expiring futures contract or an expired options contract is also 
obliged to make a cash payment to the buyer, such cash or cash 
equivalents constitute physical delivery property.
    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 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;
    (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

[[Page 19428]]

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.
    (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 paragraphs (1) and (3) of this definition, 
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 Market Participants Division 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 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 Market Participants 
Division, or such members 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

[[Page 19429]]

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 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 section 4d or 4(b)(2) of the Act, or of the 
futures commission merchant'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 futures commission merchant pursuant to 
section 301 of the Bankruptcy Code.
    (g) Definition of ``allowed.'' The term ``allowed'' in this part 
shall have the meaning ascribed to it in 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.
    (i) If the trustee does not exercise such authority, such open 
commodity contracts do not constitute specifically identifiable 
property.
    (ii) If the trustee exercises such authority:
    (A) 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.
    (B)(1) Where, in the judgment of the trustee, the books and records 
of the debtor reveal a clear preference by a relevant public customer 
with respect to transfer or liquidation of open commodity contracts, 
the trustee shall endeavor, to the extent reasonably practicable, to 
comply with that preference.
    (2) Where, in the judgment of the trustee, the books and records of 
the debtor do not reveal a clear preference by a relevant public 
customer with

[[Page 19430]]

respect to transfer or liquidation of open commodity contracts, the 
trustee will 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.
    (C) Such notice must also inform the customer that:
    (1) (Where instructions have been requested pursuant to paragraph 
(c)(2)(ii)(B)(2) of this section), 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;
    (2) Any transfer of the open commodity contracts is subject to the 
terms for distribution contained in Sec.  190.09(d)(2);
    (3) Absent compliance with any terms imposed by the trustee or the 
court, the trustee may liquidate the open commodity contracts; and
    (4) Providing (or having provided) 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 19431]]

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 under-margined (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 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 19432]]

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.
    (iv) The trustee shall, in exercising their discretion with regard 
to addressing letters of credit, including as to the timing and amount 
of a request for substitute customer property, endeavor to mitigate, to 
the extent practicable, the adverse effects upon customers that have 
posted letters of credit, in a manner that achieves pro rata treatment 
among customer claims.
    (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

[[Page 19433]]

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 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

[[Page 19434]]

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 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;
    (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 under-
margined or does not have a deficit balance in any other commodity 
contract accounts.
    (5) Delivery made or taken on behalf of proprietary account. If 
delivery of physical delivery property is to be made or taken on behalf 
of the debtor's own account or the account of any non-public customer 
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,

[[Page 19435]]

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 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 (including the risk disclosures referred to in Sec.  
1.65(a)(3) of this chapter) 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)(i) 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.
    (ii) Paragraph (b)(4)(i) of this section shall not apply where the 
customer has a pre-existing account agreement with the transferee 
futures commission merchant. In such a case, the transferred account 
will be governed by that pre-existing account agreement.
    (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) The debtor's own account 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

[[Page 19436]]

    (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 sections 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 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;
    (iii) The transfer prior to the order for relief by a clearing 
organization, or by a receiver that has been appointed for the futures 
commission merchant (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 sections 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 funded net equity.

    For purposes of this subpart, funded net equity shall be computed 
as follows:
    (a) Funded claim. The funded 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.

[[Page 19437]]

    (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.
    (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 for public customers of a futures 
commission merchant maintained with a debtor shall be deemed to be held 
in a separate capacity from any omnibus customer account for non-public 
customers of such futures commission merchant and from any account 
maintained with the debtor on its own behalf or on behalf of any non-
public customer.
    (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 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 (defined as x), must be deducted from 
any obligation to the customer owed by the debtor which is not required 
to be included in computing the equity of that customer (defined as y). 
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

[[Page 19438]]

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 the amount of the net equity claim of 
such customer (defined as x) less the amounts referred to in paragraph 
(c)(1)(ii) of this section of such customer for any account class 
(defined as y) divided by the sum of the net equity claims of all 
customers for accounts of that class (defined as p) less the amounts 
referred to in paragraph (c)(1)(ii) of this section of all customers 
for accounts of that class (defined as q) (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--
    (A) 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; and
    (B) For cash delivery property, any cash transferred to the trustee 
on or after the filing date for the purpose of paying for delivery.
    (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 a temporary or a 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:

[[Page 19439]]

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

[[Page 19440]]

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 then
    (ii) 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 
then,
    (iii) 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, 
thereafter,
    (iv) 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 of this chapter, 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 the funded balance 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   Current records during business as usual.

    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.

Subpart C--Clearing Organization as Debtor


Sec.  190.11   Scope and purpose of this subpart.

    (a) 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.
    (b) If the debtor clearing organization is organized outside the 
United States,

[[Page 19441]]

and is subject to a foreign proceeding, as defined in 11 U.S.C. 
101(23), in the jurisdiction in which it is organized, then only the 
following provisions of this part shall apply:
    (1) Subpart A.
    (2) Section 190.12.
    (3) Section 190.13, but only with respect to futures contracts and 
cleared swaps contracts cleared by FCM clearing members on behalf of 
their public customers and the property margining or securing such 
contracts.
    (4) Sections 190.17 and 190.18, but only with respect to claims of 
FCM clearing members on behalf of their public customers, as well as to 
property that is or should have been segregated for the benefit of FCM 
clearing members' public customers, or that has been recovered for the 
benefit of FCM clearing members' public customers.


Sec.  190.12   Required reports and records.

    (a) Notices--(1) 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.  39.16 
and, as applicable, Sec.  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 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 
sections 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) Operation of the derivatives clearing organization. Subsequent 
to the order for relief, the derivatives clearing organization shall 
cease making calls for variation settlement or initial margin.
    (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. 
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.

[[Page 19442]]

    (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.  39.16 and, as 
applicable, Sec.  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, and consistent with the protection of 
customers.


Sec.  190.16   Delivery.

    (a) General. In the event that a commodity contract, cleared by the 
derivatives clearing organization, 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, or moves into delivery position after that date and 
time, but before being terminated, liquidated, or transferred, then, in 
either such event, 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--
    (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)(i) 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.  39.16 and, if applicable, Sec.  39.35 
of this chapter.
    (ii) The calculation in paragraph (b)(1)(i) of this section will 
include, 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. Such loss allocation 
arrangements shall be applied to the extent necessary to address losses 
arising from default by clearing members.
    (2) Appropriate adjustments shall be made to the net equity claims 
of the clearing members that are so entitled under the following 
circumstances: 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) 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).
    (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, considered separately, 
such members' house accounts.
    (1) Customer property includes the following:

[[Page 19443]]

    (i) All cash, securities, or other property, or the proceeds of 
such cash, securities, or other property, that is 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, in order 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) 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) Was 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);
    (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; and
    (iv) Amounts of its own funds that the debtor had committed as part 
of its loss allocation rules, to the extent that such amounts have not 
already been applied under such rules.
    (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) 
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; and
    (ii) Any remaining excess after the application of paragraph 
(c)(1)(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.
    (2) 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; and
    (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 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 
then
    (ii) 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, separately, customer property other than member property, in

[[Page 19444]]

proportion to the ratio of total gains in member accounts with net 
gains, and total gains in clearing members' 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, separately, 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 with the property described in 
paragraphs (b)(1)(i) through (iv) of this section, as applicable, to 
the extent necessary to meet the shortfall, in accordance with the 
derivatives clearing organization's default rules and procedures 
adopted pursuant to Sec.  39.16 and, as applicable, Sec.  39.35 of this 
chapter, and (with respect to paragraph (b)(1)(ii) of this section) 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. 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 
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.

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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 framework 1 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

[[Page 19455]]

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 in part 1 of this chapter) (``non-XM 
accounts''), are treated as two subclasses 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 this part 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 in part 1 of this chapter or Commission 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)(1) 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.
    (2) 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.
    (3) If there is a shortfall in both the non-XM and XM pools:
    (i) 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
    (ii) 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.
    (4) In this way, non-XM customers will never be adversely affected 
by an XM shortfall.
    (g) The following examples illustrate the operation of this 
framework 1. 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 a sovereign action of 
a foreign government or court has occurred that contributes to 
shortfalls in the amounts of futures customer funds or Cleared Swaps 
Customer Collateral. In the event a sovereign action creates or 
contributes to a shortfall in customer property, applying the 
allocation convention will result in a reallocation of distributions of 
futures customer funds or Cleared Swaps Collateral to take into account 
the impact of the sovereign action. 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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    Issued in Washington, DC, on December 17, 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

    When our Commission considered the proposal to amend the CFTC's 
bankruptcy rules in Part 190,\1\ I noted that, in his 1926 novel The 
Sun Also Rises, Ernest Hemingway offered what is perhaps the best 
chronicle of the anatomy of a typical bankruptcy. In the novel, the 
character Mike Campbell is asked how he went bankrupt. He answers: 
``two ways . . . gradually and then suddenly.'' \2\
---------------------------------------------------------------------------

    \1\ Bankruptcy Regulations, 85 FR 36000 (June 12, 2020).
    \2\ See Statement of Chairman Heath P. Tarbert in Support of 
Long-Awaited Updates to the CFTC's Bankruptcy Regime (Apr. 14, 
2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement041420.
---------------------------------------------------------------------------

    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. We must therefore be 
prepared with a bankruptcy regime that fosters a swift and equitable 
resolution to protect customer funds and promote financial stability.

Background on the CFTC's Bankruptcy Regime

    Part 190 of the CFTC's rules, addressing commodity broker \3\ 
bankruptcies, was finalized 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 
comprehensively updated. This regime is intended to protect customer 
funds, but having antiquated rules does not help achieve that goal.
---------------------------------------------------------------------------

    \3\ 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 accordingly embarked on a process of updating Part 
190 over the last several years, when a then-healthy economy made 
bankruptcies relatively unlikely. Now that we find ourselves in the 
midst of the COVID-19 pandemic and its economic ramifications, the 
fruits of our investment arguably could have not been better timed. The 
good news is that during 2020, U.S. derivatives markets and their 
participants have weathered the volatility associated with the 
coronavirus pandemic admirably. But as I just noted, we cannot know for 
certain what the future holds--for bankruptcy often comes ``gradually 
and then

[[Page 19474]]

suddenly.'' We must therefore be prepared for all contingencies.
    Accordingly, I am pleased to support today's final rule to update 
Part 190 for the 21st century.\4\ The final rule is a product of both 
hard work by CFTC staff and Commissioners as well as contributions from 
external stakeholders and subject matter experts, including a 
subcommittee of the American Bar Association. The final rule promotes 
the CFTC's core values in a number of ways, particularly the values of 
clarity and forward thinking. It also furthers the agency's strategic 
goal of regulating our derivatives markets to promote the interests of 
all Americans.\5\
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    \4\ After considering comments that were received on the 
original proposal, our Commission subsequently issued a Supplemental 
Proposal that withdrew Sec.  190.14(b)(2) and (3), and proposed 
other revisions to Sec.  190.14. See Bankruptcy Regulations, 85 FR 
60110 (Sept. 24, 2020) (``Supplemental Proposal''). However, in 
light of comments raised on the Supplemental Proposal, as well as 
the original proposal, our Commission concluded that, at this point, 
it should engage in further analysis and development before 
proposing this, or any other, alternative approach. Such further 
analysis and development will better enable the CFTC to propose, in 
detail, a solution that is effective, and that mitigates any 
attendant concerns.
    \5\ 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 final 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 enumerates 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 insiders; the 
requirement of pro rata distribution; and the preference to transfer 
rather than liquidate open positions.
    The final rule codifies 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 final rule 
authorizes 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 more likely to 
occur than the alternative, the final rule provides greater clarity on 
potential outcomes for trustees, brokers, and customers.
    For example, the final rule expressly permits 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.\6\
---------------------------------------------------------------------------

    \6\ The final rule also grants the trustee appropriate 
discretion in other respects--for example, by allowing the trustee 
to modify the customer proof of claim form as needed for a 
particular bankruptcy.
---------------------------------------------------------------------------

    The final rule 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 in the event of a DCO bankruptcy. 
While such a bankruptcy is extremely unlikely, it is important to 
provide ex ante clarity to DCO members and customers as to how it would 
be handled. The final rule favors following the DCO's existing default 
management and recovery and wind-down rules and procedures, but gives 
the trustee discretion to apply them reasonably and practicably. This 
allows the bankruptcy trustee to take advantage of and adapt an 
established ``playbook,'' rather than being forced either to follow a 
rigid, ``one-size-fits-all'' framework or to form a resolution plan in 
a matter of hours during the onset of a crisis. The final rule also 
gives 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 final rule updates 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 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 trading 
cycle. In addition, the final rule acknowledges digital assets as a 
physically deliverable asset class, in light of the listing of a number 
of physically delivered ``virtual currency'' derivatives contracts.
    The final rule also reflects advances in communications technology. 
For example, under the final rule, notice of a bankruptcy filing and 
related filed documents will be provided to the CFTC by electronic 
rather than paper means. Furthermore, required customer notice 
procedures no longer include publication in a ``newspaper of general 
circulation'' in light of the downward trend in newspaper readership. 
The final rule similarly recognizes 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 final 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 final rule 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 final rule 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 final rule

[[Page 19475]]

makes clear that the CFTC's bankruptcy regime is complementary to 
relatively recently-enacted customer protection rules for day-to-day 
broker operations.\7\
---------------------------------------------------------------------------

    \7\ 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).
---------------------------------------------------------------------------

    The final rule also furthers the preference--consistent with 
Subchapter IV of the Bankruptcy Code \8\--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.
---------------------------------------------------------------------------

    \8\ 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 final rule 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 final rule 
further enhances these features of our regime. Through its focus on 
promoting customer protection, clarity, and forward thinking, I believe 
the final rule will 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 final rule amending the 
Commission's regulations governing the bankruptcy proceedings of 
commodity brokers.\1\ This rulemaking makes the first comprehensive 
change to these regulations since they were first issued in 1983. I 
commend both Chairman Tarbert for his leadership in continuing the 
Commission's rulemaking agenda and former Chairman Giancarlo for laying 
the groundwork for this important rulemaking when he launched the 
CFTC's Project KISS initiative.\2\
---------------------------------------------------------------------------

    \1\ Part 190 of the Commission's regulations (17 CFR part 190).
    \2\ CFTC Requests Public Input on Simplifying Rules, https://www.cftc.gov/PressRoom/PressReleases/pr7555-17.
---------------------------------------------------------------------------

    I am pleased that today's final rule carefully took into 
consideration comments from FCMs, DCOs, asset managers and other market 
participants. I would like to highlight a few aspects of today's final 
rule. The rulemaking 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.\3\ The Commission is, for the first time, issuing rules 
specific to an insolvent DCO, which are similar to the rules applicable 
to an insolvent FCM. Next, taking advantage of the Commission's 
experience with a few insolvent FCMs over the past decades, the final 
rule provides 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 response to comments from the asset management 
community, the final provisions provide additional guidance on how a 
trustee should balance various interests in seeking to protect public 
customers.\4\ In light of the Commission's experience from the 
bankruptcy of MF Global in 2011, the new bankruptcy rules generally 
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 will apply equally to 
all collateral. The final rule 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 final rule's revised treatment of the ``delivery 
account,'' applicable in the context of physically-settled futures and 
cleared swaps, will 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.
---------------------------------------------------------------------------

    \3\ 11 U.S.C. 761 et seq.
    \4\ Sec.  190.00(c)(3)(i)(C).
---------------------------------------------------------------------------

    I acknowledge that the asset management community has raised 
concerns with certain existing DCO rules that would be recognized in 
the bankruptcy of an FCM or DCO. I would support an on-going dialogue 
between the DCOs and their members and customers on resolution and 
resiliency concerns.

Appendix 4--Statement of Commissioner Rostin Behnam

    I respectfully support the Commodity Futures Trading Commission's 
(the ``Commission'' or ``CFTC'') final rule amending Part 190 of its 
regulations, which governs bankruptcy proceedings of commodity brokers. 
First and foremost, I want to thank Commission staff for all of their 
hard work on the final rule. This is 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 final rule 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 provided a detailed submission of 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.
---------------------------------------------------------------------------

    \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. Most importantly, it is informed by 
the Commission's experience with past bankruptcies. More recently, the 
MF Global bankruptcy in 2011 was the eighth largest corporate 
bankruptcy in American history.\3\ It gave the Commission first hand 
experience with what worked, what did not, and what could be improved.
---------------------------------------------------------------------------

    \3\ 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.
---------------------------------------------------------------------------

    I was a lead advisor during the U.S. Senate's investigation of the 
MF Global bankruptcy, and 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

[[Page 19476]]

together. It was during those frenzied days that I truly appreciated 
the regulatory principle that customer margin is sacrosanct property. 
Because of my experience during those few months, I have made customer 
protections an absolute priority in my time as a Commissioner. Having 
spoken with many market participants throughout the MF Global 
bankruptcy proceedings, including those whose money disappeared in the 
days immediately following, customer protection is my most pressing 
responsibility.
    Just a few months later in early 2012, the bankruptcy of Peregrine 
Financial Group (``PFG''), the catastrophic culmination of a fraudulent 
scheme by a futures commission merchant (``FCM'') involving over $220M 
in customer funds,\4\ further laid bare the strengths and weaknesses of 
the Commission's bankruptcy regime. Important lessons have been 
learned, both in terms of what works and what does not, and I believe 
today's final rule implements the lessons learned in both of those 
events, and those that preceded them.
---------------------------------------------------------------------------

    \4\ See Press Release Number 6300-12, CFTC, CFTC Files Complaint 
Against Peregrine Financial Group, Inc. and Russell R. Wasendorf, 
Sr., Alleging Fraud, Misappropriation of Customer Funds, Violation 
of Customer Fund Segregation Laws, and Making False Statements (July 
10, 2012), https://www.cftc.gov/PressRoom/PressReleases/6300-12.
---------------------------------------------------------------------------

    Many of the changes to Part 190 in today's final rule further 
support provisions 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''), FCMs, their customers, trustees, and the public at large. 
Changes in this final rule will foster the longstanding and continuing 
policy preference for transferring (as opposed to liquidating) the 
positions of public customers--an important customer protection aimed 
at preserving the status quo/asset value. Other changes further support 
existing requirements including that shortfalls in segregated property 
should be shored up from the FCM's general assets, and that public 
customers are favored over non-public customers. The new provisions 
provide trustees with enhanced discretion based upon prior positive 
experience, and codify 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 enacting 
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 final rule also addresses a number of changes that have 
naturally occurred in our markets since the original Part 190 
finalization in 1983. The Commission is promulgating 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 final rule also 
addresses changes in technology over the past 37 years, and the 
movement from paper-based to electronic-based means of communication--a 
lesson learned from the PFG bankruptcy.
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    \5\ https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm.
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    In many ways, this final rule is exactly how the rulemaking process 
should work. It looks retrospectively at major relevant events, and 
applies important lessons learned regarding what works in the existing 
Part 190 rules, what does not, and what can be improved. But it also 
looks forward in a sense, recognizing changes in market structure and 
thinking ahead to the possibility of the bankruptcy of a clearing 
organization. This is a stark contrast to the risk principles final 
rule that we consider today. While the bankruptcy final rule looks back 
at the Commission's past experiences with MF Global and PFG, the risk 
principles final rule seems to ignore past events. While the bankruptcy 
final rule looks ahead and plans for the possibility of addressing a 
DCO bankruptcy, the risk principles final rule ignores future events 
such as climate change.
    My only concern regarding the bankruptcy rule, and it is a 
relatively small one, is one of timing. The proposal for this rule was 
issued this past April.\6\ The comment period just closed on July 13. 
The Commission then issued a supplemental notice of proposed rulemaking 
in September.\7\ That comment period ended October 26. Particularly for 
a rule of this size and intricacy, the time that staff had to review 
and analyze the comment letters and draft the final rule and preamble 
has been incredibly short. Staff has worked tirelessly on this rule to 
get to the finish line. However, I think both the Commission and the 
public might well have benefited from more time for review and 
reflection before issuing such an important rule.
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    \6\ Bankruptcy Regulations, 85 FR 36000 (June 12, 2020). https://www.cftc.gov/LawRegulation/FederalRegister/proposedrules/2020-08482.html.
    \7\ Bankruptcy Regulations, 85 FR 60110 (September 24, 2020). 
https://www.cftc.gov/LawRegulation/FederalRegister/proposedrules/2020-21005.html.
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    On that note, 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.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I support the final rule amending the Commission's part 190 
bankruptcy regulations. The amendments comprehensively update these 
regulations to address the increased size and speed of our markets and 
incorporate ``lessons learned'' from futures commission merchant (FCM) 
bankruptcies that occurred since the regulations were first adopted in 
1983. The new derivatives clearing organization (DCO) bankruptcy 
regulations provide a framework to help market participants be prepared 
for such an event. While FCM bankruptcies are infrequent, and a 
registered DCO has never gone bankrupt, any such event could have 
significant financial impacts on many market participants, which, in 
turn, could have systemic implications. Improving the overall 
effectiveness and efficiency of the bankruptcy process fosters systemic 
stability and helps to better protect, preserve, and quickly return 
customer assets.
    The Bankruptcy Code provides express preferences for positions and 
property of customers of an FCM or DCO debtor so that the customers and 
their counterparties can be assured that those positions and property 
will not be included in the debtor's general assets or clawed back 
post-filing. As a result, those positions and property (e.g., customer 
margin) can be transferred to another FCM or liquidated for value 
quickly and returned to customers following the filing of the 
bankruptcy. In this way, an FCM bankruptcy can be resolved 
expeditiously, greatly reducing any uncertainty as to the treatment of 
positions and property held in the name of the debtor.\1\ The 
protection of

[[Page 19477]]

customer assets and positions furthers market stability by reducing the 
need for customers to rush to liquidate or transfer the positions 
themselves prior to the bankruptcy to avoid such assets being entangled 
in the debtor's general assets. I am voting for the final rule because 
it significantly improves the likelihood of achieving these objectives.
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    \1\ 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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    As a general matter, commenters agreed that, overall, the final 
rule is a significant improvement. As described in the final rule 
release and my statement on the proposed rule, the revised regulations 
further solidify and implement important principles such as the 
preference for public customers, pro rata distributions within account 
classes, and prompt return of assets. The final rule does this not only 
through general statements, but also in specific procedures established 
in the rule.
    Commenters raised a number of specific concerns regarding the final 
rule. As would be expected, these concerns were often (though not 
always) grouped by the specific interests of different types of market 
participants in the event of a bankruptcy of an FCM or DCO.
    Bankruptcy occurs because there are not enough assets to cover a 
debtor's liabilities. In resolving the claims on the debtor's assets 
during a bankruptcy proceeding, the allocation of the shortfall must 
entail a balancing of equities that, unfortunately, most often leaves 
one or more creditors and other interested parties (e.g., shareholders) 
with less than they expected to have if a bankruptcy had not occurred. 
As such, different creditor groups may have competing interests in the 
preferences and processes established in the Commission's bankruptcy 
regulations.
    This reality is reflected in the thoughtful comments we received in 
response to the proposed rule. The final rule release addresses these 
comments in turn, discussing the pros and cons of the changes 
requested. In a number of instances, the final rule has been modified 
to address concerns raised where such modifications better achieve the 
stated principles of the regulations. For other concerns raised, as 
explained in the release, the balancing of the equities meant that the 
overall outcome of the bankruptcy proceeding would be better served by 
maintaining the rule as proposed. Particularly with respect to the 
bankruptcy rules, the fact that nobody gets everything they want likely 
means that the rule, for the most part, is well-balanced.
    I would like to take this opportunity to address two particular 
areas of comments. Entities that represent certain ``public customers'' 
expressed concern regarding the greater ``reasonable'' discretion 
provided to bankruptcy trustees, which is intended to facilitate a 
speedier resolution and return of value to customers generally. These 
commenters are concerned that some customers could receive less than 
they could otherwise if the trustee makes poor choices when exercising 
its discretion or does not implement specific customer instructions. 
This concern is partially addressed with the addition of Sec.  
190.00(c)(3)(i)(C) to clarify how a trustee shall exercise its 
discretion to ``best achieve the overarching goal of protecting public 
customers as a class by enhancing recoveries for, and mitigating 
disruptions to, public customers as a class.'' Otherwise, as explained 
in the preamble, the discretion granted to the trustee is appropriate 
when weighing the benefits of prompt resolution of the bankruptcy with 
the other goals of the regulations.
    The Commission also received numerous comments on the proposed DCO 
bankruptcy regulations. This is not surprising given that these 
regulations create, for the first time, a regulatory scheme for DCO 
bankruptcies. Many commenters expressed concerns regarding the 
direction in Sec.  190.15 to the trustee to, within reasonable 
discretion, follow the debtor DCO's recovery and wind-down plans. The 
final rule, while largely leaving the proposed provision in place, did 
modify the rule text to emphasize that the trustee must act in a manner 
``consistent with the protection of customers.'' In addition, the 
preamble notes that some of the concerns raised in this context are 
part of a broader discussion in the derivatives industry regarding the 
involvement of DCO members and customers in the governance, rulemaking, 
and structuring of the DCOs, and that the Commission continues to 
review these matters. I look forward to engaging in further discussions 
on these issues.
    I commend the Commission staff, particularly Bob Wasserman, for the 
thoughtful effort that has clearly been put into the final rule 
release. The Commission staff has done an exemplary job of reviewing 
the comments received, addressing those concerns, and drafting the 
preamble in very understandable language. I also appreciate Commission 
staff's engagement with my office on a number of areas in the final 
rule.
    The final rule modernizes the Commission's bankruptcy regulations 
and furthers the general principles these regulations serve. Public 
customers and markets will be better protected in the event of an FCM 
or DCO bankruptcy. For these reasons, I support the final rule.
[FR Doc. 2020-28300 Filed 4-12-21; 8:45 am]
BILLING CODE 6351-01-P