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COMMODITY FUTURES TRADING 6. Regulation § 190.08: Calculation of 6. Regulation § 190.08: Calculation of COMMISSION Funded Net Equity Funded Net Equity: Consideration of 7. Regulation § 190.09: Allocation of Costs and Benefits 17 CFR Parts 1, 4, 41, and 190 Property and Allowance of Claims 7. Regulation § 190.09: Allocation of 8. Regulation § 190.10: Provisions Property and Allowance of Claims: RIN 3038–AE67 Applicable to Futures Commission Consideration of Costs and Benefits Merchants During Business as Usual 8. Regulation § 190.10: Provisions Bankruptcy Regulations C. Subpart C—Clearing Organization as Applicable to Futures Commission Debtor Merchants During Business as Usual: AGENCY: Commodity Futures Trading 1. Regulation § 190.11: Scope and Purpose Consideration of Costs and Benefits Commission. of Subpart C 9. Section 15(a) Factors—Subpart B ACTION: Final rule. 2. Regulation § 190.12: Required Reports D. Subpart C—Clearing Organization as and Records Debtor SUMMARY: The Commodity Futures 3. Regulation § 190.13: Prohibition on 1. Regulation § 190.11: Scope and Purpose Trading Commission (the Avoidance of Transfers of Subpart C: Consideration of Costs and ‘‘Commission’’) is amending its 4. Regulation § 190.14: Operation of the Benefits Estate of the Debtor Subsequent to the 2. Regulation § 190.12: Required Reports regulations governing bankruptcy Filing Date and Records: Consideration of Costs and proceedings of commodity brokers. The 5. Regulation § 190.15: Recovery and Benefits amendments are meant Wind-Down Plans; Default Rules and 3. Regulation § 190.13: Prohibitions on comprehensively to update those Procedures Avoidance of Transfers: Consideration of regulations to reflect current market 6. Regulation § 190.16: Delivery Costs and Benefits practices and lessons learned from past 7. Regulation § 190.17: Calculation of Net 4. Regulation § 190.14: Operation of the commodity broker bankruptcies. Equity Estate of the Debtor Subsequent to the 8. Regulation § 190.18: Treatment of Filing Date: Consideration of Costs and DATES: Property Benefits Effective date: The effective date for 9. Regulation § 190.19: Support of Daily 5. Regulation § 190.15: Recovery and this final rule is May 13, 2021. Settlement Wind-Down Plans; Default Rules and Compliance date: The compliance D. Appendix A Forms Procedures: Consideration of Costs and date for § 1.43 is April 13, 2022, for all E. Appendix B Forms Benefits letters of credit accepted, and customer F. Technical Corrections to Other Parts 6. Regulation § 190.16: Delivery: agreements entered into, by a futures 1. Part 1 Consideration of Costs and Benefits 7. Regulation § 190.17: Calculation of Net commission merchant prior to May 13, 2. Part 4 3. Part 41 Equity: Consideration of Costs and 2021. G. Additional Comments Benefits FOR FURTHER INFORMATION CONTACT: H. Supplemental Proposal 8. Regulation § 190.18: Treatment of Robert B. Wasserman, Chief Counsel III. Cost-Benefit Considerations Property: Consideration of Costs and and Senior Advisor, 202–418–5092, A. Introduction Benefits [email protected], Ward P. Griffin, 1. Baseline 9. Regulation § 190.19: Support of Daily 2. Overarching Concepts Settlement: Consideration of Costs and Senior Special Counsel, 202–418–5425, Benefits [email protected], Jocelyn Partridge, a. Changes to Structure of Industry b. Trustee Discretion 10. Section 15(a) Factors—Subpart C 202–418–5926, [email protected], c. Cost Effectiveness and Promptness E. Changes to Appendices A and B Abigail S. Knauff, 202–418–5123, Versus Precision F. Technical Corrections to Parts 1, 4, and [email protected], Division of Clearing d. Unique Nature of Bankruptcy Events 41 and Risk; Commodity Futures Trading e. Administrative Costs Are Costs to the IV. Related Matters Commission, Three Lafayette Centre, Estate, and Often to the Customers A. Antitrust Considerations 1155 21st Street NW, Washington, DC f. Preference for Public Customers Over B. Regulatory Flexibility Act C. Paperwork Reduction Act 20581. Non-Public Customers and for Both Over General Creditors 1. Reporting Requirements in an FCM SUPPLEMENTARY INFORMATION: B. Subpart A—General Provisions Bankruptcy 2. Recordkeeping Requirements in an FCM Table of Contents 1. Regulation § 190.00: Statutory Authority, Organization, Core Concepts, Scope, and Bankruptcy I. Background Construction: Consideration of Costs and 3. Third-Party Disclosure Requirements A. Background of the Notice of Proposed Benefits Applicable to a Single Respondent in an Rulemaking 2. Regulation § 190.01: Definitions: FCM Bankruptcy B. Major Themes in the Revisions to Part Consideration of Costs and Benefits 4. Reporting Requirements in a Derivatives 190 3. Regulation § 190.02: General: Clearing Organization (DCO) Bankruptcy II. Finalized Regulations Consideration of Costs and Benefits 5. Recordkeeping Requirements in a DCO A. Subpart A—General Provisions 4. Section 15(a) Factors—Subpart A Bankruptcy 1. Regulation § 190.00: Statutory Authority, C. Subpart B—Futures Commission 6. Third-Party Disclosure Requirements Organization, Core Concepts, Scope, and Merchant as Debtor Applicable to a Single Respondent in a Construction 1. Regulation § 190.03: Notices and Proofs DCO Bankruptcy 2. Regulation § 190.01: Definitions of Claims: Consideration of Costs and 7. Third-Party Disclosure Requirements 3. Regulation § 190.02: General Benefits Applicable to Multiple Respondents B. Subpart B—Futures Commission 2. Regulation § 190.04: Operation of the During Business as Usual Merchant (FCM) as Debtor Debtor’s Estate—Customer Property: I. Background 1. Regulation § 190.03: Notices and Proofs Consideration of Costs and Benefits of Claims 3. Regulation § 190.05: Operation of the A. Background of the Notice of 2. Regulation § 190.04: Operation of the Debtor’s Estate—General: Consideration Proposed Rulemaking Debtor’s Estate—Customer Property of Costs and Benefits 3. Regulation § 190.05: Operation of the 4. Regulation § 190.06: Making and Taking The basic structure of the Debtor’s Estate—General Delivery Under Commodity Contracts: Commission’s bankruptcy regulations, 4. Regulation § 190.06: Making and Taking Consideration of Costs and Benefits part 190 of title 17 of the Code of Delivery Under Commodity Contracts 5. Regulation § 190.07: Transfers: Federal Regulations, was proposed in 5. Regulation § 190.07: Transfers Consideration of Costs and Benefits 1981 and finalized in 1983. In April of

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this year, the Commission proposed a of the Business Law Section of the taken in addressing such a bankruptcy, comprehensive revision of part 190 (the American Bar Association (‘‘ABA in order to foster prompt action in the ‘‘Proposal’’),1 and in September of this Subcommittee’’).5 In addition, and as event such a bankruptcy occurs, and in year, the Commission issued a discussed further below, the order to establish a more clear supplemental proposal (the Commission benefited from thoughtful, counterfactual (i.e., ‘‘what would ‘‘Supplemental Proposal’’) 2 addressing analytical, and detailed public creditors receive in a liquidation in a particular issue involving the comments submitted in response to the bankruptcy?’’) in the event of a interaction between bankruptcy and Proposal and Supplemental Proposal. resolution of a clearing organization resolution of a clearing organization pursuant to Title II of Dodd-Frank.8 The B. Major Themes in the Revisions to Part pursuant to Title II of the Dodd-Frank Commission’s approach toward a DCO 190 Wall Street Reform and Consumer bankruptcy is characterized by three Protection Act 3 (hereinafter, ‘‘Title II’’ The major themes in the revisions to overarching concepts: and ‘‘Dodd-Frank’’). part 190 include the following: a. First, the trustee should follow, to The Commission is revising part 190 (1) The Commission is adding the extent practicable and appropriate, comprehensively in light of several § 190.00, which sets out the statutory the DCO’s pre-existing default major changes to the industry over the authority, organization, core concepts, management rules and procedures and 37 years since part 190 was first scope, and rules of construction for part recovery and wind-down plans that finalized. These changes include 190. More generally, this section sets have been submitted to the Commission. exponential growth in the speed of out, after notice and comment These rules, procedures, and plans will, transactions and trade processing, rulemaking, the Commission’s thinking in most cases,9 have been developed important lessons learned over prior and intent regarding part 190 in order to pursuant to the Commission’s bankruptcies, and the increased benefit and to enhance the regulations in part 39, and subject to importance of derivatives clearing understanding of DCOs, FCMs, their staff oversight. This approach relieves organizations (‘‘DCOs’’) to the financial customers, trustees,6 and the public at the trustee of the burden of developing, system. large. in the moment, models to address an In promulgating these rules, the (2) Some of the provisions support the extraordinarily complex situation. It Commission is exercising its broad implementation of the requirements, would also enhance the clarity of the power under the Commodity Exchange established consistent with section 4d of counterfactual for purposes of Act (‘‘CEA’’ or ‘‘Act’’) to make the CEA, that shortfalls in segregated resolution under Title II. However, as regulations with respect to commodity property should be made up from the discussed further below, such plans are broker debtors. Specifically, section FCM’s general assets, while others not rigid formulae. Moreover, the 20(a) states that notwithstanding title further the preferences, arising from Commission’s approach gives the 11, the Commission may provide, with both title 11 of the United States Code trustee discretion in following those respect to a commodity broker that is a (i.e., the ‘‘Bankruptcy Code’’), section plans. Accordingly, the approach seeks debtor under chapter 7 of title 11, by 766(h), and Commission policy, that to balance advance planning with rule or regulation (1) that certain cash, with respect to customer property, flexibility to tailor the implementation securities, other property, or commodity public customers are favored over non- to the specific circumstances. contracts are to be included in or public customers, and that public b. Second, resources that are intended excluded from customer property or customers are entitled inter se to a pro to flow through to members as part of member property; (2) that certain cash, rata distribution based on their daily settlement (including both daily securities, other property, or commodity respective claims. variation payments and default contracts are to be specifically (3) Other provisions foster the resources) are devoted to that purpose, identifiable to a particular customer in longstanding and continuing policy rather than to the general estate.10 a specific capacity; (3) the method by preference for transferring (as opposed c. Third, other provisions draw, with which the business of such commodity to liquidating) positions of public appropriate adaptations, from broker is to be conducted or liquidated customers and those customers’ provisions applicable to FCMs.11 after the date of the filing of the petition proportionate share of associated (5) The Commission is noting the under such chapter, including the collateral.7 applicability of part 190 in the context payment and allocation of margin with (4) The Commission is promulgating a respect to commodity contracts not new subpart C to part 190, governing the 8 Section 210(d)(2), 12 U.S.C. 5390(d)(2), provides specifically identifiable to a particular bankruptcy of a clearing organization. In that the maximum liability of the FDIC, acting as doing so, the Commission is a receiver for a covered financial company in a customer pending their orderly resolution under Title II, is the amount the claimant liquidation; (4) any persons to which establishing ex ante the approach to be would have received if the FDIC had not been customer property and commodity appointed receiver and the covered financial contracts may be transferred under 5 The submission by the ABA Subcommittee company had instead been liquidated under chapter cautioned that ‘‘[t]he views expressed in this letter, 7 of the Bankruptcy Code. Thus, in developing section 766 of title 11; and (5) how the and the proposed Model Part 190 Rules, are resolution strategies for a DCO while mitigating net equity of a customer is to be presented on behalf of the [ABA Subcommittee]. claims against the FDIC as receiver, it is important determined.4 They have not been approved by the House of to understand what would happen if the DCO was In developing this rulemaking, the Delegates or Board of Governors of the ABA and, instead liquidated pursuant to chapter 7 of the Commission benefited from outside accordingly, should not be construed as Bankruptcy Code (and this part 190), and such a representing the policy of the ABA. In addition, liquidation is the counterfactual to resolution of contributions. In particular, the they do not represent the position of the ABA that DCO under Title II. Proposal benefited from a thoughtful Business Law Section, nor do they necessarily 9 Only those DCOs that are subject to subpart C and detailed model set of part 190 rules reflect the views of all members of the Committee.’’ of part 39 (i.e., those that have been designated as submitted by the Part 190 Subcommittee 6 Including bankruptcy and SIPA trustees, as well systemically important by the Financial Stability as the FDIC in its role as a receiver. Oversight Council (FSOC) or that have elected to be 7 This policy preference is manifest in section subject to subpart C of part 39) are subject to § 39.35 1 85 FR 36000 (June 12, 2020). 764(b) of the Bankruptcy Code, 11 U.S.C. 764(b) (default rules and procedures) and § 39.39 (recovery 2 85 FR 60110 (Sept. 24, 2020). (protecting from avoidance transfers approved by and wind-down plans). 3 Public Law 111–203 (July 21, 2010). the Commission up to seven days after the order for 10 See generally § 190.19. 4 See CEA section 20(a), 7 U.S.C. 24(a). relief), and in current § 190.02(e). 11 See, e.g., §§ 190.16, 190.17(c).

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of proceedings under the Securities precision in certain respects, cost-effectively resolving commodity Investors Protection Act (‘‘SIPA’’) in the particularly with respect to the concept broker bankruptcies while mitigating case of FCMs subject to a SIPA of pro rata treatment. Following the systemic risk and protecting the proceeding,12 and Title II of Dodd-Frank policy choice made by Congress in commodity broker’s customers. in the case of a commodity broker where section 766(h) of the Bankruptcy Code, The Commission invited comments the Federal Deposit Insurance the Commission’s policy is that it is on all aspects of the proposed Corporation (‘‘FDIC’’) is acting as a more important to be cost effective and rulemaking and received a total of 16 receiver. prompt in the distribution of customer substantive comment letters in (6) The Commission is enacting property (i.e., in terms of being able to response.15 The comments generally changes to the treatment of letters of treat customers as part of a class) than supported the adoption of revisions to credit as collateral, both during business it is to value each customer’s part 190, though several provided as usual and during bankruptcy, in entitlements on an individual basis. The suggestions as to particular elements of order to ensure that, consistent with the Commission believes that this approach the proposal that should be modified, pro rata distribution principle, would lead to (1) in general, a faster clarified, deleted, or otherwise customers who post letters of credit as administration of the proceeding, (2) improved. The Commission has adopted collateral suffer the same proportional customers receiving their share of the many, though not all, of these loss as customers who post other types debtor’s customer property more suggestions, and in some cases has of collateral. quickly, and (3) a decrease in (7) The Commission is granting sought to address the concerns raised administrative costs (and thus, in case through alternative drafting.16 trustees enhanced discretion, based on of a shortfall in customer property, a both practical necessity and positive greater return to customers). II. Finalized Regulations experience. (8) Many of the changes are intended a. Recent commodity broker to update part 190 in light of changes to In the discussion below, the bankruptcies have involved many the regulatory framework over the past Commission highlights topics of interest thousands of customers, with as many three decades, including cross- to commenters and discusses comment as hundreds of thousands of commodity references to other Commission letters that are representative of the contracts. Trustees must make decisions regulations. Some of these codify actual views expressed on those topics. The as to how to handle such customers and practice in prior bankruptcies, such as discussion does not explicitly respond contracts in the days—in some cases, a requirement that an FCM notify the to every comment submitted; rather, it the hours—after being appointed. Commission of its imminent intention addresses important issues raised by the Moreover, each commodity broker to file for voluntary bankruptcy. In proposed rulemaking and analyzes bankruptcy has unique characteristics, another case, the Commission is those issues in the context of specific and bankruptcy trustees need to adapt addressing for the first time the comments. correspondingly quickly to those unique interaction between part 190 and recent A. Subpart A—General Provisions 17 characteristics. revisions to the Commission’s customer i. In order to foster the ability of the protection rules.14 The Commission is adopting as trustee to operate effectively, some of (9) Other changes follow from changes subpart A (§§ 190.00–190.02) general the changes would permit the trustee to the technological ecosystem, in provisions to address both debtors that enhanced discretion generally. particular changes from paper-based to are both FCMs and debtors that are ii. Others, recognizing the difficulty in electronic-based means of DCOs. treating large numbers of public communication and recording, (for customers on a bespoke basis, would example, the use of communication to 15 The Commission received comment letters permit the trustee to treat public customers’ electronic addresses rather submitted by the following: American Council of customers on an aggregate basis. These than by paper mail, as well as the use Life Insurers (ACLI); Better Markets, Inc. (Better changes represent a move from a model Markets); Cboe Global Markets, Inc. (CBOE); CME of websites as a means for the trustee to Group Inc. (CME); Commodity Markets Council where the trustee receives and complies communicate with customers on a (CMC); Futures Industry Association (FIA); with instructions from individual public regular basis). The proposal would also Investment Company Institute (ICI); customers, to a model—reflecting actual recognize the change from paper-based Intercontinental Exchange Inc. (ICE); International practice in commodity broker Swaps and Derivatives, Inc. (ISDA); LCH Group to electronic recording of ‘‘documents of (LCH); National Grain and Feed Association bankruptcies in recent decades—where title.’’ Many of these changes also (NGFA); Options Clearing Corporation (OCC); Part the trustee transfers as many open recognize the actual practice in prior 190 Subcommittee of the Business Law Section of commodity contracts as possible on an bankruptcies. the American Bar Association (ABA omnibus basis. Subcommittee); Securities Industry and Financial (10) Finally, many of the changes are Markets Asset Management Group and Managed b. These grants of discretion are also intended to clarify language in existing Funds Association (SIFMA AMG/MFA);); Kathryn supported by the Commission’s positive regulations, without any intent to Trkla; Geoffrey Goodman; and Vincent Lazar, as experience working in cooperation and change substantive results. While some individuals (Subcommittee Members), and consultation with bankruptcy and SIPA of these changes will, as discussed Vanguard Group, Inc. (Vanguard). trustees. 16 The Commission also issued the Supplemental below, address ambiguities that have Proposal, which withdrew proposed § 190.14(b)(2) c. On a related note, and as discussed complicated past bankruptcies, this and (3), and proposed an alternative. The further as the third overarching concept comprehensive revision of part 190 has Commission received 5 substantive comment letters in the section below on cost-benefit also provided opportunities to clarify in response, each of which was from an entity that considerations,13 part 190 favors cost had also submitted a comment letter on the language in order to avoid future Proposal. For the reasons discussed in section II.H effectiveness and promptness over ambiguities, and to add provisions to below, the Commission is not adopting the address circumstances that have not yet Supplemental Proposal. 12 Those would be FCMs that are also registered arisen, in order to accomplish better and 17 The Commission is adopting the proposed as broker-dealers with the Securities and Exchange technical corrections and updates to parts 1, 4, and Commission. See generally SIPA, 15 U.S.C. 78aaa et more reliably the goals of promptly and 41, which are discussed in section II.F. below. seq. Moreover, as discussed in section II.B.8, parts of 13 See the overarching concept discussed in 14 78 FR 68506 (Nov. 14, 2013). This refers to proposed § 190.10 are being adopted, but codified section III.A.2.c below. § 190.05(f) in section II.B.3 below. in part 1.

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1. Regulation § 190.00: Statutory CME and the ABA Subcommittee futures account class (including options Authority, Organization, Core Concepts, specifically supporting the inclusion of on futures),22 the foreign futures Scope, and Construction an explanation of the Commission’s account class (including options on 23 The Commission is adopting § 190.00 authority to adopt the part 190 foreign futures), the cleared swaps as proposed with the addition of regulations in § 190.00. account class for swaps cleared by a § 190.00(c)(3)(i)(C) and the modification The Commission is adopting registered DCO (including cleared § 190.00(b) to explain that the part 190 options other than options on futures or to § 190.00(d)(3)(v), as set forth below. 24 The Commission is adopting § 190.00 to regulations are organized into three foreign futures), and the delivery set forth general provisions that state subparts. Subpart A contains general account class for property held in an facts and concepts that exist in the provisions applicable in all cases. account designated as a delivery Commission’s bankruptcy regulations. It Subpart B contains provisions that account. Delivery accounts are used for is applicable to all of part 190. The apply when the debtor is an FCM, the effecting delivery under commodity Commission’s intent is to assist trustees, definition of which includes acting as a contracts that provide for settlement via 18 bankruptcy courts, customers, clearing foreign FCM. Subpart C contains delivery of the underlying when a members, clearing organizations, and provisions that apply when the debtor is commodity contract is held to a DCO, as defined by the CEA. The expiration or, in the case of an option other interested parties in 25 understanding the Commission’s Commission received comments from on a commodity, is exercised. The Commission is adopting rationale for, and intent in the ABA Subcommittee, CME, and ICI § 190.00(c)(3)(i) to prescribe the separate promulgating, the specific provisions of in support of the reorganization of part treatment of ‘‘public customers’’ and part 190. The Commission also believes 190. ‘‘non-public customers,’’ as defined in that the regulation may be particularly The Commission is adopting § 190.01, within each account class in useful in a time of crisis for those § 190.00(c) to set forth the core 19 the event of a proceeding in which the individuals who may not have extensive concepts of part 190 that are central debtor is an FCM. It explains that, in a experience with the CEA or Commission to understanding how a commodity bankruptcy, public customers are regulations. broker bankruptcy works. These include The Commission requested comment concepts related to commodity brokers generally entitled to a priority with respect to all aspects of proposed and commodity contracts, account distribution of cash, securities, or other § 190.00. The Commission also raised classes, public customers and non- customer property over ‘‘non-public specific questions as to whether a public customers, Commission customers,’’ and both are given a regulation setting forth core concepts segregation requirements, member priority over all other claimants (except would be useful; whether the core property,20 porting of public customer for claims relating to the administration concepts were under or over inclusive; commodity contract positions, pro rata of customer property) pursuant to distribution, and deliveries. section 766(h) of the Bankruptcy and whether the definitions and 26 discussions for each core concept would The Commission is adopting Code. The Commission is adopting be helpful. The Commission received § 190.00(c)(1) to explain that subchapter § 190.00(c)(3)(ii) to address the division several comments expressing support IV of chapter 7 of the Bankruptcy Code of customer property and member for various aspects of proposed § 190.00, applies to a debtor that is a ‘‘commodity property in proceedings in which the including comments from SIFMA AMG/ broker,’’ the definition of which requires debtor is a clearing organization. In such MFA, CME, and the ABA a ‘‘customer.’’ 21 Section 190.00(c)(1) a proceeding, customer property Subcommittee. CME noted in particular states that the regulations in part 190 consists of member property, which is that it believed that the regulation ‘‘may apply to commodity brokers that are distributed to pay member claims based prove particularly useful to a trustee FCMs as defined by the Act, or DCOs as on members’ house accounts, and who has little experience with the CEA defined by the Act. 22 or the Commission’s customer funds The Commission is adopting This corresponds to segregation pursuant to § 190.00(c)(2) to explain that the CEA section 4d(a) of the CEA, 7 U.S.C. 6d(a). segregation rules, as they try to get ‘up 23 This corresponds to segregation pursuant to to speed’ in the critical early hours and and Commission regulations provide § 30.7 (enacted pursuant to section 4(b)(2)(A) of the days following the trustee’s separate treatment and protections for CEA, 7 U.S.C. 6(b)(2)(A). appointment when the trustee is different types of cleared commodity 24 This corresponds to segregation pursuant to expected to act quickly on various contracts or account classes. The four section 4d(f) of the CEA, 7 U.S.C. 6d(f). account classes include the (domestic) 25 Delivery accounts are discussed further below matters.’’ in, e.g., §§ 190.00(c)(6), 190.01 (definition of The Commission is adopting delivery account, cash delivery property, physical § 190.00(a) to set forth the Commission’s 18 See CEA section 1a(28), 7 U.S.C. 1a(28). The delivery property) and 190.06. definition of foreign FCM involves soliciting or statutory authority to adopt the 26 Section 766(h) of the Bankruptcy Code accepting orders for the purchase or sale of a explicitly states that the trustee shall distribute proposed part 190 regulations under commodity for future delivery executed on a foreign property ratably to customers in priority to all other section 8a(5) of the CEA, which board of trade, or by accepting property or claims, except claims that are attributable to the empowers the Commission to make and extending credit to margin, guarantee or secure any administration of customer property. trade or contract that results from such a promulgate such rules and regulations Notwithstanding any other provision of this solicitation or acceptance. See section 761(12) of subsection, a customer net equity claim based on as are necessary to effectuate any of the the Bankruptcy Code, 11 U.S.C. 761(12). a proprietary account may not be paid either in provisions or to accomplish any of the 19 The Commission is using to use the term ‘‘core whole or in part, directly or indirectly, out of purposes of the CEA, and section 20 of concepts’’ to avoid confusion with the core customer property unless all other customer net the CEA, which provides that the principles applicable to registered entities. Cf. CEA equity claims have been paid in full. Thus, all section 5b(c)(2), 7 U.S.C. 7a–1(c)(2). customer property will be allocated to public Commission may, notwithstanding the 20 ‘‘Member property’’ is defined in § 190.01 and customers so long as the funded balance in any Bankruptcy Code, adopt certain rules or will be used to identify cash, securities, or property account class for public customers is less than one regulations governing a proceeding available to pay the net equity claims of clearing hundred percent of public customer net equity involving a commodity broker that is a members based on their house account at the claims. Once all account classes for public clearing organization. Cf. 11 U.S.C. 761(16). customers are fully funded (i.e., at one hundred debtor under subchapter IV of chapter 7 21 See 11 U.S.C. 101(6) (definition of ‘‘commodity percent of net equity claims), any excess will be of the Bankruptcy Code. The broker’’), 761(9) (definition of ‘‘customer’’ referred allocated to non-public customers’ net equity Commission received comments from to in 101(6)). claims until all of those are fully funded.

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customer property other than member rata to those public customers. The pro CME, OCC, Vanguard, and NGFA property, which is reserved for payment rata distribution principle carries forth supported the concept of preferring the of claims for the benefit of members’ the statutory direction in section 766(h) claims of public customers over non- public customers. The Commission is of the Bankruptcy Code. It ensures that public customers in a bankruptcy adopting § 190.00(c)(3)(iii) to address all public customers within an account proceeding. CME agreed with the the preferential assignment of property class will suffer the same proportional inclusion of the core concept set forth among customer classes and account loss, including those public customers § 190.00(c)(3)(ii), noting that ‘‘it aids classes in clearing organization that post as collateral letters of credit or understanding to explain how the bankruptcies. Certain customer specifically identifiable property.28 Any distinction between the public customer property, as specified in § 190.18(c), customer property that is not class and the non-public customer class will be preferentially assigned to attributable to any particular account is reflected at the DCO-level in the ‘‘customer property other than member class or which is in excess of public distinctions made between customer property’’ (i.e., property for the public customer net equity claims for the accounts and house accounts and customers of members) instead of account class to which it is attributed, between the two categories of customer ‘‘member property’’ to the extent that will be distributed to public customers property—customer property and there is a shortfall in funded balances in respect of net equity claims in other member property—that are available to for members’ public customer claims. account classes where there is a satisfy the net equity claims of each.’’ To the extent that there are excess shortfall. Thus, as noted in Better Markets supported the funded balances for members’ claims in § 190.00(c)(3), all public customer net clarification in § 190.00(c)(5)(ii) that any customer class/account class equity claims would receive priority customers relying on letters of credit combination, that excess will also be over non-public customer claims. must carry the same proportional losses assigned preferentially to ‘‘customer The Commission is adopting as customers posting other forms of property other than member property’’ § 190.00(c)(6) to address deliveries. It acceptable collateral. for other account classes to the extent of explains that the delivery provisions of NGFA supported the core concept of any shortfall in funded balances for part 190 apply to any commodity that is prioritizing the prompt transfer of members’ public customer claims in subject to delivery under a commodity customer accounts and positions to such account classes. Where property contract, including agricultural another FCM as opposed to liquidating will be assigned to a particular customer commodities, other non-financial customer accounts. OCC, however, class with more than one account class, commodities (such as metals or energy), disagreed with this policy preference. it will be assigned on a least funded to and commodities that are financial in OCC supported ‘‘the Commission’s most funded basis among the account nature (including virtual currencies). In objective to mitigate risk to an FCM’s classes. the ordinary course of business, customers and limit market volatility,’’ The Commission is adopting commodity contracts with delivery noting that ‘‘[p]orting positions and § 190.00(c)(4) to explain that, in a obligations are offset before reaching the associated collateral in an FCM proceeding in which the debtor is an delivery stage (i.e., prior to triggering bankruptcy proceeding can be an FCM, part 190 details the policy bilateral delivery obligations). effective way to achieve these objectives preference for transferring to another Nonetheless, when delivery obligations in some instances.’’ OCC believed, FCM (commonly known as ‘‘porting’’), do arise, a delivery default could have however, that the trustee should retain the open commodity contract positions a disruptive effect on the cash market broad discretion to decide, on a case-by- of the debtor’s customers along with all for the commodity and could adversely case basis and in consideration of or a portion of such customers’ account impact the parties to the transaction. In certain factors (e.g., the defaulting equity.27 a proceeding in which the debtor is an FCM’s total book of positions and The Commission is adopting FCM, the delivery provisions in part 190 market conditions) whether porting or § 190.00(c)(5) to address pro rata reflect the policy preferences (A) to liquidating positions will achieve the distribution. It explains that, if the liquidate commodity contracts that best result for customers involved in an aggregate value of customer property in settle via delivery before they move into FCM’s bankruptcy. OCC further a particular account class is less than a delivery position and (B) when commented that the market risk the amount needed to satisfy the net contracts do move into a delivery associated with closing out and equity claims of public customers in position, to allow the delivery to occur, reopening positions for certain that account class (i.e., there is a where practicable, outside the customers that may be introduced with ‘‘shortfall’’), customer property in that administration of the debtor’s estate liquidation should be weighed against account class will be distributed pro (i.e., directly between the debtor’s potential drawbacks of porting, customer and the delivery counterparty including that ‘‘(i) a trustee (or DCO) 27 Transfer or porting of customer positions assigned by the clearing organization). must first identify a transferee to accept mitigates risks to both the customers of the debtor The Commission received several the open position[s] and collateral, FCM and to the markets. Specifically, porting (rather than the alternative, liquidation) of customer comments expressing support for which depending on market conditions positions protects customers’ hedges from changes certain provisions in § 190.00(c) and could be a difficult and time consuming in value between the time they are liquidated and two comments expressing concerns. process; (ii) until the transfer is the time, if any, that the customer may be able to CME expressed support for ‘‘limiting the re-establish them (and thus mitigates the market complete, the customer may face risk that some customers use the futures markets to scope of part 190 to the bankruptcy of uncertainty as to how its position and counteract), and similarly protects customers’ a commodity broker that is an FCM or associated collateral will be resolved directional positions. Moreover, not all customers a DCO and to commodity contracts that and may not be able to exit the position may be able to re-establish positions with the same are cleared’’ as set forth § 190.00(c)(1). speed—in particular, smaller customers may be in a timely and efficient manner; and subject to longer delays in re-establishing their (iii) a customer may be required to post positions. In addition, liquidation of an FCM’s book 28 In prior bankruptcies, some customers posting additional collateral at a new FCM prior of positions can increase volatility in the markets, letters of credit or specifically identifiable property to or immediately after a transfer.’’ to the detriment of all market participants (and also as collateral sought to escape pro rata treatment for In response to the concerns raised by contribute to making it more expensive for these categories of collateral, contrary to the customers to re-establish their hedges and other Commission’s intent. See discussion of OCC, the Commission notes first that, as positions). § 190.04(d)(3) in section II.B.2 below. OCC forthrightly acknowledges,

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liquidating customer positions may the customer to prompt return by the In light of the foregoing and to introduce market risk associated with transferee FCM of the remaining provide clarity with respect to the scope closing out and reopening positions for collateral that was transferred—which of the trustee’s discretion, the certain customers. Additionally, may well be more prompt than a Commission is adopting new liquidating a mass of customer positions distribution in the bankruptcy § 190.00(c)(3)(i)(C) which provides that may roil the markets, if any, where proceeding of the debtor. where a provision in part 190 affords those positions are concentrated. For ICI expressed concerns with respect to the trustee discretion, that discretion these reasons, the policy preference in the discretion granted to the trustee should be exercised in a manner that the favor of transfer is both supported by under the part 190 regulations. ICI trustee determines will best achieve the statute and quite longstanding. It is agreed with the Commission ‘‘that overarching goal of protecting public supported by § 764(b) of the Bankruptcy trustees need flexibility given the customers as a class by enhancing Code, which explicitly permits transfers myriad of decisions they must make in recoveries for, and mitigating of commodity contracts that are a short period of time and the unique disruptions to, public customers as a authorized by the Commission up to circumstances that each commodity class. In seeking to achieve that seven calendar days after the order for broker insolvency may present,’’ and overarching goal, the trustee has relief. It is also embodied in current that ‘‘trustees to date have exercised discretion to balance those two subgoals § 190.02(e), which requires the trustee to their discretion in a manner that has when they are in tension. Where the immediately use its best efforts to effect generally promoted customer trustee is directed to exercise a transfer, and is continued in proposed protection.’’ ICI cautioned, however, ‘‘reasonable efforts’’ to meet a standard, (and adopted) § 190.04(a)(1). that the Commission should take steps those efforts should only be less than Furthermore, § 190.00(c)(4) to help ensure that the trustee ‘‘best efforts’’ to the extent that the establishes, consistent with § 764(b), a prioritizes the protection of public trustee determines that such an policy preference for porting, rather customers. ICI urged the Commission to approach would support the foregoing than a mandate for porting. This make clear in § 190.00 ‘‘that the trustee goals.31 recognizes that finding willing and able must exercise [its] discretion in a The Commission is adopting transferees for all customer positions manner that it determines will result in § 190.00(d)(1) to describe the scope of may or may not be practicable. the greatest recovery for, and the least commodity broker proceedings under Moreover, § 190.04(a)(1) requires the disruption to, public customers.’’ With subchapter IV of chapter 7 of the trustee to use its best efforts to effect a respect to part 190 regulations that are Bankruptcy Code,32 and the relationship transfer no later than the seventh ‘‘specifically aimed at protecting 29 between part 190 to SIPA proceedings calendar day after the order for relief, customers,’’ ICI asserted the trustee’s (where the debtor is a commodity and § 190.04(d) requires the trustee discretion should be more limited. broker) and to resolution of commodity promptly to liquidate most remaining While ICI acknowledged that, at times, brokers under Title II of the Dodd-Frank contracts after than time. Indeed, as a compliance with such provisions ‘‘may Act.’’ be impractical or impossible or may practical matter, there is cause for doubt Section 190.00(d)(1)(i) acknowledges cause harm to customers,’’ ICI was that a DCO will permit the trustee of a that, while section 101(6) of the concerned that a ‘‘reasonable efforts’’ debtor that is a clearing member to hold Bankruptcy Code recognizes 30 standard ‘‘could signal that the trustee open contracts quite that long. Thus, ‘‘commodity options dealers’’ and has wider latitude to depart from the despite the preference for porting, there ‘‘leverage transaction merchants’’ (as requirement at issue.’’ ICI asked the are practical limits to how long defined in sections 761(6) and (13) of Commission to impose a ‘‘best efforts’’ contracts will be held open before being the Bankruptcy Code), as separate liquidated. This also imposes temporal standard in certain cases. The Commission agrees with ICI that categories of commodity brokers, there limits on the uncertainty customers will are no commodity options dealers or face as to how their positions will be the trustee should exercise its discretion in a manner that best achieves the leverage transaction merchants resolved. currently registered as such. As set forth Finally, while a customer may indeed overarching goal of protecting the in the Note to paragraph (d)(1)(i)(B), the be called for additional collateral at a interests of public customers as a class, Commission is declaring its intent to transferee FCM (particularly if less than and specifically should act in the adopt regulations with respect to 100% of the collateral is transferred manner that it determines will result in commodity options dealers and leverage along with the positions), a customer the greatest recovery for, and the least transaction merchants, respectively, at that is unwilling to meet such a call will disruption to, public customers. The such time as an entity registers as such. at the least be permitted to have their Commission notes that, at times, those Section 190.00(d)(1)(ii) explains that, positions liquidated. That would entitle two sub-goals may be in tension. Because the Commission does not pursuant to section 7(b) of SIPA,33 the 29 Indeed, the preference contained § 190.00(c)(4) believe that there is a universally does not represent a departure from the existing optimal means to reconcile the two sub- 31 While ‘‘ ‘[b]est efforts’ is a term which standards under current part 190. It merely goals in aid of best achieving the necessarily takes its meaning from the highlights the requirement in § 190.04(a)(1) that the overarching goal of protecting the circumstances,’’ the trustee in exerting best efforts trustee use its best efforts to effect a transfer no later to meet a standard must diligently exert efforts to than the seventh calendar day after the order for interests of public customers, the meet that standard ‘‘to the extent of its own total relief; that requirement is substantially identical to Commission concludes that it is best to capabilities.’’ See generally Bloor v. Falstaff the requirement in current § 190.02(e). leave the balancing of the two sub-goals Brewing Corp, 454 F.Supp. 258, 266–67 aff’d 601 30 For example, OCC Rule 1102(a) provides that to the discretion of the trustee. It is in F.2d 609 (2nd. Cir. 1979). By contrast, in exerting OCC may summarily suspend any Clearing Member ‘‘reasonable efforts’’ to meet a standard, the which is in such financial or operating difficulty that context that the Commission has Commission expects that the trustee will work in that OCC determines and so notifies the Securities decided to direct the trustee to exercise good faith to meet the standard, but will also take and Exchange Commission or the Commodity ‘‘reasonable efforts’’ rather than ‘‘best into account other considerations, including the Futures Trading Commission that suspension is efforts’’ to achieve certain standards. In impact of the effort necessary to meet the standard necessary for the protection of the Corporation, on the overarching goal of protecting public other Clearing Members, or the general public. OCC determining what efforts are customers as a class. Rule 1106 permits OCC to close out the positions ‘‘reasonable,’’ the trustee should act to 32 12 U.S.C. 5381 et seq. of a suspended clearing member. achieve the overarching goal. 33 15 U.S.C. 78aaa et seq.

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trustee in a SIPA proceeding where the segregated customer property is pro rata to SIPA rather than by the FCM rules. debtor is also a commodity broker has treatment. To achieve this goal, the Cboe noted that such clarity will be the same duties as a trustee in a FCM’s segregation records (including ‘‘beneficial to the entire ecosystem, proceeding under subchapter IV of account statements) and reporting to the including customers of FCMs and chapter 7 of the Bankruptcy Code, to the Commission and self-regulatory broker-dealers’’ and will ‘‘further the extent consistent with SIPA or as organizations (‘‘SROs’’) and DCOs must ability of market participants to utilize ordered by the court.34 This part reflect what is actually available for portfolio margining and the associated implements subchapter IV of chapter 7 customers. This is necessary to enable efficiencies.’’ CME expressed support by establishing the trustee’s duties FCMs, SROs, DCOs, and the for § 190.00(d)(1)(iii). CME specifically thereunder, consistent with the broad Commission to ensure, during business supported ‘‘setting out that Part 190 authority granted to the Commission as usual, that (a) customer property is ‘shall serve as guidance’ to the FDIC as pursuant to section 20 of the CEA. being properly protected pursuant to the receiver for an FCM or DCO in a Therefore, this part also applies to a segregation requirements of section 4d proceeding under Title II of Dodd Frank, proceeding commenced under SIPA of the CEA and the regulations with respect to the distribution of with respect to a debtor that is thereunder, and (b) customer property is customer property and member registered as a broker or dealer under not subject to hidden arrangements that property.’’ Noting that ‘‘Title II [of the section 15 of the Securities Exchange cannot be accounted for transparently Dodd-Frank Act] directs the FDIC to Act of 1934 35 when the debtor also is and reliably. Through § 190.00(d)(2)(ii), apply the provisions of subchapter IV of an FCM. the Commission is making clear that chapter 7 of the [Bankruptcy] Code with Moreover, in the context of a customer property cannot be burdened respect to such distributions,’’ CME resolution proceeding under Title II of by equitable trusts. Attempting to stated its belief that ‘‘it is reasonable to Dodd-Frank, section 210(m)(1)(B) 36 account for such equitable trusts in a read Title II’s cross-reference to provides that the FDIC (in its role as bankruptcy proceeding under part 190 subchapter IV of chapter 7 ‘‘as indirectly resolution authority) must apply the would undermine the Commission’s bringing [p]art 190 into the scope of that provisions of subchapter IV of chapter 7 implementation and enforcement of the provision given the need for of the Bankruptcy Code in respect of the statutory scheme under the CEA. Commission regulations to give distribution of customer property and Section 190.00(d)(3) provides that specificity and meaning to the general member property of a resolution certain transactions, contracts, or principles set out in subchapter IV.’’ 37 entity that is a commodity broker as agreements are excluded from the term SIFMA AMG/MFA supported the 39 if the resolution entity were a debtor for ‘‘commodity contract.’’ The excluded principle of excluding property held in purposes of subchapter IV. Accordingly, agreements and transactions a constructive trust from customer § 190.00(d)(1)(iii) explains that this part traditionally have not been considered property as set forth in § 190.00(d)(2)(ii), shall serve as guidance with respect to to be commodity contracts for purposes noting that this principle ‘‘serves to the distribution of property in a of segregation and customer protection, preserve the integrity of customer proceeding in which the FDIC acts as a while those that are excepted from these property.’’ ICI strongly supported setting receiver for an FCM or DCO pursuant to exclusions are so considered, and thus 38 forth the prohibition on excluding Title II of Dodd-Frank. are covered by part 190. property from ‘‘customer property’’ The Commission is adopting The Commission received four because it is considered to be held in a § 190.00(d)(2)(i) to clarify that a trustee comments supportive of specific trust implied in equity in may not recognize any account classes provisions of proposed § 190.00(d) and § 190.00(d)(2)(ii), and the exclusion not explicitly provided for in part 190. one comment requesting a modification from the term ‘‘commodity contract’’ of Section 190.00(d)(2)(ii) provides that no of the regulation. CME agreed that property that would otherwise be removing provisions relating to off-exchange retail foreign currency included in customer property, as commodity option dealers and leverage transactions in § 190.00(d)(3)(iv). defined in § 190.01, shall be excluded transaction merchants would ‘‘improve The ABA Subcommittee from customer property because it is the rules’ clarity.’’ CME and Cboe recommended one modification to this considered to be held in a constructive expressed support for the clarification regulation. It asked the Commission to trust, resulting trust, or other trust that in § 190.00(d)(1)(ii) of the applicability amend proposed § 190.00(d)(3)(v) to is implied in equity. of SIPA in the bankruptcy proceeding of clarify that mixed swaps could be Generally, in a commodity broker a firm that is dually registered as an commodity contracts subject to part 190. bankruptcy, the basis for distributing FCM and a broker-dealer where the In support of its position, the ABA bankruptcy must be handled pursuant Subcommittee asserted that a DCO 34 See SIPA section 7(b), 15 U.S.C. 78fff–1(b) (To could theoretically provide clearing the extent consistent with the provisions of [SIPA] 39 The contracts that would be excluded include: services to FCMs and their customers or as otherwise ordered by the court, a trustee shall Options on commodities unless cleared by a DCO be subject to the same duties as a trustee in a case with respect to mixed swaps, where the (or, in the context of a foreign futures clearing mixed swap positions are carried in under chapter 7 of title 11, including, if the debtor member, a foreign clearing organization); forwards is a commodity broker, as defined under section (defined as such pursuant to the exclusions in accounts subject to part 22 and 101 of such title, the duties specified in subchapter sections 1a(27) or 1a(47)(B)(ii) of the CEA), unless customers are part of the cleared swap IV of such chapter 7). they are cleared by a DCO (or, in the context of a account class under part 190. The ABA 35 15 U.S.C. 78o. foreign futures clearing member, a foreign clearing 36 12 U.S.C. 5390(m)(1)(B). organization); security futures products when they Subcommittee analogized the inclusion 37 That is, the entity being resolved under Title are carried in a securities account; retail foreign of mixed swaps within the ‘‘commodity II. Section 210(m)(1)(b) refers to ‘‘any covered currency transactions described in sections contract’’ definition to the financial company or bridge financial company.’’ 2(c)(2)(B) or (C) of the CEA; security-based swaps Commission’s proposal to not exclude 38 12 U.S.C. 5390(m)(1)(B) provides that the FDIC or other securities carried in a securities account must apply the provisions of subchapter IV of (other than security futures products carried in an security futures products from the chapter 7 of the Code with respect to the enumerated account class); and retail commodity commodity contract definition when the distribution of customer property and member transactions described in section (2)(c)(2)(D) of the security futures product is carried in an property in connection with the liquidation of a CEA (other than transactions executed on or subject account for which there is a commodity broker that is a ‘‘covered financial to the rules of a designated contract market company’’ or ‘‘bridge financial company’’ (terms (‘‘DCM’’) or foreign board of trade (‘‘FBOT’’) as if corresponding account class under part defined in 12 U.S.C. 5381(a)). they were futures). 190. The Commission agrees with the

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ABA Subcommittee’s reasoning with Accordingly, after consideration of proposed definition in § 190.01 and is respect to proposed § 190.00(d)(3)(v) the comments and for the reasons stated adopting each definition as proposed.42 and is amending § 190.00(d)(3)(v) to above, the Commission is adopting The Commission is adopting the read in pertinent part, that ‘‘. . . a § 190.00 as proposed with the addition definition of ‘‘account class’’ as security futures product or mixed swap of § 190.00(c)(3)(i)(C) and the proposed with the modifications (as defined in 1a(47)(D) of the Act) that modification to § 190.00(d)(3)(v), as set described below. The current definition is, in either case, carried in an account forth above. of the term ‘‘account class’’ specifies for which there is a corresponding that it includes certain types of account class under part 190 is not 2. Regulation § 190.01: Definitions customer accounts, each of which is to excluded.’’ be recognized as a separate class of The Commission is adopting § 190.01 account. The types are ‘‘futures The Commission is adopting as proposed with modifications set forth § 190.00(e) to explain the context in account,’’ ‘‘foreign futures accounts,’’ below, to update the definitions for ‘‘leverage accounts,’’ ‘‘delivery which part 190 should be interpreted. It revised part 190. Most of the changes in states that any references to other accounts,’’ and ‘‘cleared swap § 190.01 are conforming changes, such accounts.’’ The Commission is adding federal rules and regulations refer to the as correcting cross-references and most current versions of these rules and detail to the definition of ‘‘account deleting definitions of certain terms that regulations (i.e., ‘‘as the same may be class’’ by including therein definitions are not used in part 190, as amended. amended, superseded or renumbered’’) of ‘‘futures account,’’ ‘‘foreign futures Other changes tie the definitions in and that, where they differ, the accounts,’’ ‘‘cleared swaps accounts,’’ § 190.01 more closely to the definitions definitions set forth in § 190.01 shall be and ‘‘delivery accounts.’’ However, as in § 1.3 and other Commission used instead of the defined terms set discussed above with respect to forth in section 761 of the Bankruptcy regulations, to reflect changes in § 190.00(d)(1)(i), the Commission is Code. The Commission notes that other Commission regulations. In some cases, removing, at least temporarily, the regulations in part 190 are designed to the Commission is adopting more ‘‘commodity options’’ and ‘‘leverage 43 be consistent with subchapter IV of substantive changes to the definitions, account’’ account classes. chapter 7 of the Bankruptcy Code. such as amending or adding definitions 42 The Commission did not receive comments Section 190.00(e) addresses account to further clarify and provide additional details where the current definitions are with respect to the following part 190 definitions classes in the context of portfolio as proposed in § 190.00: Act, Bankruptcy code, margining and cross margining silent or unclear, or to reflect concepts Business day, Calendar day, Cash delivery account programs. Where commodity contracts that are new to part 190. In particular, class, Cash equivalents, Clearing organization, the Commission is separating the Commodity broker, Commodity contract account, (and associated collateral) that would be Court, Cover, Customer, Customer claim of record, attributable to one account class are, delivery account class into two Customer class, Dealer option, Debtor, Distribution, instead, commingled with the subclasses, a physical delivery account Equity, Exchange Act, FDIC, Filing Date, Final net commodity contracts (and associated class and a cash delivery account class; equity determination date, Foreign board of trade, the relevant terms are defined below. Foreign clearing organization, Foreign future, collateral) in a second account class (the Foreign futures commission merchant, Foreign ‘‘home field’’), then the trustee must The definitions of commodity contract futures intermediary, Funded balance, Futures and treat all such commodity contracts and and physical delivery property codify futures contract, In-the-money amount, Joint positions that the Commission has taken account, Leverage contract, Leverage transaction associated collateral as being held in, merchant, Member property, Net equity, Open and consistent with the regulations in recent commodity broker commodity contract, Order for relief, Person, applicable to, an account of the second bankruptcies.40 Premium, Primary liquidation date, Principal account class. The approach of The Commission is also amending contract, Securities Account, SIPA, Security, Short term obligation, Specifically identifiable property, following the rules of the ‘‘home field’’ § 190.01 to replace the paragraphs Strike price, Substitute customer property, Swap, also pertains to securities positions held identified with an alphabetic Trustee, and Undermargined. Accordingly, the in a commodity account class (and thus designation for each defined term (e.g., Commission is adopting those definitions as treated in accord with the relevant ‘‘§ 190.01(ll)’’) with a simple proposed, as discussed later in section II.A.2. commodity account class) and 43 The Commission is adopting paragraph (2) of alphabetized list, as is recommended by the definition of account class to address commodity contract positions (and the Office of the Federal Register, and as commingling orders and rules. Specifically, there associated collateral) held in the recently implemented by the are cases where commodity contracts (and securities account, in which case the Commission with respect to, e.g., associated collateral) that would be attributable to one account class are held separately from contracts rules applicable to the securities 41 § 1.3. and collateral associated with that first account account will apply, consistent with The Commission requested comment class, and instead are allocated to a different section 16(2)(b)(ii) of SIPA, 15 U.S.C. account class and commingled with contracts and 78lll(2)(b)(ii). with respect to all aspects of proposed collateral in that latter account class. This would § 190.01, including the usefulness and The Commission received two take place because the contracts in question are any unintended consequences of the risk-offsetting to contracts in the latter account comments on proposed § 190.00(e). ICI revised definitions. The Commission class. For example, this could involve portfolio and Cboe expressed support for the margining within a DCO or cross-margining received a number of comments on the clarity provided by § 190.00(e) with between a DCO and another central counterparty, proposed definitions in § 190.01. As which may or may not be a DCO. This commingling respect to portfolio margining and cross may be authorized pursuant to a Commission margining programs. ICI strongly further detailed below, the Commission is modifying some of the definitions in regulation or order, or pursuant to a clearing supported the ‘‘home field’’ rule in organization rule that is approved in accordance proposed § 190.00(e), noting that response to comments. Unless stated with § 39.15(b)(2). The Commission is adopting providing ‘‘clarity regarding how otherwise below, the Commission did paragraph (2) to confirm that the trustee must treat not receive any comments on a the commodity contracts in question (and the transactions and margin that are associated collateral) as being held in an account of portfolio margined in the same account the latter account class. The Commission is also will be treated in the event that an FCM 40 Respectively, In Re Peregrine Financial Group, adopting paragraph (3) of the definition of account Inc., No. 12–B27488 (Bankr. N.D. Ill.), and MF class to address cases where the commodity broker or broker-dealer becomes insolvent is a Global, Inc. establishes internal books and records in which it ‘‘prerequisite for an effective portfolio 41 See generally 83 FR 7979, 7979 & n.6 (Feb. 23, records a customer’s commodity contracts and margining regime.’’ 2018). Continued

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The Commission is adopting the definition of ‘‘account class’’ should pro rata distributions to customers for definition of ‘‘futures account’’ to cross- address separately non-public their delivery claims. The definitions of reference the definition of the same term customers, and has amended the the terms ‘‘physical delivery property’’ in § 1.3 of the Act, while the definition definitions to do so. and ‘‘cash delivery property’’ are of ‘‘cleared swaps account’’ cross- Accordingly, after consideration of addressed in detail later in this section. references the definition of ‘‘cleared the comments and for the reasons stated As customer property held in a swaps customer account’’ in § 22.1. above, the Commission is adopting the delivery account is not subject to the These definitions apply to both FCMs ‘‘account class,’’ ‘‘futures account,’’ Commission’s segregation requirements, and DCOs. The definition of ‘‘foreign foreign futures account,’’ and ‘‘cleared the Commission believes it may be more futures account’’ cross-references the swaps account’’ definitions in § 190.01 challenging and time-consuming to definition of ‘‘30.7 account’’ in § 30.1(g). as proposed with the modifications identify customer property for the cash As that latter definition is limited to referred to above. delivery account class,47 (and such cash FCMs, the Commission is adopting a The ‘‘delivery account’’ class is the would thus be commingled with the corresponding reference to such fourth type of account class. It is the FCM’s own cash intended for accounts at a clearing organization, in relevant account through which an FCM operations). Consequently, the the event that a clearing organization or DCO accounts for the making or Commission believes separating (1) clears foreign futures transactions for taking of physical delivery under most cash delivery property and members that are FCMs, where those commodity contracts whose terms customer claims from (2) most physical accounts are maintained on behalf of require settlement by delivery of a delivery property and customer claims those FCM members’ 30.7 customers (as commodity. The FCM or DCO should promote more efficient and that latter term is defined in § 30.1(f)). designates such account as a delivery prompter distribution of the latter to The Commission clarifies that this account on its books and records. The customers. For these reasons, the would not apply if a foreign clearing Commission is adopting the definition Commission is adopting the delivery organization is clearing foreign futures of ‘‘delivery account’’ as proposed account definition to be further divided for clearing members that are not subject within paragraph (1)(iv) of the into physical delivery and cash delivery to the requirements of § 30.7. definition of account class, with a account classes, for purposes of pro rata The ABA Subcommittee and CME modification to conform to the issue distributions to customers for their recommended that the Commission addressed in the preceding paragraph: delivery claims. expand the definitions of ‘‘futures The delivery account applies to ‘‘both The claims with respect to the account,’’ ‘‘foreign futures account,’’ public and non-public customers, physical delivery and cash delivery and ‘‘cleared swaps account’’ within the considered separately.’’ 45 subclasses are fixed on the ‘‘filing 48 § 190.01 definition of ‘‘account class’’ to The current definition of ‘‘delivery date.’’ Thus, the physical delivery cover the accounts of non-public account’’ in § 190.05(a)(2) refers to an account class includes, in addition to customers. The ABA Subcommittee and account that contains only property certain physical delivery property, cash CME stated that as proposed, the cross- described in three of the nine categories delivery property received post-filing references to § 1.3, the ‘‘30.7 account’’ in of property in the current definition of date in exchange for physical delivery 30.1, and the ‘‘cleared swaps customer ‘‘specifically identifiable property.’’ The property held on the filing date that has account’’ in § 22.1 within the account Commission has determined to adopt a been delivered under a commodity class definitions, limited the scope of more functional definition of ‘‘delivery contract. Conversely, the cash delivery those definitions to only segregated account’’ in § 190.01. This revised account class includes, in addition to accounts of public customers despite definition will focus on an account certain cash delivery property, physical the Commission’s intention to use those maintained on the books and records of delivery property that has been received same account class distinctions for non- an FCM or DCO for the purpose of post-filing date in exchange for cash public customers elsewhere in the part accounting for the making or taking of delivery property held on the filing 190 rules. The ABA Subcommittee and delivery under commodity contracts date. CME suggested that those account class whose terms require settlement by CME and ICE supported separate distinctions are also relevant for the subaccounts of the delivery account for delivery of a commodity.46 non-public customer class (i.e., the physical property (the property being The Commission is thus adopting holders of proprietary accounts carried delivered) and cash property (cash used by FCMs and for clearing members’ paragraph (1)(iv)(A)(1) to define delivery accounts for FCMs. The house accounts carried by DCOs). 47 The Commission agrees with a point previously The Commission is persuaded by the Commission is adopting paragraph made by the ABA Committee: ‘‘Based on lessons comments that there are, in at least (1)(iv)(A)(2) to incorporate the same learned from the MF Global Bankruptcy, those some cases, account class distinctions concepts for clearing organizations, and challenges are likely greater for tracing cash. also permit a clearing organization to act Physical delivery property, in particular when held within the customer class for non-public in the form of electronic documents of title as is customers,44 and thus agrees that the as a central depository for physical prevalent today, is more readily identifiable and revised definitions of ‘‘futures account,’’ delivery property represented by less vulnerable to loss, compared to cash delivery ‘‘foreign futures account,’’ and ‘‘cleared electronic title documents, or otherwise property that an FCM may hold in an operating in electronic (dematerialized) form. bank account.’’ See Transmittal Letter from The Part swaps account’’ within the § 190.01 190 Subcommittee of the Business Law Section of As set forth in paragraph (1)(iv)(B), the American Bar Association accompanying Model collateral, and related activity. It confirms that the the delivery account class is being Part 190 Rules (‘‘ABA Cover Note’’), available at commodity broker is considered to maintain such subdivided into separate physical and https://comments.cftc.gov/PublicComments/ an account for the customer regardless of whether cash delivery account classes, as ViewComment.aspx?id=61330&SearchText at 14. it has kept such books and records current or See also In re MF Global Inc., 2012 WL 1424670 accurate. provided in § 190.06(b), for purposes of (noting how physical delivery property was 44 See, e.g., § 190.09(c)(2)(iv) (allocating residual traceable). property to the non-public customer estate for each 45 This separate consideration is a consequence of 48 ‘‘Filing date’’ means the date that a petition account class in the same order as is prescribed in the fact that, pursuant to Bankruptcy Code section under the Bankruptcy Code or application under paragraphs (c)(2)(i) through (iii) of this section for 766(h), public customer claims must be paid in full SIPA commencing a proceeding is filed or on which the allocation of the customer estate among account before non-public customer claims. the FDIC is appointed as a receiver pursuant to 12 classes.) 46 See § 190.01. U.S.C. 5382(a).

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to pay for delivery). CME agreed with proposed with the modifications recorded in a customer’s delivery the proposed definition of the delivery described below. The Commission accounts as of the filing date, along with account class and supported the proposed to define cash delivery any delivery property subsequently proposed separation of the delivery property to carry through the concepts received in accepting a delivery. account class into the cash delivery from current § 190.01(ll)(4) and (5) that However, the Commission also received account and physical delivery account the cash or cash equivalents, or the several comments on three aspects of classes, as they delineate the customer commodity must be identified on the the proposed definition of cash delivery property that is available to distribute to books and records of the debtor as property. customers in each account class on a having been received, from or for the First, the ABA Subcommittee, CME, pro rata basis. CME agreed that cash account of a particular customer, on or ICE, FIA, and CMC recommended that delivery property should include cash after three calendar days before the the Commission remove the three- or cash equivalents recorded in a relevant (i) first delivery notice date in calendar day restriction proposed in the customer’s delivery account as of the the case of a futures contract or (ii) definition of cash delivery property in filing date, along with any physical exercise date in the case of an option. § 190.01. While several of these delivery property subsequently received The Commission is adopting the cash commenters recognized the in accepting a delivery, and likewise delivery property definition to mean Commission’s intention to encourage that physical delivery property should any cash or cash equivalents recorded in customers and their FCMs to hold cash include any cash delivery property a delivery account that is, as of the filing in a segregated account where it is better received subsequent to the filing date in date: (1) Credited to such account to pay protected until needed to pay for a exchange for making a delivery. CME for receipt of delivery of a commodity delivery that is effected in the delivery also had specific comments on each of under a commodity contract; (2) account, the commenters were the two subaccount definitions as credited to such account to collateralize concerned that cash or cash equivalents discussed below. or guarantee an obligation to make or might be posted to delivery accounts CME noted that the Commission does take delivery of a commodity under a sooner than three days before the first not impose segregation requirements on commodity contract, or (3) has been notice date or exercise date, and FCMs with respect to the cash or credited to such account as payment therefore this property might be denied physical delivery property that an FCM received in exchange for making the cash delivery property protection. holds on behalf of its customers and delivery of a commodity under a FIA stated that the Federal Register records in a delivery account. As commodity contract. It includes release did not explain why the learned from the In re MF Global, Inc. property in the form of commodities Commission proposed to restrict cash bankruptcy (hereinafter ‘‘MF Global’’),49 that have been delivered after the filing delivery property to cash and cash CME agreed that it can be more date in exchange for cash or cash equivalents received no earlier than challenging for a trustee to trace the equivalents held in a delivery account three calendar days before the relevant cash recorded in delivery accounts than as of the filing date. The definition also first notice day or exercise date. FIA and to trace physical delivery property. For requires that the cash or cash ICE could not identify any justification example, the MF Global trustee could equivalents, or the commodity, must be as to why cash or cash equivalents that more readily identify physical delivery identified on the books and the records may be received by a debtor FCM and property in the form of electronic title of the debtor as having been received, properly deposited in a cash delivery account prior to this period should documents, compared to identifying from or for the account of a particular receive different protections under part non-segregated cash belonging to the customer, on or after seven calendar 190 than cash and cash equivalents delivery account class given the days before the relevant (i) first delivery received within the three-calendar day fungible nature of cash. notice date in the case of a futures time frame. The ABA Subcommittee CME recommended that the contract or (ii) exercise date in the case noted that their Committee eliminated Commission address through a separate of a cleared option.51 In response to this provision in the Model Part 190 rulemaking the broader issues around comments discussed below, the Rules to avoid unintended whether customer property carried in Commission is adopting the definition consequences. delivery accounts should be subject to of cash delivery property to also include CME recognized that the three-day any special customer protections, such any cash transferred by a customer to limitation is based on the limitation in as requirements that FCMs should hold the trustee on or after the filing date for current part 190, but stated that it does such property in custody accounts or the purpose of paying for delivery, not make sense and if not eliminated limitations on how long cash or cash consistent with § 190.06(a)(3)(ii)(B)(1). from the definition, it could be equivalents should be held in delivery The Commission is also adopting the detrimental to customers, which is accounts that are not subject to custody definition in response to comments that contrary to the goal of enhancing 50 requirements. requested that the Commission provide customer protections. CME further At this time, after consideration of the that in the case of a contract where one explained that if a customer posts cash comments and for the reasons stated fiat currency is to be exchanged for or cash equivalents to its delivery above the Commission is adopting the another fiat currency, each currency account in anticipation of paying for an definition of ‘‘delivery account’’ as will be considered cash delivery upcoming delivery or to guarantee its proposed, with the modification to note property to the extent that it is recorded obligation to take delivery, the timing of that it applies to each of public and non- in a delivery account. the payment should not matter. If the public customers, considered Commenters generally supported parties intend to make and take separately. separate subaccounts of the delivery delivery, CME believed the trustee The Commission is adopting the account, and that cash delivery property should be able to follow the customers’ definition of ‘‘cash delivery property’’ as should include cash or cash equivalents intention. CME explained that a customer is unlikely to leave cash in an 49 In re MF Global, No. 11–2790 (MG) (SIPA) 51 As discussed below, the proposal had specified (Bankr. S.D.N.Y.). a period of three calendar days; after consideration unsegregated delivery account with an 50 This recommendation is addressed in section of the comments, that period has been changed to FCM for any extended time, without II.G below. seven calendar days. reason, when it would be better

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protected by holding the cash in a delivery property to property that is a delivery account is considered in segregated account or withdrawing the transferred into a delivery account conjunction with segregation protection cash if not needed to meet upcoming shortly before the notice or exercise for property in such an account. delivery obligations. CME noted that date.52 Thus, the Commission However, the Commission believes there can be times, though, when a considered whether a change in the CME’s concerns about long weekends customer will legitimately post cash to current standard is warranted. As raise important issues. For example, in its delivery account sooner than the discussed further below, the the context of an FCM’s global business, definition would allow, for example, out Commission concludes that while the there could be a bank holiday on a of caution to assure that the necessary case has been made to extend the Friday in the jurisdiction where a funds are available to pay for a delivery limitation from three calendar days to customer is based, a Federal holiday on when the first notice date or exercise seven calendar days, the case has not the following Monday in the U.S., and date immediately follows a weekend or been made to remove the limitation in the exercise or notice date might be on holiday, or to meet payment deadlines its entirety at this time. a Tuesday; in which event three imposed by the FCM, or based on While delivery accounts provide some calendar days may be too short. market convention. CME noted that customer protection, in that they benefit Similarly, in the vein of CME’s some FCMs may require customers to from favorable treatment in bankruptcy, comment, there may be legitimate post cash sooner than three days prior they lack the protection of segregation reasons to transfer the funds a day or to the relevant notice or exercise date, requirements, in contrast to futures two in advance of when they are as applicable, to satisfy a delivery- account, foreign futures account, and needed, to account for the possibility of related obligation. CME believed it cleared swaps accounts. In the case of a failure in the transfer process. could be potentially disruptive to the the latter types of accounts, the FCM Weighing the concerns of having delivery process to deny the customer must maintain in accounts, protected funds for an extended time in an the protection of having its funds from the claims of creditors of the FCM account that is not protected by classified as cash delivery property other than the customers for whom they segregation against the need to provide because it posted the cash or cash are segregated, sufficient funds to repay a modest amount of flexibility in the equivalents needed to complete an the claims of such customers in full, at process, the Commission has upcoming delivery too soon. all times. Such segregation protections determined that a reasonable balance CME also believed the three-day are a very important means of ensuring can be achieved by changing the three- timing element does not make sense that sufficient funds are in fact available day (before notice or exercise date) with respect to cash recorded in a to pay customers in full in the (highly period to a seven-day period. The customer’s delivery account as of the unlikely) event of the insolvency of an Commission believes this extended time filing date, which the customer had FCM. period will address completely the previously received as payment for Accordingly, the Commission is of the concern that a delivery date may come delivering a commodity under an view that changing current part 190 to after a holiday weekend, and should expired or exercised contract. CME completely remove any time limitation mitigate concerns about FCM funding believed the Commission intended for for protecting property transferred into requirements that extend beyond three the timing limitation to apply to this a delivery account would, in light of days. If and when a separate rulemaking situation, but the proposed definition this lack of segregation protection, carry results in additional protection for does not exclude such cash from the the risk of significant unintended delivery accounts, it will be appropriate requirement. consequences, e.g., customers being to revisit this aspect of part 190 as part CME understood that the Commission encouraged to transfer funds of such a rulemaking. proposed to keep the timing limitation prematurely into an account without Second, the ABA Subcommittee, to encourage FCMs and their delivery such protection, and thus a bankruptcy CME, and CMC recommended that the customers to hold cash intended to pay where a greater number of customers Committee revise the definition of cash for a delivery in a segregated account receive less than the full amount of their delivery property to allow for the until bilateral delivery obligations are claims, and greater total shortfalls in possibility that cash or cash equivalents near at hand. However, CME questioned repayment of such claims. could be posted after the filing date for whether the limitation was effective in CME, while noting their preference the purpose of paying for a delivery, and encouraging the desired behavior, in for simply deleting the three-day to provide protection for such deposits. particular when it is contained in limitation, observed that protection of The commenters requested that the bankruptcy regulations and parties with customer property held in delivery Commission expand the definition to delivery obligations may not necessarily accounts should be addressed in a direct allow for the rare possibility that a be aware of it. As a result, CME and transparent manner through a customer may be unable to post funds recommended that the Commission separate rulemaking. The Commission needed to pay for a delivery in advance address the protection of customer concludes that deleting entirely the time of the filing date so that the definition property held in delivery accounts in a limitation on posting cash delivery should also cover cash delivery property more direct and transparent matter, property should only be undertaken, if received after the filing date in through a separate rulemaking. at all, in the context of a separate, anticipation of taking delivery of a Specifically, CME recommended that dedicated, and explicit rulemaking, in commodity. CME noted that as has been the Commission revise the ‘‘cash which moving property more quickly to seen with other FCM bankruptcies, the delivery property’’ definition to remove days prior to actual filing can be chaotic the limitation that cash delivery 52 See current § 190.05(a)(2) (tying delivery and customers may not have had the property must be recorded in the account to portions of the definition of specifically opportunity to meet such a deadline. To identifiable property in § 190.01); § 190.01(ll)(4) and delivery account no sooner than three (5) (limiting recognition of cash as specifically allow the delivery to be completed calendar days before the first notice date identifiable property to cases where it is identified reduces a potential disruptive situation or exercise date. on the books and records of the FCM as being to commodities markets during an The Commission notes that part 190 received from or for the account of a particular customer on or after three calendar days before the otherwise tumultuous time. currently contains the three-day first notice date or exercise date specifically for the This issue is illuminated by limitation, which serves to limit purpose of a delivery or exercise). considering the interplay of other

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regulations that affect delivery. The The Commission is adopting the foregoing) for the commodity that the Commission notes that while § 190.04(c) definition of ‘‘physical delivery debtor holds for the account of the continues the preference for the trustee property’’ in § 190.01 as proposed with customer, where the customer received to liquidate contracts moving into modifications, as described below. The or acquired such property by taking delivery position before they do so, and Commission is adopting the definition delivery under an expired or exercised § 190.06(a)(2) continues the preference, of ‘‘physical delivery property’’ to commodity contract, and which, as of in cases where the trustee is unable to include, under the four specified sets of the filing date or thereafter, can be do so, for the trustee to arrange for circumstances discussed below, a identified as held in a delivery account delivery to occur outside the estate, commodity, whether tangible or for the benefit of such customer on the § 190.06(a)(3) acknowledges that there intangible, held in a form that can be books and records of the debtor.56 may be cases where the trustee will delivered to meet and fulfill delivery The third category addresses property need to facilitate the making or taking obligations under a commodity contract that (a) is in fact being used, or has in of delivery. Regulation that settles via delivery if held to a fact been used, for the purpose of § 190.06(a)(3)(ii)(B)(1) refers to cases delivery position.53 The Commission is making or taking delivery, but (b) is where the trustee pays for delivery (in adopting the definition to include held in a futures, foreign futures, whole or in part) with cash transferred warehouse receipts, other documents of cleared swaps, or (if the commodity is by the customer to the trustee on or after title, or shipping certificates (including a security) securities account.57 This the filing date for the purpose of paying electronic versions of the forgoing), for property would be considered physical for delivery. the commodity, or the commodity itself. delivery property solely for the purpose Thus, the Commission agrees with the The Commission is amending the of the obligations, pursuant to § 190.06, arguments made by the commenters physical deliver property definition to to make or take delivery of physical who suggested that the Commission address changes in delivery practices delivery property. The property in this expand the definition of ‘‘cash delivery since the 1980s. The reference to category would be distributed as part of property’’ in this context, and electronic versions of warehouse the account class in which it is held consequently is adding an explicit receipts, other documents of title, or (futures, foreign futures, or cleared reference to the cash transferred from a shipping certificates explicitly swaps, or, in the case of a securities customer to the trustee after the filing recognizes that title documents for account, as part of a SIPA proceeding). date, consistent with commodities are now commonly held in Fourth, where such commodities or § 190.06(a)(3)(ii)(B)(1). Moreover, for dematerialized, electronic form, in lieu documents of title are not held by the consistency, the Commission will of paper. Moreover, the types of debtor, but are delivered or received by amend § 190.08(c)(1)(ii) as proposed to commodities that might be physically a customer in accordance with explicitly give such post-petition delivered would extend beyond tangible § 190.06(a)(2) (either by itself in the case transfers treatment as 100% funded. commodities to those that are of an FCM bankruptcy or in conjunction Finally, the ABA Subcommittee intangible, including Treasury with § 190.16(a) in the case of a clearing suggested that the Commission clarify securities, foreign currencies, or virtual organization bankruptcy), they will be that the delivery of two different fiat currencies.54 considered physical delivery property, currencies for foreign currency For purposes of analytical clarity, the but, again, solely for purposes of commodity contract constitutes cash Commission is adopting the definition obligations to make or take delivery of delivery property. CME suggested a of physical delivery property as physical delivery property pursuant to similar technical change to clarify in the subdivided into four categories: § 190.06. As this property is held definition that for a commodity contract First, the commodities or warehouse outside of the debtor’s estate (and there that settles by delivery of a foreign receipts, other documents of title, or was no obligation to transmit it to the currency as the underlying commodity shipping certificates (including debtor’s customer accounts), it is not or by an exchange of a pair of electronic versions of any of the subject to pro rata distribution. currencies, the USD or foreign currency foregoing) for the commodity that the The Commission is also adding a recorded to a delivery account in debtor holds for the account of a special case to correspond with the connection with either side of the customer for purposes of making special case for cash delivery property, delivery constitutes cash delivery delivery of such property and which, as which states that where one fiat property. of the filing date or thereafter, can be currency is exchanged for another, In response to the ABA Subcommittee identified as held in a delivery account neither such currency, to the extent that comment regarding the delivery of two for the benefit of such customer on the it is recorded in the delivery account, fiat currencies, ‘‘[g]iven the fungible books and records of the debtor.55 will be considered physical delivery nature of cash, regardless of currency Second, the commodities or property. The Commission is also, as denomination,’’ the Commission has warehouse receipts, other documents of discussed further below, additionally determined to amend further the title, or shipping certificates (including amending the physical delivery definition of ‘‘cash delivery property’’ to electronic versions of any of the property definition to address the clarify that for foreign exchange possibility of a negative delivery price contracts, i.e., contracts where one fiat 53 The current definition is found in currency is exchanged for another fiat § 190.01(ll)(3), and focuses on documents of title 56 The current definition does not prescribe or currency, both fiat currencies will be and physical commodities. imply a limit to how long such received property treated as cash delivery property, and 54 See ABA Cover Note at 10, 12–13. can be held in a delivery account, because there is neither currency will be considered 55 These first two categories together correspond no principled basis to draw a bright line delineating to current § 190.01(ll)(3), with the first category how long is too long. The definition the physical delivery property. corresponding to physical delivery property held Commission is adopting explicitly codifies that Accordingly, in consideration of the for the purpose of making delivery and the second position. comments and the reasons discussed category corresponding to physical delivery 57 As the ABA Cover Note explained at 13, above, the Commission will adopt the property held as a result of taking delivery. The ‘‘[w]hen the FCM has a role in facilitating delivery, property that is (or should be) within these two deliveries may occur via title transfer in a futures definition of ‘‘cash delivery property’’ in categories, as of the filing date, comprises the account, foreign futures account, cleared swaps § 190.01 as modified, with the additions property that will be distributed as part of the account, delivery account, or, if the commodity is referred to above. physical delivery class. a security . . . in a securities account.’’

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

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portion of a claim that is funded (in pro concept of a ‘‘house account’’ in part definition of ‘‘public customer,’’ 60 rata distribution). 190 and the concept of a proprietary which would be analyzed separately for Accordingly, after consideration of account in § 1.3, and (b) separately each of the relevant account classes the comments, including the ABA define the term in relation to an FCM, (futures, foreign futures, cleared swaps, Subcommittee’s suggestion regarding a foreign futures commission merchant, and delivery) with the relevant cross- the funded portion of a customer’s and a DCO. references to other Commission allowed claim throughout part 190, and The ABA Subcommittee and CME regulations. For the ‘‘futures account for the reasons stated above, the agreed with expanding the current class,’’ this would be a futures customer Commission is changing the defined definition to cover the house accounts as defined in § 1.3, whose futures term ‘‘allowed net equity’’ to ‘‘funded that DCOs maintain for clearing account is subject to the segregation net equity,’’ and adopting the definition members. However, the commenters requirements of section 4d(a) of the Act as so modified. The Commission is also noted that ‘‘house account’’ is used in and the Commission regulations adding § 190.02(g) (as discussed below) only three places for an FCM thereunder; for the foreign futures and adding ‘‘funded balance of’’ before proceeding: (i) Proposed § 190.06(a)(5), account class, a 30.7 customer as ‘‘such customer’s allowed net equity which addresses deliveries made or defined in § 30.1, whose foreign futures claim’’ in § 190.09(d)(3) as suggested. taken with respect to the debtor FCM’s account is subject to the segregation The Commission is adopting the house account under open commodity requirements of § 30.7; for the cleared definition of ‘‘commodity contract’’ in contracts; (ii) proposed § 190.07(c), swaps account class, a cleared swaps § 190.01 as proposed, in order to amend which prohibits transfer of the debtor customer as defined in § 22.1, whose the definition to incorporate and extend FCM’s house account after the filing cleared swaps account is subject to the in context (through references to current date; and (iii) proposed segregation requirements of part 22; and for the delivery account class, a Commission regulations) the definition § 190.08(b)(2)(ix), which provides that customer that would be classified as a in section 761(4) of the Bankruptcy when a non-debtor FCM maintains an 59 ‘‘public customer’’ if the property held Code. omnibus account and a house account ICI strongly supported the proposed in the customer’s delivery account had with a debtor FCM, it holds the amendments to the definition of been held in an account described in accounts in a separate capacity for ‘‘commodity contract’’ to include any one of the prior three categories. The purposes of calculating its net equity ‘‘futures contract’’ and any ‘‘swap’’ Commission is tying the definition of claims against the debtor FCM. thereby permitting transactions carried public customer for bankruptcy Assuming the Commission intended to in a futures or cleared swaps account in purposes to the definitions of expand the scope of these provisions in accordance with the Commission’s ‘‘customer’’ (and segregation each case, the ABA Subcommittee and regulations to be eligible for the requirements) that apply during CME suggested that the Commission protections that part 190 affords. business as usual. An FCM’s non-public modify the three provisions to clarify Accordingly, after consideration of customers are customers that are not that they apply to proprietary accounts the comment and for the reasons stated public customers. of FCMs, and to limit the defined term above, the Commission is adopting the As part of the process for introducing to house accounts maintained by a DCO definition of ‘‘commodity contract’’ as a bespoke regime for the bankruptcy of for clearing members. The ABA proposed. a clearing organization, the Commission The Commission is adopting the Subcommittee believed it was is differentiating between public and definition of ‘‘customer property and unnecessary, potentially confusing, and non-public customers such that customer estate’’ as proposed to update could preclude porting of proprietary customers of clearing members (whether the definition to clarify cross-references accounts. such clearing members are FCMs or within part 190 and to note that The Commission agrees with the foreign brokers) acting on behalf of their customer property distribution is commenters’ recommendation to proprietary (i.e., house) accounts, would addressed in section 766(i) of the streamline the ‘‘house account’’ be non-public customers, while all other Bankruptcy Code in addition to section definition and amend the respective customers of clearing members would 766(h). subpart B provisions to limit the use of be public customers. ICE supported the Commission’s ‘‘house account’’ to the context of In the case of members of a DCO that decision to include forward contracts clearing organization bankruptcies to are foreign brokers, the determination as that are traded on a DCM and cleared by avoid any potential confusion regarding to whether a customer of such a member a DCO as customer property. the ability to port proprietary accounts. is a proprietary member would be based Accordingly, after consideration of Accordingly, after considering the on either the rules of the clearing the comment, and for the reasons stated comments, and for the reasons stated organization or the jurisdiction of above, the Commission is adopting the above, the Commission is adopting the incorporation of such member: If either definition of ‘‘Customer property, definition of ‘‘house account’’ in designates the customer as a proprietary customer estate’’ in § 190.01 as § 190.01, as modified. member, then the customer would be proposed. The Commission is adopting the treated as a non-public customer. The Commission is adopting the definitions of ‘‘non-public customer’’ Vanguard agreed that the proposed definition of ‘‘house account’’ with and ‘‘public customer’’ as proposed to definition of public customer in modifications, as set forth below to define who is considered a public § 190.01 included any customer of an modify the existing definition to (a) versus a non-public customer separately FCM whose commodity contract is clarify the connection between the for FCMs and for clearing organizations. subject to the Commission’s segregation These definitions are complements (i.e., 59 It should be noted that, consistent with every customer is either a ‘‘public 60 This is in contrast to the current definition in § 190.00(d)(3)(iv) and the decision In re Peregrine § 190.01(cc) and (ii), which explicitly define non- Financial Group, Inc., 866 F.3d 775, 776 (7th Cir. customer’’ or a ‘‘non-public customer,’’ public customer, and define public customer as a 2017), adopting by reference Secure Leverage but never both). customer that is not a non-public customer. This Group, Inc. v. Bodenstein, 558 B.R. 226 (N.D. Ill. In the case of a customer of an FCM, change is not substantive, but rather fosters closely 2016), retail foreign exchange contracts do not fit tying the account classes to business-as-usual within the definition of commodity contracts. the Commission is adopting the segregation requirements.

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requirements, and for a DCO, a person considered as public customer trades at Accordingly, after consideration of the whose account with the FCM is not the FCM, but would not be part of the comments and for the reasons stated classified as a proprietary account. CME customer omnibus account of the above, the Commission is adopting the also supported the proposed definitions foreign broker at the FCM. definition of ‘‘variation settlement’’ in of public customer and non-public Accordingly, after consideration of § 190.01 as proposed. customer as it believed they are more the comments and for the reasons stated The Commission did not receive understandable than the prior part 190 above, the Commission is adopting the comments on the remaining definitions definitions. definitions of ‘‘non-public customer’’ in § 190.01 and is therefore adopting CME, however, asked the Commission and ‘‘public customer’’ as proposed in them as proposed. to reconsider the recommendation of the § 190.01. The Commission is adopting the ABA Subcommittee to include non-U.S. The Commission is adopting the definition of ‘‘Act’’ in § 190.01 to refer customers of foreign broker clearing definitions of ‘‘variation settlement’’ as to the Commodity Exchange Act. members of a DCO within the public proposed to define the payments that a The Commission is amending the customer definition. CME noted that it trustee may make with respect to open definition of ‘‘Bankruptcy Code’’ in previously considered admitting foreign commodity contracts. The definition of § 190.01 to update cross-references. brokers as clearing members to clear variation settlement includes ‘‘variation The Commission is amending the trades of their non-U.S. customers in margin’’ as defined in § 1.3, and also definition of ‘‘Business day’’ to define futures or options on futures listed on includes ‘‘all other daily settlement what constitutes a Federal holiday and the CME or the other designated amounts (such as price alignment clarify that the end of a business day is contract markets (‘‘DCMs’’) owned by payments) that may be owed or owing one second before the beginning of the CME Group, which would be analogous on the commodity contract’’ to cover all next business day. to a foreign clearing organization of the potential obligations associated The Commission is amending the admitting FCMs as members to clear with an open commodity contract. definition of ‘‘Calendar day’’ to include trades of their public customers in CME supported defining variation a reference to Washington, DC as the futures or options on futures listed by a settlement and generally agreed with the reference location for the Calendar day. foreign board of trade. While that model substance of the definition, but The Commission is adopting the does not currently exist for U.S. DCOs recommended that the Commission definition of ‘‘Cash delivery account and the DCMs for which they provide adopt one self-contained definition that class’’ to cross-reference it to the new clearing services, CME believed it is does not rely on cross-reference to definition in ‘‘Account class.’’ appropriate to include that flexibility in another Commission definition. CME The Commission is adopting the part 190 to accommodate that suggested that the Commission adopt definition of ‘‘Cash equivalents’’ to possibility. OCC also requested the ABA Subcommittee’s variation define assets that might be accepted as clarification as to whether customers of settlement definition which would a substitute for United States dollar foreign brokers that access a DCO cover ‘‘any amount paid or collected (or cash. through an FCM clearing member to be paid or collected) on an open The Commission is amending the affiliated with the foreign broker would commodity contract relating to changes definition of ‘‘Cleared swaps account’’ be treated as public customers. in the market value of the commodity in § 190.01 to cross-reference it to the The Commission is of the view that contract since the trade was executed or new definition in ‘‘Account class.’’ including non-U.S. customers of the previous time the commodity The Commission is adopting the foreign-broker clearing members as contract was marked to market along amended definition of ‘‘Clearing public customers should be considered with all other daily settlement amounts organization’’ to update cross- as part of a comprehensive review of the (such as price alignment payments) that references. issues at such time as the model of may be owed or owing on the The Commission is amending the admitting foreign brokers as clearing commodity contract.’’ definition of ‘‘Commodity broker’’ to members for U.S. DCOs becomes The ABA Subcommittee believed that reflect the current definition of empirical. Such a review of the issues, the definition of variation settlement commodity broker in the Bankruptcy including issues related to both was not used consistently in the Code and the relevant cross-references. bankruptcy and risk management, can Proposal and identified two places in The Commission is adding the be more reliably, and more efficiently, proposed § 190.14(b) where the term definition of ‘‘Commodity contract be conducted in the context of empirical account’’ to refer to accounts of a rather than hypothetical circumstances. ‘‘variation’’ is used instead of ‘‘variation settlement.’’ The ABA Committee customer based on commodity contracts In response to OCC’s request for in one of the four account classes, as clarification, the Commission notes that recommended using ‘‘variation settlement’’ in both places, to avoid any well as, for purposes of identifying where a foreign broker clears the trades customer property for the foreign of its (foreign) customers through an confusion as to whether ‘‘variation’’ refers to the Commission’s variation futures account class (subject to affiliated FCM that is a clearing § 190.09(a)(1)), accounts maintained by member, those trades would be cleared margin definition or variation settlement definition. foreign clearing organizations or foreign on an omnibus basis through the FCM’s futures intermediaries reflecting foreign customer account, and would be The Commission notes that the cross- references in § 190.01 to definitions in futures or options on futures executed required to be kept separate from the on or subject to the rules of a foreign proprietary trades of the affiliated other parts of the Commission’s rules is intentional to clarify the relationships board of trade, including any account foreign broker. Thus, those customers maintained on behalf of the debtor’s would be treated as public customers. If with those other definitions, and thus the Commission declines to make the public customers. a foreign broker clears its own The Commission is amending the change proposed by the commenters.61 proprietary trades through an definition of ‘‘Court’’ to clarify that the unaffiliated FCM (i.e., there is no 61 The technical correction suggested by the ABA court having jurisdiction over the proprietary relationship between the subcommittee to § 190.14(b) (change ‘‘variation’’ to foreign broker and the FCM as set forth ‘‘variation settlement’’) will be adopted in one case; has been removed entirely by the supplemental in § 1.3), those trades would be the subsection where the second case was found notice of proposed rulemaking.

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debtor’s estate may not be a bankruptcy The Commission is revising the current § 190.09(a) and addressing it in court (e.g., in the event of a withdrawal definition of ‘‘Final net equity § 190.01, and clarifying that member of the reference).62 determination date’’ stylistically, to property is the property that may be The Commission is amending the provide updated cross-references, and to used to pay net equity claims based on definition of ‘‘Cover’’ to improve clarity further clarify who the parties involved both the members’ house account as without any substantive change to the are intended to be. well as claims on behalf of non-public current definition. The Commission is adding the customers of the member. The Commission is amending the definition of ‘‘Foreign board of trade’’ The Commission is revising the definition of ‘‘Customer’’ to reflect the and adopting by reference the definition definition of ‘‘Net equity’’ to update revisions to part 190 through this in § 1.3 (which is consistent with cross-references, including the rulemaking, specifically, noting the § 48.2(a)). difference between bankruptcy of an different meanings of ‘‘customer’’ with The Commission is adding the FCM and of a clearing organization. respect to an FCM in contrast to with definition of ‘‘Foreign clearing The Commission is revising the respect to a DCO. organization’’ to refer to a clearing definition of ‘‘Open commodity The Commission is amending the house, clearing association, clearing contract’’ to improve clarity without any definition of ‘‘Customer claim of corporation or similar entity, facility or substantive changes to the definition. record’’ to improve clarity without any organization that clears and settles The Commission is revising the substantive changes to the current transactions in futures or options on definition of ‘‘Order for relief’’ to update definition. futures executed on or subject to the cross-references and incorporate The Commission is amending the rules of a foreign board of trade. stylistic, non-substantive changes. definition of ‘‘Customer class’’ to reflect The Commission is retaining the The Commission is adding the the revisions to part 190 through this definitions of ‘‘Foreign future’’ and definition of ‘‘Person’’ to clarify what rulemaking, specifically emphasizing ‘‘Foreign futures commission merchant’’ this term means in the context of part the difference between public customers as proposed to be unchanged. and non-public customers. The Commission is adopting the 190. The Commission is deleting the definition of ‘‘Foreign futures The Commission is adding the definition of ‘‘Dealer option’’ as this intermediary’’ to refer to a foreign definition of ‘‘Physical delivery account term is no longer used. futures or options broker, as defined in class’’ to be cross-referenced to the new The Commission is amending the § 30.1, acting as an intermediary for definition in ‘‘Account class.’’ definition of ‘‘Debtor’’ to explicitly refer foreign futures contracts between a The Commission is deleting the to commodity brokers involved in a foreign futures commission merchant definition of ‘‘Premium’’ as that term is bankruptcy proceeding, a proceeding and a foreign clearing organization. no longer used. under SIPA, or a proceeding under The Commission is revising the The Commission is revising the which the FDIC is appointed as a definition of ‘‘Funded balance’’ to the definition of ‘‘Primary liquidation date’’ receiver. definition in § 190.08(c). That definition to reflect the removal of the concept of The Commission is newly adopting a is discussed further below in section accounts being held open for later definition of ‘‘Distribution’’ to include II.B.6. transfer. As a result of such removal, the the transfer of property on a customer’s The Commission is adding a Commission is also deleting current behalf, return of property to a customer, definition for ‘‘Futures’’ and ‘‘Futures § 190.03(a), which set forth provisions as well as distributions to a customer of contract,’’ used interchangeably, to regarding the operation of accounts held valuable property that is different than clarify what these terms mean for open for later transfer, since there will the property posted by that customer. purposes of part 190. no longer be any such accounts. The Commission is amending the The Commission is deleting the The Commission is deleting the definition of ‘‘Equity’’ to update a cross- definition of ‘‘In-the-money amount’’ as definition of ‘‘Principal contract’’ as that reference. the term will no longer be used and term is no longer used. This term was The Commission is adding definitions replacing it with ‘‘in-the-money,’’ a term previously used to refer to contracts that for ‘‘Exchange Act’’ and ‘‘FDIC’’ to that is Boolean, and is used in are not traded on designated contract incorporate the statute and regulator, § 190.04(c). markets, but the definition excluded respectively, in part 190. The Commission is amending the cleared swaps. The Commission is revising the definition of ‘‘Joint account’’ to reflect The Commission is adding the definition of ‘‘Filing date’’ to include that a commodity pool must be a legal definition of the ‘‘Securities account’’ the commencement date for proceedings entity.64 Thus, the Commission is and ‘‘SIPA’’ to address the bankruptcy under SIPA or Title II of the Dodd-Frank removing the reference to a commodity 63 of an FCM that is also subject to the Act. pool that is not a legal entity. Securities Investor Protection Act. The Commission is deleting the These are based on appropriate cross- 62 Cf. 28 U.S.C. 157(d). definitions of ‘‘Leverage contract’’ and references to the Exchange Act and 63 In SIPA, the term ‘‘filing date’’ is defined to ‘‘Leverage transaction merchant’’ occur earlier than the filing of an application for a SIPA. protective decree if the debtor is the subject of a consistent with the discussion above The Commission is amending the proceeding in which a receiver, trustee, or with respect to § 190.00(d)(1)(i)(B). definition of ‘‘Security’’ to update the liquidator for the debtor has been appointed and The Commission is removing the cross-reference to the Bankruptcy Code such proceeding is commenced before the date on definition of ‘‘Member property’’ from which the application for a protective decree under without any substantive changes to the SIPA is filed. In such case, the term ‘‘filing date’’ definition. purposes of part 190, ‘‘filing date’’ refers to the date is defined to mean the date on which such The Commission is removing the proceeding is commenced. By contrast, this on and after which a commodity broker is treated rulemaking does not define the term ‘‘filing date’’ as a debtor in bankruptcy. See, e.g., §§ 190.00(c)(4), definition of ‘‘Short term obligation’’ to occur earlier in such a case, although it would 190.06(a)(1) and (b)(1), 190.08(b)(4), and from § 190.01 as the term is no longer (in § 190.02(f) as discussed below) authorize such 190.09(a)(1)(ii)(A). For purposes of SIPA, by used within the definition of a to receiver themselves file a voluntary petition for contrast, the ‘‘filing date’’ is the date on which bankruptcy of the FCM. securities are valued. See, e.g., SIPA sections 8(b), ‘‘specifically identifiable property.’’ The This difference is due to the different uses of the 8(c)(1), 8(d), 9 ff–2(b), (c)(1), (d), and 78fff–3(a)(3). Commission is instead amending the ‘‘filing date’’ in these rules and in SIPA. For 64 See § 4.20(a)(1). ‘‘specifically identifiable property’’

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definition with respect to securities, as The Commission is also adopting the Commission is adopting § 190.02(a)(1) discussed immediately below. definition to add as a swap, for purposes based on current § 190.10(b)(1) with one The Commission is amending the of this part, ‘‘any other contract, substantive change to permit a trustee to definition of ‘‘Specifically identifiable agreement or transaction that is carried request an exemption from the property’’ to update and streamline the in a cleared swaps account pursuant to Commission from any procedural definition in current § 190.01(ll). a rule, regulation or order of the provision (rather than limiting such Paragraph (1)(i) focuses on ‘‘futures Commission, provided, in each case, requests to exemptions from, or accounts,’’ ‘‘foreign futures accounts,’’ that it is cleared by a clearing extension of, a time limit). Such an and ‘‘cleared swaps accounts.’’ organization [i.e., a DCO] as, or the same exemption may be subject to conditions, Paragraph (1)(i)(A) corresponds in major as if it were, a swap.’’ 67 and must be consistent with the part to paragraphs (ll)(1) and (6) of the The Commission is amending the purposes of this part and of subchapter current definition. For securities, definition of ‘‘Trustee’’ to include the IV of the Bankruptcy Code. The paragraph (1)(i)(A)(1) substantially trustee in a SIPA proceeding. Commission is adopting § 190.02(a)(1) copies current paragraph (ll)(1)(i), but The Commission is adopting a consistent with major theme 7, clarifies that a security, to be included definition of ‘‘Undermargined’’ for discussed in section I.B. above regarding as specifically identifiable property, purposes of part 190 to mean when the enhanced trustee discretion. Section must have ‘‘a duration or maturity date funded balance of a debtor’s futures 190.02(a)(1) allows the trustee to request of more than 180 days.’’ Paragraph account, foreign futures account, or to be permitted to extend a deadline or (1)(i)(A)(2) reformats current paragraph cleared swaps account is below the to amend a form. (ll)(6). For warehouse receipts, bills of minimum amount that the debtor is The Commission is also adopting lading, or other documents of title required to collect and maintain for the § 190.02(a)(2)(i) and (ii), (a)(3), and (b), (paragraph (i)(B), corresponding to open commodity contracts in such as derived from current §§ 190.10(b)(2), current paragraph (ll)(1)(ii)), the account under the rules of the relevant (3), and (4) and 190.10(d), respectively, definition restates the corresponding clearing organization, foreign clearing with minor editorial and conforming portion of the current definition. organization, DCM, Swap Execution changes. Paragraph (1)(ii) of the definition Facility (‘‘SEF’’), or FBOT. If any such The Commission is adopting furthers the approach of providing rules establish both an initial margin § 190.02(b) to delegate the functions of discretion to the trustee. It includes as requirement and a lower maintenance the Commission set forth in part 190, specifically identifiable property margin 68 requirement applicable to any other than the authority to disapprove commodity contracts that are treated as commodity contracts (or to the entire pre-relief transfers pursuant to such in accordance with § 190.03(c)(2). portfolio of commodity contracts or any § 190.07(e)(1), to the Director of the 65 As discussed further below, the latter subset thereof) in a particular Division of Clearing and Risk, after provision permits (but does not require) commodity contract account of the consultation with the Director of the the trustee, following consultation with customer, the trustee will use the lower Market Participants Division 70 (with the the Commission, to treat open maintenance margin level to determine possibility of further delegations to commodity contracts of public the customer’s minimum margin members of the respective Directors’ customers as specifically identifiable requirement for such account. An staffs). property if they are held in a futures undermargined account may or may not The Commission is adopting account, foreign futures account, or be in deficit.69 § 190.02(c) to exclude from the cleared swaps account that is designated Accordingly, after consideration of definition of ‘‘customer’’ entities who as a hedging account in the debtor’s the comments, and for the reasons hold claims against a debtor solely on books and records, and if the trustee discussed above, the Commission will account of uncleared forward contracts. determines that treating the commodity adopt § 190.01 as proposed, with the The Commission is adopting § 190.02(d) contracts as specifically identifiable amendments discussed above. to provide that the Bankruptcy Code property is reasonably practicable under 3. Regulation § 190.02: General will not be construed to prohibit a the circumstances of the case. In commodity broker from doing certain contrast, paragraph (ll)(2) of the current Regulation § 190.02 is being adopted combinations of business, or to permit definition is more prescriptive. as proposed, with the addition of any otherwise prohibited operation, The Commission is amending the paragraph (g) as described below. The trade or business. The Commission is definition of ‘‘Strike price’’ for brevity 67 adopting § 190.02(e) to provide that without any substantive change. Cf. 11 U.S.C. 761(4)(F)(ii) (including as a security futures products held in a The Commission is adding the commodity contract ‘‘with respect to a futures securities account shall not be definition of ‘‘Substitute customer commission merchant or clearing organization, any other contract, option, agreement, or transaction, in considered to be part of commodity property’’ to refer to the property (in the each case, that is cleared by a clearing futures or options accounts as those form of cash or cash equivalents) organization’’). terms are used in section 761(9) of the delivered to the trustee by or on behalf 68 For further discussion of maintenance margin Bankruptcy Code. The Commission is of a customer in order to redeem either and its relationship to initial margin, see, e.g., https://www.cmegroup.com/education/courses/ adopting § 190.02(c) (forward contracts), specifically identifiable property or a introduction-to-futures/margin-know-what- (d) (other), and (e) (rule of construction) letter of credit. isneeded.html. as transposed from current § 190.10(e), The Commission is adopting the 69 An account is in deficit if the balance is (g), and (h), respectively. definition of ‘‘Swap’’ to replace the negative (i.e., the customer owes the debtor instead The Commission continues to believe, current definition of ‘‘Cleared swap’’ 66 of the reverse). An account can be undermargined but not in deficit (if the balance is positive, but less as stated in the proposal, that § 190.02(f) in part 190. The definition of reflects the than the required margin). See discussion of should enhance customer protection in current definition and meaning of the § 190.04(b)(f). For example, if the margin cases where a receiver has been term ‘‘swap’’ in section 1a(47) of the requirement is $100 and the account balance is $20, CEA and Commission regulation § 1.3. the account is undermargined by $80, but is not in deficit. If the account loses a further $35, the 70 The Market Participants Division is the balance would be ($15). The account would be in successor to the Division of Swap Dealer and 65 See section II.B.1.c. deficit by $15, and would be undermargined by Intermediary Oversight, the title of that division at 66 See current § 190.01(pp). $115. the time of the Proposal.

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appointed (pursuant to e.g., section 6c engaging, or is about to engage in any a. Regulation § 190.03(a): Notices— of the CEA) for an FCM due to a act or practice constituting a violation of Means of Providing 71 violation or imminent violation of the any provision of this Act or any rule, The Commission is adopting customer property protection regulation, or order thereunder. FIA § 190.03(a) to set forth the means by requirements of section 4d of the CEA noted that there may be circumstances which notices required under subpart B or of the regulations thereunder, or of in which a receiver may determine that of part 190 are to be provided. Section the Commission’s capital rule (§ 1.17). a voluntary petition under the 190.03(a)(1) is substantially similar to Section 190.02(f) explicitly permits such Bankruptcy Code is warranted. current § 190.10(a), but, in an effort to a receiver to file a voluntary petition for However, in light of the fact that such modernize part 190, the Commission is bankruptcy of such FCM in appropriate a petition would effectively close the deleting the requirement that notices be cases. For example, the receiver may FCM, FIA believed that § 190.02(f) given to it via overnight mail (i.e., in determine that, due to a deficiency in should provide that the receiver may hard copy). The Commission is file a voluntary petition only with the property in segregation, bankruptcy is retaining the requirement that all such necessary to protect customers’ interests prior consent of the Commission. notices be sent via electronic mail. The in customer property. The Commission notes that § 190.02(f) Commission believes that overnight The Commission requested comment is limited to cases where the receiver with respect to all aspects of proposed was appointed due to concerns about hard copy delivery is unnecessary and § 190.02. In particular, the Commission either protection of customer property, that removing the requirement to send requested comment as to whether it or of capital inadequacy, and the notices to the Commission via overnight would be appropriate to permit trustees appointment would be in response to a mail will result in cost savings. The Commission is adopting to request relief from procedural proceeding initiated by the Commission. § 190.03(a)(2) to provide a generalized provisions such as requirements as to In such a case, the Commission believes approach for giving notice to customers forms, in addition to requesting relief that it would be appropriate and most under part 190. In light of evolving from deadlines; whether it would be effective to defer to the judgment of the technology, § 190.03(a)(2) replaces the appropriate to permit receivers for appointed receiver as to the necessity of specific procedures for providing notice FCMs to file voluntary petitions in the filing of a petition in bankruptcy. to customers that appear in current bankruptcy; and whether any portion of As a technical point, the ABA § 190.02(b) with the requirement that proposed § 190.02 would likely to lead Subcommittee recommended the trustee must establish and follow to unintended consequences, and, if so, (consistent with their recommendation procedures ‘‘reasonably designed’’ for how may these be mitigated. in the definitions section, § 190.01, to The Commission received two more precisely use the term ‘‘allowed giving notice to customers under comments on proposed § 190.02. CME net equity’’) 72 that the Commission subpart B of part 190. Such notice generally supported proposed § 190.02, further amend § 190.02 by adding new procedures should generally include the including adding a provision that would paragraph (g) to proposed § 190.02 to use of a website and customers’ allow the trustee to request an state that the term ‘‘allowed’’ in this part electronic addresses. In the exemption from the procedural shall have the meaning ascribed to it in Commission’s view, this new approach requirements of the rules. CME also the Bankruptcy Code. The ABA provides trustees with the necessary favored adding the proposed provision Subcommittee believed that this would flexibility to determine the best way to to clarify that a receiver appointed for confirm that ‘‘allowed’’ under part 190 provide notice and is consistent with an FCM due to segregation or net capital equates with the use of ‘‘allowed’’ under the manner in which bankruptcy violations may, in an appropriate case, the Bankruptcy Code. The Commission trustees in recent FCM bankruptcy cases file a petition for bankruptcy of the FCM agrees, and is making the change. have provided notice to customers. The pursuant to section 301 of the Accordingly, after consideration of Commission also believes that adopting Bankruptcy Code. In contrast, FIA the comments, and for the reasons a generalized notice requirement in lieu recommended that the Commission stated above, the Commission is of retaining more specific notice require a receiver to obtain the adopting § 190.02 as proposed, with the obligations (e.g., newspaper publication) Commission’s consent before the addition of paragraph (g). will result in both cost savings for the debtor’s estate, and more efficient and receiver may file a voluntary petition in B. Subpart B—Futures Commission bankruptcy on behalf of an FCM. FIA effective notification of customers. Merchant (FCM) as Debtor The Commission requested comment believed that any receiver that may be The Commission is adopting subpart on the approach to the notice appointed by a court would be in B (§§ 190.03–190.10) to address debtors requirements set forth in proposed response to a proceeding initiated by the that are FCMs. § 190.03(a). The Commission Commission pursuant to section 6c of specifically asked whether the proposed the Act, which authorizes the 1. Regulation § 190.03: Notices and changes would be helpful; would be Commission to file an action in the Proofs of Claims likely to lead to unintended appropriate U.S. District Court when it The Commission is adopting § 190.03 consequences; and how any unintended appears that a person has engaged, is as proposed with modifications to consequences could be mitigated. CME § 190.03(c)(2), as set forth below. 71 Section 6c of the CEA provides in relevant part supported providing trustees with the The Commission is adopting § 190.03 flexibility, in consultation with the that whenever it shall appear to the Commission to set forth requirements for the notices that any person has engaged, is engaging, or is about Commission, to establish appropriate to engage in any act or practice constituting a and proofs of claim that are applicable procedures for giving notice to violation of any provision of this Act or any rule, to subpart B of part 190. It reorganizes regulation, or order thereunder the Commission customers and moving away from and revises much of current § 190.02, outdated and impractical notice may bring an action in the proper district court to and incorporates some portions of enjoin such act or practice, or to enforce requirements. CME also agreed that the current § 190.10. compliance with this Act (emphasis supplied). changes align with how trustees in Section 6c also refers to an order appointing a recent FCM cases have communicated temporary receiver to administer such restraining 72 See section II.A.2. (recommending that the order and to perform such other duties as the court Commission instead use ‘‘funded net equity’’ as the with the FCM’s customers and are more may consider appropriate. 7 U.S.C. 13a–1. defined term in the § 190.01 definitions.) customer-friendly.

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b. Regulation § 190.03(b): Notices to the with section 764(b) of the Bankruptcy LCH expressed support for the Commission and Designated Self- Code and relevant provisions of part requirement that FCMs notify DSROs, in Regulatory Organizations 190. It is derived from current addition to the CFTC, of involuntary Section 190.03(b)(1) is derived from § 190.02(a)(2). While § 190.03(b)(2) bankruptcy filings. LCH also requested current § 190.02(a)(1), but includes retains the requirement that such notice that the Commission consider ways in revised notice requirements that are be provided ‘‘[a]s soon as possible,’’ it which this information could be quickly designed to ensure that the Commission removes the requirement that such transmitted to the DCOs that may be and the relevant designated self- notice be provided no later than three impacted, given the interconnectedness regulatory organization (‘‘DSRO’’) 73 will days after the order for relief. The of the derivatives market. While, as be aware of a voluntary or involuntary Commission believes that the three-day noted above, staff would be in contact bankruptcy filing or SIPA application as deadline set forth in current with DCOs that might be impacted by a soon as is practicable and to codify the § 190.02(a)(2) is likely in many cases to bankruptcy proceeding involving an practices observed in recent bankruptcy be too long, but may, in some cases, be FCM as a matter of supervisory practice, and SIPA cases.74 First, § 190.03(b)(1) too short. this practice does not need to be provides that, in the event of a The Commission expects that the incorporated into regulation. Moreover, voluntary bankruptcy filing, the bankruptcy trustee would begin working the Commission notes that many DCOs, commodity broker must notify the on transferring any open commodity including LCH, require as part of their Commission and the appropriate DSRO contracts as soon as the trustee is own rules and procedures that their as soon as practicable before, and in any appointed and that, by the end of three clearing members provide prompt event no later than, the time of filing. days following entry of the order for notice of a bankruptcy filing affecting 76 Second, § 190.03(b)(1) provides that, in relief, any such transfers likely will be the clearing member. the event of an involuntary bankruptcy either completed, actively in process, or determined not to be possible. Indeed, c. Regulation § 190.03(c): Notices to filing or an application for a protective Customers; Treatment of Hedging decree under SIPA,75 the commodity the Commission expects that a DCO would, in most cases, be reluctant to Accounts and Treatment of Specifically broker must notify the Commission and Identifiable Property the appropriate DSRO immediately hold a position open for more than three The Commission is adopting upon the filing of such petition or days following the entry of the order for § 190.03(c) to address notices to application. The Commission notes that, relief unless a transfer is actively in customers and the treatment of hedging as a practical matter, a decision to file process and imminent. Thus, while the accounts and specifically identifiable for bankruptcy takes measurable time, Commission recognizes that the ‘‘[a]s property. as does the preparation of the necessary soon as possible’’ language is somewhat vague, given past experience, the Section 190.03(c)(1) requires the papers. In previous FCM voluntary trustee to use all reasonable efforts to bankruptcy filings, the commodity Commission views the current timeframe of three days after the entry notify promptly any customer whose broker has provided the Commission futures account, foreign futures account, and its DSRO with notice ahead of the of the order for relief as generally too long, and it is not clear what precise or cleared swaps account includes bankruptcy filing. Section 190.03(b)(1) specifically identifiable property, other merely codifies the expectation that shorter period of time would be generally appropriate, given the than open commodity contracts, which such advance notice should, in fact, has not been liquidated, that such occur to the extent practicable. Section uniqueness of each case. Under different circumstances, that is, where transfer property may be liquidated on and after 190.03(b)(1) allows the commodity the seventh day after the order for relief broker to provide the relevant docket arrangements cannot be made within three days after the order for relief, a if the customer has not instructed the number of the bankruptcy or SIPA trustee in writing before the deadline proceeding to the Commission and the specified deadline for notification may in fact be harmful, in that it could be specified in the notice to return such DSRO ‘‘as soon as known,’’ in order to property pursuant to the terms for account for the fact that there may be a interpreted to prohibit notification after the expiration of such deadline (and distribution of customer property time lag between the filing of a contained in part 190. It also requires proceeding and the assignment of a thus, impliedly prohibit the trustee from that the trustee’s notice to customers docket number. forming the intent to transfer after that with specifically identifiable property Section 190.03(b)(2) sets forth the time). requirements for the provision of notice In the event of an FCM bankruptcy, include, where applicable, a reference to to the Commission of an intent to the Commission anticipates that there substitute property. Section 190.03(c)(1) is derived from transfer or to apply to transfer open will be frequent contact between the current § 190.02(b)(1), but replaces the commodity contracts in accordance trustee, the relevant DSRO, any relevant clearing organization(s), and requirement that the trustee publish such notice to customers in a newspaper 73 For further detail regarding SROs and DSROs Commission staff. Thus, a specified see generally § 1.52. deadline for such notification would not for two consecutive days prior to 74 A voluntary case under a chapter of the appear to be helpful. Section liquidating the specifically identifiable Bankruptcy Code is commenced by the debtor by 190.03(b)(2) also clarifies that property with the requirement that the filing a petition under that chapter. Section 301(a) trustee notify customers in accordance of the Bankruptcy Code, 11 U.S.C. 301(a). Under notification should be made with certain circumstances, creditors of a person may file respect to a transfer of customer with § 190.03(a)(2). This change is an involuntary case against that person pursuant to property. intended to provide the trustee with section 303 of the Bankruptcy Code, 11 U.S.C. 303. The Commission requested comment flexibility in notifying customers In such cases, the order for relief will be granted only if the petition is not timely controverted or if on proposed § 190.03(b). Specifically, regarding specifically identifiable the court makes specific findings. Id. There is no the Commission asked whether historical precedent for an involuntary petition in proposed § 190.03 would meet the 76 See, e.g., LCH Ltd.: FCM Procedures of the bankruptcy being filed against a commodity broker. objective of ensuring that the Clearing House 1.6(b)(G) (‘‘All FCM Clearing 75 A SIPA proceeding is commenced when the Commission and the relevant DSRO will Members must provide the Clearing House in a Securities Investors Protection Corporation prompt and timely manner with: . . . notice if the (‘‘SIPC’’) files a petition for a protective order. See be aware of a bankruptcy filing or SIPA FCM Clearing Member becomes the subject of a generally SIPA section 5, 15 U.S.C. 78eee. proceeding as soon as is practicable. bankruptcy petition.’’).

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property and to modernize part 190 to in response to a comment, the to provide special hedging account allow the trustee to provide notice to Commission is modifying this proposal treatment. customers in a way that will maximize to address cases where, in the judgment The Commission is adopting the number of customers reached. The of the trustee, the books and records of § 190.03(c)(3) to make minor timeframe in which the Commission the debtor reveal a clear preference by modifications to the notice of the would allow the trustee to commence the public customer with respect to commencement of an involuntary liquidation of specifically identifiable transfer or liquidation of open proceeding that the trustee may provide property has been modified to reflect commodity contracts. to customers prior to entry of an order the revised notice requirements. for relief, and upon leave of the court. Section 190.03(c)(2) also delineates Because § 190.03(c)(1) does not require Such modifications include clarifying certain information that the trustee must newspaper publication of customer that such notice must be in accordance include in the notice. As proposed, the notice, the Commission is allowing the with the notice provisions set forth notice must inform the customer that (1) trustee to commence liquidation of § 190.03(a)(2), amending certain specifically identifiable property on the if the customer does not provide terminology, and removing unnecessary seventh day after the order for relief (or instructions in the prescribed manner references. such other date as specified by the and by the prescribed deadline, the Section 190.03(c)(4) requires the trustee with the approval of the customer’s open commodity contracts bankruptcy trustee to notify customers Commission or the court), so long as the will not be treated as specifically that an order for relief has been entered trustee has used all reasonable efforts identifiable property; (2) any transfer of and instruct customers to file a proof of promptly to notify the customer under the open commodity contracts is subject customer claim. The regulation is § 190.03(a)(2) and the customer has not to the terms for distribution contained derived from current § 190.02(b)(4), but instructed the trustee in writing to in § 190.09(d)(2); (3) absent compliance adds that the notice must be provided return such specifically identifiable with any terms imposed by the trustee in accordance with § 190.03(a)(2). property. or the court, the trustee may liquidate Section 190.03(c)(4) replaces the term The Commission is adopting the open commodity contracts; and (4) ‘‘customer of record’’ with the term § 190.03(c)(2) to address how a providing instructions may not prevent ‘‘customer,’’ as ‘‘customer of record’’ is bankruptcy trustee may treat open the open commodity contracts from not a defined term in part 190 and all commodity contracts carried in hedging being liquidated. The Commission is customers should receive notice that an accounts. This regulation moves from making conforming changes to this order of relief has been entered. Section the bespoke approach of current portion of proposed § 190.03(c)(2) to 190.03(c)(4) also provides that the § 190.02(b)(2) to a categorical approach, reflect the modification referenced trustee shall cause the proof of customer in light of the practical difficulties of above. To the extent the trustee does not claim form to set forth the bar date for treating large numbers of customers exercise its authority to treat public its filing consistent with the current with similar open contracts on a customer positions carried in a hedging § 190.03(a)(2). bespoke basis.77 The Commission notes account as specifically identifiable The Commission requested comment that recent commodity broker property, the trustee must endeavor to, on proposed § 190.03(c). It specifically bankruptcies have involved thousands as the baseline expectation, treat open asked whether the proposed changes to of customers, with as many as hundreds commodity contracts of public the notice requirements would be of thousands of commodity contracts. customers carried in hedging accounts helpful; whether the discretion granted Trustees must make decisions as to how the same as other customer property and to the trustee concerning the treatment to handle such customers and contracts effect a transfer of such contracts to the of hedging accounts as specifically within days—in some cases, hours— extent possible.79 The Commission is identifiable property is appropriately after being appointed. Therefore, the making these changes to reflect the tailored; whether the proposed revisions Commission is giving the trustee the policy preference to port all positions of appeared likely to lead to unintended authority (i.e., an option, but not an public customers. Requiring a trustee to consequences; and how such obligation) to treat open commodity identify hedging accounts and provide consequences; if any, could be contracts of public customers held in hedging account holders the mitigated. The Commission received three hedging accounts designated as such in opportunity to keep their positions open comments on proposed § 190.03. CME the debtor’s records as specifically may be a resource and time intensive identifiable property, after consulting fully endorsed the policy preference process, which the Commission believes that the trustee should use their best with the Commission and when could interfere with the trustee’s ability practical under the circumstances. To efforts to transfer all public customer to take prudent and timely action to positions and related customer property the extent the trustee exercises such manage the debtor FCM’s estate to authority, the trustee is required to from the debtor FCM to one or more protect all of the FCM’s customers. The other FCMs. Accordingly, CME notify each relevant public customer in Commission believes that allowing the accordance with § 190.03(a)(2). As supported the provisions in § 190.03(c) FCM to rely on representations made by that grant the trustee the discretion to proposed, § 190.03(c)(2) would have customers during business-as-usual will required the trustee, in all cases, to not treat customer positions carried in alleviate this concern. In cases where it hedge accounts as specifically request that the customer provide may be practical, the trustee may elect instructions as to whether to transfer or identifiable property, unless the trustee liquidate the relevant open commodity determines that doing so would be This would simplify the existing requirement that 78 practicable under the circumstances, contracts. As discussed further below, FCMs provide a hedging instructions form when a customer first opens up a hedging account. For following consultation with the 77 See major theme 7 in section I.B. above. commodity contract accounts opened prior to the Commission. CME asserted that this 78 The Commission is also making other changes effective date of the part 190 revisions, the discretion will allow the trustee to that are intended to make it simpler for the trustee Commission is proposing that FCMs may rely on devote their attention to transferring to identify hedging positions and allow an FCM to written hedging instructions received from the designate an account as a hedging account by customer in accordance with current § 190.06(d). open positions of all public customers, relying on explicit customer representations that See § 1.41(c). along with their proportionate share of the account contains a hedging position. See § 1.41. 79 See § 190.00(c)(4). the customer property, in the aggregate.

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SIFMA AMG/MFA also generally agreed reveal a clear preference by a relevant d. Regulation § 190.03(d): Notice of with § 190.03(c)(2) in that it grants to public customer with respect to transfer Court Filings the trustee the authority (that is, the or liquidation of open commodity Section 190.03(d) addresses notices of option but not the obligation) to treat contracts, the trustee shall endeavor, to court filings. It is derived from current open commodity contracts of public the extent reasonably practicable, to § 190.10(f), but makes modernizing customers held in hedging accounts comply with that preference; and (2) changes to the terminology and method designated as such in the debtor’s Where, in the judgment of the trustee, of providing notice to the Commission. record as specifically identifiable the books and records of the debtor do The Commission requested comment on property. SIFMA AMG/MFA stated that not reveal a clear preference by a proposed § 190.03(d). The Commission permitting the trustee this flexibility relevant public customer with respect to specifically asked whether the proposed would serve the interest of customers as transfer or liquidation of open revisions appeared likely to lead to a whole by facilitating a more rapid commodity contracts, the trustee will unintended consequences, and, if so, transfer of customer positions and request the customer to provide written how such consequences could be property. SIFMA AMG/MFA instructions whether to transfer or mitigated. The Commission did not recommended, however, that the liquidate such open commodity receive any comments on proposed Commission explicitly clarify that contracts. Such notice must specify the § 190.03(d). § 190.03(c)(2) is not intended to affect manner for providing such instructions the treatment of hedging accounts under and the deadline by which the customer e. Regulation § 190.03(e): Proof of part 39 of the Commission’s regulations must provide instructions. Customer Claim Other conforming changes are being and that, to the extent reasonably The Commission is adopting made to § 190.03(c)(2). With respect to practicable, the trustee’s goal will be to § 190.03(e) to require a trustee to request SIFMA AMG/MFA’s request that the maximize value to the public that customers provide information 80 Commission explicitly clarify that customer. Additionally, in the context sufficient to determine a customer’s of the treatment of hedging accounts, proposed § 190.03(c)(2) is not intended claim in accordance with the SIFMA AMG/MFA recommended that, to affect the treatment of hedging regulations contained in part 190. if the trustee exercises the authority as accounts under part 39, the Commission Section 190.03(e) lists certain granted in this provision, the trustee notes that § 190.03(c)(2) governs the information that customers shall be should be first required to consult the trustee’s actions, and does not govern requested to provide, to the extent instructions (regarding preferences with the actions a DCO may take under its reasonably practicable, but grants the respect to transfer or liquidation of open default rules or otherwise. trustee discretion to adapt the request to commodity contracts) provided by a ACLI recommended that the the facts of the particular case. Such public customer to the debtor at the Commission amend proposed discretion is being granted to the trustee time of opening the relevant hedging § 190.03(c)(2) to require a trustee to account, and only if such instructions transfer a public customer’s hedge in order to enable the trustee to tailor are missing or unclear should the positions where the customer has the proof of claim form to the trustee require such customer to provide requested the transfer and met the information that is most appropriate in it with written instructions as required terms unless, in consultation light of the specifics of the types of contemplated by proposed with the Commission, it is determined business that the debtor did (and did § 190.03(c)(2). SIFMA AMG/MFA noted that it would be unreasonable to transfer not do), the way in which such types of that the notice sent by the trustee to the such positions. ACLI further business were organized, and the customer can still provide that existing recommended that the Commission add available records of the debtor (as well or previously provided instructions may a threshold such as ‘‘impossibility’’ or as the reliability of those records). not prevent the open commodity ‘‘exigent circumstances’’ to limit a Section 190.03(e) is generally derived contracts from being liquidated. SIFMA trustee’s ability to liquidate a customer’s from current § 190.02(d), although AMG/MFA asserted that adding this hedge position in lieu of a requested certain items on the list of information first step would further the goal of transfer. ACLI asserted that the to be requested of customers have been expediency. Commission’s oversight should be revised and reorganized to: Inter alia, The Commission agrees with the specifically mandated. In response to improve clarity; tie the questions to suggestion by SIFMA AMG/MFA that it ACLI’s comment, the Commission notes definitions of terms in part 190; give the is more efficient to endeavor to follow that § 190.00(c)(4) sets forth a preference claimant an opportunity to provide a clear instructions previously provided for the porting of all open commodity more complete picture of its claims; and rather than to request new instructions. contract positions of public customers, provide its own view as to the value of Moreover, this approach mitigates the along with all or a portion of such such open positions, unliquidated risk that a customer who has already customers’ account equity, and securities or other unliquidated made their preference patent will fail to § 190.04(a)(1) instructs the trustee property in order to support its claim reply to the request and thus be treated promptly to use its best efforts to effect against the debtor. in a manner contrary to that previously a transfer of such positions and property The Commission requested comment expressed preference. in accordance with § 190.07(c) and (d) on proposed § 190.03(e). Specifically, Accordingly, the Commission is not later than seven calendar days after the Commission asked whether the amending and reorganizing the order for relief. The discretion proposed changes would be helpful; § 190.03(c)(2) to implement that granted to the trustee in § 190.03(c)(2) is whether the discretion granted to the suggestion. Specifically, based on the reality that, in light of trustee was appropriately tailored; § 190.03(c)(2)(ii)(B) is being amended to limited time and administrative whether the proposed revisions provide, in pertinent part that: (1) resources, achieving porting to the appeared likely to lead to unintended Where, in the judgment of the trustee, maximum extent is fostered by treating consequences; and how such the books and records of the debtor customers on an omnibus, rather than consequences, if any, could be an individualized, basis. For these mitigated. The Commission received 80 This last point is addressed with the addition reasons, the Commission declines to one comment on proposed § 190.03(e). of § 190.00(c)(3)(i)(C). adopt ACLI’s specific suggestions. CME noted that the proposed regulation

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is a major improvement over the current margin and variation settlement, as well The Commission is adopting regulation. as the liquidation and valuation of § 190.04(a)(2), as derived from positions. The Commission is adopting § 190.02(e)(2), to remove the f. Regulation § 190.03(f): Proof of Claim § 190.04 to clarify and update portions liquidation-only trading limitations on Form of §§ 190.02, 190.03, and 190.04. an FCM that is subject to an involuntary Regulation § 190.03(f) provides that a The Commission requested comment bankruptcy petition unless otherwise template proof of claim form is included with respect to all aspects of proposed directed by the Commission, by any as appendix A to part 190.81 The § 190.04 including: Whether the applicable self-regulatory organization, Commission substantially revised the revisions create any unintended or by court. The Commission is instead customer proof of claim form in order to conflicts with customer protection adopting limitations on the business of streamline it and better map it to the regulations set forth in parts 1, 22, and an FCM in bankruptcy in § 190.04(g) to information listed in § 190.03(e). The 30; how any such conflicts may be more generally address involuntary revised customer proof of claim form resolved; whether there are any proceedings.85 now includes, in each section, citations proposed clarification changes that are The Commission is adopting to the location in the text of § 190.03(e) likely to create unintended § 190.04(a)(2), as derived from current where such information is listed. consequences; and, if so, how might § 190.02(e)(2), to provide that if such Section 190.03(f)(1) provides that, to those be avoided or mitigated. commodity broker demonstrates to the the extent there are no open commodity Commission within a specified period a. Regulation § 190.04(a): Transfers contracts that are being treated as of time that it is in compliance with the specifically identifiable property, the The Commission is adopting Commission’s segregation and financial bankruptcy trustee should modify the § 190.04(a) as proposed. Section requirements on the filing date, the proof of claim form to delete any 190.04(a) largely retains the current Commission may determine to allow the references to open commodity contracts provisions in current § 190.02(e) commodity broker to continue in as specifically identifiable property. For regarding transfers for customers in a business. The Commission is retaining example, this would be the case if all bankruptcy proceeding. It also retains this provision because any requirement open commodity contracts had been the policy preference 82 that the trustee to transfer customers is properly transferred or liquidated before the should use its best efforts to transfer addressed pursuant to § 1.17(a)(4), proof of claim form is sent. Section open commodity contracts and property which deals with FCMs that do not meet 190.03(f)(2) makes clear that the trustee held by the failed FCM for or on behalf minimum financial requirements. The has discretion as to whether to use the of its public customers to one or more Commission is of the view that an FCM template proof of claim form, and that solvent FCMs.83 Regulation that does meet such requirements the proof of claim form should be § 190.04(a)(1) provides that the trustee should not be compelled to cease modified to reflect the specific facts and ‘‘shall promptly’’ use its best efforts to business and transfer its customers circumstances of the case. The effect such transfers, while current absent an appropriate finding by a court provisions of § 190.03(f), taken together, § 190.02(e)(1) states that the trustee or the Commission. are meant to provide bankruptcy must ‘‘must immediately’’ do so. This In addition, similar to § 190.04(a)(1), trustees with appropriate flexibility to revision signals that the trustee must as discussed above, the Commission is determine the best and most efficient take action to transfer open commodity replacing the term ‘‘equity’’ with way to compose the customer proof of contracts as soon as practicable, while ‘‘property’’ to clarify that the transfers claim. avoiding potential pressure of the term discussed in § 190.04(a)(2) are for all The Commission requested comment ‘‘immediately’’ in light of the challenges types of property that the commodity on proposed § 190.03(f). Specifically, presented in an FCM bankruptcy. broker is holding on behalf of the Commission asked whether the Regulation § 190.04(a)(2) replaces the customers, rather than limited to only proposed changes to the treatment of the term ‘‘equity’’ with ‘‘property’’ to clarify equity. Also, the Commission is adding proof of customer claim form would be that the trustee should endeavor to the word ‘‘public’’ before ‘‘customers’’ helpful; whether they would lead to transfer all types of property that the to clarify in § 190.04(a)(2) that the unintended consequences; and how commodity broker is holding on behalf transfers discussed in § 190.04(a)(1) such consequences, if any, could be of customers; the transfer is not limited relate to the open commodity contracts mitigated. The Commission also asked to equity. The Commission is also and property of the debtor’s public whether the discretion granted to the adding the word ‘‘public’’ before customers. trustee was appropriately tailored and, ‘‘customers’’ to clarify that the transfers The Commission did not receive any if not, what changes should be made. discussed in § 190.04(a)(1) relate to the comments on this aspect of the CME commented that the proof of claim open commodity contracts and property Proposal. Accordingly, for the reasons form had been improved and supported of the debtor’s public customers.84 stated above, the Commission is the flexibility provided to the trustee. Accordingly, after consideration of adopting § 190.04(a) as proposed. 82 The Commission discussed the rationale for the comments and for the reasons stated this policy preference in the discussion of b. Regulation § 190.04(b): Treatment of above, the Commission is adopting § 190.00(c)(4). See section II.A.1. See also ABA Open Commodity Contracts § 190.03 as proposed, with Cover Note at 14 (recommending explicitly The Commission is adopting modifications to § 190.03(c)(2), as set identifying in § 190.04(a) a clear policy that the § 190.04(b) as proposed to clarify and forth above. trustee should use best efforts to transfer open commodity contracts and property held by the update the provisions in current 2. Regulation § 190.04: Operation of the failed FCM for or on behalf of its public customers § 190.02(g)(1), which allow a trustee to to one or more solvent FCMs). Debtor’s Estate—Customer Property 83 The Commission is also adopting cross- make ‘‘variation and maintenance The Commission is adopting § 190.04 references in § 190.04(a) to other provisions within margin payments’’ on behalf of the as proposed with modifications, as set proposed part 190 that discuss transfers of customer property. 85 The Commission is deleting the reference to forth below to address the collection of 84 The Commission is adopting the same change— ‘‘liquidation’’ in § 190.02(e)(4) accordingly since the addition of the word ‘‘public’’ before ‘‘customers’’— limitation to trading for liquidation only is being 81 Appendix A is discussed in section II.D below. to § 190.04(a)(2), as discussed below. deleted from § 190.04(a)(2).

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debtor FCM’s customers. The including the phrase ‘‘to the extent the open commodity contract positions Commission is adopting § 190.04(b) to within the trustee’s control’’ to of such customer. Second, the be generally consistent with the current recognize that certain commodity Commission is adopting regulation but with a number of contract accounts may be held on an § 190.04(b)(1)(v) to provide that the substantive changes. omnibus basis (i.e., on behalf of several trustee may not use payments received First, the Commission is adopting customers), so to the extent the trustee from one public customer to meet the § 190.04(b) to permit the trustee to make is making a margin payment on behalf margin (or any other) obligations of any margin payments pending transfer or of the omnibus account, it may be out other customer. Given the restriction in liquidation; not just pending liquidation of the trustee’s control to identify and paragraph (b)(1)(v), the Commission as required by current § 190.02(g)(1). only pay on behalf of those underlying believes it may in some cases be The amendment is consistent with the customer accounts (within the omnibus impracticable for a trustee to follow Commission’s longstanding policy for account) that are not in deficit. The paragraph (b)(1)(iv). In such a situation, the trustee to endeavor to transfer open Commission is including a proviso to therefore the trustee would hold onto commodity contracts. The trustee has note that § 190.04(b)(1)(i) shall not be the funds received in response to a two paths for the treatment of such construed to prevent a clearing margin payment and such funds would contracts: Transfer and, if transfer is not organization, foreign clearing be credited to the account of the possible, liquidation. organization, FCM, or foreign futures customer that made the payment.89 Second, the Commission is adopting intermediary from exercising its rights Regulation § 190.04(b)(1)(vi) builds § 190.04(b)(1) to delete the phrase to the extent permitted under applicable upon current § 190.02(g)(1)(iv), which ‘‘required to be liquidated under law. This proviso is intended to remove provides that no payments need to be paragraph (f)(1) of this section’’ in any doubt that the right of these made to restore initial margin, thus current § 190.02(g)(1) to eliminate a ‘‘upstream’’ entities to use collateral noting that such payments are not complete prohibition against paying posted by the FCM on an omnibus basis required but implicitly allowed to be margin on open contracts. While is not affected by the prohibition on made. Revised § 190.04(b)(1)(vi) holding contracts open may or may not making margin payments on behalf of explains in this in more detail and be practicable given the particular accounts that are in deficit. provides more comprehensive guidance circumstances of the bankruptcy, a The Commission is adopting to the trustee about when such complete prohibition against paying § 190.04(b)(1)(ii) as a new provision to payments may be made. Specifically, margin on such open contracts would prohibit the trustee from making an § 190.04(b)(1)(vi) provides that, in the undermine the point of having the upstream margin payment with respect event that the funds segregated for the possibility to hold those contracts open. to a specific customer account that benefit of public customers in a Accordingly, the Commission is would exceed the funded balance of that particular account class exceed the deleting the phrase ‘‘required to be account. This restriction is consistent aggregate net equity claims for all liquidated under paragraph (f)(1) of this with the pro rata distribution principle customers in that account class, the section’’ and thus will instead apply discussed in § 190.00(c)(5), in that any trustee is permitted to use such funds to more broadly to any open commodity payment in excess of a customer’s meet the margin obligations for any contracts. funded balance would be to the public customer in such account class The Commission is also adopting detriment of other customers. whose account is undermargined, but several technical amendments. Third, The Commission is adopting some not in deficit, and sets conditions the Commission is replacing the phrase non-substantive clarifications in around such use. ‘‘variation and maintenance margin § 190.04(b)(1)(iii), as derived from Regulation § 190.04(b)(2) updates payments’’ with ‘‘payments of initial current § 190.02(g)(1)(ii), to retain the current § 190.02(g)(2), which concerns margin and variation settlement’’ which, limitation that the trustee may not make margin calls made by trustee with in the Commission’s view, more payments on behalf of non-public respect to undermargined accounts of accurately describes the types of customers of the debtor from funds that public customers. The Commission is payments being reflected in this are segregated for the benefit of public removing the current requirement in provision. Fourth, the Commission is customers. § 190.02(g)(2) that the trustee issue replacing the phrase ‘‘to a commodity The Commission is adopting margin calls, by replacing the term broker’’ with ‘‘to a clearing organization, § 190.04(b)(1)(iv)–(v) to clarify and ‘‘must issue margin calls’’ with ‘‘may commodity broker, foreign clearing expand upon current issue a margin call,’’ in light of the organization or foreign futures § 190.02(g)(1)(iii),86 to require that possibility that the trustee will intermediary’’ to account for the various margin is used consistent with the determine it impracticable or inefficient types of entities to which a margin requirements of section 4d of the CEA.87 to do so. Current § 190.02(g)(2), which payment described in this provision First, the Commission is adopting sets up a retail-level analysis on issuing may be made. Lastly, the Commission is § 190.04(b)(1)(iv) to provide that, if the mandatory margin calls based on the replacing the phrase ‘‘specifically trustee receives payments from a funded balance of the account, is based identifiable to a particular customer’’ customer in response to a margin call, on a model of the FCM continuing in with ‘‘specifically identifiable property then to the extent within the trustee’s business. Revised § 190.04(b)(d) of a particular customer’’ in order to be control,88 the trustee must use such recognizes that an FCM in bankruptcy consistent with the definitions in part payments to make margin payments for will be operated in crisis mode, and 190, which includes as a defined term may be pending wholesale transfer or ‘‘specifically identifiable property.’’ 86 Current § 190.02(g)(1)(iii) provides that the liquidation of open positions.90 The Commission is adopting trustee must make margin payments if payments of Therefore, the Commission is allowing § 190.04(b)(1)(i), as derived from current margin are received from customers after for the possibility that the trustee may bankruptcy in response to margin calls. § 190.02(g)(1)(i), to prevent the trustee issue margin calls. The specification of from making any payments on behalf of 87 See 7 U.S.C. 6d. 88 The phrase ‘‘to the extent within the trustee’s any commodity contract account that is control’’ recognizes the reality that certain accounts 89 See § 190.08(c)(1)(ii). in deficit, to the extent within the are held on an omnibus basis. See discussion of 90 See generally major theme 7 discussed in trustee’s control. The Commission is § 190.04(b)(1)(i) above. section I.B. above.

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highly prescriptive conditions for fails to meet a margin call made by the that a minimum of one hour is sufficient issuing such calls is no longer trustee within a reasonable time. notice for a trustee to liquidate an appropriate, given the Commission Pursuant to current § 190.03(b)(1), a undermargined account. The whether or not to make a margin call is trustee must liquidate open commodity Commission intends this revision to now based on the trustee’s discretion. contracts if any payment of margin provide the trustee with the discretion Regulation § 190.04(b)(3), as derived would result in a deficit in the account to deem a period of less than one hour from current § 190.02(g)(3) with updated in which they are held.94 Revised as sufficient notice to liquidate an cross-references, retains the important § 190.04(b)(4) adds a requirement to undermargined account if the ‘‘exigent concept that margin payments made by liquidate all open commodity contracts circumstances’’ so require. a customer in response to a trustee’s in any commodity contract account that The Commission is deleting current margin call are fully credited to the is in deficit. The existing language § 190.03(b)(3) to permit the trustee to customer’s funded balance. As these applies to an account that is on the liquidate open commodity contracts post-petition payments made by the threshold of deficit; the Commission is where the trustee has received no customer are fully counted toward the revising the language to clarify that the customer instructions with respect to customer’s funded net equity claims provision also applies to an account that such contracts by the sixth calendar day under § 190.04(b)(3), they are not is already in deficit. Moreover, the following the entry of the order for subject to pro rata distribution (in change from ‘‘payment of margin’’ to relief. The Commission is adopting this contrast to the treatment of the debtor ‘‘mark-to-market’’ calculations change as part of a model where the commodity broker’s pre-petition addresses the case where the trustee is trustee receives and complies with obligations to customers). aware, based on mark-to-market instructions from individual customers Regulation § 190.04(b)(4) is derived calculations, that the account is in to a model—that reflects actual practice from a combination of current deficit. In order to protect other in commodity broker bankruptcies in §§ 190.03(b)(1) and (2) and 190.04(e)(4), customers more effectively, the trustee recent decades—where the trustee and addresses the trustee’s obligation to should begin the liquidation process transfers as many open commodity liquidate certain open commodity immediately upon gaining that contracts as possible.96 contracts; in particular, those in deficit awareness, rather than delaying until The Commission is adopting new and those where the customer has failed the time when a margin payment is due. § 190.04(b)(5) to provide guidance to the to promptly meet a margin call. During Regulation § 190.04(b)(4) also trustee in assigning liquidating business-as-usual, an FCM is required to provides that, absent exigent positions 97 to the debtor FCM’s cover, at all times, any customer circumstances or unless otherwise customers when only a portion of the accounts in deficit (i.e., those with debit provided, a reasonable time for meeting open commodity contracts in an balances) with its own capital.91 The margin calls made by a trustee shall be omnibus account are liquidated. The FCM is also required to cover with its one hour or such greater period not to new guidance is designed to protect the own capital any undermargined exceed one business day, as determined customer account as a whole, in light of amounts in customer accounts each day by the trustee.95 This language is largely the fact that any losses which cause a by no later than the Residual Interest reflective of current § 190.04(e)(4), but customer account to go into deficit are, Deadline.92 These ongoing requirements adds the concept of ‘‘exigent as discussed in connection with are intended to protect other customers circumstances’’ as a new exception to § 190.04(b)(4), at the risk of other with positive account balances. the general and long-established rule customers. To mitigate the risk of such An FCM in bankruptcy will generally losses, § 190.04(b)(5) establishes a not have capital available to protect 94 An account is in deficit if the balance is preference, subject to the trustee’s other customers by covering these negative (i.e., the customer owes the debtor instead exercise of reasonable business obligations; rather, any loss suffered by of the reverse). An account can be undermargined but not in deficit (if the balance is positive, but less judgment, for assigning liquidating customers whose accounts are in deficit than the amount of required margin). For example, transactions to individual customer will be at the risk of those other a customer may have a margin requirement of $100 accounts in a risk-reducing manner. customers.93 The Commission intends and an equity balance of $80. Such customer is Specifically, the trustee should for § 190.04(b)(4) to mitigate the risk to undermargined by $20, but is not in deficit, because the liquidation value of the commodity contracts is endeavor to assign such liquidating those other customers by directing the positive. transactions first, in a risk-reducing trustee to liquidate such accounts. 95 See Morgan Stanley & Co. Inc. v. Peak Ridge manner, to commodity contract In light of the importance of Master SPC Ltd., 930 F.Supp.2d 532, 539–540 accounts that are in deficit; second, in mitigating this fellow-customer risk, (S.D.N.Y. 2013)(Morgan Stanley, in its business discretion, determined Peak Ridge’s account had a risk-reducing manner, to commodity § 190.04(b)(4), in contrast to many of the assumed overly risky positions, necessitating an contract accounts that are other proposed changes to part 190, increase in the margin requirement and giving Peak undermargined; 98 and finally to curtails the trustee’s discretion. Ridge a limited amount of time to bring the account liquidate any remaining open Specifically, § 190.04(b)(4), as derived into compliance. ‘‘Courts have held that as little as one hour is sufficient notice under similar commodity contracts. Where there are from current § 190.03(b)(1) and (2), circumstances.’’). See also Capital Options Invs., multiple accounts in any of these provides that the trustee shall, as soon Inc. v. Goldberg Bros. Commodities, Inc., 958 F.2d groups, the trustee is instructed to, as as practicable, liquidate all open 186, 190 (7th Cir. 1992) (‘‘One-hour notice to post practicable, to allocate such liquidating commodity contract accounts in any additional margin . . . is reasonable where a contract specifically provides for margin calls on transactions pro rata. The term ‘‘risk- commodity contract account (i) that is options at any time and without notice.’’); reducing manner’’ is measured by the in deficit; (ii) for which any mark-to- Prudential–Bache Sec., Inc. v. Stricklin, 890 F.2d margin methodology and parameters market calculation would result in a 704, 706–07 (4th Cir. 1989) (rejecting a claim that 24-hour notice, which the broker normally gave to deficit; or (iii) for which the customer 96 customers, was necessary before broker could Cf. major theme 7 in section I.B above. liquidate an under-margined account and 97 A liquidating position or transaction is one that 91 See, e.g., §§ 1.22(i)(4), 1.23(a)(2). upholding notice of one hour as in accordance with offsets a position held by the debtor, in whole or 92 See, e.g., § 1.22(c)(3). the customer agreement); Modern Settings, Inc. v. in part. Thus, if the debtor has three long March ’21 93 While the trustee may seek to recover any debit Prudential–Bache Sec. Inc., 936 F.2d 640, 645 (2d corn contracts, then three (or two, or one) short balance from a customer, see § 190.09(a)(1)(ii)(E), Cir. 1991) (upholding a provision of a customer March ’21 corn contracts would be a liquidating § 190.04(b)(4) proceeds from the conservative agreement allowing Defendant-broker to liquidate transaction. assumption that such efforts will be unsuccessful. an under-margined account without notice). 98 And thus are next at risk of going into deficit.

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

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increase: (1) The risk that such customer customers of an FCM credit for any trading or (ii) the first day on which would default; (2) the risk that delaying gains that were haircut during such notice of delivery may be tendered— liquidation of such a customer’s gains-based haircutting. With respect to that is, where the contract would move positions increases the potential for and this suggestion, the Commission notes into delivery position. The Commission likelihood that they would do so with that, where a DCO at which a debtor intends § 190.04(c) to have the same a debit balance; and (3) the risk that the FCM is a member applies gains-based purpose as its predecessors, but uses size of that debit balance would increase haircutting under that DCO’s rules, the more explicit language regarding as a result of that delay, thereby measure of the claim of a customer physical delivery to refer to ‘‘any open reducing the funded balances of other whose account at the debtor FCM commodity contract that settles upon customers. The Commission is of the contains contracts cleared on that DCO expiration or exercise via the making or view that timeframes that may have will be based on the customer taking of delivery of a commodity,’’ and been acceptable during business-as- agreement between that customer and that is moving into the delivery usual cannot bind the trustee in the debtor FCM. If, outside of the FCM’s position. The Commission also intends addressing the context of an FCM in bankruptcy and pursuant to that § 190.04(c) to expand current bankruptcy, because any post-petition customer agreement, the customer’s § 190.03(b)(5), with the incorporation of losses incurred by a customer will be at gains would have been reduced by X% some aspects of current § 190.02(f)(1)(ii), the cost of other customers (without the or $Y, then the amount of the to include an explicit reference to how normal buffer of the capital of a going- customer’s claim in bankruptcy would options on commodities move into concern FCM). Moreover, the be adjusted accordingly.100 delivery position. Commission agrees with the view Accordingly, the Commission does not CME supported proposed § 190.04(c), championed by ICI and Vanguard that accept that suggestion. which directs the trustee to use their the trustee should be required to swiftly ICI and Vanguard agreed with best efforts to liquidate open physical crystallize and therefore cap the losses proposed § 190.04(b)(5) which prohibits delivery commodity contracts that have resulting from deficit balances by a trustee from making margin payments not been transferred before the contracts promptly liquidating accounts in deficit that would exceed the customer’s move into a delivery position as CME and those for which a customer has funded account balance or transfer a believed this would avoid unnecessary failed to meet a margin call. OCC’s customer’s transactions or property and disruptions to the delivery process by concerns about treating customers thereby increase the exposure of other customers that did not intend to equitably inter se are understandable, customers. Vanguard supported participate in making or taking delivery. but, in the Commission’s view, ensuring addressing situations where the trustee ICI supported adding provisions that complete equity may not be practicable. could allow certain customers to avoid clarify the standards applicable to an A trustee must make decisions within a the core customer protection of pro rata FCM’s liquidation of a debtor FCM’s severely limited timeframe in a situation treatment at the expense of other transactions and the way a trustee must that is likely to be chaotic and with customers. assign liquidating transactions in the information that is limited and may be Accordingly, after consideration of context of a partial liquidation. imperfect. In these circumstances, the the comments, and for the reasons According, after consideration of the Commission is of the view that it is stated above, § 190.04(b) will be adopted comments, and for the reasons stated appropriate to defer to the trustee’s as proposed. above, the Commission is adopting discretion to make the best decisions c. Regulation § 190.04(c): Contracts § 190.04(c) as proposed. they can under the circumstances. Moving Into Delivery Accordingly, the Commission believes d. Regulation § 190.04(d): Liquidation or that, where a trustee makes in good faith The Commission is adopting Offset decisions with regard to margin and § 190.04(c), as proposed, to direct the The Commission is adopting liquidation of accounts, that are, in trustee to use its best efforts to avoid § 190.04(d) as proposed with delivery obligations concerning retrospect, inequitable, the modifications, as set forth below. contracts held through the debtor FCM Commission’s regulations should Regulation § 190.04(d), as derived from by transferring or liquidating such discourage challenges to such a decision current §§ 190.02(f) and 190.04(d), sets contracts before they move into delivery (and, if such a challenge is made, forth the categories of commodity position. The Commission is adopting should reduce the likelihood that it is contracts and other property held by or § 190.04(c) based on its analog in successful). for the account of a debtor that must be current § 190.03(b)(5) and is While the trustee retains discretion, as liquidated by the trustee in the market incorporating a portion of current specified in, inter alia, proposed or by book entry offset, promptly, and § 190.02(f)(1)(ii). Current § 190.03(b)(5) § 190.04, to manage the affairs of the in an orderly manner.101 instructs the trustee to liquidate debtor FCM, the Commission can Importantly, the Commission is promptly, and in an orderly manner, confirm, as requested by ICE, that a DCO retaining the requirement, present in the commodity contracts that are not settled of which that FCM is a member retains header language to current § 190.02(f), 99 in cash (implicitly, those that settle via its rights to act under its rules. that the trustee must effect such SIFMA AMG/MFA recommended that physical delivery of a commodity) where the contract would remain open the Commission amend proposed 101 The Commission is also adopting three non- § 190.04(b) to clearly state that, to the beyond the earlier of (i) the last day of substantive changes in the header language to extent gains-based haircutting has been proposed § 190.04(d) from that in current utilized by a DCO in respect of customer 100 Moreover, there are other reasons to forego an § 190.02(f): (1) The addition of the phrase ‘‘except approach that would reverse the effects of gains- as otherwise set forth in this paragraph (d)’’ to positions, the trustee should give based haircutting. As discussed in more detail in account for any exceptions that are included in the section II.C.7 below, there is a limited amount of paragraphs under the header language; (2) the 99 See, e.g., § 190.04(b)(1) (while trustee shall, to customer property available. Any increase in some addition of cross-references to proposed § 190.04(e) the extent within its control, not make payments on customers claims (and thus their distributions) due when discussing liquidation, as that provision behalf of an account in deficit, this shall not be to the reversal of gains-based haircutting would contains instructions on how to effect liquidation; construed to prevent a clearing organization from thus come at the expense of a reduced share of that and (3) the deletion of the phrase ‘‘subject to limit exercising its rights to the extent permitted under limited customer property, and thus reduced moves and to applicable procedures under the applicable law). distributions, to other customers. Bankruptcy Code.’’

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liquidation ‘‘in an orderly manner.’’ property if the fair market value of the the trustee on behalf of the debtor’s Regulation § 190.04(d) recognizes that property drops below 90% of its value estate, a DCO, a foreign broker, or any factor which, in the trustee’s on the date of the entry of the order for foreign clearing organization, and discretion, makes it imprudent to relief,105 § 190.04(d)(2)(i) changes that whether it is held on a pass-through or liquidate a position at a particular point standard to 75% of the fair market other basis. The amount of the in time would contribute to the trustee’s value, in order to provide greater substitute customer property to be judgment as to what constitutes discretion to the trustee to forego or posted may be less than the full-face liquidation ‘‘in an orderly manner.’’ postpone liquidation in appropriate amount of the letter of credit, in the Section 190.04(d)(1), as derived from cases. trustee’s discretion, if such lesser § 190.02(f)(1), requires that all open Third, revised § 190.04(d)(2)(ii) adds amount is sufficient to ensure pro rata commodity contracts must be an additional condition that will require treatment consistent with proposed liquidated, subject to two exceptions: (1) liquidation where failure to liquidate §§ 190.08 and 190.09. If required, the Commodity contracts that are the specifically identifiable property trustee may require the customer to post specifically identifiable property and may result in a deficit balance in the property equal to the full-face amount of are subject to customer instructions to applicable customer account, which the letter of credit to ensure pro rata transfer as provided in proposed corresponds to the general policy of treatment. Regulation § 190.04(d)(3)(i) § 190.03(c)(2); and (2) open commodity liquidating any accounts that are in provides that, if such a customer fails to contract positions that are in a delivery deficit. provide substitute customer property position.102 In the former case Lastly, § 190.04(d)(2)(iii), which is within a reasonable time specified by (specifically identifiable property), the similar to current § 190.02(f)(2)(ii), the trustee, the trustee may draw upon Commission is adopting § 190.04(d)(1) includes updated cross-references to the the full amount of the letter of credit or to revise the language of current provisions in proposed part 190 that any portion thereof. § 190.02(f)(1)(ii) to add references to the discuss the return of specifically Regulation § 190.04(d)(3)(ii) addresses provisions of § 190.03(c)(2) (concerning identifiable property. cases where a letter of credit received, the trustee’s option to treat hedging Regulation § 190.04(d)(3) is a new acquired or held to margin, guarantee, accounts as specifically identifiable provision that codifies the secure, purchase, or sell a commodity property) and § 190.09(d)(2) (concerning Commission’s longstanding policies of contract is not fully drawn upon. The the payments that customers on whose pro rata distribution and equitable trustee is instructed to treat any portion behalf specifically identifiable treatment of customers in bankruptcy, of the letter of credit that is not fully commodity contracts will be transferred as described in § 190.00(c)(5) above, as drawn upon as having been distributed must make to ensure that they do not applied to letters of credit posted as to the customer. However, the amount receive property in excess of their pro margin.106 Accordingly, customers who treated as having been distributed will rata share).103 The latter exception, for post letters of credit as margin will be be reduced by the value of any open commodity contract positions that treated no differently than other substitute customer property delivered are in a delivery position is new, and customers and thus would suffer the by the customer to the trustee. For provides that such positions should be same pro rata loss. example, if the face amount of the letter treated in accordance with § 190.06, The implementation of this policy in of credit is $1,000,000, the customer which concerns delivery.104 current § 190.08(a)(1)(i)(E) was delivers $250,000 in substitute customer Regulation § 190.04(d)(2) describes challenged in an adversary proceeding property, and no portion of the letter of when specifically identifiable property, in the MF Global bankruptcy; 107 the credit is drawn upon, then the trustee other than open commodity contracts or codification of this policy in will treat the customer as having physical delivery property, must be §§ 190.00(c)(5) (clarifying policy), received a distribution of $750,000. In liquidated. The Commission derived 190.04(d)(3) (treatment in bankruptcy), order to avoid an effective transfer of § 190.04(d)(2) from current and 1.43 (treatment during business-as- value, due to an expiration of the letter § 190.02(f)(2), with a number of usual) are intended to implement the of credit on or after the date of the order revisions. policy effectively and to forestall any for relief, to the customer who posted First, the provision applies to future challenge. the letter of credit, this calculation will specifically identifiable property, other Regulation § 190.04(d)(3) provides not be changed due to such an than open commodity contracts or that the trustee may request that such a expiration. physical delivery property, while the customer deliver substitute customer Regulation § 190.04(d)(3)(iii) confirms current regulation applies only to property with respect to any letter of that any proceeds of a letter of credit specifically identifiable property other credit received, acquired or held to drawn by the trustee, or substitute than open commodity contracts. The margin, guarantee, secure, purchase, or customer property posted by a Commission intends for this change to sell a commodity contract. This applies customer, shall be considered customer provide the trustee with discretion to whether the letter of credit is held by property in the account class applicable avoid interfering with the physical to the original letter of credit. delivery process. 105 See current § 190.02(f)(2)(i). Regulation § 190.04(d)(4), as derived Second, while the current regulation 106 See, e.g., 48 FR 8716, 8718–19 (March 1, 1983) from current § 190.02(f)(3), provides for (Commission intends to assure that customers using would require liquidation of such a letter of credit to meet original margin obligations the liquidation of all other property not would be treated no differently than customers required to be transferred or returned 102 Regulation § 190.04(d)(1) deletes the reference depositing other forms of non-cash margin or pursuant to customer instructions and in current § 190.02(f)(1)(i) to dealer option contracts customers with excess cash margin deposits. If which has not been liquidated. since such term is no longer used. letters of credit are treated differently than Treasury 103 The Commission is incorporating part of bills or other non-cash deposits, there would be a Regulation § 190.04(d)(4) excepts from current § 190.02(f)(1)(ii) into § 190.04(c), and substantial incentive to use and accept such letters the liquidation requirement any therefore that will not appear in § 190.04(d)(1). of credit as margin as they would be a means of ‘‘physical delivery property held for 104 As noted in section II.A.1 above in the avoiding the pro rata distribution of margin funds, delivery in accordance with the contrary to the intent of the Bankruptcy Code (11 discussion of § 190.00(c)(6), a delivery default could provision of’’ § 190.06, in order to avoid have a disruptive effect on the cash market for the U.S.C. 766).) commodity and could adversely impact the parties 107 See ConocoPhillips v. Giddens, No. 12 Civ. interfering with the physical delivery to the transaction. 6014, 2012 WL 4757866 (S.D.N.Y. 2012). process.

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

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shortfalls will necessarily be borne by deliver substitute customer property in other parts of the proposed revisions public customers. If public customers with respect to a letter of credit, and regarding treatment of letters of credit posting letters of credit (including in the that the amount of the request may posted with or through the debtor FCM delivery account) are shielded from equal the full face amount of the letter do not apply.’’ such losses, they will be borne in greater of credit or any portion thereof, to the For example, the Commission proportion by other public customers. extent required or may be required, in understands that upon expiry of certain That result would be inconsistent with the trustee’s discretion to ensure pro deliverable contracts and assignment of the Commission’s longstanding policy, rata treatment among customer claims delivery obligation, the long/buyer of embodied in section 766(h) of the within each account class, consistent the contract must post collateral to the Bankruptcy Code, to treat all customers with §§ 190.08 and 190.09. Thus, the DCO against its final payment obligation on a pro rata basis.108 amount of the substitute customer on the delivery. In certain cases, However, the concerns raised by property requested (or, if substitute collateral in the form of a delivery letter commenters regarding sudden and customer property is not provided, the of credit collateral is posted by the unexpected liquidity needs are amount of the letter of credit drawn customer directly to the DCO. The important ones. They are important both upon (if partial draws are permitted)) delivery letters of credit in these cases in the context of delivery letters of should be proportionate to the amount are subject to uniform terms that name credit, as discussed by some required or may be required, in the the DCO as the sole beneficiary on the commenters, and more broadly as trustee’s discretion, to ensure pro rata instrument. These delivery letters of well.109 The Commission agrees that treatment among customer claims. If the credit do not create an obligation of or these concerns can and should be amount of the shortfall in the relevant to a customer’s FCM as they are posted mitigated. Specifically, the trustee has account class (whether cash delivery directly to the DCO and the FCM is not discretion in managing this process with property or otherwise) is estimated to be a named beneficiary on the respect to letters of credit, and should a small percentage, the amount of instrument.110 exercise that discretion with the goal of substitute customer property requested In the context of a delivery letter of achieving pro rata treatment among would also be a small percentage credit that is posted directly with the customers in a manner that mitigates, to (subject to the trustee adding an DCO or with the delivery counterparty, the extent practicable, the adverse appropriate buffer for later corrections rather than with or through the FCM, effects upon customers that have posted in estimates, and taking into account and for which the FCM is not a named letters of credit. any need to use the letter of credit as beneficiary, the Commission confirms First, with regard to timing, the ongoing performance bond for the that the letter of credit is outside the commenters expressed concern that customer’s obligations). delivery account class, i.e., it does not requests for substitute property would To re-enforce these concepts, the constitute cash delivery property (or cause ‘‘sudden’’ liquidity needs. Commission is adding a new property of the debtor’s estate), and the Regulation § 190.04(d)(3)(i) states that § 190.04(d)(3)(iv), which provides that provisions in other parts of the the trustee may draw upon the letter of the trustee shall, in exercising their proposed revisions regarding treatment credit if the customer fails to provide discretion with regard to addressing of letters of credit posted with or substitute customer property within a letters of credit, including as to the through the debtor FCM do not reasonable time specified by the trustee. timing and amount of a request for apply.111 If the expiry date of the letter of credit substitute customer property, endeavor The Commission believes that this is not imminent, the Commission to mitigate, to the extent practicable, the clarification, in combination with the expects that a ‘‘reasonable time’’ would adverse effects upon customers that new provision directing the trustee’s be sufficiently long to enable the have posted letters of credit in a manner discretion in the context of letters of customer to mitigate liquidity concerns that achieves pro rata treatment among credit, will ameliorate the commenters (consistent with the trustee’s plans to customer claims. The Commission concerns regarding delivery letters of make distributions). If the expiry date of intends that this new paragraph will credit. the letter of credit is imminent, and the confirm to trustees that they should The foregoing applies to the trustee. customer can and does arrange to have steer their discretion in the specified DCOs remain free to exercise any of the that expiry date extended, the parties manner, and will provide assurance to rights and powers in their rules vis-a`-vis could work in the context of that customers that have posted letters of their clearing members, in particular extended expiry date. However, if the credit that the trustees will exercise with respect to risk management, expiry date is imminent, and cannot be their discretion in that manner. The limited only by requirements within the extended, then the trustee will need to Commission believes that this provision Commission’s regulations.112 However, take promptly whatever steps are, in will appropriately address concerns in this context, the Commission would their discretion, necessary to ensure pro regarding the manner in which the encourage DCOs holding letters of credit rata treatment among customers. trustee ensures that customers that have posted by customers of FCMs in Second, with regard to the amount posted letters of credit are treated bankruptcy to exercise their rights requested, § 190.04(d)(3) provides that economically in the same manner as under such letters of credit in a the trustee may request that a customer customers who have posted other forms of collateral 110 Similarly, CMC’s concerns focus on ‘‘a 108 Pursuant to § 190.08(c)(1)(ii), the customer’s Moreover, in the context of § 190.06, delivery LOC upon which the DCO is beneficiary.’’ funded balance includes 100% of margin posted CME requested that the Commission 111 The Commission was not requested to opine after the order for relief. Accordingly, this principle confirm that ‘‘when a customer posts a on whether this approach vis-a`-vis letters of credit would not apply to a delivery letter of credit posted is permissible outside of the context of the delivery after the order for relief (unless the letter of credit delivery letter of credit directly with the account class, and expresses no view on that was delivered in substitution for a pre-bankruptcy DCO or with its delivery counterparty, question. letter of credit). and not with or through the FCM, the 112 See, e.g., § 190.04(e) (Rules providing for 109 Moreover, and for the avoidance of doubt, as letter of credit is outside the delivery liquidation other than on the open market shall be delivery is simply a stage in the life of a commodity designed to achieve, to the extent feasible under contract, § 190.04(d)(3) applies to letters of credit in account class, i.e., it does not constitute market conditions at the time of liquidation, a connection with delivery obligations under a cash delivery property (or property of process for liquidating open commodity contracts commodity contract. the debtor’s estate), and the provisions that results in competitive pricing.)

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measured fashion, in order to achieve futures that were established on or conditions at the time of liquidation and risk management goals fully but in a subject to the rules of a foreign board of subject to any rules or orders of the manner that mitigates, to the extent trade and cleared by the debtor as a relevant clearing organization, foreign practicable, adverse effects upon member of a foreign clearing clearing organization, DCM, SEF or customers that have posted letters of organization, providing that such foreign board of trade governing its credit.113 contracts shall by liquidated pursuant to liquidation of such open commodity Accordingly, after consideration of the rules of the foreign clearing contracts. the comments and for the reasons stated organization or foreign board of trade or, If the liquidating FCM or foreign above, the Commission is adopting in the absence of such rules, in the futures intermediary fails to do so, the § 190.04(d) as proposed, with the manner the trustee deems appropriate. trustee may seek damages reflecting the addition of new § 190.04(d)(3)(iv) as set This the new provision is analogous to difference in price(s) resulting from forth above. the existing provision but would extend such failure. However, such damages e. Regulation § 190.04(e): Liquidation of to cases where the debtor FCM is a would be the trustee’s sole available Open Commodity Contracts member of a foreign clearing remedy as the regulation makes clear organization. that ‘‘[i]n no event shall any such The Commission is adopting Section 190.04(e)(1)(ii) provides liquidation be voided.’’ § 190.04(e) as proposed to provide instructions to the trustee regarding the The Commission is adopting details regarding the liquidation and liquidation of open commodity § 190.04(e)(4)(i) and (ii) based on valuation of open positions.114 contracts where the debtor is not a current § 190.04(d)(2) and (3), Paragraph (e) is derived from current member of a DCO or foreign clearing respectively, with some minor non- § 190.04(d), subject to a number of organization, but instead clears through substantive language changes and changes. one or more accounts established with updated cross-references. The Commission is adopting an FCM or a foreign futures The Commission requested comment § 190.04(e)(1)(i), as derived from current intermediary. In such a case, in particular on the treatment of letters § 190.04(d)(1)(ii), to describe the process § 190.04(e)(1)(ii) provides that the of credit in bankruptcy, as set forth in of liquidating open commodity trustee shall use commercially proposed § 190.04(e). The Commission contracts when the debtor is a member reasonable efforts to liquidate the open did not receive any comments on this of a clearing organization. Regulation commodity contracts to achieve aspect of the Proposal. Accordingly, for § 190.04(e)(1)(i), like its predecessor, competitive pricing, to the extent the reasons stated above, the emphasizes the goal of competitive feasible under market conditions at the Commission is adopting § 190.04(e) as pricing to the extent feasible under time of liquidation. The Commission is proposed. market conditions at the time of adding this provision to account for liquidation. Treatment under the CEA of those circumstances where the trustee f. Regulation § 190.04(f): Long Option clearing organization rules has evolved must liquidate open commodity Contracts from a pre-approval regime to a contracts for a debtor that is not a The Commission is adopting primarily self-certification regime. The clearing member. § 190.04(f) as proposed to contain only Commission is of the view that the As with § 190.04(e)(1)(i), the minor non-substantive changes from the various processes set forth in part 40 of Commission is adopting § 190.04(e)(2) current § 190.04(e)(5), including (1) a the Commission’s regulations (including to delete the rule approval requirement, cross-reference to the liquidation self-certifications under § 40.6, for the same reasons stated above. provisions in proposed § 190.04(d) and voluntary submission for rule approval Regulation § 190.04(e)(2) is derived from (e), and (2) a clarification that the under § 40.5, and Commission review of current § 190.04(d)(1)(ii) which requires provision is referring to commodity certain rules of systemically important a trustee or clearing organization to contracts that are long option contracts, DCOs under § 40.10) are sufficient, and apply to the Commission for permission rather than to long option contracts that a separate rule approval process for to liquidate open commodity contracts more generally. rules regarding settlement price in the by book entry. In such a case, the The Commission did not receive any context of a bankruptcy is no longer settlement price for such commodity comments on this aspect of the necessary. The Commission is contracts shall be determined by the Proposal. Accordingly, for the reasons accordingly adopting § 190.04(e)(1)(i) to clearing organization in accordance stated above, the Commission is delete the requirement contained in with its rules, which shall be designed adopting § 190.04(f) as proposed. current § 190.04(d)(1)(i) that a clearing to establish, to the extent feasible under 3. Regulation § 190.05: Operation of the organization must obtain approval market conditions at the time of Debtor’s Estate—General pursuant to section 5c(c) of the CEA for liquidation, such settlement prices in a its rules regarding liquidation of open competitive manner. The Commission is adopting § 190.05 commodity contracts. The Commission is adopting to revise parts of current § 190.04 and Section 190.04(e)(1)(i) also adds a § 190.04(e)(3) to recognize that an FCM add new provisions to (1) require a provision regarding open commodity or foreign futures intermediary through trustee to use all reasonable efforts to contracts that are futures or options on which a debtor FCM carries open continue to issue account statements for commodity contracts will generally customer accounts holding open 113 In this connection, the Commission notes that have enforceable contractual rights to commodity contracts or other property OCC Rule 1104(a)(ii) permits OCC, if the issuer of liquidate such commodity contracts. and (2) clarify the trustee’s obligation a letter of credit agrees to extend the irrevocability New § 190.04(e)(3) confirms that the with respect to residual interest. The of its commitment thereunder in a manner satisfactory to OCC, to ‘‘demand only such amounts upstream intermediary may exercise Commission requested comment with as it may from time to time deem necessary to meet such rights. However, the liquidating respect to all aspects of proposed anticipated disbursements.’’ FCM or foreign futures intermediary § 190.05. 114 The Commission is amending § 190.08(d) to shall use commercially reasonable The Commission is adopting also clarify the process by which customer § 190.05(a) to amend the requirement in positions and other customer property are valued efforts to liquidate the open commodity for purposes of determining the amount of a contracts to achieve competitive pricing, current § 190.04(a) that the trustee customer’s claim. to the extent feasible under market ‘‘shall’’ comply with all provisions of

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the CEA and of the regulations must compute a daily funded balance. the debtor’s case is closed.’’ Section thereunder as if it were the debtor, to Third, § 190.05(b) revises the length of 190.05(c)(2) simplifies the state that the trustee ‘‘shall use time that the trustee is obligated to corresponding portion of current reasonable efforts to comply’’ with all compute the funded balance of § 190.04(c)(2) by omitting the provisions of the CEA and of the customer accounts from ‘‘until the final requirement that the records required in regulations thereunder as if it were the liquidation date’’ to until the open § 190.05(c)(1) be available to the Court debtor. This change is intended to commodity contracts and other property and parties in interest. The requirement provide the trustee with some flexibility in the account have been transferred or that such records be available to the in making decisions in an emergency liquidated. This change ties the Commission and the United States bankruptcy situation, subject to the computation requirement to each Department of Justice is being retained. requirements of the Bankruptcy Code. specific account, such that a bankruptcy A court generally will not itself look at Given that an FCM bankruptcy will trustee is not required to continue to records, and any parties in interest likely be a fast-paced situation requiring compute the funded balance of should have access to records under the the trustee to make decisions with little customer accounts that do not contain discovery provisions of the Federal time for consideration, the Commission any open commodity contracts or other Rules of Bankruptcy Procedure and the recognizes that there may be property. Lastly, the specific deadline Federal Rules of Civil Procedure, as circumstances under which strict by which the computation must be applicable. The Commission did not compliance with the CEA and the completed is being removed. The receive any comments on proposed regulations thereunder may not be Commission does not believe that the § 190.05(c). practicable. The Commission did not deadline in current § 190.04(b) (by noon The Commission is adopting new receive any comments on proposed the next business day) is crucial in a § 190.05(d) to facilitate the ability of § 190.05(a).115 bankruptcy context (as it is with respect customers of the bankrupt FCM with The Commission is adopting to an FCM conducting ongoing daily open commodity contracts or property § 190.05(b) to address the computation business).117 Such computation would, to keep track of such open commodity of funded balances. It is derived from, however, inherently need to be contracts or property even during and makes several revisions to, accomplished prior to performing any insolvency, and promptly to make them § 190.04(b). The Commission’s objective action where knowledge of funded aware of the specifics of the liquidation in making such revisions is to provide balances is essential, such as transfers of or transfer of such contracts or property. the bankruptcy trustee with the latitude accounts or property. Section 190.05(d) requires the trustee to to act reasonably given the The Commission received one use all reasonable efforts to continue to circumstances with which the trustee is comment regarding proposed issue account statements with respect to confronted, recognizing that information § 190.05(b). CME agreed that allowing any customer for whose account open may be more reliable and/or accurate in the trustee to compute the funded commodity contracts or other property some insolvency situations than in balance for customers’ accounts before is held that has not been liquidated or others and permitting an approach that, transferring or liquidating customer transferred. Section 190.05(d) also to an appropriate extent, favors cost positions or property using ‘‘reasonable requires the trustee to issue an account effectiveness and promptness over efforts’’ to be ‘‘as accurate as reasonably statement reflecting any liquidation or precision.116 First, whereas current practicable under the circumstances, transfer that has taken place with § 190.04(b) provides that a trustee including the reliability and availability respect to a customer account promptly ‘‘must’’ compute a daily funded balance of information’’ ‘‘should allow the after such liquidation or transfer has for the relevant customer accounts, trustee to act more promptly to transfer occurred. § 190.05(b) requires the trustee to use the positions of public customers and The Commission sought comment on ‘‘reasonable efforts’’ to make such their pro rata share of the customer the practicability of the proposed computations. Such computations are property than if the trustee were held to requirements regarding the issuance of required to be ‘‘as accurate as a strict standard of precision in account statements. ICI commented in reasonably practicable under the calculating funded balances before it support of the account statement circumstances, including the reliability could undertake such transfers.’’ This is requirements. and availability of information.’’ consistent with the Commission’s view. The Commission is adopting Second, § 190.05(b) increases the scope The Commission is adopting § 190.05(e)(1) to amend the requirement of customer accounts for which the § 190.05(c)(1) to amend the record in current § 190.04(e)(2) that a trustee bankruptcy trustee is obligated to retention requirements in current must obtain court approval to make compute a funded balance from § 190.04(c) to be more comprehensive. disbursements to customers, to accounts that contain open commodity Section 190.05(c)(1) expands the specifically carve out transfers of contracts to accounts that contain open referenced records from ‘‘computations customer property made in accordance required by this [p]art’’ to ‘‘records commodity contracts or other property. with § 190.07. The Commission is required under this chapter to be In the Commission’s view, there is no making this change to reflect the policy maintained by the debtor, including reason to exclude customer accounts preference to transfer as many public records of the computations required by that contain only property (the value of customer positions as practicable in the this part.’’ To enable the trustee to which may change) from the scope of event of an FCM insolvency.118 The mitigate the expenses of record those for which bankruptcy trustees Commission notes, however, that this retention, however, it reduces the time that records are required to be retained 115 To the extent that ICI’s comment raising 118 The Commission notes that current § 190.08(d) concerns about trustee discretion applies here, the from ‘‘the greater of the period required provides for the return of specifically identifiable Commission notes that the addition of by § 1.31 of this chapter or for a period property other than commodity contracts under § 190.00(c)(3)(i)(C), which directs the trustee to use of one year after the close of the certain circumstances (namely, where the customer their discretion with the overarching goal of bankruptcy proceeding for which they makes good any pro rata loss related to that protecting public customers, should mitigate that property) without court approval; however, the concern. were compiled’’ to ‘‘until such time as Commission is deleting this provision in favor of 116 See major theme 7 discussed in section I.B allowing transfers without court approval for the above. 117 See, e.g., § 1.32(d). reasons stated above.

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carve out does not detract from the MFA, ICI, and Vanguard. CME avoid adverse consequences to parties trustee’s ability to, in their discretion, supported adding clarity that the trustee that may be relying on delivery taking nonetheless seek and obtain court should use reasonable efforts to operate place in connection with their business approval for certain transfers of the debtor FCM’s estate in compliance operations. property. The Commission recognizes with the CEA and CFTC regulations The delivery provisions in the current that there is an inherent tension governing FCMs, including to apply the regulations largely reflect the delivery between distributing to public residual interest provisions in § 1.11, in practices at the time current part 190 customers as much customer property a manner appropriate to the context of was adopted in 1983. At that time, as possible from the debtor’s estate, as their responsibilities and in light of the delivery was effected largely by quickly as possible, and ensuring existence of a surplus or deficit in tendering paper warehouse receipts or accuracy in distribution, and believes customer property available to pay certificates. In contrast, most deliverable that § 190.05(e)(1) strikes the right customer claims. ICI and Vanguard title documents today are held and balance between these competing supported the clarification in proposed transferred in electronic form, typically objectives.119 § 190.05(f) that an FCM’s residual with the clearing organization serving as Section 190.05(e)(2) addresses how a interest is to be applied to public the central depository for such bankruptcy trustee may invest the customer claims. Vanguard noted its instruments. Under the terms of some proceeds 120 from the liquidation of belief that ‘‘FCM residual interest is a contracts (such as oil or gas futures) the open commodity contracts and valuable buffer to insulate FCM party with the contractual obligation to specifically identifiable property, and customers from the risk of delayed or make delivery will physically transfer a other customer property. It is derived failed margin transfers from other tangible commodity to meet its from, and retains much of, current customers.’’ Vanguard was ‘‘pleased that obligations. In other cases, intangible § 190.04(e)(3), but it expands the the Commission has confirmed that, commodities may be delivered, provision permitting the bankruptcy while residual interest is fronted by including virtual currencies. As noted trustee to ‘‘invest any customer equity FCMs, it must be used to support previously, in the definitions section in accounts which remain open in customers through an FCM insolvency,’’ (§ 190.01), the Commission is dividing accordance with § 190.03’’ to permit the noting that its ‘‘purpose is to enhance the delivery account class into physical investment of ‘‘any other customer core customer protections.’’ SIFMA delivery and cash delivery account property.’’ It continues to limit the AMG/MFA also believed that ‘‘the subclasses to recognize the differing permissible investments to obligations proposed use of residual interest as issues that apply to physical delivery of, or fully guaranteed by, the United contemplated by proposed §§ 190.05(f) property versus cash delivery property. States, and to limit the location of and 190.09 is appropriate,’’ and agreed The Commission is also recognizing permissible depositories to those with the Commission that ‘‘the residual that, consistent with current practice, 123 located in the United States or its interest provisions contained in § 1.11 physical deliveries may be effected 124 territories or possessions. The remain important.’’ in different types of accounts. For Commission did not receive any Accordingly, after consideration of example, when an FCM has a role in comments on proposed § 190.05(e). the comments and for the reasons stated facilitating delivery, deliveries may The Commission is adopting new above, the Commission is adopting occur via title transfer in a futures § 190.05(f) to require a bankruptcy § 190.05 as proposed. account, foreign futures account, cleared trustee to apply the residual interest swaps account, delivery account, or, if 4. Regulation § 190.06: Making and provisions contained in § 1.11 ‘‘in a the commodity is a security, in a Taking Delivery Under Commodity 125 manner appropriate to the context of securities account. Contracts their responsibilities as a bankruptcy Section 190.06(a) applies to trustee’’ and ‘‘in light of the existence of The Commission is adopting § 190.06 commodity contracts that settle upon a surplus or deficit in customer property as proposed. The Commission is expiration or exercise by making or available to pay customer claims.’’ The adopting § 190.06 to provide more taking delivery of physical delivery purpose of the residual interest specificity regarding making and taking property, if such commodity contracts provisions is to have the FCM maintain deliveries on commodity contracts in are in a delivery position on the filing a sufficient buffer in segregated funds the context of an FCM bankruptcy and date or the trustee is unable to liquidate ‘‘to reasonably ensure that the [FCM] to reflect current delivery practices. such commodity contracts in . . . remains in compliance with the Section 190.06 is derived from current accordance with § 190.04(c) to prevent segregated funds requirements at all § 190.05, but implements new concepts them from moving into a delivery 126 times.’’ 121 The Commission requested (with respect to delivery practices, position. The Commission is comment with respect to all aspects of intangible commodities, and separation of physical and cash delivery property), 123 Current § 190.05 applies to the delivery of a proposed § 190.05. Specifically, the physical commodity, or of documents of title to Commission sought comment on the as discussed further below. physical commodities. Section 190.06 applies to practicability and appropriateness of Generally, open positions may enter a any type of commodity that is subject to delivery, proposed § 190.05(f). delivery position where the parties whether tangible or intangible. This is captured in The Commission received supportive incur bilateral contractual delivery the definition of physical property. Given the obligations.122 It is important to address different ways in which delivery may take place, comments from CME, SIFMA AMG/ physical delivery property is not limited to property deliveries to avoid disruption to the that an FCM holds for or on behalf of a customer 119 The concept of prioritizing cost effectiveness cash market for the commodity and to in a delivery account. For a discussion of those and promptness over precision is discussed in different ways, see the third and fourth categories detail in major theme 7 in section I.B above and in 122 The timing of the entry of the order for relief under the definition of physical delivery property overarching concept three in the cost-benefit in a subchapter IV proceeding relative to when in § 190.01 in section II.A.2 above. considerations, section III.A.2.iii below. physical delivery contracts move into a delivery 124 See also § 1.42. 120 Section 190.05(e)(2) uses the term ‘‘proceeds’’ positions will generally influence whether a 125 See also § 1.42. rather than the term ‘‘equity,’’ which is used in delivery issue may arise. Additionally, during 126 As discussed above, § 190.04(c) directs the current § 190.04(e)(3). This change in wording is business as usual, market participants typically trustee to use its best efforts to avoid delivery not meant to be a substantive. offset contracts before incurring delivery obligations concerning contracts held through the 121 Section 1.11(e)(3)(i)(D). obligations. Continued

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adopting § 190.06(a)(2) to address makes physical delivery in satisfaction the definition of house account as it delivery made or taken on behalf of a of a commodity contract using property applies to FCMs. The reference in the customer outside of the administration that is outside the administration of the provision as proposed to ‘‘a house of the debtor’s estate, (i.e., directly estate of the debtor, the customer account of the debtor’’ is being replaced between the debtor’s customer and the nonetheless has property held in in the final rule with a reference to ‘‘the delivery counterparty assigned by the connection with that contract at the debtor’s own account or the account of clearing organization). It replaces debtor (i.e., collateral posted in any non-public customer of the debtor.’’ current § 190.05(b). Current § 190.05(b) connection with that contract pre- No substantive change vis-a`-vis either requires a DCO, DCM, or SEF to enact petition). Consistent with current the current regulation or the regulation rules that permit parties to make or take § 190.05(b)(2), § 190.06(a)(2)(ii) provides as proposed is intended. delivery under a commodity contract that the property held at the debtor The Commission is adopting new outside the debtor’s estate, through becomes part of the customer’s claim § 190.06(b) to divide the delivery substitution of the customer for the and can only be distributed pro rata, account class into separate physical commodity broker. The Commission despite the customer fulfilling the delivery and cash delivery account believes that deliveries should occur in delivery obligation outside the subclasses, for purposes of pro rata this manner only where feasible. administration of the debtor’s estate. distributions to customers in the Deliveries may not always happen in Section 190.06(a)(3) applies when it is delivery account class on their net this manner, as customers largely rely not practicable to effect delivery outside equity claims. Because claims in each on their FCMs to hold physical delivery the estate. Section 190.06(a)(3) clarifies subclass are fixed as of the filing date, property on their behalf in electronic that which was implied, but was not § 190.06(b)(1)(i) provides that the form.127 addressed, in current § 190.05(c)(1)–(2), physical delivery account class includes Section 190.06(a)(2)(i) 128 directs the by providing additional details for when physical delivery property held in trustee to use ‘‘reasonable efforts’’ to delivery is made or taken within the delivery accounts as of the filing date, allow a customer to deliver physical debtor’s estate. It contains provisions for and the proceeds of any such physical delivery property that is held directly by the trustee to deliver physical or cash delivery property received subsequently the customer in settlement of a delivery property on a customer’s (i.e., cash received after the filing date, commodity contract, and to allow behalf, or return such property to the in exchange for physical delivery payment in exchange for such delivery, customer so that the customer may property on which delivery was made), to occur outside the debtor’s estate, fulfill its delivery obligation. The and § 190.06(b)(ii) provides the cash where the rules of the exchange or regulation also includes restrictions delivery account class includes cash clearing organization prescribe a process designed to assure that a customer does delivery property in delivery accounts for delivery that allows delivery to be not receive (or otherwise benefit from) as of the filing date, along with physical fulfilled either (A) in the ordinary a distribution of customer property (or delivery property for which delivery is course by the customer, (B) by other use of such property that benefits subsequently taken (i.e., in exchange for substitution of the customer for the the customer) that exceeds the cash delivery property paid after the commodity broker, or (C) through customer’s pro rata share of the relevant filing date) on behalf of a customer in agreement of the buyer and seller to customer property pool. accordance with § 190.06(a)(3). alternative delivery procedures. In The Commission is adopting new Section 190.06(b)(2) describes the adopting a ‘‘reasonable efforts’’ standard § 190.06(a)(4) to recognize that delivery customer property included in the cash rather than (as in current § 190.05(a)(1)) may need to be made in a securities delivery account class and in the ‘‘best efforts,’’ the Commission is account if an open commodity contract physical delivery account class. Section recognizing that, in the event that the held in a futures account, foreign 190.06(b)(2) provides that customer trustee is unable to transfer or earlier futures account, or cleared swaps property in the cash delivery account liquidate the positions, delivery account requires the delivery of class includes cash or cash equivalents involves a significant degree of bespoke securities, and property from any of that are held in an account under a administration. Moreover, requiring the these accounts is transferred to the name, or in a manner, that clearly trustee’s ‘‘best efforts’’ for delivery securities account for the purpose of indicates that the account holds might require the trustee to spend an effecting delivery. The value of the property for the purpose of making inordinate amount of time focusing on property transferred to the securities payment for taking delivery of a the needs of a few customers and detract account must be limited to the commodity under commodity contracts. from the trustee’s ability to manage the customer’s funded balance for a Customer property in the cash delivery short term challenges of the commodity contract account, and only account class also includes any other administration of the estate in the days to the extent that funded balance property that is (A) not segregated for immediately following the filing date. exceeds (i.e., the surplus over) the the benefit of customers in the futures, Section 190.06(a)(2)(ii) addresses the customer’s minimum margin foreign futures, or cleared swaps circumstance where, while the customer requirements for that account. Such a account classes) and (B) traceable transfer may not be made if the (through, e.g., account statements) as debtor FCM by transferring or liquidating such customer is undermargined or has a having been received after the filing contracts before they move into delivery position. deficit balance in any other commodity date as part of taking delivery. 127 The requirement for registered entity rules to contract accounts. Section 190.06(b)(2) also provides, be submitted for approval in accordance with Section 190.06(a)(5), as proposed, conversely, that customer property in section 5c(c) of the Act has been deleted for reasons addressed deliveries made or taken on the physical delivery account class discussed in section II.B.2 above with respect to § 190.04(e)(1) and (2). behalf of ‘‘a house account of the includes cash or cash equivalents that 128 The Commission notes that § 190.04(c) directs debtor.’’ It was derived from current are held in an account under a name, or the trustee to use its best efforts to avoid delivery § 190.05(c)(3), with some clarifying in a manner, that clearly indicates that obligations concerning contracts held through the wording. Consistent with the suggestion the account holds property received in debtor FCM by transferring or liquidating such contracts before they move into delivery position. from the ABA Subcommittee, as payment for making delivery of a Section 190.06(a)(2) applies where the trustee is discussed in section II.A.2 above, the commodity under a commodity unable to do so. Commission is deleting in this final rule contract. Customer property in the

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physical delivery account class also preference, explained in § 190.00(c)(4), including through bona fide changes in includes any other property that is (A) for transferring (or ‘‘porting’’) public margin requirements and guarantee not segregated for the benefit of customer commodity contract positions, fund contributions for transferee customers in the futures, foreign futures, as well as all or a portion of such clearing members.’’ or cleared swaps account classes) and customers’ account equity. It is being As discussed immediately above, the (B) traceable (through, e.g., account adopted as proposed with modifications provision already states that ‘‘this statements) as having been held for the to § 190.07(b), (d), and (e), as set forth paragraph (a)(3) shall not . . . be purpose of making delivery of a below. interpreted to limit a clearing commodity under a commodity The Commission requested comment organization’s ability adequately to contract, or held as of the filing date as with respect to all aspects of proposed manage risk.’’ Moreover, recognizing the a result of taking delivery. § 190.07, and raised particular questions different or additional margin The Commission requested comment with respect to the proposed six-month requirements or guarantee fund on all aspects of proposed § 190.06. In post-transfer period to complete contribution requirements resulting particular, the Commission sought customer diligence, partial transfers, from the additional positions carried by comment on the implications of and estimates of customer claims. a transferee clearing member is not a subdividing the delivery account class Section 190.07(a) addresses rules that rule that interferes with the acceptance into separate physical delivery and cash clearing organizations and SROs may of a transfer of commodity contracts.130 delivery account subclasses, including ‘‘adopt, maintain in effect, or enforce’’ Accordingly, the Commission concludes any additional challenges or benefits that may affect transfers. that § 190.07(a)(3) appropriately meets that the Commission did not consider. In § 190.07, paragraphs (a)(1) and (2) the goal of promoting transfers to the CME expressed support for specific states that these organizations may not extent consistent with good risk aspects of proposed § 190.06, such as: have such rules that, respectively, ‘‘are management. (1) The proposed enhancements to the inconsistent with the provisions of’’ part Regulation § 190.07(b) concerns delivery account class, including 190 or that interfere with the acceptance requirements for transferees. Paragraph separating the account class into by their members of commodity (b)(1) clarifies that it is the duty of the physical and cash delivery account contracts and collateral from FCMs that transferee—not of anyone else—to classes; (2) the additional detail are required to transfer accounts assure that the transfer will not cause provided to the trustee on how to pursuant to § 1.17(a)(4). These the transferee to be in violation of the facilitate the completion of deliveries provisions are derived from current minimum financial requirements. including, in particular, the requirement § 190.06(a)(1) and (2), with technical Paragraph (b)(2) notes that the transferee for the trustee to use reasonable efforts changes. No comments were received accepts the transfer subject to any loss to allow delivery to occur outside with respect to these provisions. arising from deficit balances that cannot Section 190.07(a)(3) is intended to administration of the debtor FCM’s be recovered from the customer, and, in promote transfers, to the extent estate when the rules of the relevant the case of customer accounts, must consistent with good risk management. exchange or DCO prescribe a process for keep such counts open for at least one It provides that no clearing organization allowing deliveries to be accomplished business day (unless the customer fails or other SRO may adopt, maintain in to respond to a margin call within a as set forth in the proposal; and (3) the effect, or enforce rules that ‘‘interfere clarification that cash or cash reasonable time) and may not collect with the acceptance by its members of commissions with respect to the equivalents held by the debtor FCM in transfers of commodity contracts, and an account maintained at a bank, DCO, transfer. the property margining or securing such As stated in the proposal, the foreign clearing organization or contracts, from [an FCM that is a debtor] Commission understands that customer elsewhere constitutes customer property if such transfers have been approved by diligence processes would have already when it is held under a name or in a the Commission . . .’’ Paragraph (a)(3) been required to have been completed manner clearly indicating the property includes a proviso, however, that it by the debtor FCM with respect to each in the account relates to deliveries. As shall not (i) ‘‘[l]imit the exercise of any of its customers as part of opening their to the latter, CME believes that this will contractual right of a clearing accounts. Regulation § 190.07(b)(3) thus facilitate identifying cash delivery organization or other registered entity to provides that a transferee may accept property available to distribute to liquidate or transfer open commodity open commodity contracts and customers in the cash delivery account contracts’’; or (ii) ‘‘[b]e interpreted to property, and may open accounts on its 129 class. limit a clearing organization’s ability records prior to completing customer Accordingly, after consideration of adequately to manage risk.’’ diligence, provided that account the comments and for the reasons stated FIA supported the proviso, and CME opening diligence as required is above, the Commission is adopting ‘‘agree[ed] that transfers should be made performed as soon as practicable but no § 190.06 as proposed, with consistent with sound risk management later than six months after transfer, modifications to § 190.06(a)(5) as set principles, and in that regard unless the time is extended, by the forth above. welcome[d] the proposed clarification Commission, for a particular account, 5. Regulation § 190.07: Transfers that the requirements under the transfer, or debtor. This provision is proposed rule do not limit the rights of Regulation § 190.07 was proposed to consistent with past practice in FCM a DCO (or a DCM or swap execution bankruptcies. set forth detailed provisions governing facility as ‘‘registered entities’’ as CME supported this provision as a transfers, consistent with the policy defined in the CEA) to liquidate or ‘‘practical change’’ that should assist in finding willing transferees, while ICI 129 CME noted that its support was ‘‘subject to transfer open commodity contracts.’’ CME’s comments which request changes to the cash ICE, by contrast, was concerned that the believed that it will help mitigate or delivery property and physical delivery property term ‘‘interfere with’’ is overly broad, definitions.’’ Specifically, CME requested that the and requested that the Commission 130 The Commission understands ICE’s reference Commission adopt more formal requirements with ‘‘clarify that a clearing organization is to ‘‘bona fide changes in margin requirements and respect to delivery accounts through a separate guarantee fund contributions’’ to mean changes that rulemaking. That request is addressed in section not precluded from managing the risks are not based on the fact that positions were II.G below. presented by any such transfer, acquired by transfer.

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eliminate ‘‘speed bumps’’ to porting. conducting ongoing customer due margin,’’ the Commission believes that Vanguard supported the flexibility diligence, to include . . . the determination of whether a advanced by the Commission here, but [u]nderstanding the nature and purpose transferee FCM is promptly collecting urged the Commission to work to of customer relationships for the such margin should be informed by the harmonize that flexibility across other purpose of developing a customer risk exigencies of the situation. There is, regulatory regimes applicable at FCMs, profile . . . .’’ 31 CFR 1026.210(b)(5)(i). however, no basis for a general particularly for those dually registered The Commission is of the view that exemption for transferee accounts from as broker-dealers. § 190.07(b)(3) would inform the the requirements of § 39.13(g)(8)(iii), FIA supported the policy underlying determination of what constitutes providing that a DCO shall require that paragraph (b)(3), and noted that it is appropriate risk-based procedures in its members do not permit customers to essential to realize the policy of favoring the exigent context of an FCM accepting withdraw funds from their accounts porting over liquidation of customer a transfer of accounts from an FCM that unless the accounts would be fully accounts. FIA also agreed that six is a debtor in bankruptcy. margined after such withdrawal. If the months is a reasonable period of time While FIA appears to request a transferee FCM is not confident of the for this process, subject to the reference to the account opening information it has regarding the Commission’s authority to grant disclosure requirements in §§ 1.55, 30.6, transferred account, it would seem additional time in particular and 33.7, these would appear to be appropriate to risk manage with caution. circumstances. FIA was, however, of the addressed by the bulk transfer Once the transferee FCM is confident view that this regulation should provisions of § 1.65. The Commission is that it fully understands the situation, ‘‘provide transferee FCMs more specific amending § 190.07(b)(3) to include a the transferee can act in accordance relief from applicable law relating to parenthetical statement that explicitly with its normal procedures.131 ‘customer diligence.’ ’’ refers to ‘‘the risk disclosures referred to Similarly, there is no basis to provide a FIA encouraged the Commission to in § 1.65(a)(3).’’ This will modify the general exemption from undermargined specify the customer diligence rules sixty-day requirement of that paragraph. account capital charges in accordance from which transferee FCMs will have The Commission declines to amend with § 1.17. temporary relief. FIA stated that the regulation to extend the time to In all of these cases, the Commission comply with capital and residual encourages DCOs and SROs to take ‘‘such rules may include, but not be limited interest requirements. To do so would to: (i) rules relating to anti-money laundering similar approaches. requirements (including rules requiring risk permitting a transfer of accounts to While the Commission has declined, FCMs to implement customer identification result in contagion of financial in many of the above cases, to provide programs and know your customer weakness. The Commission reiterates general relief by regulation, this is requirements and all corresponding self- the importance of § 190.07(b)(1), which without prejudice to the possibility that regulatory organization (‘‘SRO’’) provides that ‘‘it is the duty of each more targeted relief may be appropriate requirements); (ii) rules relating to risk and transferee to assure that it will not in particular cases. Specifically, any other disclosures (§§ 1.55, 30.6, 33.7 and accept a transfer that would cause the further relief that might be appropriate similar SRO disclosure requirements); (iii) transferee to be in violation of the in a particular situation could be rules relating to capital and residual interest minimum financial requirements set requested by, e.g., the transferee, in light requirements (§§ 1.11, 1.17, 1.22, 1.23, 22.2, 22.17, 30.7 and 41.48 and related SRO forth in this chapter.’’ of the relevant facts and circumstances. requirements); (iv) rules relating to account However, to the extent that shortfalls The Commission observes that its staff statements required under § 1.33 in the event in compliance with these requirements have traditionally responded to requests positions transfer with inadequate contact are due to errors or shortfalls in the data for relief in emergency situations with information (§ 1.33 and related SRO received by the transferee from the great dispatch, and expects, and thus requirements); and [(v)] rules relating to transferor FCM, and the transferee acts instructs staff, to continue to do so in margin in the event accounts transfer without with reasonable and appropriate this context in the future.132 adequate margin (§§ 1.17, 39.13, 41.42–41.49 diligence in seeking to detect such OCC recommended that ‘‘the and related SRO requirements).’’ errors or shortfalls in data, and, where Commission adopt a parallel regulation The Commission has considered each detected, in investigating and correcting permitting a DCO to postpone any due of the five types of requirements them, such shortfalls in compliance diligence the DCO would typically have discussed by FIA: would not be considered violations of to perform on an FCM member With respect to anti-money such requirements. accepting transferred positions from a laundering requirements, the Similarly, where account statements bankrupt FCM.’’ This would include the Commission notes that, for purposes of required by § 1.33 do not reach the requirements of, e.g., § 39.12, requiring the Customer Identification Program customer due to errors or shortfalls in a DCO to have ‘‘continuing participation (‘‘CIP’’) requirements applicable to the contact information provided to the requirements for clearing members of futures commission merchants pursuant transferee, there would be no violation the [DCO] that are objective, publicly to 31 CFR 1026.220, the term ‘‘account’’ so long as the transferee takes available, and risk-based.’’ is defined to exclude ‘‘[a]n account that reasonable steps to detect such errors or The Commission does not agree that the futures commission merchant shortfalls (e.g., by reacting promptly to the situations are parallel: An FCM is acquires through any acquisition, rejected email or returned postal mail, required to perform individualized due merger, purchase of assets, or or to complaints by a transferred assumption of liabilities.’’ 31 CFR customer that they are not receiving 131 Such normal procedures would include the 1026.100(a)(2)(i). Thus, transferred such statements) and to correct the ‘‘ordinary course of business’’ referred to in Letter 19–17, or any successor letter or regulation. See accounts are not subject to the CIP situation once detected. The proposed CFTC Letter 19–17, https://www.cftc.gov/node/ requirements. regulation does not need to be amended 217076. However, the Customer Due Diligence to achieve this result. 132 For the avoidance of doubt, the nature of the (‘‘CDD’’) requirements of 31 CFR Finally, with respect to FIA’s request expectation and the instruction is that staff will provide a response to such requests with great 1026.210(b)(5) do appear to apply. for relief with respect to regulations dispatch. The nature of the response, whether These include a requirement for ‘‘relating to margin in the event affirmative, affirmative in part, or negative, will ‘‘[a]ppropriate risk-based procedures for accounts transfer without adequate depend on the relevant facts and circumstances.

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diligence on each of its customers, will be renumbered as § 190.07(b)(4)(i), Regulation § 190.07(c) addresses which in the case of a transfer such as and paragraph (b)(4)(ii) will be added to eligibility of accounts for transfer under was seen in historical situations such as provide that paragraph (b)(4)(i) shall not section 764(b) of the Bankruptcy Code. MF Global, would amount to hundreds apply where the customer has a pre- This provision states that ‘‘[a]ll or even thousands of customers. By existing account agreement with the commodity contract accounts (including contrast, the focus of a DCO is on the transferee futures commission accounts with no open commodity financial and operational capability of merchant. In such a case, the transferred contract positions) are eligible for each of its clearing members that is a account will be governed by that pre- transfer. . . .’’ This language recognizes transferee to manage, in the aggregate, existing account agreement. that accounts can be transferred even if the customer portfolios of which it However, where the transferred they are intended for trading accepts transfer. The number of customer does not have a pre-existing commodities but do not include any transferee FCM clearing members is account agreement with the transferee open commodity contracts at the time of likely to be no more than a dozen. FCM, FIA conceded that ‘‘the account the order for relief.134 In any event, the Commission expects agreement [between the transferor and Regulation § 190.07(d) addresses that a DCO would, and would be the customer] should stay in place for a special rules for transfers under section permitted to, conduct its due diligence short defined interim period during 764(b) of the Bankruptcy Code. procedures in a manner consistent with which the parties may Paragraph (d)(1) instructs the trustee to balancing risk management renegotiate. . . .’’ FIA did not specify ‘‘use its best efforts to effect a transfer requirements (see, e.g., § 190.07(a)(3)(ii) how long that ‘‘short defined interim to one or more other commodity brokers (restrictions on a DCO interfering with period’’ should last, nor what should of all eligible commodity contract the acceptance of transfers from a debtor happen at the end of that period if the accounts, open commodity contracts FCM ‘‘shall not be interpreted to limit parties fail to reach agreement. The and property held by the debtor for or a clearing organization’s ability Commission notes that nothing prevents on behalf of its customers, based on adequately to manage risk’’) with the either the transferee FCM or customer customer claims of record, no later than exigencies of the situation. from negotiating at any time to change the seventh calendar day after the order Section 190.07(b)(4) is designed to the (in this case, assigned) account for relief.’’ The Commission will correct clarify what the account agreement agreement between them, and that, a typographical error in the proposal, between the transferred customer and aside from § 190.07(b)(2)(ii)(A) and refer to ‘‘customer claims of record’’ the transferee is at and after the time the (requiring the transferee to keep the rather than ‘‘customer claims or record.’’ transfer becomes effective. This customer’s commodity contracts open at Regulation § 190.07(d)(2) addresses includes situations where an account is least one business day after their receipt cases of partial transfers and multiple partially transferred. As proposed, it unless the customer fails to meet transferees. It includes a requirement provides that any account agreements promptly a margin call), nothing in the that ‘‘a partial transfer of contracts and governing a transferred account shall be Commission’s regulations prevents property may be made so long as such deemed assigned to the transferee and either the transferee or customer from transfer would not result in an increase shall govern the customer’s relationship terminating their relationship if they in the amount of any customer’s net unless and until a new agreement is cannot reach agreement as to the terms equity claim.’’ The added language is reached. It also provides that a breach under which that relationship should intended to caution against partial of the agreement prior to a transfer does continue, on what either party believes transfers that would break netting sets not constitute a breach on the part of the is a timely basis. Accordingly, the and make the customer worse off. The transferee. CME, ICI, and Vanguard Commission declines to modify Commission has also decided to state supported this provision. § 190.07(b)(4) in this context. that one way to accomplish a partial FIA appreciated the need for legal Lastly, FIA observed that a customer’s certainty as to the terms of the transfer is ‘‘by liquidating a portion of account may not always be able to be the open commodity contracts held by relationship between a transferee FCM physically transferred from the debtor and each transferred customer, but was a customer such that sufficient value is FCM to the transferee FCM. The realized, or margin requirements are concerned that the transferee FCM Commission notes that the reference in might be disadvantaged by being subject reduced to an extent sufficient, to § 190.07(b)(4) to assignment of account permit the transfer of some or all of the to an account agreement between the agreements does not refer to the transferred customer and the transferor remaining open commodity contracts movement of physical documents.133 As and property.’’ This language is (debtor) FCM. There are two possible requested by FIA, the Commission can situations with respect to each intended to clarify that the liquidation thus confirm that assignment of the customer: Either the customer does, or may either crystalize gains or have the agreement does not depend upon such does not, have a pre-existing account effect of reducing the required margin. movement. Finally, with regards to the transfer of agreement with the transferee FCM. Regulation § 190.07(b)(5) provides FIA noted that many large customers, part of a spread or a straddle, that customer instructions received by in particular, may maintain accounts at the debtor with respect to open 134 more than one FCM, and thus it may be Cf. 11 U.S.C. 761(9)(A)(ii)(II) (customer means, commodity contracts or specifically with respect to an FCM, an entity that holds a claim the case that the customer already has identifiable property that has been, or against the FCM arising out of ‘‘a deposit or an account agreement in place with the will be, transferred in accordance with payment of cash, security, or other property with transferee FCM. FIA asked the such [FCM] for the purpose of making or margining section 764(b) of the Bankruptcy Code, Commission to confirm their view that, [a] commodity contract’’) (emphasis added). should be transmitted to any transferee, in this context, the transferee would not Thus, where a person opens a customer account which shall comply therewith to the and deposits collateral on day 1, intending to trade be required to manage the ported extent practicable (if the transferee on day 3 (or some subsequent day when the account(s) in accordance with the customer determines that it is propitious to trade) subsequently enters insolvency). agreement with the transferor FCM. The and the FCM becomes a debtor on day 2 (or some other day when the customer has no positions Commission agrees with this view, and 133 To be sure, a transfer agreement would likely open) such person nonetheless qualifies as a is modifying proposed § 190.07(b)(4) to include transfers of records or at least copies of customer, and their claim would be a customer state this explicitly: The proposed text records as a matter of good practice. claim.

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§ 190.07(d)(2)(ii) states that ‘‘to the Regulation § 190.07(e) addresses the bankruptcy distribution; or (ii) The extent practicable under the prohibition on avoidance of transfers withdrawal or settlement is disapproved circumstances,’’ each side of the spread under section 764(b) of the Bankruptcy by the Commission. or straddle must be transferred or none Code. It explicitly approves specific Regulation § 190.07(f) provides that, of the open commodity contracts types of transfers, unless such transfers notwithstanding the other provisions of comprising the spread or straddle may are disapproved by the Commission. this section (with exceptions discussed be transferred. This language is Section 190.07(e)(1) approves (i) below), the Commission may prohibit intended to clarify that the trustee is transfers that were made before the the transfer of a particular set or sets of required to protect customers holding order for relief in compliance with the commodity contract accounts and spread or straddle positions from the § 1.17(a)(4) (FCM fails to meet capital customer property, or permit the breaking of netting sets, but only to the requirements); (ii) pre-relief transfers, transfer of a particular set or sets of extent practicable given the withdrawals or settlements at the commodity contract accounts and circumstances. request of public customers, unless the customer property that do not comply Regulation § 190.07(d)(3) provides customer acted in collusion with the with the requirements of the section. details regarding the treatment and debtor to obtain a greater share than it The exceptions are the policy in favor transfer of letters of credit used as would otherwise be entitled to; and (iii) of avoiding the breaking of netting sets margin, consistent with other proposed pre-relief transfers of customer accounts in § 190.07(d)(2)(ii), and the avoidance provisions related to letters of credit. In or commodity contracts and other of prejudice to other customers in particular, this provision states that a related property, either by a clearing § 190.07(d)(5). transfer of a letter of credit cannot be organization or a receiver that has been Accordingly, after consideration of made if it would result in a recovery appointed for the FCM that is now a the comments and for the reasons stated that exceeds the amount to which the debtor. In this context, ‘‘public above, the Commission is adopting customer is entitled in §§ 190.08 and customers’’ would include a lower-level § 190.07 as proposed with modifications 190.09. If the letter of credit cannot be (i.e., downstream) FCM acting on behalf to § 190.07(b), (d), and (e), as set forth transferred and the customer does not of its own public customers (e.g., above. deliver substitute property, the trustee cleared at the debtor on an omnibus may draw upon a portion or upon all of basis). 6. Regulation § 190.08: Calculation of the letter of credit, the proceeds of Regulation § 190.07(e)(2) pertains to Funded Net Equity which will be treated as customer post-relief transfers. Section 764(b) of Section 190.08 is being adopted as property in the applicable account class. the bankruptcy code permits the proposed with a number of technical The Commission believes a regulation Commission to approve, and thus modifications, as set forth below. detailing how letters of credit are to be protect from avoidance, transfers that The Commission requested comment treated in a transfer will provide more occur up to seven days after the order with respect to all aspects of proposed certainty, as there is currently no such for relief. Section 190.07(e)(2)(i) § 190.08, and raised particular questions regulation, and that the proposed approves transfers of eligible with respect to the revisions to the treatment is both practical and commodity contract accounts or calculation of the equity balance of a consistent with the policy of pro rata customer property made by the trustee commodity contract set forth in distribution.135 or any clearing organization. Section proposed § 190.08(b)(1), and the Regulation § 190.07(d)(4) requires a 190.07(e)(2)(ii) approves transfers made appropriateness of the proposal to trustee to use reasonable efforts to at the direction of the Commission upon determine the value of an open prevent physical delivery property from such terms and conditions as the commodity contract at the end of the being separated from commodity Commission may deem appropriate and last settlement cycle on the day contract positions under which the in the public interest. preceding the transfer rather than at the property is deliverable. The Regulation § 190.07(e)(3) was referred end of the day of the transfer, as set Commission is proposing this regulation to in preamble to the proposal as forth in § 190.08(d)(1)–(2). to clarify its expectations in such derived from current § 190.06(g)(3). It As proposed, § 190.08(a) stated that situations, specifically, to promote the was inadvertently omitted from the rule the ‘‘allowed net equity claim of a delivery process. text in the proposal. customer shall be equal to the aggregate Regulation § 190.07(d)(5) is intended Section 190.07(e)(3) pertains to pre- of the funded balances of such to prevent prejudice to customers relief withdrawals by customers (in customer’s net equity claim for each generally by prohibiting the trustee from contrast to the transfers dealt with account class.’’ As discussed above, the making a transfer that would result in previously in § 190.07(e)(1)(ii)). It states ABA Subcommittee urged that there (in terms analogous to § 190.07(e)(1)(ii)) insufficient customer property being should be more precise use of the term that notwithstanding the provisions of available to make equivalent percentage ‘‘allowed claim.’’ 136 The Commission paragraphs (c) and (d) of this section, distributions to all equity claim holders agrees with this recommendation. the following transfers are approved and in the applicable account class. It Accordingly, the Commission is may not be avoided under sections 544, clarifies that the trustee should make amending the language in the proposal 546, 547, 548, 549 or 724(a) of the determinations in this context based on to replace the term ‘‘allowed net equity’’ Bankruptcy Code: The withdrawal or customer claims reflected in the FCM’s with the term ‘‘funded net equity’’ in settlement of a commodity contract records, and, for customer claims that the final rule in both § 190.08(a) and in account by a public customer, including are not consistent with those records, the title of § 190.08.137 a public customer which is a should make estimates using reasonable commodity broker, prior to the filing discretion based in each case on 136 See discussion of ‘‘funded claim’’ in section date unless: (i) The customer making the available information as of the calendar II.A.2 above. withdrawal or settlement acted in 137 Proposed § 190.08(a) is derived from current day immediately preceding transfer. collusion with the debtor or its § 190.07(a), but reflects the fact that, under the revised definition of the term ‘‘primary liquidation 135 See also discussion of treatment of letters of principals to obtain a greater share of date,’’ all commodity contracts will be liquidated or credit in bankruptcy under § 190.04(d)(3) in section the bankruptcy estate than that to which transferred prior to the primary liquidation date. II.B.2. such customer would be entitled in a Since no (relevant) operations will occur

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Section 190.08(b) sets forth the steps SIFMA AMG/MFA urged the are customer claims of record as of the for a trustee to follow when calculating Commission to amend this provision to filing date are transferred with all of the each customer’s net equity.138 Section ‘‘treat accounts of the same principal or equity pertaining thereto) will be based 190.08(b)(1), equity determination, sets beneficial owner maintained by on the allowed amount of such claims. forth the steps for a trustee to follow different agents or nominees as separate Section 190.08(b)(5), correction for when calculating the equity balance of accounts,’’ noting that this approach ongoing events, provides that the each commodity contract account of a would ‘‘reduce the administrative calculation of net equity will be customer. When calculating the difficulties the trustee would face in adjusted to correct for misestimates or customer’s claim against the debtor, the consolidating all accounts of the same errors, including corrections for the basis for calculating such claim is the principal or beneficial owner’’ and liquidation of claims or specifically data that appears in the debtor’s records. would ‘‘avoid[] any confusion as to the identifiable property at a value different Once the customer’s claim based on the treatment of separate accounts that from the estimate value previously used debtor’s records is calculated, the could arise with the overlay of the time- in computing net equity. customer will have the opportunity to limited relief provided by Letter 19– As proposed, § 190.08(c) set forth the dispute such claim based on their own 17.’’ 140 SIFMA AMG/MFA asserted that method for calculation of a customer’s records, and the trustee may adjust the this change would be similar to the funded balance, i.e., ‘‘a customer’s pro debtor’s records if it is persuaded by the approach taken by the Commission in rata share of the customer estate with customer. There were no comments proposed § 190.08(b)(2)(xiv), which respect to each account class available directed specifically to this provision. provides that accounts held by a for distribution to customers of the same Section 190.08(b)(2), customer customer in separate capacities shall be customer class.’’ Section 190.08(c)(1) determination (aggregation), provides deemed to be accounts of different sets forth instructions for calculating the instructions to the trustee regarding how customers. funded balance of any customer claim, to aggregate the credit and debit equity The Commission notes that CFTC while § 190.08(c)(2) requires the funded balances of all accounts of the same Letter 19–17 conditioned such relief on balance to be adjusted to correct for class held by a customer. Specifically, the FCM performing ‘‘stress testing and ongoing events. the regulation sets forth how to credit limits . . . on a combined One change is being made to determine whether accounts are held in account basis’’ and ‘‘provid[ing] each paragraph (c)(1), as a result of the same capacity or in separate beneficial owner using separate addressing a comment that affected a capacities. There were two comments accounts with a disclosure that under prior section. As proposed, applicable to this provision. CFTC [p]art 190 rules all separate § 190.08(c)(1)(ii) addressed giving As proposed, § 190.08(b)(2)(ix) accounts of the beneficial owner will be customers credit for 100% of margin referred to the fact that an omnibus combined in the event of an FCM payments made after the order for relief. customer accounts is held in a separate bankruptcy.’’ 141 Thus, treating separate As discussed above,142 a number of capacity from the ‘‘house account.’’ As accounts of the same beneficial owner commenters (ABA Subcommittee, CME, noted above,139 the ABA Subcommittee on a combined basis is entirely CMC), suggested that the definition of has suggested the deletion of the term consistent with the approach taken in cash delivery property be expanded to ‘‘house account’’ in the context of FCM Letter 19–17. Nor is the situation of address the possibility of post-filing- bankruptcies, and the Commission has separate accounts for the same date payments made by customers to the accepted this suggestion. Consistent beneficial owner analogous to a FCM to pay for delivery. Such payments with that approach, the Commission is customer holding accounts in separate should be credited in full to the accepting the ABA Subcommittee’s capacities, as referred to in customer’s funded balance. Indeed, revised drafting for this provision: An § 190.08(b)(2)(xiv) (e.g., in their personal § 190.06(a)(3)(ii)(B)(2) provides that the omnibus customer account for public capacity versus in their capacity as trustee could issue payment calls in this customers of a futures commission trustee for X, or in their capacity as context and that ‘‘the full amount of any merchant maintained with a debtor trustee for Y versus their capacity as payment made by the customer in shall be deemed to be held in a separate trustee for Z.). In those latter cases, the response to a payment call must be capacity from any omnibus customer same legal owner is acting for separate credited to the funded balance of the account for non-public customers of beneficial owners. Accordingly, the particular account for which such such futures commission merchant and Commission is declining to amend payment is made.’’ from any account maintained with the § 190.08(b)(2)(xii). In order to be consistent with the debtor on its own behalf or on behalf of Section 190.08(b)(3), setoffs, sets forth principle that 100% of post-filing-date any non-public customer (emphasis instructions regarding how and when to payments are credited to a customer’s added only for illustration). set off positive and negative equity funded balance, proposed As proposed, § 190.08(b)(2)(xii) balances. § 190.08(c)(1)(ii) is being amended, with provided that except as otherwise Section 190.08(b)(4), correction for the proposed language addressing post- provided in this section, an account distributions, provides that the value of filing-date margin payments to be maintained with a debtor by an agent or property that has been transferred or codified as § 190.08(c)(1)(ii)(A), and the nominee for a principal or a beneficial distributed must be added to the net addition of § 190.08(c)(1)(ii)(B) to owner shall be deemed to be an account equity amount calculated for that address post-filing-date payments for held in the individual capacity of such customer after performing the steps deliveries, to read as follows: ‘‘[then principal or beneficial owner. contained in § 190.08(b)(1) through (3). adding 100% of] . . . [f]or cash delivery Section 190.08(b)(4) also includes a property, any cash transferred to the subsequent to the liquidation date, provisions that proviso that clarifies that the calculation trustee on or after the filing date for the address how to deal with commodity contracts after of net equity for any late-filed claims (in purpose of paying for delivery.’’ that time are moot. Section 190.08(d), valuation, sets 138 Pursuant to section 20(a)(5) of the CEA, 7 cases where all accounts for which there U.S.C. 24(a)(5), the Commission has the power to forth instructions about how to value provide how the net equity of a customer is to be 140 See CFTC Letter 19–17, https://www.cftc.gov/ determined. node/217076. 142 See discussion of cash delivery property in 139 See section II.A.2 above. 141 Id. at 5 (emphasis supplied). section II.A.2, above.

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commodity contracts and other property clearing organization as of the end of the Accordingly, after consideration of for purposes of calculating net equity as settlement cycle during which the the comments and for the reasons stated set forth in the rest of § 190.08. commodity contract was liquidated. ICE above, § 190.08 is being adopted as Section 190.08(d)(1) sets forth disagreed with this approach, stating proposed, with modifications to the title instructions regarding how to value that ‘‘the price achieved in the auction and to § 190.08(a), (b), and (c), as set commodity contracts, separately should be used.’’ However, as the forth above. addressing: (i) Open commodity Commission noted in the proposing contracts, and (ii) liquidated commodity 7. Regulation § 190.09: Allocation of release, the units being auctioned will Property and Allowance of Claims contracts. often be a heterogenous (though risk- As proposed, § 190.08(d)(1)(i), related) set of products, tenors (e.g., Section 190.09 is being adopted to set regarding the valuation of open contract months), and directions (e.g., forth rules governing the scope of commodity contracts, states that ‘‘if an long or short). Different auctioned customer property, the allocation of open commodity contract is transferred portfolios may contain the same or customer property between customer to another commodity broker, its value similar contracts. In this context, setting and account classes, and distribution of on the debtor’s books and records shall the price of a particular contract based customer property. It was derived from be determined as of the end of the last on the auction price for a portfolio current § 190.08. It is being adopted as settlement cycle on the day preceding would require considerable proposed with modifications to such transfer.’’ The Commission noted interpretation. Accordingly, the § 190.09(d)(3), as set forth below. in the proposal that ‘‘[t]his would allow Commission will implement the The Commission requested comment the value of the open commodity approach from the proposal. with respect to all aspects of proposed contract to be known prior to the § 190.09. The Commission also raised Section 190.08(d)(2) sets forth the transfer,’’ 143 and, as discussed above, particular questions with respect to: approach for valuing listed securities, specifically sought comments on this Whether the proposed revisions to and incorporates the same weighted issue. § 190.09(a)(1) would appropriately The Commission received contrasting average concept discussed above with preserve customer property for the comments on this provision. ICE ‘‘d[id] respect to § 190.08(d)(1)(ii)(A). benefit of customers; whether proposed not believe that valuation is the right Section 190.08(d)(3) sets forth the § 190.09(a)(1)(ii)(G), concerning one, particularly because the market approach for valuing commodities held property that other regulations require may move significantly on the date of in inventory, directing the trustee to use to be placed into segregation, and transfer.’’ By contrast, CME ‘‘agree[d]’’ fair market value. If such fair market § 190.09(a)(1)(ii)(L), concerning with valuation as of the end the last value is not readily ascertainable from remaining shortfalls, are appropriately settlement cycle on the day preceding public sources of prices, the trustee is crafted; whether it is advisable to permit transfer, because it aligns with directed to use the approach in customers to post ‘‘substitute customer calculations of funded balances under § 190.08(d)(5), discussed below. property’’ rather than ‘‘cash’’ in proposed § 190.08(c), and noted that Section 190.08(d)(4) addresses the proposed § 190.09(d); and whether it is ‘‘any mark-to-market gains or losses on valuation of letters of credit. The trustee appropriate to clarify the term ‘‘like- the date of the transfer should be is directed to use the face amount (less kind securities’’ by reference to the reflected by the receiving FCM(s) in the amounts, if any, drawn and concept, derived from SIPA, of customer account statements as a result outstanding). However, if the trustee ‘‘securities of the same class and series of that day’s settlement cycle.’’ The makes a determination in good faith that of an issuer?’’ Commission is persuaded by the latter a draw is unlikely to be honored on There are three substantive changes in comment, and will adopt the provision either a temporary or permanent basis, new § 190.09, as compared to current as proposed, both for the reasons stated they are directed to use the approach in regulations: by the latter commenter, and because of paragraph (d)(5). Section 190.09(a)(1)(ii)(G) and (L) are concerns regarding practicability. Section 190.08(d)(5) provides the two categories of property that are Markets move on a continuous basis so trustee with pragmatic flexibility in defined to be included in customer long as they are open and, considering determining the value of customer property in order better to protect markets around the world, some property by allowing the trustee, in their customers from shortfalls in customer markets on which futures, foreign sole discretion, to enlist the use of property (i.e., cases where customer futures, or cleared swaps are traded are professional assistance to value all other property is insufficient to cover claims moving at all times other than over a customer property.144 This provision for customer property). weekend. further notes that, if such property is Section 190.09(a)(1)(ii)(G) is a new Section 190.08(d)(1)(ii)(A) allows the sold, its value for purposes of the category of property that constitutes trustee to use the weighted average of calculations required by this part is customer property. It includes any cash, liquidation prices for identical equal to the actual value realized on sale securities, or other property which commodity contracts that are liquidated of such property (the trustee, of course, constitutes current assets of the debtor, within a 24-hour period or business day, retains discretion to engage professional including the debtor’s trading or but not at the same price. assistance to allocate such value among operating accounts and commodities of Section 190.08(d)(1)(ii)(B) provides a heterogenous set of items sold as a the debtor held in inventory, in the instructions on how to value commodity unit). Finally, the provision notes that greater of (i) the amount of the debtor’s contracts that are liquidated as part of any such sale shall be made in targeted residual interest amount a bulk auction by a clearing organization compliance with all applicable statutes, pursuant to § 1.11 with respect to each or similarly outside of the open market. rules, and orders of any court or account class, or (ii) the debtor’s As proposed, this provision would governmental entity with jurisdiction obligations to cover debit balances or value a commodity contract that is thereover. undermargined amounts as provided in liquidated as part of a bulk auction at §§ 1.20, 1.22, 22.2 and, 30.7. Each of the the settlement price calculated by the 144 The trustee’s employment of professionals sets of regulations referred to in remains subject to the requirements of section 327 proposed § 190.09(a)(1)(ii)(G) requires 143 85 FR 36028. of the Bankruptcy Code. an FCM to put certain funds into

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segregation on behalf of customers. To The purpose of requiring customers statement is helpful, legally or the extent the FCM has failed to comply to, in essence, ‘‘buy back’’ specifically practically, whether it should be with those regulatory requirements prior identifiable property is to implement changed, or whether it should be to the filing of the bankruptcy, this the pro rata distribution principle set deleted). provision requires the bankruptcy forth in section 766(h) of the Section 190.10 will be adopted as trustee to fulfill that requirement, and Bankruptcy Code, and discussed in proposed with modifications. In allows the trustee to use the current § 190.00(d)(5). Permitting customers to particular, the ABA Subcommittee and assets of the debtor to do that. redeem specifically identifiable CME suggested that the provisions in CME stated that this new provision is property with either cash or cash proposed § 190.10 be codified in part 1, a ‘‘substantial improvement over the equivalents, rather than requiring cash, along with other regulations that pertain current rule,’’ and it was also supported may mitigate the difficulty (and costs) to an FCM’s business as usual. The ABA by ICI and Vanguard. such customers face in obtaining Subcommittee stated that, while they Section 190.09(a)(1)(ii)(L) is the redemption, but will in any event fully had originally suggested that these analog to current § 190.08(a)(1)(ii)(J) but implement the pro rata distribution provisions belong in § 190.10, ‘‘[u]pon with updated cross-references (and a principle. further reflection, the Committee new second sentence, discussed in the As a technical point, the ABA believes that such a rule more logically next paragraph). It states that customer Subcommittee recommended belongs in the Commission’s Part 1 property includes any cash, securities, (consistent with their recommendation Regulations, along with other rules that or other property in the debtor’s estate, in the definitions section, § 190.01, to apply to FCMs during business as usual. but only to the extent that the customer more precisely use the term ‘‘allowed Compliance and legal personnel could property under the other definitional net equity’’) that the reference in inadvertently overlook obligations that elements is insufficient to satisfy in full proposed § 190.09(d)(3) to the amount are not located in the Commission rule all claims of the FCM’s public distributable on a customer’s claim be set where they would expect to find customers.145 amended to add ‘‘[the] funded balance them.’’ A new second sentence of of’’ before the phrase ‘‘such customers The Commission agrees with the § 190.09(a)(1)(ii)(L) notes explicitly that allowed net equity claim.’’ The commenters that transparency would be customer property for purposes of these Commission agrees, and is making the fostered by putting the ‘‘business as regulations includes any ‘‘customer change. usual’’ requirements proposed for property,’’ as that term is defined in The remaining provisions of revised § 190.10 into part 1 of the Commission’s SIPA, that remains after satisfaction of § 190.09 include only technical changes regulations. Accordingly, as discussed the provisions in SIPA regarding to the current regulations. further below, most of the paragraphs of Accordingly, after consideration of the regulation that was proposed as allocation of (securities) customer the comments, and for the reasons § 190.10 are being renumbered and will property. SIPA provides that such stated above, § 190.09 will be adopted as be codified in specified places in part 1. remaining customer property would be proposed, with the modification to The provisions of proposed § 190.10 allocated to the general estate of the 146 § 190.09(d)(3) referred to above. will otherwise be adopted as proposed. debtor. Any securities customer The provision proposed as § 190.10(a) 8. Regulation § 190.10: Provisions property that remains after satisfaction notes that an FCM is required to Applicable to Futures Commission in full of securities claims provided for maintain current records relating to its Merchants During Business as Usual in that section of SIPA proceeding and customer accounts, pursuant to §§ 1.31, would accordingly become property of The Commission proposed § 190.10 to 1.35, 1.36, and 1.37, and in a manner the general estate should, to the extent contain new and relocated provisions that would permit them to be provided otherwise provided in proposed that set forth an FCM’s obligations to another FCM in connection with the § 190.09(a)(1)(ii)(L), and for the same during business as usual. The transfer of open customer contracts of reasons, become customer property in Commission requested comment with other customer property. This provision the FCM bankruptcy proceeding. respect to all aspects of proposed recognizes that current and accurate Section 190.09(d) governs the § 190.10, and specifically with respect records are imperative in arranging for distribution of customer property, and to (1) the impact of proposed § 190.10(b) the transfer of customer contracts and has its analog in current § 190.08(d). regarding the designation of hedging other property, both for the trustee of Section 190.09(d)(1)(i) and (ii) and (d)(2) accounts, (2) the impact of proposed the estate of the defaulter and for an require customers to deposit ‘‘substitute § 190.10(c) regarding the establishment FCM that is accepting the transfer. customer property,’’ to obtain the return of delivery accounts during business as Nonetheless, it does not add to an or transfer of specifically identifiable usual, (3) the changes in proposed FCM’s obligations under the specified property. ‘‘Substitute customer § 190.10(d) to the business as usual regulations, but rather is useful as a property’’ is defined in § 190.01 to mean requirements for acceptance of letters of reference for the trustee. Accordingly, (in relevant part) ‘‘cash or cash credit, and in particular (a) whether its this provision will not be moved to part equivalents.’’ ‘‘Cash equivalents,’’ in understanding is correct that most 1. turn, are defined as ‘‘assets, other than letters of credit currently in use by the No comments were received with United States dollar cash, that are industry follow the JAC forms, (b) the respect to the substance of proposed highly liquid such that they may be impact of additional requirements § 190.10(a). As the remaining converted into United States dollar cash concerning letters of credit (as well as paragraphs of proposed § 190.10 will be within one business day without any alternative methods of achieving the moved to part 1, this provision will be material discount in value.’’ goal of treating customers posting letters codified as § 190.10. of credit consistent with the treatment The provision proposed as § 190.10(b) 145 ICE notes that the issues with respect to this of other customers), and (c) whether the concerns the designation of hedging provision may be complicated, and that it may proposed one year transition period is accounts. It incorporates concepts warrant further consideration, but ultimately expresses no view on it. reasonable, and (4) the disclosure contained in current §§ 190.04(e) and 146 See generally SIPA section 8(c)(1), 15 U.S.C. statement for non-cash margin set out in 190.06(d) and the current Bankruptcy 78fff–2(c)(1). proposed § 190.10(e) (whether the appendix form 3 instructions. As it sets

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forth obligations for an FCM during it sets forth obligations for an FCM regulation would have on FCMs and business as usual, it will be moved to during business as usual, it will be their customers, since letters of credit part 1. As it does not fit under any moved to part 1. As it does not fit under are currently in use by the industry.149 existing part 1 regulation, it will be any existing part 1 regulation, it will be The Commission proposed that, upon moved under the miscellaneous heading moved under the miscellaneous the effective date of the regulation, what of part 1, and codified as § 1.41. heading, and codified as § 1.42. is now codified as § 1.43 would apply For purposes of § 1.41, a customer When a commodity contract is in the only to new letters of credit and will not need to provide, and an FCM delivery phase, or when a customer has customer agreements. In order to will not be required to judge, evidence taken delivery of commodities that are mitigate the impact of implementing of hedging intent for purposes of physically delivered, associated this regulation with respect to existing bankruptcy treatment. Rather, § 1.41 property may be held in a ‘‘delivery letters of credit and customer will permit the FCM to treat the account account’’ rather than in the segregated agreements, the Commission proposed a as a hedging account for such purposes accounts pursuant to, e.g., § 1.20 or transition period of one year from the based solely upon the written record of § 22.2. Section 1.42 recognizes that effective date until § 1.43 will apply to the customer’s representation. Hedging when an FCM facilitates delivery under existing letters of credit and customer treatment for these bankruptcy purposes a customer’s physical delivery contract, agreements. will not be determinative for any other and such delivery is effected outside of CME supported this one-year purpose. a futures account, foreign futures transition period. By contrast, SIFMA Section 1.41(a) will require an FCM to account, or cleared swaps account, it AMG/MFA urged the Commission to provide a customer an opportunity to must be effected through (and the shorten it in the interest of investor designate an account as a hedging associated property held in) a delivery protection. They asked how letters of account when the customer first opens account. If, however, the commodity credit would be treated if an FCM were the account, rather than when the that is subject to delivery is a security, to go into bankruptcy during the customer undertakes its first hedging the FCM may effect delivery through transition period? contract, as specified in current (and the property may be held in) a The provisions in this rulemaking § 190.06(d)(1). This provision will also securities account. The regulation regarding letters of credit are intended require that the FCM indicate clarifies that the property must be held to codify the Commission’s prominently in its accounting records in one of these types of accounts. ICE longstanding policy that ‘‘customers for each customer account whether the and CME generally support this using a letter of credit to meet original 148 account is designated as a hedging provision. margin obligations [sh]ould be treated account. The provision proposed as § 190.10(d) no differently than customers depositing Section 1.41(b) will set forth the addresses letters of credit that an FCM other forms of non-cash margin or accepts as collateral. As it sets forth requirements for an FCM to treat an customers with excess cash margin obligations for an FCM during business account as a hedging account: If, but deposits.’’ 150 This is the policy that has as usual, it will be moved to part 1. As only if, the FCM obtains the customer’s been advanced by the Commission, it does not fit under any existing part 1 written representation that the including in litigation,151 under the regulation, it will be moved under the customer’s trading in the account will current rules. Moreover, this policy is miscellaneous heading, and codified as constitute hedging as defined under any supported by the provision in revised relevant Commission regulation or rule § 1.43. Section 1.43 will prohibit an FCM § 190.04(d)(3)(ii) that, for a letter of of a DCO, DCM, SEF, or FBOT. CME credit posted as collateral, ‘‘the trustee supported this approach, and the clarity from accepting a letter of credit as collateral unless certain conditions (1) shall treat any portion that is not drawn it adds. upon (less the value of any substitute In order to avoid the significant are met at the time of acceptance and (2) remain true through its date of customer property delivered by the burden that would be associated with customer) as having been distributed to requiring FCMs to re-obtain hedging expiration. First, pursuant to § 1.43(a), the trustee the customer for purposes of calculating instructions for existing accounts, entitlements to distribution or transfer.’’ § 1.41(c) will provide that the must be able to draw upon the letter of credit, in full or in part, in the event of That provision is not subject to the one- requirements of § 1.41(a) and (b) do not year transition period. apply to commodity contract accounts a bankruptcy proceeding, the entry of a protective decree under SIPA, or the While the Commission will decline to opened prior to the effective date of shorten the one-year transition period these revisions. Rather, the provision appointment of FDIC as receiver pursuant to Title II of the Dodd-Frank for existing letters of credit, trustees will will recognize expressly that an FCM be expected to treat such letters of credit may continue to designate existing Act. Second, pursuant to § 1.43(b), if the letter of credit is permitted to be and is in accordance with the Commission’s accounts as hedging accounts based on policy. written hedging instructions obtained passed through to a clearing organization, the bankruptcy trustee for The provision proposed as § 190.10(e) under former § 190.06(d). concerns the disclosure statement for Finally, § 1.41(d) will permit an FCM such clearing organization or (if non-cash margin. No comments were to designate an existing futures, foreign applicable) FDIC must be able to draw received specific to this provision. futures or cleared swaps account of a upon the letter of credit, in full or in particular customer as a hedging part, in the event of a bankruptcy 149 The Joint Audit Committee (‘‘JAC’’) forms for account, provided that the FCM obtains proceeding, or where the FDIC is appointed as receiver pursuant to Title an Irrevocable Standby Letter of Credit (both Pass- the representation required under Through and Non Pass-Through) appear to be § 1.41(b). II. consistent with the requirements of § 1.43. The provision proposed as § 190.10(c) The Commission has considered the 150 See, e.g., 48 FR 8716, 8718 (March 1, 1983) addresses the establishment of delivery impact that implementation of this (Adopting release for part 190); Proposal, 86 FR at 36019 & n. 103. accounts during business as usual.147 As 148 CME again recommended that the Commission 151 See, e.g. Brief of the Commodity Futures consider adopting customer protection Trading Commission In Support Of The Trustee’s 147 See § 190.06 regarding the making and taking requirements with respect to delivery accounts via Motion To Confirm in ConocoPhillips v. Giddens, of deliveries during bankruptcy. a separate rulemaking. Case No. 1:12–cv–06014–KBF, Document 33.

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As it sets forth obligations for an FCM ultimately did) forego providing Frank.156 If any clearing organization during business as usual, it will be generally applicable rules for the were to approach insolvency, it is moved to part 1. This provision does fit bankruptcy of a clearing organization.153 possible, though not certain, that such under existing § 1.55 (Public disclosures The Commission explained that it had an entity would be resolved pursuant to by futures commission merchants), and proposed no other rules with respect to Title II of Dodd-Frank.157 will be added at the end, codified as the operation of clearing organization Administration of a resolution under § 1.55(p). debtors—other than proposing that all Title II of Dodd-Frank depends, in part, Accordingly, after consideration of open commodity contracts, even those on clarity as to entitlements under the comments, and for the reasons in a deliverable position, be liquidated chapter 7 of the Bankruptcy Code. stated above, § 190.10 will be adopted as in the event of a clearing organization proposed, with modifications: Proposed Specifically, section 210(a)(7)(B) of bankruptcy—because the Commission Dodd-Frank 158 provides with respect to § 190.10(a) will be codified as § 190.10, viewed it as highly unlikely that an proposed § 190.10(b) will be codified as claims against the covered financial exchange could maintain a properly agency in resolution, that ‘‘a creditor § 1.41, proposed § 190.10(c) will be functioning futures market in the event codified as § 1.42, proposed § 190.10(d) shall, in no event, receive less than the of the collapse of its clearing amount that the creditor is entitled to will be codified as § 1.43, and proposed organization. The Commission noted § 190.10(e) will be codified as § 1.55(p). under paragraphs (2) and (3) of that, under section 764(b)(2) of the subsection (d), as applicable.’’ Tracing C. Subpart C—Clearing Organization as Bankruptcy Code, it had the power to to the cross-referenced subsection, Debtor permit a distribution of the proceeds of section 210(d)(2) 159 provides that the a clearing organization liquidation free The Commission is adopting a new maximum liability of the FDIC to a from the avoidance powers of the claimant is the amount that the claimant subpart C of part 190 (proposed trustee. The Commission further §§ 190.11–190.19), with certain would have received if the FDIC had not explained that it was not proposing a been appointed receiver, and (instead), modifications discussed below, to general rule, because the bankruptcy of address the currently unprecedented the covered financial company had been a clearing organization would be liquidated under chapter 7 of the scenario of a clearing organization as unique. Instead, the Commission was 152 Bankruptcy Code.160 Thus, it is debtor. inclined to take a case-by-case approach The customers of a clearing important to have a clear with respect to clearing organizations, organization are its members, ‘‘counterfactual’’ that establishes what given the potential for market considered separately in two roles: (1) creditors would be entitled to in the disruption and disruption of the Each member may have a proprietary case of the liquidation of a clearing nation’s economy as a whole, in the case (also known as ‘‘house’’) account at the of a clearing organization bankruptcy, as clearing organization, on behalf of itself 156 See Dodd-Frank section 804 (designation of well as the desirability of the and its non-public customers (i.e., systemic importance), section 803(8) (definition of Commission’s active participation in affiliates). The property that the clearing ‘‘supervisory agency’’), 12 U.S.C. 5463, 5462(8). developing a means of meeting such an These are CME and ICE Clear Credit. A third organization holds in respect of these emergency.154 clearing organization (Options Clearing accounts is referred to as ‘‘member Much has changed in the intervening Corporation) has also been so designated, but the property.’’ (2) Each member may have SEC is the supervisory agency in that case. 39 years. Markets move much more 157 one or more accounts (e.g., futures, Resolution under Title II would require a quickly, and thus the importance of recommendation concerning factors specified in cleared swaps) for that members’ public quick action in respect to the section 203(a)(2) of Dodd-Frank, 12 U.S.C. customers. The property that the bankruptcy of a clearing organization 5383(a)(2), by a 2⁄3 majority of the members then serving of each of the Board of Governors of the clearing organization holds in respect of has increased. The Commodity Futures these accounts is referred to as Federal Reserve System and of the FDIC, followed Modernization Act established DCOs as by a determination concerning a related set of ‘‘customer property other than member a separate registration category.155 The factors specified in section 203(b), 12 U.S.C. property.’’ Many clearing members will bankruptcy of a clearing organization 5383(b), by the Secretary of the Treasury in consultation with the President. Thus, the choice of have both such types of accounts, would remain unique—it remains the although some may have only one or the resolution versus bankruptcy for a DCO that is, in case that no clearing organization the terminology of Dodd-Frank, ‘‘in default or in other. registered with the Commission has ever danger of default,’’ see Dodd-Frank section entered bankruptcy—and thus the need 203(c)(4), 12 U.S.C. 5383(c)(4), cannot be 1. Regulation § 190.11: Scope and considered certain. Purpose of Subpart C for significant flexibility remains, but It is, however, clear that Title II applies to The Commission is adopting § 190.11 the balance has shifted towards clearing organizations. See, e.g., Dodd-Frank section establishing ex ante the approach that 210(m), 12 U.S.C. 5390(m) (applying ‘‘the as proposed, but designated as new provisions of subchapter IV of chapter 7 of the paragraph (a), and adding a new would be taken. Two clearing organizations for which bankruptcy code’’ to ‘‘member property’’ of paragraph (b), as set forth below. The ‘‘commodity brokers’’). Pursuant to section 761(16) the Commission has been designated the Commission is adopting § 190.11 to of the Bankruptcy Code, ‘‘member property’’ agency with primary jurisdiction have applies only to a debtor that is a ‘‘clearing establish that subpart C of part 190 will been designated as systemically organization.’’ 11 U.S.C. 761(16). apply to proceedings under subchapter 158 important to the United States financial 12 U.S.C. 5390(a)(7)(B). IV to chapter 7 of the Bankruptcy Code 159 system pursuant to Title VIII of Dodd- 12 U.S.C. 5390(d)(2). where the debtor is a clearing 160 For the sake of completeness, it should be noted that section 210(d)(2), 12 U.S.C. 5390(d)(2), organization. 153 When originally proposing part 190 in At the time, the definition of clearing provides, as an additional comparator, ‘‘any similar organization in section 761(2) of the Bankruptcy provision of State insolvency law applicable to the 1981, the Commission proposed to (and Code was an ‘‘organization that clears commodity covered financial company.’’ Given Federal contracts on, or subject to the rules of, a contract regulation of DCOs, it would appear that this phrase 152 After considering comments that were market or board of trade.’’ See Public Law 95–598 is inapplicable. Similarly, section 210(d)(3), 12 received on the original Proposal, the Commission (1978), 92 Stat 2549. U.S.C. 5390(d)(3), which refers to covered financial subsequently issued a Supplemental Proposal that 154 46 FR 57535, 57545 (Nov. 24, 1981). companies that are brokers or dealers resolved by withdrew § 190.14(b)(2) and (3), and proposed other 155 Commodity Futures Modernization Act of SIPC, is also inapplicable here, given the revisions to § 190.14. Bankruptcy Regulations, 85 2000 Public Law 106–554 section 1(a)(5); Appendix inconsistency in being both a DCO and a broker- FR 60110 (Sept. 24, 2020). E, section 112(f). dealer.

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organization under chapter 7 to the separate customer account class customers; (2) § 190.17, setting forth the (subchapter IV) of the Bankruptcy Code. structure provided for under U.S. law calculation of net equity; and (3) Although the Commission believes (futures, cleared swaps and foreign § 190.18, setting forth the treatment of that the potential—albeit futures), to the extent carried through property. In such a scenario, §§ 190.13, unprecedented—scenario of a clearing FCM clearing members.’’ 190.17, and 190.18 would only apply organization as debtor would require After considering the comments, the with respect to: (1) Claims of FCM significant flexibility, the Commission Commission is adopting § 190.11 with clearing members on behalf of their also believes it necessary and modifications. With respect to the public customers; and (2) property that appropriate to establish an ex ante set protection of customer property in is or should have been segregated for the of regulations for such a scenario. connection with foreign DCOs, the benefit of FCM clearing members’ The Commission requested comment Commission has traditionally focused public customers, or that has been regarding the proposed scope of subpart its efforts on the protection of the public recovered for the benefit of FCM C, as set forth in proposed § 190.11. The customers of FCM members of such clearing members’ public customers. Commission also specifically asked foreign DCOs. While protecting public Accordingly, after consideration of commenters whether they supported or customers of FCM members of foreign the comments and for the reasons stated opposed the establishment of an DCOs would not be well served by above, the Commission is: (1) Adopting explicit, bespoke set of regulations for disapplying part 190 in the case of the language of § 190.11 as proposed, the bankruptcy of a clearing foreign DCOs, as suggested in ICE’s first but designated as new paragraph (a); organization. approach, as well as in the comment by and (2) modifying proposed § 190.11 by The Commission received two SIFMA AMG/MFA, balancing the goal adding the following as new paragraph comments that raised concerns about of protecting public customers of FCM (b): If the debtor clearing organization is how the proposed subpart C regulations members with the goal of mitigating organized outside the United States, and would apply in the case of a debtor conflict with foreign proceedings would is subject to a foreign proceeding, as clearing organization that is organized appear to be supported by following defined in 11 U.S.C. 101(23), in the and/or domiciled in a foreign country. ICE’s second approach, and limiting the jurisdiction in which it is organized, SIFMA AMG/MFA commented that applicability of part 190, in the case of then only the following provisions of ‘‘Part 190 should include a clear a foreign DCO subject to a proceeding in part 190 shall apply: (1) Subpart A; (2) statement of public policy . . . that if an its home jurisdiction, to focus on the § 190.12; (3) § 190.13, but only with insolvency proceeding is commenced in contracts and property of public respect to futures contracts and cleared respect of a DCO located outside the customers of FCM members. swaps contracts cleared by FCM United States, such home country In order to balance the goal of clearing members on behalf of their proceeding should take precedence over protecting public customers of FCM public customers and the property any case under the [U.S.] Bankruptcy members with the goal of mitigating margining or securing such contracts; Code.’’ conflict with foreign proceedings, the and (4) §§ 190.17 and 190.18, but only ICE commented that such a clearing Commission believes it to be with respect to claims of FCM clearing organization, if insolvent, ‘‘is likely to appropriate that, in a situation where a members on behalf of their public be subject to an insolvency proceeding debtor clearing organization is customers, as well as property that is or in its home jurisdiction.’’ ICE also organized outside the United States and should have been segregated for the commented that many such DCOs ‘‘have is subject to a foreign bankruptcy benefit of FCM clearing members’ significant assets (including for this proceeding, part 190 should apply as public customers, or that has been purpose, the assets of clearing members follows. First, the Commission believes recovered for the benefit of FCM and their customers.’’ In particular, ICE it to be appropriate that subpart A clearing members’ public customers.’’ stated that ‘‘a foreign DCO may have, in should apply to such proceedings, given addition to the customer account classes that those provisions set forth core 2. Regulation § 190.12: Required Reports contemplated by the CEA and CFTC concepts, definitions and general and Records regulations (and the Part 190 provisions. Second, the Commission The Commission is adopting § 190.12 regulations), one or more classes of believes it to be appropriate that to establish the recordkeeping and customer accounts that are required to § 190.12 should apply to such reporting obligations of a debtor clearing be segregated or separately accounted proceedings, given that the regulation organization and/or trustee in a for under applicable foreign law, sets forth requirements for records and bankruptcy proceeding under subpart C. generally for the protection of foreign reporting, which are critical in such The operations of a clearing clearing members and their customers.’’ proceedings. And third, the Commission organization are extremely time- ICE further commented that, ‘‘[t]o the believes it to be appropriate that three sensitive. For example, § 39.14 requires extent the Part 190 rules mandate a regulations should be applicable in a that a clearing organization complete distribution scheme for property of the limited fashion, to focus on the settlement with each clearing member at [DCO in bankruptcy] that would be contracts and property of public least once every business day. It is thus inconsistent with foreign law applicable customers of FCM members: 161 (1) critical that the Commission receive to the DCO, and that could disadvantage § 190.13, setting forth the prohibition on notice of a DCO bankruptcy in an foreign members or their customers, avoidance of transfers, but only with extraordinarily rapid manner. Similarly, significant conflicts may arise . . . .’’ respect to futures and cleared swaps the trustee that is appointed (as well as ICE suggested two alternative contracts cleared by FCM clearing the Commission) must receive critical approaches for the Commission to members on behalf of their public documents rapidly, and proper notice consider: (1) The ‘‘Commission could should be provided to the DCO’s provide that the new Part 190 161 As noted above, the Commission has members. regulations would not apply to a foreign traditionally focused its efforts on the protection of Regulation § 190.12 sets forth the DCO;’’ or (2) ‘‘[a]lternatively, the the public customers of FCM members of such timing and content of notices that must foreign DCOs. In a DCO bankruptcy, the Commission could provide that the new Commission believes that the application of these be provided to the Commission and the Part 190 regulations, including the three regulations would be critical to fulfilling the DCO’s members, as well as the timing distributional regime, would apply only agency’s mission to protect customers. and content of reports and records that

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must be provided to the Commission clearing organization’s bankruptcy), and the event of an insolvency proceeding and trustee. § 39.19(c)(5) (reporting specially involving the debtor.165 Section 190.12(a)(1) is analogous to requested by the Commission or, by The Commission requested comment § 190.03(a), as amended herein, in that delegated authority, staff). In order to with respect to all aspects of proposed it would provide instructions regarding provide the trustee with an initial § 190.12. The Commission raised how to give notice to the Commission overview of the business and status of specific questions as to whether the and to a clearing organization’s the clearing organization, with respect reports and records identified in members, where such notice would be to quarterly, annual, or event-specific proposed § 190.12 to be provided to the required under subpart C of part 190.162 reports, the clearing organization would Commission are useful and appropriate, Section 190.12(a)(2) would require the be required to provide any such reports and whether additional reports and clearing organization to notify the filed during the preceding 12 months. records should be included. The Commission either in advance of, or at These reports would need to be Commission also asked if the proposed the time of, filing a petition in provided to the trustee as soon as time deadlines are appropriate. bankruptcy (or within three hours of practicable, but in any event no later The Commission received two receiving notice of a filing of an than three hours following the later of comments on proposed § 190.12. involuntary petition against it).163 the commencement of the proceeding or CME expressed support for proposed Notice would need to include the filing the appointment of the trustee. It is the § 190.12, and agreed with the date and the court in which the Commission’s expectation that in the Commission that ‘‘the reports and proceeding has been or will be filed. event of an impending bankruptcy records identified in [the proposed While the clearing organization would event, staff at the DCO would, as soon regulation] would be useful for the also need to provide notice of the docket as practicable, be preparing these trustee and the Commission.’’ CME also number, if the docket number is not materials for transmission to the trustee. agreed with the Commission that certain immediately assigned, that information Similarly, § 190.12(b)(2) requires the items, such as the DCO’s default rules would be provided separately as soon as debtor clearing organization, in the and recovery and wind-down plans, available. same time-frame, to provide the trustee should be furnished as soon as possible. OCC ‘‘generally support[ed] a It is also important to permit the and the Commission with copies of the requirement for a DCO to provide a trustee to begin to understand the default management plan and default trustee and the Commission with business of the clearing organization as rules and procedures maintained by the soon as practicable, and within hours. information they need for efficient debtor pursuant to § 39.16 and, as resolution of the DCO,’’ recognizing that Accordingly, § 190.12(b)(1) requires the applicable, § 39.35. While some of this clearing organization to provide to the ‘‘time would be of the essence in such information may have previously been a proceeding.’’ OCC also noted that, trustee copies of each of the most recent filed with the Commission pursuant to reports filed with the Commission because the ‘‘information is periodically § 39.19, it is important that the under § 39.19(c), which includes reported to, or filed with, the Commission have readily available what § 39.19(c)(1) (daily reports, including Commission,’’ OCC did not ‘‘foresee any the clearing organization believes are initial margin required and on deposit challenge in identifying and providing the most up-to-date versions of these by clearing member, daily variation and this information without delay.’’ documents. Moreover, given that these end-of-day positions (by member, by However, OCC requested that proposed documents must be provided to the house and customer origin), and other § 190.12(b) be amended to require a trustee, providing copies to the daily cash flows), § 39.19(c)(2) DCO to provide the information Commission should impose minimal (quarterly reports, including of financial delineated therein ‘‘as soon as additional burden (particularly if the resources), § 39.19(c)(3) (annual practicable.’’ OCC ‘‘believe[d] that a reporting, including audited financial documents are provided in electronic specific deadline of three hours is statements and a report of the chief form). overly prescriptive.’’ compliance officer), § 39.14(c)(4) (event- Regulation § 39.20(a) requires a DCO After considering the comments, the specific reporting, which would include to maintain records of all activities Commission is adopting § 190.12 as the most up-to-date version of any related to its business as such, and sets proposed. As the commenters observed, recovery and wind-down plans the forth a non-exclusive list of the records the information specified in § 190.12 is debtor maintained pursuant to that are included in that term. To enable § 39.39(b),164 and which may well the trustee and the Commission further 165 The trustee of a corporation in bankruptcy include events that contributed to the to understand the business of the controls the corporation’s attorney-client privilege clearing organization, § 190.12(c) for pre-bankruptcy communications. Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 162 While § 190.03(a)(2), as amended herein, requires the debtor clearing organization 343 (1985). Production to the Commission pursuant applies to notice to an FCM’s customers, and to make copies of such records available to the proposed regulation would not waive that § 190.12(a)(1)(ii) applies to notice to a clearing to the trustee and to the Commission no privilege (although voluntary production would). organization’s members, the means of giving notice later than the business day after the See, e.g., U.S. v. de la Jara, 973 F.2d 746, 749 (9th are identical. For a discussion of how these notice Cir. 1992) (‘‘a party does not waive the attorney- provisions differ from the prior iteration of part 190, commencement of the proceeding. In client privilege for documents which he is please refer to the discussion of § 190.03(a) above. order to inform the trustee and the compelled to produce’’) (emphasis in original); 163 Commodity broker bankruptcies are rare, and Commission better concerning the Office of Comptroller of the Currency Interpretative outside the experience of most chapter 7 trustees, enforceability in bankruptcy of the Letter, 1991 WL 338409 (with respect to ‘‘internal who are chosen from a panel of private trustees Bank documents’’ that are ‘‘subject to the attorney- eligible to serve as such for all chapter 7 cases. See clearing organization’s rules and client privilege’’ and are ‘‘requested by OCC generally 11 U.S.C. 701(a)(1), 28 U.S.C. 586(a)(1). procedures, the clearing organization is examiners for their use during examinations of the Historically, Commission staff, on being notified of similarly required to make available any Bank,’’ OCC ‘‘has the power to request and receive an impending commodity broker bankruptcy, have materials from national banks in carrying out its worked with the office of the relevant regional opinions of counsel or other legal supervisory duties. It follows that national banks United States Trustee, see generally 28 U.S.C. 581 memoranda provided to the debtor, by must comply with such requests. That being the et seq., to identify, and have then briefed, the inside or outside counsel, in the five case, it is our position that when national banks chapter 7 trustee that would then be appointed. years preceding the commencement of furnish documents to us at our request they are not This would be even more important in the context the proceeding, relating to the acting voluntarily and do not waive any attorney- of a clearing organization bankruptcy. client privilege that may attach to such 164 See § 39.19(c)(4)(xxiv). enforceability of those arrangements in documents.’’).

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important for the trustee and the contracts cannot be avoided as long as an alternative path. Subsequent to the Commission, and time would be of the it was approved by the Commission, issuance of the Proposal, the essence in a DCO bankruptcy. Moreover, either before or after such transfer. Commission received several comments the prescribed task in § 190.12 is to Similarly, whereas § 190.07(e)(2)(i) on proposed § 190.14(b), and based on gather and transmit documents that provides (for all commodity brokers, its consideration of those comments, the already exist, rather than to generate including clearing organizations) that a Commission determined it to be new information. The documents to be post-relief transfer of a customer appropriate to issue the Supplemental sent to the trustee are documents that account cannot be avoided as long as it Proposal. The Supplemental Proposal were recently sent to the Commission, is not disapproved by the Commission, modified proposed § 190.14(b) in and the documents to be sent to the § 190.13(b) instead provides that a post- several respects, including the trustee and to the Commission are relief transfer of open commodity withdrawal of proposed § 190.14(b)(2) documents that one would expect, as contracts and the property margining or and (3) and the new proposal of an the commenter noted, to be readily securing such contracts made to another alternative approach.166 Further accessible. In this context, the clearing organization cannot be avoided discussion of the Supplemental Commission believes that a deadline of as long as it was approved by the Proposal, including the Commission’s ‘‘as soon as practicable and in any event Commission, either before or after such consideration of comments received in no later than three hours following the transfer. response to the Supplemental Proposal, commencement of the proceeding’’ (or, The Commission requested comment is set forth in section II.H below. where appropriate, the appointment of with respect to all aspects of proposed Section 190.14(c)(1) requires the the trustee) is reasonable and will set § 190.13, and in particular, the trustee to liquidate, no later than seven clear expectations for relevant parties Commission asked whether commenters calendar days after the order for relief, that will facilitate DCOs’ contingency agreed with the proposed approach of all open commodity contracts that had planning. requiring explicit Commission approval not earlier been terminated, liquidated Accordingly, after consideration of of transfers by debtor DCOs. or transferred. However, in the Proposal, the comments, and for the reasons The Commission received one paragraph (c)(1) also provided that such stated above, the Commission is comment on proposed § 190.13. CME liquidation would not be required if the adopting § 190.12 as proposed. expressed support for proposed Commission (whether at the request of the trustee or sua sponte) determined 3. Regulation § 190.13: Prohibition on § 190.13, particularly the allowance for that such liquidation would be Avoidance of Transfers Commission approval of transfers after such transfers have occurred. CME inconsistent with the avoidance of The Commission is adopting § 190.13 noted that porting customer positions to systemic risk 167 or, in the expert as proposed, to implement section a DCO would be the preferred course of judgment of the Commission, would not 764(b) of the U.S. Bankruptcy Code, action in a bankruptcy, and a DCO may be in the best interests of the debtor protecting certain transfers from need to act quickly. clearing organization’s estate.168 In such avoidance (sometimes referred to as Accordingly, after consideration of a situation, the trustee would be ‘‘claw-back’’) with respect to a debtor the comments and for the reasons stated directed to carry out such liquidation in clearing organization. Regulation above, the Commission is adopting accordance with the rules and § 190.13 is analogous to new § 190.07(e) § 190.13 as proposed. procedures of the debtor clearing (and current § 190.06(g)), with certain changes. Specifically, while § 190.07(e) 4. Regulation § 190.14: Operation of the 166 In withdrawing proposed § 190.14(b)(2) and allows FCM transfers unless they are Estate of the Debtor Subsequent to the (3), the Commission determined, after considering explicitly disapproved by the Filing Date the comments, that those provisions would not be a practicable and effective way to foster the transfer Commission, § 190.13 requires explicit The Commission is adopting § 190.14 of clearing operations—to the extent that such an Commission approval for DCO transfers. as proposed, with certain modifications opportunity presents itself—at an acceptable cost. The difference in approach is rooted in discussed below. The Commission also endeavored to propose (in the the inherent difference between FCM Section 190.14(a) provides discretion Supplemental Proposal) a more cost-effective alternative to foster the resolution of a DCO—in transfers and DCO transfers: Whereas an to the trustee to design the proof of particular, a systemically important DCO—under FCM is capable of transferring only a claim form and to specify the Title II of the Dodd-Frank Act. Specifically, as set portion of its customer positions, a DCO information that is required. The forth in the Supplemental Proposal, the would be expected to transfer all of its Commission proposed ‘‘a limited revision to the Commission believes that broad Proposal that would (1) stay the termination of customer positions (or at least all discretion is appropriate in this context, SIDCO contracts for a brief time after bankruptcy in positions in a given product set) given the bespoke nature of a clearing order to foster the success of a Title II Resolution, simultaneously in order to maintain a organization bankruptcy. if the FDIC is appointed receiver in such a Resolution within that time, but (2) do so in a balanced book. Given the importance of Section 190.14(b) addresses the manner that does not undermine the QMNA status transferring all open commodity operation of a debtor clearing of SIDCO rules.’’ contracts—and the property margining organization in bankruptcy and The Commission sought comment on the such contracts—in the event of a DCO provides that, after the order for relief, Supplemental Proposal, and in particular, whether bankruptcy, the Commission believes the DCO shall cease making calls for the new approach could reasonably be expected to achieve the Commission’s stated goals, would be that any such transfer should require either variation or initial margin. feasible, would be the best design for such a explicit Commission approval, either As originally proposed, § 190.14(b) solution, and appropriately reflected consideration before or after such transfer. included additional provisions that of benefits and costs. Thus, whereas § 190.07(e)(1) provides were intended to provide a brief 167 See section 3(b) of the CEA, 7 U.S.C. 5(b) (‘‘It is the purpose of [the CEA] . . . to ensure . . . the that a pre-relief transfer by a clearing opportunity, after the order for relief, to avoidance of systemic risk . . . .’’). organization cannot be avoided as long enable paths alternative to liquidation— 168 See section 20(a)(3) of the CEA, 7 U.S.C. as it is not disapproved by the that is, resolution under Title II of the 24(a)(3) (‘‘Notwithstanding title 11 ..., the Commission, § 190.13(a) instead Dodd-Frank Act, or transfer of clearing Commission may provide, with respect to a provides that a pre-relief transfer of operations to another DCO—in cases commodity broker that is a debtor . . . [,] the method by which the business of such commodity open commodity contracts and the where a short delay (i.e., less than or broker is to be conducted or liquidated after the property margining or securing such equal to six days) might facilitate such date of the filing of the petition . . . .’’).

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

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proposed § 190.14 would create an issue not be adopted.’’ FIA raised concerns that, in the context of a debtor DCO, with respect to its own close-out netting that those provisions may inadvertently includes members] to file a proof of rules or netting opinions, because its create ‘‘an unacceptable level of legal claim containing such information as is own rules ‘‘would compel termination uncertainty related to the enforcement deemed appropriate by the trustee.’’ To of open contracts upon a CME of closeout netting provisions’’ set out the extent that the DCO is conducting bankruptcy event and, thus the in DCO rulebooks, which all but four non-CFTC-regulated activity that is conditions of Regulation 190.14(b) DCOs maintain. FIA asserted that, if outside the scope of the part 190 would not be satisfied and the trustee proposed § 190.14(b)(2)(ii)(A) ‘‘could be regulations, the proof of claim form could not continue CME’s DCO read to provide the trustee some level of should include an opportunity to claim operations.’’ Nonetheless, CME discretion to determine whether or for debts of the DCO related to activity speculated that other DCOs ‘‘could when DCO rules may ‘compel’ the that is not regulated by the CFTC. These potentially have rules that permit a termination of contracts, such would be payable from the general clearing member to terminate open discretion, in turn, may call into estate (outside of customer property) or, positions at their discretion without question whether the DCO’s rules if secured, from the property securing compelling termination.’’ constitute a ‘qualifying master netting the debts. Thus, such activity will be ISDA supported the provision in agreement’ as described in the rules of properly accounted for in the DCO proposed § 190.14(b) that would the several bank regulatory authorities.’’ bankruptcy, and members will not be ‘‘prevent the trustee from continuing FIA also commented that the disadvantaged. For those reasons, the operation of the DCO subsequent to the ‘‘continued operation of a DCO after an Commission does not believe that order for relief if the DCO’s rules order for relief would be ill-advised’’ § 190.14(a) should be modified in the contain closeout netting provisions.’’ and impracticable. FIA stated that a manner recommended by ICE. However, ISDA also recommended that trustee with no familiarity or The Commission is adopting the Commission modify proposed understanding of central clearing would § 190.14(b)(1) as proposed, with two § 190.14(c)(1) to delete the second be highly unlikely to be able to manage modifications that reflect the sentence and amend the first sentence to effectively the operation of a bankrupt Commission’s previous withdrawal of affirmatively provide that: DCO. In the case of SIDCOs, FIA noted paragraphs (b)(2) and (3) in the ‘‘notwithstanding anything else to the that ‘‘the prospect of a bankruptcy Supplemental Proposal: (1) Proposed contrary in Subpart C, the trustee shall trustee operating the DCO for even a paragraph (b)(1) is re-designated as liquidate all open contracts in brief interim period prior to paragraph (b); and (2) new paragraph (b) accordance with the close-out needing commencement of Title II [resolution] is modified to remove the phrase: provisions in the DCO’s rules (or proceedings could result in a loss of ‘‘except as otherwise explicitly provided bylaws) and, in any event, no later than market confidence and a destabilizing in this paragraph (b).’’ 172 seven calendar days after the entry of rush to exit by clearing members and Several commenters expressed the order for relief.’’ ISDA commented their clients, [thereby] potentially concern that proposed § 190.14(b) that it is ‘‘critical’’ that ‘‘all aspects of frustrat[ing] the successful resolution of inadvertently creates legal uncertainty [the] Part 190 regulations . . . support, the DCO.’’ In the case of other DCOs, with respect to the enforceability of a and in no event be inconsistent with, FIA commented that ‘‘the post-filing DCO’s close-out netting rules and . . . exposure netting.’’ ISDA noted that transfer of . . . clearing operations to requested that the Commission address ‘‘[e]nforceable close-out netting rights another DCO would be difficult at best,’’ this concern in varying ways.173 The provide the legal basis for netting of and ‘‘clearing members and their clients Commission considered those exposures between derivative should not be expected to take the comments in advance of issuing the counterparties, which reduces costs, execution risk of being forced to Supplemental Proposal, and determined increases market liquidity and reduces continue clearing through a bankrupt that § 190.14(b)(2) and (3) would not be credit and systemic risks.’’ ISDA stated DCO when successful completion of a a practicable and effective way to foster that a ‘‘firm’s right to terminate transfer to a new DCO in bankruptcy is the transfer of clearing operations—to outstanding transactions with a not certain.’’ FIA also stated its belief the extent that such an opportunity counterparty following an event of that ‘‘non-defaulting clearing members presents itself—at an acceptable cost. default and calculate the net amount or their clients would be [unwilling] to Consequently, the Commission due to one party by another is the continue to pay margin to the estate of withdrew § 190.14(b)(2) and (3) in the primary means of mitigating credit risks a bankrupt DCO.’’ associated with financial contracts.’’ The ABA Subcommittee requested Supplemental Proposal and instead ISDA further argued that, [w]ithout that the Commission revise proposed proposed an alternative approach. The enforceable close-out netting rights, § 190.14(b) ‘‘to clarify that the DCO’s Supplemental Proposal, including the firms would need to manage their credit close-out netting rules remain in effect Commission’s consideration of risk on a gross basis, dramatically and are enforceable as written, comments thereto, is discussed below in reducing liquidity and credit capacity.’’ notwithstanding any decision under section II.H of this adopting release. OCC commented that ‘‘the [proposed § ] 190.14(b) by the Commenters’ concerns regarding the Commission should continue to consult Commission to allow the trustee to legal uncertainty of close-out netting with DCOs and market participants who continue making calls for variation rules in the context of § 190.14(b) also rely on closeout netting opinions to settlement and margin.’’ The ABA apply to § 190.14(c), as proposed, ensure that the proposed rules[, Subcommittee raised a concern that specifically the language that states that including proposed § 190.14(b)(2),] do proposed § 190.14(b) ‘‘may create the trustee shall liquidate all open not raise uncertainty related to the unintended ambiguity’’ regarding the positions no later than seven calendar enforceability of DCOs’ closeout netting enforceability of such rules. days after the order for relief ‘‘unless the rules or have other unintended After considering the comments, the 172 consequences.’’ Commission is adopting § 190.14(a) as See 85 FR at 60112 n.12 (‘‘The Commission will make appropriate edits to the language in FIA commented that proposed proposed. The Commission notes that proposed § 190.14(b)(1) as part of the process of § 190.14(b)(2) and proposed § 190.14(c) § 190.14(a) provides that the trustee finalizing the [p]art 190 rule proposal.’’). are ‘‘fundamentally flawed and should shall ‘‘instruct each customer [a term 173 See comment letters from ICE, CME.

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Commission determines that liquidation procedures maintained pursuant to any member default), with a roadmap to would be inconsistent with the § 39.16 and, as applicable, § 39.35, and manage such action. The Commission avoidance of systemic risk or would not any recovery and wind-down plans further intends that the roadmap be be in the best interests of the debtor’s maintained by the debtor and filed with based on the rules, procedures, and estate’’ (the ‘‘Unless Clause’’). Some the Commission, pursuant to §§ 39.39 plans that the DCO has developed in commenters—including FIA and and 39.19, respectively. Section 39.16 advance, and that are subject to the ISDA—explicitly raised this issue in the requires each DCO to, among other requirements of the Commission’s context of § 190.14(c), to the extent that things, ‘‘adopt rules and procedures regulations. the proposed language would afford the designed to allow for the efficient, fair, The Commission requested comment trustee with some level of discretion to and safe management of events during with respect to all aspects of proposed determine whether or when a DCO rule which clearing members become § 190.15. The Commission also raised may ‘‘compel’’ the termination of insolvent or default on the obligations of specific questions as to whether it is contracts. Although the Commission such clearing members to the’’ DCO. In appropriate to steer the trustee towards believes that commenters’ concerns adopting § 39.35, the Commission implementation of the debtor DCO’s were largely addressed in the explained that it ‘‘was designed to default rules and procedures and Supplemental Proposal through the protect SIDCOs, [s]ubpart C DCOs, their recovery and wind-down plans, and withdrawal of § 190.14(b)(2) and (3), the clearing members, customers of clearing whether the proposed language Commission agrees that the Unless members, and the financial system more concerning discretion, reasonability, Clause raises similar concerns, in that it broadly by requiring SIDCOs and and practicability is appropriate and suggests that the Commission may [s]ubpart C DCOs to have plans and sufficient. decide that a DCO’s contracts should procedures to address credit losses and The Commission received several not be terminated in bankruptcy, and liquidity shortfalls beyond their comments on proposed § 190.15. CME 175 accordingly that paragraph (c)(1) should prefunded resources.’’ Similarly, in and ICE generally supported the be modified by removing the Unless adopting § 39.39, the Commission proposal, although ICE raised concerns Clause. Thus, after considering the explained that it was ‘‘designed to about the discretion afforded to the comments, the Commission is adopting protect the members of such DCOs and trustee. In contrast, Vanguard, FIA, § 190.14(c) as proposed, with a their customers, as well as the financial ACLI, SIFMA AMG/MFA, and ICI modification to paragraph (c)(1) by system more broadly, from the expressed concerns with the proposed deleting the phrase: ‘‘unless the consequences of a disorderly failure of rule, in whole or in part. 176 Commission determines that liquidation such a DCO.’’ ICE, while generally supporting the Section 190.15(a) states that the would be inconsistent with the proposal, objected to the language in trustee shall not avoid or prohibit any avoidance of systemic risk or would not § 190.15 that a ‘‘trustee’s obligation to action taken by the debtor DCO that was be in the best interests of the debtor’s [follow a DCO’s default rules and reasonably within the scope of, and was estate.’’ This modification—when taken recovery and wind-down plans] is in conjunction with the Commission’s provided for, in any recovery and wind- down plans maintained by the debtor ‘subject to the reasonable discretion’ of prior withdrawal of § 190.14(b)(2) and the trustee or is limited ‘to the extent (3)—should remove any lingering and filed with the Commission, subject to section 766 of the Bankruptcy Code. reasonable and practicable.’ ’’ While ICE uncertainties in § 190.14 concerning the acknowledged ‘‘the need for some enforceability of close-out netting The Commission’s intent is to provide finality and legal certainty to actions degree of flexibility in the conduct of a provisions in a DCO bankruptcy. taken by a DCO to implement its bankruptcy proceeding,’’ it contended The Commission received no specific that ‘‘the Commission should make comments on the proposed language of recovery and wind-down plans, which are developed subject to Commission clear that the trustee cannot override the § 190.14(d) and, thus, is adopting that DCO rules . . . [or] deviate from an paragraph as proposed. regulations. Section 190.15(b) instructs the trustee approved recovery or wind-down plan.’’ Accordingly, after consideration of to implement, in consultation with the Vanguard requested that proposed the comments and for the reasons stated Commission, the debtor DCO’s default § 190.15(a) be removed, arguing that it above, the Commission is adopting rules and procedures maintained would be ‘‘imprudent to give deference’’ § 190.14 as proposed, with the deletion pursuant to § 39.16, and, as applicable, to a DCO’s rules because such rules ‘‘do of paragraphs (b)(2) and (3) and § 39.35, as well as any termination, not set forth a comprehensive roadmap modifications to paragraphs (b)(1) and close-out and liquidation provisions to dealing with DCO insolvency.’’ (c)(1), as set forth above.174 included in the rules of the debtor, Vanguard noted that ‘‘DCO rulebooks 5. Regulation § 190.15: Recovery and subject to the trustee’s reasonable set forth a variety of powers the DCO Wind-Down Plans; Default Rules and discretion and to the extent that may employ’’ (e.g., ‘‘assessments, Procedures implementation of such default rules variation margin gains haircutting, and tear-ups’’), and that such rules ‘‘lack The Commission is adopting § 190.15 and procedures is practicable. Similarly, § 190.15(c), as proposed, [the] necessary specificity and detail to substantially as proposed (with a provide certainty to FCMs and modification, as discussed below), to instructs the trustee, in consultation with the Commission, to take actions in customers, or to the trustee,’’ with favor the implementation of a debtor respect to what would follow in DCO clearing organization’s default rules and accordance with any recovery and wind-down plans maintained by the insolvency. Vanguard was concerned that such uncertainty may ‘‘contribute 174 The modifications to paragraph (b)(1) include debtor and filed with the Commission, both the addition of the language described above to the extent reasonable and practicable. to further market stresses during a and the re-designation of proposed paragraph (b)(1) The Commission’s intent is to provide critical time,’’ and that expressly as new paragraph (b), in light of the withdrawal of the trustee, who will need to take instructing the trustee to implement a proposed paragraphs (b)(2) and (3) in the DCO’s default rules and procedures Supplemental Proposal. prompt action to manage the DCO (and For further discussion of the Supplemental ‘‘where practicable,’’ permits a DCO to Proposal and the Commission’s consideration of 175 78 FR 72476, 72492 (Dec. 2, 2013). ‘‘override the fundamental customer comments thereto, see section II.H below. 176 Id. at 72494. protections intended by Part 190.’’

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FIA did not support the adoption of rules and procedures and recovery and add a new clause to proposed § 190.15 proposed § 190.15(b) and (c), wind-down plans under proposed requiring the trustee and Commission, commenting that the proposal’s post- § 190.15(a) and (c). ACLI claimed that in implementing § 190.15, to ‘‘consider bankruptcy implementation of all DCO ‘‘DCO recovery and wind-down plans whether implementation of the debtor’s default rules and procedures and include such drastic measures as default rules and procedures [and recovery and wind-down plans is Variation Margin Gains Haircutting . . . recovery and wind-down plans] may ‘‘inappropriate.’’ FIA was concerned and Partial Tear-Up . . . [that] are not undermine the core principles set forth that the proposal’s ‘‘concept of ‘default subject to routine public input at the in § 190.00 or may pose additional rules and procedures’ could encompass DCO level or at the Commission.’’ ACLI systemic risk.’’ 177 If the trustee and a number of different tools or actions, identified several circumstances in Commission determine that such some of which would be inappropriate which deference to the DCO’s rules or implementation would have that effect, and risky for a bankruptcy trustee to recovery and wind-down plans should SIFMA AMG/MFA suggested that the attempt to execute.’’ In addition, ‘‘to the be reduced. ACLI asserted that: (a) A provision permit the trustee to override extent that the Commission would trustee should not be expected to defer the rules, procedures, and plans. SIFMA select some but not other default rules to recovery and wind-down measures AMG/MFA further commented that, in and procedures for a trustee to unless they were originally adopted the event that deference to a DCO’s implement,’’ uncertainty with respect to with public input at the DCO level and default management rules and possible bankruptcy scenarios would made public for a reasonable period procedures and recovery and wind- increase. FIA stated that a DCO’s default before the bankruptcy proceeding; (b) down plans is mandated in subpart C of rules and procedures should not be used the trustee should ‘‘have discretion to the proposal, the Commission should ‘‘for any purpose other than to ensure override a DCO’s recovery or wind- amend parts 39 and 40 of the enforcement of a DCO’s closeout netting down actions if they violate proposed Commission’s regulations ‘‘to ensure provisions,’’ and that, ‘‘[b]y their terms, [p]art 190’s goal of protecting customer that customers have the opportunity to the default rules and procedures . . . property on no worse than a pro rata provide meaningful input during the represent contractual arrangements basis’’; and (c) consistent with proposed development and application of such between a DCO and its members whose § 190.15(b), the trustee should be able to rules, procedures, and plans.’’ purpose is to provide resources and avoid or prohibit any DCO action that it ICI did not support the proposal’s tools to the DCO to prevent its determines, in consultation with the deference to a DCO’s loss allocation, bankruptcy.’’ FIA argued that ‘‘a Commission, is not ‘‘reasonable and recovery, and wind-down rules in a fundamental term’’ of these practicable.’’ DCO liquidation. ICI asserted that such arrangements is that ‘‘such resources rules are neither ‘‘clear’’ nor ‘‘well- SIFMA AMG/MFA commented that vetted.’’ ICI stated that DCO rules ‘‘do and tools are only available prior to requiring a trustee to defer to a DCO’s bankruptcy,’’ and that instructing a not provide the level of specificity and recovery and wind-down plans as set detail that is required to give certainty trustee in bankruptcy to implement, forth in proposed § 190.15(a) and (c) is with discretion, the DCO’s default rules to market participants,’’ but rather, they ‘‘inadvisable’’ and, in some cases, ‘‘enumerate a wide variety of tools that and procedures would ‘‘undermine the ‘‘unworkable,’’ and recommended that long-standing and settled expectations a DCO may deploy to recover losses,’’ the provisions be deleted. SIFMA AMG/ some of which ‘‘have the capacity to of DCOs and their members.’’ In the MFA recommend that, if the alternative, FIA recommended that the alter the entitlements of customers’’ Commission retains proposed under part 190 (e.g., ‘‘a customer would Commission revise proposed § 190.15(b) § 190.15(a), the provision be amended to only be entitled to such a pro rata share ‘‘to confirm that, in administering a remove the words ‘‘was reasonably in of customer property to the extent the proceeding under Subpart C, the trustee the scope of’’ and replace references to DCO rules did not modify the must implement any termination, close- the DCO’s recovery and wind-down distribution of the DCO’s assets’’ out and liquidation provisions included plans with references to the DCO’s through variation margin gains in the rules (or bylaws) of the debtor’’ default rules and procedures. In support haircutting or partial tear-up). ICI (including loss allocation provisions). of their position, SIFMA AMG/MFA recommended that, ‘‘[b]efore the FIA raised further concerns about the asserted that recovery and wind-down Commission gives effect to any DCO treatment of a DCO’s recovery plans in plans are insufficiently prescriptive, and loss allocation, recovery, and wind- proposed § 190.15. FIA asserted that that because they tend to be drafted as down rules in a [p]art 190 proceeding, such plans are intended to address a menu of options, such plans are not . . . the Commission should develop ‘‘actions to be taken prior to the DCO’s likely to provide the trustee with clear and codify minimum principles that bankruptcy and [are] not relevant post- direction, effectively causing the trustee must be reflected in [those rules,] . . . filing.’’ FIA also stated that such plans to defer to the judgment of the debtor review both existing DCO rules and ‘‘would provide no meaningful itself. SIFMA AMG/MFA also asserted proposed rule changes to ensure that guidance to a trustee’’ because they ‘‘do that recovery and wind-down plans do they are consistent with the not prescribe a particular course of not require Commission approval or Commission’s minimum principles . . . action.’’ Rather, they ‘‘present a menu of reflect significant input from customers, [, and] require DCOs to change their options that a DCO might consider.’’ and because DCOs are not required to governance process for rule changes to FIA asserted that reliance on a DCO’s make such plans public, the plans are give stakeholders greater opportunity for recovery and wind-down plans is not a fair reflection of the ex ante input.’’ ‘‘particularly inappropriate’’ because expectations of a DCO’s stakeholders. As an initial matter, the Commission some of them ‘‘have been developed SIFMA AMG/MFA further asserted that notes that some commenters, including with no input or opportunity for ‘‘requiring the trustee . . . to defer to ACLI, FIA, ICI, and SIFMA AMG/MFA, comment by clearing members and the debtor’s resolution plans would be objected to the application of DCO other market participants.’’ inconsistent with other regimes for the recovery and wind-down plans and ACLI also expressed concern with the resolution of systemically important rules, in particular the application of deference that a trustee in bankruptcy financial institutions.’’ SIFMA AMG/ would be required to afford a DCO’s MFA requested that the Commission 177 Alteration in original.

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variation margin gains haircutting, seven calendar days after entry of the add at the end the qualifier that these because they believed that changes order for relief’’ (emphasis added). actions should also only be taken to the should be made to the process by which Turning to SIFMA AMG/MFA’s extent consistent with the protection of parts 39 and 40 permit DCOs to adopt suggestion that ‘‘the trustee and the customers.181 such plans and rules. Commission should explicitly be With respect to systemic risk, while Amendments to parts 39 and 40 are required to consider the core concepts the Commission, as a governmental beyond the scope of this rulemaking, set forth in proposed § 190.00 and agency, is attentive to considerations of systemic risk in implementing a debtor mitigating systemic risk in all that it and the Commission does not believe 182 that these concerns with the content and DCO’s rules procedures and plans’’: does, it may be difficult for a trustee to make meaningful determinations as operation of parts 39 and 40 should With respect to the core concepts, to how to do so. Moreover, the trustee inhibit the use of such plans and rules § 190.00(c) states that ‘‘the specific is the representative of the bankruptcy in the context of part 190. However, the requirements in [part 190] should be estate, see 11 U.S.C. 323(a), with Commission continues actively to interpreted and applied consistently fiduciary duties to estate review these issues, in particular with with these core concepts.’’ In short, that beneficiaries,183 rather than to the respect to governance, as they relate to requirement is already present. financial system as a whole. parts 39 and 40. Moreover, the Commission has added § 190.00(c)(3)(i)(C) to provide that where Accordingly, the Commission does not The Commission also notes that other a provision in part 190 affords the believe it appropriate to add an explicit commenters, including FIA, believed trustee discretion, that discretion should requirement concerning considerations that default rules and procedures and be exercised in a manner that the trustee of systemic risk, as suggested by SIFMA recovery plans are designed to avoid determines will best achieve the AMG/MFA. bankruptcy, and should not be applied overarching goal of protecting public The Commission does not agree that if they fail in achieving that goal. customers by enhancing recoveries for, FIA’s observation that DCO recovery However, the DCO’s rules, procedures, and mitigating disruptions to, public and wind-down plans may ‘‘not and plans set forth ex ante the manner customers as a class. Thus, in exercising prescribe a particular course of action in which losses are allocated—that is, their discretion to determine what is but, rather, present a menu of options who is exposed to them, and to what ‘‘reasonable’’ for purposes of § 190.15, that a DCO may consider’’ supports extent. In the event that losses must be the trustee is already directed to focus FIA’s conclusion that ‘‘these plans borne in bankruptcy, the Commission on the ‘‘core concepts’’ in § 190.00(c), would appear to provide no meaningful believes, as was noted in the preamble and, in particular, the ‘‘overarching goal guidance to a trustee.’’ To the contrary, to the proposal, that ‘‘allocation of of protecting public customers.’’ the Commission believes that providing losses should not depend on the However, while a DCO’s default rules a ‘‘menu of options’’ among which the happenstance of when default and procedures are required to be made trustee may select (and adapt) in a management or recovery tools were public, posted on the DCO’s website,179 manner that is ‘‘reasonable and used—e.g., when assessments were the same is not true for the DCO’s practicable’’ would provide the called for, or when such assessments recovery and wind-down plans. Thus, trustee—who would be stepping into a were met.’’ The Commission does not in implementing the DCO’s default rules complex and difficult situation with believe that the comments offer a and procedures, the trustee would be little preparation—with a helpful persuasive reason why the allocation of implementing rules and procedures roadmap to determine strategy and losses—who wins, who loses, and how that, prior to the bankruptcy, were both tactics, in order to act in a prompt and much—should change on the basis of subject to the supervision of the cost-effective manner. when a bankruptcy is filed. Commission and transparently available The Commission also declines to provide that the trustee cannot override The Commission further notes that a to both clearing members and their the DCO’s rules or deviate from an number of commenters, including ACLI customers. By contrast, in implementing approved recovery or wind-down plan. the DCO’s recovery and wind-down and Vanguard, were concerned with the Even if part 39 were to require that such plans, the trustee would be application in bankruptcy of recovery plans be ‘‘approved’’—and it does not— implementing plans that, prior to the tools such as variation margin gains they are designed in the context of bankruptcy, were subject to the haircutting and partial tear-up. operation of the DCO outside of supervision of the Commission,180 but Variation margin gains haircutting, to bankruptcy. Thus, the Commission may not have been transparently the extent set forth in DCO rules, will believes it to be appropriate for the be applied in bankruptcy, in that it available to clearing members or their trustee to apply them with flexibility to represents the ex ante manner in which customers. In light of this distinction, a the extent reasonable and practicable. losses are allocated.178 By contrast, more customer-protective approach Accordingly, after consideration of partial tear-up of contracts will not be seems appropriate in the latter context. the comments and for the reasons stated applied; rather, pursuant to Accordingly, the Commission is above, the Commission is adopting § 190.14(c)(1), ‘‘the trustee shall modifying proposed § 190.15(c), which § 190.15 as proposed, with the liquidate all open commodity contracts reads that in administering a proceeding modification to § 190.15(c) discussed that have not been terminated, under this subpart, the trustee shall, in above. liquidated or transferred no later than consultation with the Commission, take actions in accordance with any recovery 181 The ‘‘customers’’ of a DCO are, as noted at the 178 Moreover, as discussed in more detail in and wind-down plans maintained by top of this section II.C, the clearing members with section II.C.7 below, there is a limited amount of the debtor and filed with the respect to their public customers, as well as the customer property available. Any increase in some Commission pursuant to § 39.39, to the clearing members with respect to their proprietary or ‘‘house’’ accounts. customers claims (and thus, their distributions) due extent reasonable and practicable—to to the disapplication of gains-based haircutting 182 See CEA section 3(b), 7 U.S.C. 5(b) (purposes would come at the expense of a reduced share of of the CEA include ‘‘the avoidance of systemic that limited customer property (i.e., reduced 179 See § 39.21(c)(6). risk’’). distributions) to other customers, which could total 180 Note that § 190.15(c) only applies to recovery 183 See U.S. Department of Justice, Executive less than the amount of their claim arising from and wind-down plans that were ‘‘filed with the Office for United States Trustees, Handbook for initial margin. Commission pursuant to § 39.39 of this chapter.’’ Chapter 7 Trustees Section 4.B, at 4–2.

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6. Regulation § 190.16: Delivery contracts that move into delivery on behalf of its public customers The Commission is adopting § 190.16 position after the filing and that the (customer account) and claims on behalf as proposed with a modification to trustee is unable to liquidate. CME of itself and its non-public customers paragraph (a), as set forth below. stated that ‘‘[i]t is equally important to (i.e., affiliates) (house account), and, Regulation § 190.16(a) instructs the protect deliveries under [such] contracts within those separate customer classes, trustee to use reasonable efforts to . . . to protect against disruption to the claims may be further separated by facilitate and cooperate with completion commercial markets and operations,’’ account class. The member shall be of delivery in a manner consistent with and that the trustee may not be able to treated as part of the public customer § 190.06(a) (which instructs trustees of terminate them. class with respect to claims based on The ABA Subcommittee similarly FCMs in bankruptcy to foster delivery commodity customer accounts carried expressed concern that proposed where a contract has entered delivery as ‘‘customer accounts’’ by the clearing § 190.16(a) ‘‘does not address contracts phase before the filing date or where it organization for the benefit of the that are unable to be liquidated and that is not practicable for the trustee to member’s public customers, and as part then move into delivery position,’’ liquidate a contract moving into of the non-public customer class with noting that ‘‘it may be impossible or delivery position after the filing date) respect to claims based on its house impracticable for a trustee to liquidate and the pro rata distribution principle account. Section 190.17(a)(2) directs every’’ physical-delivery commodity that net equity shall be calculated in § 190.00(c)(5). The Commission contract that is open at the date and believes that it is important to address separately with respect to each customer time of the order for relief before the capacity and, within such customer deliveries to avoid disruption to the contract moves into delivery position. cash market for the commodity and to capacity, by account class. The ABA Subcommittee recommended Section 190.17(b) sets forth how a avoid adverse consequences to parties that the Commission ‘‘remove the debtor DCO’s pre-existing rules and that may be relying on delivery taking timing limitation in Proposed Rule procedures governing the allocation of place in connection with their business 190.16(a),’’ and add language stating losses—including the default rules and operations. However, given the potential that ‘‘the trustee should use reasonable procedures—should be applied in a for competing demands on the trustee’s efforts to liquidate open physical DCO bankruptcy. resources, including time, this delivery commodity contracts before Section 190.17(b)(1) confirms that the instruction is limited to requiring they move into a delivery position.’’ calculation of members’ net equity ‘‘reasonable efforts.’’ The Commission agrees with claims—and, thus, the allocation of Regulation § 190.16(b) carries comments raised by CME and the ABA losses among members and their forward, to the context of a DCO in Subcommittee that deliveries should be accounts—shall be based on the full bankruptcy, the delineation between the facilitated after the order for relief for application of the debtors’ loss physical delivery property account class contracts that are not otherwise allocation rules and procedures, and the cash delivery property account terminated, liquidated, or transferred. including the default rules and class in § 190.06(b), as discussed above. The Commission believes that procedures referred to in §§ 39.16 and Specifically, physical delivery property modifying the proposal to address that 39.35. These pre-existing loss allocation that is held in delivery accounts for the scenario is appropriate to avoid rules and procedures are the contract purpose of making delivery shall be disruption to the cash market and to between and among the members and treated as physical delivery property, as avoid adverse consequences to parties the DCO, and the Commission believes will the proceeds from any sale of such that may be relying on delivery taking that it is appropriate to give them effect property. By contrast, cash delivery place in connection with their business regardless of the bankruptcy of the DCO property that is held in delivery operations. or the timing of any such bankruptcy. In accounts for the purpose of paying for Accordingly, after consideration of other words, the pre-existing loss delivery shall be treated as cash delivery the comments, and for the reasons allocation rules and procedures (such as property, as would any physical stated above, the Commission is member assessments) should be given delivery property for which delivery is adopting § 190.16 with a modification to the same effect in a bankruptcy, subsequently taken. apply paragraph (a) to any contract that regardless of whether default The Commission requested comment ‘‘moves into delivery after [the date and management or recovery tools were with respect to all aspects of proposed time of the order for relief], but before fully applied prior to the order for relief. § 190.16. The Commission raised being terminated, liquidated, or While certain DCOs may have specific questions as to whether it is transferred.’’ discretion, consistent with governance appropriate, in the context of a clearing procedures, as to precisely when they organization bankruptcy, to separate the 7. Regulation § 190.17: Calculation of call for members to meet assessment physical delivery account class from the Net Equity obligations, the Commission believes cash delivery account class, and if so, The Commission is adopting § 190.17 that allocation of losses should not whether the physical delivery account as proposed, with a modification to depend on the happenstance of when class should be further sub-divided. The § 190.17(b)(2), as discussed below. default management or recovery tools Commission also asked whether the Section 190.17 establishes net equity were used—e.g., when assessments were delivery account class should be treated calculations to be used in determining called for, or when such assessments as a single, undivided account class. the claims against the debtor DCO (and CME supported the requirement in were met. the allocation of losses) among members Section 190.17(b) also addresses DCO proposed § 190.16 that the trustee use and their accounts. rules that govern how recoveries on reasonable efforts to facilitate deliveries Section 190.17(a) with respect to net claims against defaulting members are of commodity contracts that have equity is parallel to § 190.18(a) with allocated to non-defaulting members’ moved into delivery prior to the date respect to the treatment of customer accounts,184 which effectively ‘‘reverse and time of relief on behalf of a clearing property. Section 190.17(a)(1) confirms member or customer, but asked that the that a member of a clearing organization 184 These recoveries might be based on Commission ‘‘expand the rule to require may have claims in separate capacities. prosecution of such claims in an insolvency or the trustee to facilitate deliveries’’ under Specifically, a member may have claims receivership proceeding, or, in the reasonable

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the waterfall’’ by allocating recovered funded balance for FCMs is an calculation of a clearing member’s net assets to member accounts in reverse analogous exercise, the Commission equity claim with respect to its house order of the allocation of the losses to intends that such calculations under account.’’ The ABA Subcommittee those member accounts.185 Section § 190.17(d) will be made in the manner requested that the Commission modify 190.17(b)(2) implements such DCO rules provided in § 190.08(c), to the extent the proposed regulation to clarify that in bankruptcy, thereby adjusting applicable. ‘‘house account net equity claims would members’ net equity claims (and the The Commission requested comment be adjusted to reflect post-filing basis for distributing any such with respect to all aspects of proposed obligations only if and to the extent that recoveries) in light of such recoveries. § 190.17. The Commission raised a the DCO’s rules and procedures impose The provision similarly implements specific question as to whether it is obligations on clearing members to DCO loss allocation rules in other appropriate to base the calculations continue making such payments contexts, for example, (i) rights to proposed § 190.17 on the full following the DCO’s bankruptcy.’’ portions of mutualized default resources application of the debtors’ loss Specifically, the ABA Subcommittee that are either prefunded or assessed allocation rules and procedures, suggested that the following phrase be and collected, and, in either event, not including the DCO’s default rules and added to the end of § 190.17(b)(1): If and used, as well as (ii) rules that would procedures. to the extent that the debtor’s loss allocate to members recoveries against Commenters addressed the proposed allocation rules and procedures impose third parties for non-default losses that language of paragraph (b), or of § 190.17 obligations on clearing members to are, under the DCO’s rules, originally generally, but did not offer specific make such payments on or after the borne by members. comments on the proposed language of filing date. Section 190.17(c) adopts by reference paragraph (a), (c), or (d). FIA did not support the adoption of the equity calculations set forth in CME commented in support of § 190.17(b)(1). FIA stated that it would proposed § 190.08, to the extent § 190.17(b)(1)’s application of ‘‘the be ‘‘inappropriate to require a clearing applicable. DCO’s loss allocation rules and member to reduce the value of its net Finally, § 190.17(d) implements procedures, including the DCO’s default equity claim by the amount of an section 766(i) of the Bankruptcy Code, rules and procedures, to the calculation assessment that, under the rules of the which: (1) Allocates a debtor DCO’s of clearing members’ net equity claims,’’ relevant DCO, either may no longer be customer property (other than member but suggested a clarification to the made or are not required to be paid.’’ property) to the DCO’s customers (i.e., proposed rule. Specifically, CME FIA asserted that a DCO’s default fund clearing members) ratably based on the suggested that the Commission ‘‘clarify is ‘‘a multilateral indemnification clearing members’ net equity claims that ‘full application’ of the DCO’s loss arrangement between the DCO and its based on their (public) customer allocation rules and procedures to the members pursuant to which members’ accounts; and (2) allocates a debtor calculation of clearing members’ house contributions are used to cover the DCO’s member property to the DCO’s net equity claims means that DCO’s losses resulting from member clearing members ratably based on the assessments or similar loss allocation default(s) and thereby prevent the clearing members’ net equity claims arrangements thereunder are part of the DCO’s bankruptcy.’’ FIA stated that a based on their proprietary (i.e., house) calculation only if and to the extent that ‘‘DCO has no authority under its rules accounts. To implement section 766(i), the DCO’s rules and procedures provide to request or to apply these funds for § 190.17(d) defines ‘‘funded balance’’ as for post-filing assessments and any other purpose, nor do we believe a clearing member’s pro rata share of payments.’’ CME noted that a ‘‘DCO’s that a trustee would have any authority member property (for a clearing rules are the contract between and under the [Bankruptcy] Code to do so.’’ member’s house accounts) or customer among the members and the DCO,’’ and FIA noted further that, ‘‘by requiring property other than member property that, ‘‘[i]f the calculation of net equity that a clearing member’s net equity (for accounts for a clearing member’s claims deviates from the DCO’s loss claim must include the full application public customers). The pro rata amount allocation under its rules, including of the DCO’s loss allocation rules and shall be calculated with respect to each determination of amounts owned under procedures, proposed Rule 190.17(b)(1) account class available for distribution close-out netting rules, that could appears to have the effect of reducing a to customers of the same customer class. adversely affect CME’s netting opinion clearing member’s potential recovery, Moreover, given that the calculation of as to the enforceability of its netting even when the full application of the rules.’’ CME also commented in support DCO’s loss allocation rules is not commercial judgment of the DCO, the settlement or of ‘‘giving effect to provisions in the necessary to meet the DCO’s obligations sale of such claims. debtor DCO’s loss allocation rules that to non-defaulting clearing members,’’ 185 For example, if the DCO rules allocate losses entitle clearing members to return of thereby impermissibly benefitting the in excess of the defaulters’ available resources first guaranty fund deposits or other to the DCO’s own contributions, second to the DCO’s general creditors and mutualized default fund contributions of members mutualized default resources that are shareholders to the detriment of clearing other than the defaulter, third to assessments, and not used, or to payments out of amounts members. fourth to gains-based haircutting (pro rata), all of that the DCO recovers on claims against ICE commented that the Commission which tools were in fact used in a particular case, a defaulting clearing member, through should refrain from adopting § 190.17(b) then recoveries on claims against the defaulting members would be allocated (to the extent adjustments to clearing member’s net or providing ‘‘specific guidance as to available) first to those member accounts for which equity claims against member property what assumptions the CFTC would gains were haircut, pro rata based on the aggregate to reflect their entitlement to such make and how the net equity claim is amount of such haircuts per member account, until payments.’’ CME also commented in to be calculated hypothetically.’’ ICE all such haircuts have been reversed, second to those members who paid assessments, pro rata support of § 190.17(b)(2). stated that, in determining a clearing based on the amount of such assessments paid, The ABA Subcommittee expressed member’s net equity claim, it is neither until all such assessments have been repaid, third concern with respect to perceived appropriate nor feasible to consider a to members whose mutualized default-fund ambiguity in § 190.17(b)(1) regarding potential assessment that could have contributions were consumed, pro rata based on such default-fund contributions, until all such ‘‘how assessments that were not called been called for before a bankruptcy contributions have been repaid, and fourth to the for, or that were called for but not paid filing but was not. ICE asserted that a DCO to the extent of its own contribution. before the filing date, would impact the DCO’s determination of whether ‘‘to call

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for an assessment and/or implement result in a customer being entitled to fund) to cover a shortfall. Should those other loss allocation arrangements’’ only ‘‘a pro rata share to the extent the resources be insufficient to cover the accounts for many considerations that DCO rules did not modify the shortfall, such default waterfalls would not be appropriate to revisit in an distribution of the DCO’s asset, whether generally proceed to use the DCO’s own insolvency. ICE also asserted that pre- or post-petition, through measures capital contribution, and only after calculating the full application of loss such as variation margin gains those resources are extinguished is the allocation rules, or determining what haircutting or partial tear-up of remaining shortfall mutualized among would have happened in any full transactions.’’ Vanguard noted the the clearing members: (1) First, through allocation, may not be possible. ICE possibility that, ‘‘as the DCO begins to the prefunded default fund noted, for example: (a) Because a DCO fail,’’ the DCO’s rules ‘‘could be changed contributions of non-defaulting clearing is not obligated to impose assessments without the appropriate vetting by members; (2) then, through limited against its clearing members, it is FCMs and customers who presently bear assessment powers against those non- unclear how the CFTC or the trustee an inordinate share of the risk.’’ defaulting clearing members, which are would determine how many Vanguard believed that ‘‘any application generally set as a multiple of each assessments the DCO should have made; of non-defaulting customer gains clearing member’s prior contributions to (b) in the event that ‘‘clearing members haircutting, or any other margin the default fund; and (3) finally, through have the right to cap their liability by haircutting, should be prohibited as gains-based haircuts that affect both terminating their membership in a being fundamentally at odds with clearing members and (through DCO,’’ it is unclear how the CFTC or the normal insolvency practice and highly customer agreements) the customers of trustee would determine whether a counterproductive to incentivizing clearing members (i.e., public clearing member should have customers not to abandon a failing customers). terminated its membership; 186 and (c) it DCO.’’ Vanguard asserted that, if The Commission notes two important ‘‘may not be possible to determine haircutting is to be allowed, customers takeaways from the general structure of definitively what the [DCO’s] losses . . . should ‘‘receive full compensation in default waterfalls. First, each clearing would have been if additional loss the form of a credit or equity claim member knows, in advance of a default, allocation steps, such as variation against the DCO [that is] superior to that the maximum amount of its exposure to margin gains haircutting or tear-up, had of other creditors.’’ Vanguard also contribute to mutualized loss through been taken.’’ suggested that § 190.17(b)(2) be the guarantee fund and the DCO’s SIFMA AMG/MFA commented that modified in the same manner as assessment powers. Second, should §§ 190.17 and 190.18(b)(1) should be suggested by SIFMA AMG/MFA, with there be any reduction in the amount of modified to explicitly state that any respect to situations in which a debtor funds collected through such gains that were haircut during gains- DCO does not have ‘‘reverse the assessments, then any losses in excess based haircutting will be treated as waterfall’’ rules, or has ‘‘reverse the of the waterfall (i.e., up through the customer property and included in the waterfall’’ rules that do not address each assessments) would instead be allocated net equity claims of the clearing level of the debtor DCO’s waterfall. to both clearing members and their members and customers whose gains ICI expressed concern that public customers. In other words, if the were haircut. SIFMA AMG/MFA further § 190.17(b)(1) would permit a DCO’s losses are large enough, a reduced commented in support of § 190.17(b) but loss allocation, recovery, and wind- allocation of losses to clearing members suggested that the proposal be modified down rules ‘‘to override the would necessarily mean that their to provide that, if a debtor DCO either fundamental customer protections that public customers would bear an (i) does not have ‘‘reverse the waterfall’’ Part 190 and Subchapter IV [of the increased allocation of losses. rules or (ii) has ‘‘reverse the waterfall’’ Bankruptcy Code] are meant to The Commission remains of the view rules that do not address each level of safeguard,’’ because they would ‘‘no that, as discussed in the proposal, the debtor DCO’s waterfall, the net longer guarantee to a customer a pro ‘‘[w]hile certain DCOs may have equity clams of the debtor DCO’s rata share of customer property based discretion, consistent with governance clearing members and customers will be on its transactions and margin in procedures, as to precisely when they calculated as though the debtor DCO, in accordance with Subchapter IV.’’ In that call for members to meet assessment fact, ‘‘has ‘reverse the waterfall’ rules scenario, ICI commented that ‘‘a obligations, . . . allocation of losses that address each level of the DCO’s customer would only be entitled to such should not depend on the happenstance waterfall. a pro rata share to the extent the DCO of when default management or Vanguard commented on rules did not modify the distribution of recovery tools were used—e.g., when § 190.17(b)(1)’s requirement that a the DCO’s assets, whether pre- or post- assessments were called for, or when 187 trustee’s calculation of DCO members’ petition, through measures such as such assessments were met.’’ As net equity claims include the full variation gains haircutting or partial discussed above, the losses in a DCO application of DCO loss allocation rules tear-up of transactions.’’ bankruptcy ultimately would be and procedures. Vanguard expressed Having received no specific allocated between clearing members and concern that the requirement would comments on the proposed language of customers, and clearing members’ paragraphs (a), (c), and (d) of § 190.17, exposure to this allocation of losses is 186 But see ICE Clear Credit Rules 806, 807. To the Commission is adopting those already capped by the ex ante limits on mitigate the risk that their members will ‘‘rush to paragraphs as proposed. assessment powers. If the Commission the exits’’ after a default, DCOs generally hold As described above, the Commission were to modify the language of departing members liable for assessments due to the received several comments on paragraph (b) in the manner suggested defaults that occurred before they withdrew from membership, as well as during a ‘‘cooling-off’’ paragraph (b). After considering the by multiple commenters, the period that extends past the date the member gives comments, the Commission notes that modification would effectively decrease notice of intent to withdraw. The ICE Clear Credit DCO default rules and procedures (also the allocation of losses that would be rules cited, which include a ‘‘cooling-off period’’ of referred to as ‘‘default waterfalls’’), as a borne by clearing members—below the at least 30 days, are examples of this phenomenon. Thus, the possibility that clearing members would general matter, first use the resources of ex ante limits of which they are on withdraw is not likely to affect their liability for the defaulter (i.e., the defaulter’s initial assessments in this context. margin and contribution to the default 187 85 FR at 36038.

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notice—and correspondingly increase clearing member to pay in additional assessments or similar loss allocation the allocation of losses that would be funds; rather, paragraph (b)(1) reduces arrangements provided for under those borne by customers. In other words, in the clearing member’s net equity claim rules and procedures that were not such a scenario, the Commission against the estate of the DCO, to account called for before the filing date, or, if believes that the suggested language for uncalled or uncollected assessments. called for, have not been paid. Such loss could harm customers and run counter Pursuant to section 20(a)(5) of the CEA, allocation arrangements shall be applied to the Commission’s policy that, with the Commission has the power to to the extent necessary to address losses respect to customer property, public provide, with respect to a commodity arising from default by clearing customers be favored over non-public broker in bankruptcy, ‘‘how the net members. customers. For those reasons, the equity of a customer is to be The ABA Subcommittee, in its Commission declines to adopt determined,’’ 189 and the Commission comment letter, was concerned that the commenters’ suggestions to modify the believes that by setting the net equity proposed rule is ambiguous on whether net equity calculations in § 190.17(b) by calculation as proposed, the rule would limiting (or eliminating) the allocation appropriately set such calculations in a assessments or similar loss allocation of assessments that were not exercised manner that does ‘‘not depend on the arrangements would be included in the prior to a bankruptcy filing. happenstance of when default calculation where the clearing By contrast, gains-based haircuts are management or recovery tools were organization’s rules do not impose also part of the pre-bankruptcy used,’’ as discussed more fully above. obligations on clearing members to arrangements for allocating losses. If Second, FIA noted that, ‘‘by requiring make such payments on or after the that part of the ‘‘waterfall’’ is reached, that a clearing member’s net equity filing date. The modified structure of then that ex ante arrangement should be claim must include the full application paragraph (b)(1), as described above, followed. Moreover, there is a limited of the DCO’s loss allocation rules and should remove that ambiguity, albeit not amount of customer property available. procedures, proposed [§ ] 190.17(b)(1) in the direction that the ABA Thus, to the extent the application of appears to have the effect of reducing a Subcommittee would prefer: The gains-based haircuts was to be reversed, clearing member’s potential recovery, calculation ‘‘will include, with respect and some customers would realize even when the full application of the to the clearing member’s house account, increases in the allowed amounts of DCO’s loss allocation rules is not any assessments or similar loss their claims (and thus a greater share of necessary to meet the DCO’s obligations allocation arrangements that were not customer property), other customers to non-defaulting clearing members’’ called for before the filing date . . . to would suffer a decreased share of and that ‘‘[s]uch a result would the extent necessary to address losses customer property; indeed, the latter impermissibly benefit the DCO’s general arising from default . . .’’ (emphasis customers may, as a result, receive less creditors and shareholders to the added). than the amount of their claims for detriment of clearing members.’’ The CME’s comment letter also raises a initial margin. This could have the Commission did not intend for the concern that should be addressed. In effect of reducing those customers’ potential outcome suggested by FIA; particular, CME is concerned that recoveries below the initial margin they rather, in proposed § 190.17(b)(2)(i), the deviating from the DCO’s rules with have posted. The Commission stands Commission intended to provide that, respect to loss allocation in this context firmly against initial margin haircutting where the full amount of assessment could adversely affect the DCO’s netting as inimical to the principles of powers is not needed to cover a default, opinion as to the enforceability of its segregation. Thus, the Commission an appropriate adjustment shall be netting rules. The Commission notes declines to adopt the suggestion by made to the net equity claims of clearing that this argument conflates bank capital SIFMA AMG/MFA and Vanguard to members. The Commission believes that charge calculations for cleared reverse the application of gains-based the rule text should be modified in transactions with capital charge haircutting in a DCO bankruptcy. order to communicate its intent more calculations for default fund FIA’s comment letter raised two clearly, and avoid the possibility of the contributions. Pursuant to, e.g., 12 CFR points that should be further addressed. unintended outcome raised by FIA. 217.133(a)(2), a clearing member that is First, FIA stated that a DCO, under its Accordingly, the Commission is (or is part of) a bank holding company rules, lacks the authority to apply the modifying § 190.17(b)(1) to clarify that regulated by the Federal Reserve Board DCO’s default fund for any purpose the DCO’s ‘‘loss allocation arrangements and that uses the internal ratings and other than preventing the DCO’s shall be applied to the extent necessary bankruptcy, and a trustee would to address losses arising from default by advanced measurement approaches to similarly lack the authority to do so clearing members.’’ bank capital requirements is required to under the Bankruptcy Code.188 FIA This modification separates paragraph use the methodologies described in the further argued that, as a result of that (b)(1) into two separate parts. First, applicable paragraph of 12 CFR 217.133 limitation, the DCO’s authority to make paragraph (b)(1)(i) will provide that the to calculate its risk-weighted assets for new assessments or otherwise require calculation of a clearing member’s net a cleared transaction (that is, paragraph that members contribute additional equity claim shall include the full (c) of that section) and the funds to a DCO’s default fund would not application of the debtor’s loss methodologies described in a different continue into bankruptcy. allocation rules and procedures, paragraph to calculate its risk-weighted Consequently, FIA argued that a including the default rules and assets for its default fund contribution clearing member’s net equity claim procedures referred to in § 39.16 and, if to a CCP (that is, paragraph (d) of that 190 should not be reduced in bankruptcy by applicable, § 39.35. Second, paragraph section). Netting opinions are the amount of an assessment that would (b)(1)(ii) will provide that the necessary to treat cleared transactions no longer be required to be paid under calculation in paragraph (b)(1)(i) will the DCO’s rules. However, the include, with respect to the clearing 190 There are analogous provisions for bank Commission notes that § 190.17(b)(1) holding companies regulated by the Federal Reserve member’s house account, any Board that use the standardized approach for does not instruct the trustee to call any calculating bank capital requirements (12 CFR 189 In the bankruptcy of a clearing organization, 217.35) as well as banks regulated by the FDIC and 188 FIA at 9. clearing members are a species of customer. the Office of the Comptroller of the Currency.

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on a net basis,191 while assessments are member property) and the account class (guarantee deposits, assessments, etc.) related to default fund contributions. to which it is allocated, and would be first to customer property other than Thus, the treatment of assessment designated by reference to such member property, to the extent that any obligations is irrelevant to netting customer class and account class. account class therein is not fully opinions for cleared transactions. Section 190.18(b) sets out the scope of funded, and then to member property. The Commission also received customer property for a clearing In proposing this provision, the comments on proposed § 190.17(b)(2) organization,192 and is based in large Commission intended such treatment of concerning the treatment of ‘‘reverse the part on § 190.09(a). Specifically, in property to favor public customers over waterfall’’ rules in the context of a DCO § 190.18, paragraphs (b)(1)(i)(A) through non-public customers. Section bankruptcy. After considering the (G) are based on § 190.09(a)(1)(i)(A) 190.18(c)(2) allocates any excess funds comments, the Commission continues to through (G). Section 190.18(b)(1)(i) does in any account class for members’ house believe that it is useful and appropriate not include a provision that is parallel accounts first to customer property to use ‘‘reverse the waterfall’’ rules for to § 190.09(a)(1)(i)(H), because loans of other than member property to the recoveries made by a clearing margin are not applicable to DCOs. In extent that any account class therein is organization (including a debtor § 190.18, paragraphs (b)(1)(ii)(A) not fully funded, and then any clearing organization). Some through (D) are based on remaining excess to house accounts to commenters suggested that proposed § 190.09(a)(1)(ii)(A), (D), (E), and (F), § 190.17(b)(2) be modified to address while § 190.18(b)(1)(ii)(E) adopts by the extent that any account class therein situations where the debtor DCO lacks reference § 190.09(a)(1)(ii)(H) through is not fully funded. Finally, ‘‘reverse the waterfall’’ rules, or where (K) as if the term debtor used therein § 190.18(c)(3) allocates any excess funds such rules do not address each level of refers to a clearing organization as in any account for members’ customer the debtor clearing organization’s debtor. Section 190.18(b)(1)(ii) does not accounts first to customer property waterfall. Although the commenters did include provisions that are parallel to other than member property to the not provide specific language that could § 190.09(a)(1)(ii)(B), (C), (G), and (L), extent that any account class therein is be used to apply to such situations, the because they would not be applicable not fully funded, and then any Commission believes that such a due to the differences in business remaining excess to house accounts, to complicated modification is beyond the models, structures, and activities of the extent that any account class therein bounds of what was proposed, and thus, DCOs and FCMs, respectively. Section is not fully funded. the Commission declines to make the 190.18(b)(1)(iii) is unique to clearing Section 190.18(d) allocates customer modification here. Nonetheless, the organizations, and includes as customer property among account classes within commenters’ suggestion is well taken, property any guarantee fund deposit, customer classes. Section 190.18(d)(1) and the Commission may consider assessment, or similar payment or confirms that, where customer property further work on that issue in the future. deposit made by a member, to the extent is tied to a specific account class—that Accordingly, after consideration of any remains following administration of is, where it is segregated on behalf of, the comments, and for the reasons the debtor’s default rules and readily traceable on the filing date to, or stated above, the Commission is: (1) procedures. Section 190.18(b)(1)(iii) also recovered by the trustee on behalf of or Adopting § 190.17(a), (b)(1), (c), and (d) includes any other property of a for the benefit of an account class as proposed; and (2) adopting member that, pursuant to the debtor’s within a customer class—the property § 190.17(b)(2) with the modification rules and procedures, is available to must be allocated to the customer estate discussed above. satisfy claims made by or on behalf of of that account class (that is, the account 8. Regulation § 190.18: Treatment of public customers of a member. Finally, class for which it is segregated, to which Property § 190.18(b)(2), which identifies property it is readily traceable, or for which it is that is not included in customer recovered). Section 190.18(d)(2) The Commission is adopting § 190.18 property, adopts by reference to establish the allocation of the debtor provides that customer property that § 190.09(a)(2) as if the term debtor used cannot be allocated in accordance with DCO’s estate in order to satisfy claims therein refers to a clearing organization of clearing members, as customers of the paragraph (d)(1) shall be allocated in a as debtor and to the extent relevant to manner that promotes equality of debtor. The Commission is adopting a clearing organization. § 190.18 as proposed, with the following percentage distribution among account Section 190.18(c) allocates customer classes within a customer class. Thus, in modifications: (1) Adding new property between customer classes, paragraph (b)(1)(iv), as described below; such a scenario, such property would be favoring allocation to customer property allocated first to the account class for and (2) removing paragraph (c)(1) and other than member property over renumbering the remaining paragraphs which funded balance—that is, the allocation to member property, so long percentage that each member’s net of paragraph (c). as the funded balance in any account Section 190.18(a) with respect to equity claim is funded—is the lowest. class for members’ public customers is This would continue until the funded customer property is parallel to less than one hundred percent of net § 190.17(a) with respect to net equity. balance percentage of that account class equity claims. Once all account classes equals the funded balance percentage of Paragraph (a) provides that property of for customer property other than the debtor clearing organization’s estate the account class with the next lowest member property are fully funded (i.e., percentage of funded claims. The is allocated between member property, at one hundred percent of net equity remaining customer property would be and customer property other than claims), any excess could be allocated to allocated to those two account classes so member property, in order to satisfy member property. Section 190.18(c)(1), that the funded balance for each such claims of clearing members as as proposed (but not adopted herein, as account class remains equal. This would customers of the debtor. Such property discussed below), would allocate any continue until the funded balance would constitute a separate estate of the property referred to in § 190.18(b)(1)(iii) customer class (i.e., member property, percentage of those two account classes is equal to the funded balance of the and customer property other than 192 This is another provision prescribed pursuant to the Commission’s authority under section account class with the next lowest 191 See 12 CFR 217.3(d). 20(a)(1) of the CEA, 7 U.S.C. 24(a)(1). percentage of funded claims, and so

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

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

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property only where the funded balance potential analysis of § 190.08(c)(1). In capital purposes, and thus would not be is less than one hundred percent of net particular, the Commission has subject to more onerous capital equity claims for members’ public considered that bank regulators may treatment. In contrast, proposed customers in an account class, i.e., conclude that, because § 190.08(c)(1) § 190.18(c)(1) would apply guarantee where the DCO had failed to maintain directs the use of DCO default funds for funds to cases that are distinct from a in segregation sufficient funds to pay reasons other than addressing member default. As discussed above, it members’ public customer account mutualized member defaults, member seems entirely plausible that doing so balances in full. In other words, in that contributions to DCO default funds do would take such contributions outside scenario, the debtor DCO would be non- not fit within the definition (in bank of the definition (in bank capital compliant with Commission capital regulations) of ‘‘default fund regulations) of ‘‘default fund regulations. This is not a re-writing of contribution,’’ see, e.g., 12 CFR 217.2. contribution,’’ and thus subject them to the DCO’s rules,195 nor a re-writing of Specifically, such member contributions more onerous capital treatment. The the contract between the DCO and its may not constitute ‘‘funds contributed Commission believes that this members, nor an undermining of the or commitments made by a clearing distinction is significant and forms the DCO’s ‘‘well-founded, transparent, and member to a CCP’s mutualized loss basis for the difference in the enforceable legal framework,’’ but an sharing arrangement,’’ see, e.g., id. If Commission’s respective approaches to allocation of shortfall in a bankruptcy this were the case, members’ default § 190.17(b)(1) and proposed case where the DCO is non-compliant fund contributions would be subject to § 190.18(c)(1). with Commission regulations. more onerous capital treatment than Accordingly, after consideration of The use of guarantee funds in the they would receive if such contributions the comments, and for the reasons manner specified in proposed did fit within the definition of ‘‘default stated above, the Commission is § 190.18(c)(1) would not be an fund contributions.’’ 197 That more adopting § 190.18 as proposed, with the ‘‘unexpected loss’’ to non-defaulting onerous capital treatment would have a following modifications, as set forth clearing members, given that the direct, negative impact on normal day- above: (1) Adding new paragraph regulation would be transparently to-day activities for bank-affiliated (b)(1)(iv), as described above; and (2) by available to all. To the extent that the clearing members, and not merely in the removing paragraph (c)(1) and consequences of the application of the uncertain future event of a DCO renumbering the remaining paragraphs regulation (re-allocation of their default bankruptcy. In other words, as of paragraph (c). fund contributions to cover a shortfall in discussed further below in section customer property for members’ public III.D.8, while the benefits to public 9. Regulation § 190.19: Support of Daily customers) would be unexpected by customers of § 190.18(c)(1) in case of Settlement clearing members, and unpredicted by bankruptcy would be balanced by the The Commission is adopting § 190.19 their risk management systems, it is costs to clearing members, the present- as proposed, with a modification to equally the case that the public day costs to (bank-affiliated) clearing paragraph (b)(1), as discussed below. customers of clearing members would members of more onerous capital As the Commission noted in be surprised by a shortfall in customer treatment would not be offset by proposing § 39.14(b), ‘‘[t]he daily property, which their risk management significant benefits to public customers. settlement of financial obligations systems would also see as The Commission acknowledges that arising from the addition of new unexpected.196 Thus, the choice is not the decision not to adopt proposed positions and price changes with simply whether to impose an § 190.18(c)(1) differs from the respect to all open positions is an unexpected loss to clearing members or Commission’s approach to essential element of the clearing process not, but rather a choice of who should § 190.17(b)(1). In § 190.17(b)(1), at a DCO.’’ 198 Indeed, Congress bear that unexpected loss, clearing uncalled or unmet assessments would confirmed this by requiring that each members (as a group) or their customers be applied to address default losses, DCO complete money settlements not (as a group). To that point, in addition with the only difference being the less frequently than once each business to the statutory authority that is timing of the bankruptcy relative to the day.199 provided in the CEA, the Commission timing of the calls for, or payment of, In the ordinary course of business, agrees with the comment from ICI that the assessments. In short, the variation settlement payments are, at a § 190.18(c)(1) would further the policy Commission concludes in that context set time or times each day,200 sent to the goal—stated in section 766(h) of the that the default fund contributions DCO from the customer and proprietary Bankruptcy Code, but also running would be treated as such for bank accounts of each clearing member with throughout the Commission’s approach net losses in such accounts (since the to part 190—of prioritizing the claims of 197 That treatment could be significantly more last point of computation of settlement public customers over the claims of onerous: For example, under the FDIC’s regulations, the capital requirement for a clearing member’s obligations for that member), and then non-public customers. prefunded default fund contribution to a qualifying sent from the DCO to the customer and However, despite the foregoing CCP can be as low as 0.16% of that default fund proprietary accounts of each clearing analysis supporting adoption of contribution. See 12 CFR 324.133(d)(4). By contrast, member with net gains in such accounts § 190.18(c)(1), the Commission is the capital requirement for a clearing member’s prefunded default fund contribution to a non- over that time period. concerned about bank regulators’ qualifying CCP is 100% of that default fund There is no necessary relationship contribution. See 12 CFR 324.10(a)(1)(iii), (b)(3) between the aggregate amount of 195 And, thus, does not require the Commission (requiring capital of 8% of risk-weighted asset payments to the DCO from all clearing to invoke or follow the procedures of CEA section amount, 324.133(d)(2) (setting risk-weighted asset 8(a)(7). amount for default fund contributions to non- 198 196 Indeed, the risk would be even more qualifying CCP at 1,250% of the contribution). 76 FR 3608, 3708 (Jan. 11, 2011). unexpected by public customers: Clearing members (1,250% * 8% = 100%). The Federal Reserve and 199 See Core Principle E(i), 7 U.S.C. 7a– are entirely aware that their default fund Office of the Comptroller of the Currency have 1(c)(2)(E)(i). contributions are at risk of use to cover a similar regulations. 200 DCOs are required to effect settlement with mutualized default. Their customers, on the other Default fund contributions to DCOs total many each clearing member at least once each business hand, expect that their customer funds are fully billions of dollars. While not all default fund day. They are additionally required to have the protected by the CEA’s and the Commission’s contributions to DCOs come from bank-affiliated capability to effect a settlement with each clearing segregation requirements. clearing members, the majority of them do. member on an intraday basis. See § 39.14(b).

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member customer accounts with net property would be allocated to (i) obtains the Commission’s approval to losses and the aggregate amount of member property and (ii) customer continue operating the DCO.’’ FIA payments from the DCO to clearing property other than member property, in commented that it did not support members’ customer accounts with net proportion to the ratio of total gains in proposed § 190.19(b), stating that the gains. On the other hand, it is the case member accounts with net gains, and provision’s reliance on a debtor DCO’s that, for each business day, the sum of total gains in customer accounts with recovery and wind-down plans post- variation settlement payments to the net gains, respectively. bankruptcy would be inappropriate.206 clearinghouse from clearing members’ The Commission is adopting SIFMA AMG/MFA requested that the customer and house accounts with net § 190.19(b) to address cases where there Commission modify proposed losses will equal the sum of variation is a shortfall in funds received pursuant § 190.19(b)(1) to clarify the settlement payments from the to paragraph (a) (i.e., settlement Commission’s presumed intent that ‘‘the clearinghouse to clearing members’ payments received by the DCO), such as debtor’s recovery and wind-down plans customer and house accounts with net in the case of a member default. shall only apply with respect to gains.201 Those variation settlement Paragraph (b)(1) sets forth how such a proposed § 190.19(b)(1)(ii)—the debtor’s payments will be received into the shortfall shall be supplemented, to the ‘‘skin in the game’’ [(i.e., its own capital DCO’s accounts at one or more extent necessary, and further states that contributions)]—and not with respect to settlement banks from the accounts of such funds shall be allocated in the the other’’ categories of customer the clearing members with net losses same proportion as referred to in property that are enumerated in and subsequently be disbursed from the paragraph (a). Paragraph (b)(1) provides § 190.19(b)(1). The Commission agrees DCO’s accounts at settlement banks to that four types of property shall be that its intent should be clarified to the accounts of the clearing members included as customer property: (i) Initial reflect the comment from SIFMA AMG/ with net gains.202 Depending on the margin held for the account of a member MFA,207 and is modifying the language settlement bank and operational that has defaulted on a daily settlement, of § 190.19 to reflect that clarification. arrangements of the particular DCO, the including initial margin segregated for Accordingly, after consideration of variation settlement funds will remain the customers of such member; 205 (ii) the comments, and for the reasons in the DCO’s accounts between receipt Assets of the debtor to the extent stated above, the Commission is and disbursement for a time period of dedicated to such use as part of the adopting § 190.19 as proposed, with a between several minutes and several debtor’s default rules and procedures, or modification to clarify that the reference hours. as part of any recovery and wind-down to the debtor’s recovery and wind-down The Commission believes that it is plans described in the paragraph (a) plans in paragraph (b)(1) applies only to crucial to the settlement process that the (i.e., the debtor DCO’s ‘‘skin in the paragraph (b)(1)(ii), as set forth above. variation settlement payments that flow game’’); (iii) Prefunded guarantee or into the DCO from accounts with net default funds maintained pursuant to D. Appendix A Forms losses are available promptly to flow out the DCO debtor’s default rules and The Commission is deleting forms 1 of the DCO as variation settlement to procedures; and (iv) Payments made by through 3 contained in appendix A and accounts with net gains. members pursuant to assessment is replacing form 4 with a streamlined The Commission is adopting powers maintained pursuant to the proof of claim form. Current forms 1 § 190.19(a), pursuant to section 20(a)(1) debtor DCO’s default rules and through 3 contain outdated provisions 203 of the CEA, to provide that, upon and procedures. Paragraph (b)(2) provides that require unnecessary information to after an order for relief, variation that, to the extent that the funds that are be collected. The Commission believes settlement funds shall be included in included as customer property pursuant these changes will provide a trustee the customer property of the DCO, and to paragraph (a), supplemented as with flexibility to act based on the that they shall be considered traceable described in paragraph (b)(1), such specific circumstances of the case, while to—and shall promptly be distributed funds would be allocated between (i) still acting consistently with the rules. to—member and customer accounts member property; and (ii) customer As noted in § 190.03(f), the trustee entitled to payment with respect to the property other than member property, in will be permitted, but not required, to 204 same daily settlement. This customer proportion to the ratio of total gains in use the revised template proof of claim member accounts with net gains, and form included as new appendix A. That 201 Thus, while (for each settlement cycle), total gains in customer accounts with customer account losses (x) plus house account losses (y) will equal customer account gains (p) plus net gains, respectively. 206 FIA’s concerns with the language in house account gains (q) (that is, x + y = p + q), x The Commission requested comment § 190.19(b) are the same as its concerns with would only equal p by random chance. with respect to all aspects of proposed § 190.15(b) and (c), discussed in greater detail 202 In some cases, the DCO will use one § 190.19. above. See supra section II.C.5. However, for the settlement bank, and all settlement funds will flow CME expressed support for proposed reasons noted in section II.C.5, the Commission into and out of that bank. In other cases, the DCO believes that providing a ‘‘menu of options’’ among may use a system of settlement banks, and the DCO § 190.19, commenting that the which a trustee may select (and adapt) in a manner may, after receiving payments from members with provisions in the proposal ‘‘are that is ‘‘reasonable and practicable’’ would provide payment obligations, move funds between and appropriate to support the daily the trustee with a helpful roadmap to determine among the settlement banks (possibly through a settlement cycle when the trustee strategy and tactics, given that the trustee will likely ‘‘concentration bank’’) to match the settlement face a complex and difficult situation with little funds at each bank to the DCO’s settlement preparation. obligations to members who are entitled to settlement process, they are treated separately in 207 As SIFMA AMG/MFA correctly suggested, the settlement payments. § 190.19(a). Such funds would be member property Commission intends for the debtor DCO’s recovery 203 7 U.S.C. 24(a)(1) (‘‘Notwithstanding title 11 of to the extent that they are deposited on behalf of and wind-down plans to apply to the property the United States Code, the Commission may members’ house accounts, and customer property described in § 190.19(b)(1)(ii), and not to the provide, with respect to a commodity broker that other than member property to the extent that they property described in paragraph (b)(1)(i), (iii) or is a debtor under chapter 7 of title 11 of the United are deposited on behalf of members’ customer (iv), in the manner and to the extent described in States Code, by rule or regulation . . . that certain accounts. paragraph (b)(1). As noted in the preamble to the cash, securities, other property, or commodity 205 This is restricted to the extent that such proposal, and as found in the regulation itself, contracts are to be included in or excluded from margin may only be used to the extent that such use § 190.19(b)(1)(ii) contains an explicit reference to customer property or member property.’’). is permitted pursuant to parts 1, 22, and 30 of the ‘‘recovery and wind-down plans,’’ whereas 204 Because deposits of initial margin described in Commission’s regulations, which include § 190.19(b)(1)(i), (iii) and (iv) do not contain such § 39.14(a)(1)(iii) are separate from the variation provisions restricting the use of customer margin. references.

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template is intended to implement special distribution framework it indeed appropriate to change the § 190.03(e), and includes cross- prescribes should apply.’’ First, the language used in framework 2 to clarify references to the detailed paragraphs of ABA Subcommittee stated that this fact.208 Third, the relevant date is that section. Similarly, the instructions ‘‘framework 2 could be read to apply the date of the calculation, not the for this template form that are included whenever there is a loss resulting from ‘‘Final Net Equity Determination Date,’’ in appendix A are also designed to aid a sovereign action, even if there is and this should be clarified as well. customers in providing information and sufficient customer property to Accordingly, the Commission is: documentation to the trustee that will otherwise pay all customer net equity (1) Modifying the first paragraph of enable the trustee to decide whether, claims in full.’’ The ABA Subcommittee framework 2 to include the statement and in what amount, to allow each suggested that an additional sentence be that: ‘‘If a futures commission merchant customer’s claim consistent with part added to the opening paragraph of enters into bankruptcy and maintains 190. framework 2 clarifying that it applies futures customer funds or Cleared The Commission received one only when there is a loss due to Swaps Customer Collateral in a comment with respect to appendix A, sovereign action and there is depository outside the U.S. or in a from CME, which opined that ‘‘the insufficient customer property to pay all depository located in the U.S. in a proposed template proof of claim form customer net equity claims in full. currency other than U.S. dollars, and a included as Appendix A [is a] major Second, the ABA Subcommittee (in sovereign action of a foreign government improvement[ ] over the current . . . conjunction with a clarifying comment or court has occurred that contributes to proof of claim template. CME also from the Subcommittee Members) noted shortfalls in the amounts of futures support[ed] giving the trustee the that framework 2 uses the term customer funds or Cleared Swaps flexibility to tailor the proof of claim ‘‘reduction in claims’’ in a potentially Customer Collateral, the trustee shall form to request information of confusing manner—framework 2 is use the following allocation customers as appropriate under the intended to reduce distributions procedures’’ (emphasis added solely for circumstances.’’ allocated to those customers who are illustration). Accordingly, after consideration of allocated losses due to sovereign risk; (2) Amending the instructions and this comment, and for the reasons stated those customers claims are not reduced. examples within the whole of above, appendix A to part 190 will be If the sovereign action is later reversed framework 2 to replace references to adopted as proposed. or modified, those customers whose ‘‘reduction in claims’’ with references to E. Appendix B Forms distributions were reduced will receive ‘‘reduction in distributions,’’ and with increased distributions on their claims. conforming changes to other text. Appendix B to part 190 contains Third, the existing instructions to (3) Deleting the phrase ‘‘Final Net special bankruptcy distribution rules. framework 2 ‘‘establish the ‘Final Net Equity Determination Date’’ from These rules are broken into two Equity Determination Date’ as the date current section II.B.2.b of framework 2, frameworks. Framework 1 provides for both converting customer claims to and replacing it with the phrase ‘‘date special rules for distributing customer U.S. dollars and determining the of the calculation.’’ funds when the debtor FCM amount of the Sovereign Loss.’’ Accordingly, after consideration of participated in a futures-securities However, in prior bankruptcies of FCM/ the comments, and for the reasons cross-margining program that refers to commodity brokers, ‘‘claims stated in stated above, the Commission is that framework. Framework 2 provides foreign currencies were either valued on adopting appendix B, framework 2 as special rules for allocating as shortfall in the date of transfer (where porting was proposed, with the modifications customer funds to customers when the available), or converted to U.S. dollars described above. shortfall is incurred with respect to as of either as of the petition date or the funds held in a depository outside the date on which the foreign currency F. Technical Corrections to Other Parts U.S. or in a foreign currency. reflected in the customer’s account was 1. Part 1 The Commission proposed clarifying liquidated (and thus the customer bore The Commission is making as changes to framework 1. No comments the risk of interim currency proposed several technical corrections were received with respect to fluctuations).’’ Furthermore, ‘‘a and updates to part 1 in order to update framework 1. Accordingly, and for the sovereign action could take place at any cross-references. These are as follows: reasons stated above, the Commission is time after the petition date, and the • In § 1.25(a)(2)(ii)(B) the Commission adopting appendix B, framework 1 as trustee is required to make funded will revise the cross-reference to proposed. balance calculations throughout the specifically identifiable property, since The Commission proposed to retain course of the bankruptcy case for the definition will be updated in framework 2 with some clarifying purposes of porting and/or making § 190.01. changes to the opening paragraph, but interim distributions.’’ • In § 1.55(d) introductory text and without proposing any substantive The Commission finds the comments (d)(1) and (2), references to current change. It proposed to retain the current on framework 2 of the ABA instructions and examples following the Subcommittee, as clarified by the § 190.06 will be removed consistent first paragraph in appendix B, comment of the Subcommittee 208 The fact that sovereign action reduces framework 2 entirely unchanged. It Members, persuasive. First, framework 2 distributions rather than claims means that, if the requested comment with respect to is indeed only intended to address cases sovereign action is later reversed or modified (e.g., framework 2. The Commission received where there is insufficient customer by appeal in the foreign courts, or due to recovery two comments on framework 2: From property to pay all customer net equity of assets in the foreign insolvency proceeding) resulting in reduced losses due to sovereign action the ABA Subcommittee, and from a claims in the relevant account class in in a particular jurisdiction, those customers whose number of individual members of that full (if there is no shortfall, then there distributions have been reduced due to sovereign subcommittee writing on their own is no need to allocate losses), and that action in that jurisdiction will receive increased behalf. point should be made clear. Second, it distributions on their claims (with those distributions adjusted to reflect the revised amount The ABA Subcommittee expressed is correct that framework 2 is intended of losses due to sovereign action). Thus, in this the concern that ‘‘[f]ramework 2 creates to reduce distributions, it is not case, the claims remain constant, while the some ambiguity on when and how the intended to reduce claims, and it is distributions increase.

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with the revisions to new § 1.41 (which equity would be treated in a resolution As noted above, the Commission was proposed as § 190.10(b) and of the DCO under Title II of the Dodd- recognizes the importance of addressing renumbered). Frank Act. ISDA observed that the deliveries and delivery accounts, in • In §§ 1.55(f) and 1.65(a)(3) Proposal’s treatment of a DCO’s order to protect customer funds in introductory text and (a)(3)(iii) the insolvency contains significant delivery accounts, to avoid disruptions Commission will update references to subtleties and nuances that could have to cash markets for delivered the customer acknowledgment in implications for the counterfactual in a commodities, and to avoid adverse § 1.55(p) (which was proposed as DCO resolution. ISDA suggested that consequences to parties that may be § 190.10(e) and renumbered). further engagement could help ensure relying on delivery taking place in connection with their business 2. Part 4 that these subtleties and nuances would not result in any unintended operations. The Commission notes that In part 4, the Commission is making consequences, and that they are broadly there potentially would be benefits to as proposed minor technical understood by all entities that could be requiring segregation for delivery corrections: In §§ 4.5(c)(2)(iii)(A), impacted by a DCO’s insolvency or accounts, but there would be 4.12(b)(1)(i)(C), and 4.13(a)(3)(ii)(A), the resolution. corresponding costs as well. The Commission will change the cross- While the Commission is finalizing Commission expects to continue its references to the defined term for ‘‘in- the Proposal, it agrees that workshops consideration of such delivery and the-money-amount.’’ and similar interactions between staff delivery account issues in the future. SIMFA AMG/MFA understood the 3. Part 41 and other agencies, as well as with industry participants, are an excellent Commission’s decision, due to limited In part 41, the Commission is making way to expose subtleties and nuances, resources, not to amend certain key as proposed one technical correction. In build common understanding, and definitions and concepts outside part § 41.41(d), the Commission will delete enhance planning. 190, as proposed by the ABA the cross-reference to the recordkeeping CME and CMC commented on various Subcommittee in its model set of part obligations in current § 190.06, pursuant issues relating to delivery, and 190 rules, within this rulemaking. These to the revisions to § 1.41 (which was requested that ‘‘the Commission amendments include, e.g., the proposed as § 190.10(b) and consider, in a separate rulemaking, the definitions of foreign option and renumbered). merits of imposing custody variation margin, as well as regulations No comments were received with any requirements or other customer concerning non-swap and non-futures of these technical corrections and protection requirements with respect to over-the-counter transactions cleared by accordingly, for the reasons stated delivery accounts, along with the a DCO and concerning leverage above, they are being adopted as possibility of further subdividing transaction merchants. However, SIFMA proposed. delivery accounts and delivery account AMG/MFA recommended that the G. Additional Comments classes by underlying asset class or Commission make these amendments as soon as possible, given the beneficial In addition to the comments delivery mechanism, e.g., electronic transfer versus physical load-out.’’ 209 impact such changes will have on the discussed above, the Commission administration of an FCM or DCO received several general comments that CME recommended that the separate rulemaking consider requirements such insolvency. The Commission may addressed matters outside the scope of consider these proposed changes in the as whether FCMs should hold such the Proposal. The Commission future. property in custody accounts or appreciates the additional feedback. ICI and Vanguard encouraged the Because these comments do not address limitations on how long cash or cash Commission to work with other proposed changes and are therefore equivalents should be held in delivery regulators to minimize existing barriers outside the scope of this rulemaking, the accounts that are not subject to custody 210 to porting, particularly for FCMs dually Commission may take the comments requirements. CME believed that any registered as broker-dealers, FCMs under advisement for future such rules would fit best in the within consolidated groups that are rulemakings. Commission’s part 1 regulations and not subject to certain due diligence ISDA encouraged the Commission to in part 190 as parties with delivery requirements, and FCMs that are subject continue working on DCO recovery and obligations may not necessarily be to the FDIC’s Orderly Liquidation resolution issues alongside the Federal aware of requirements in the bankruptcy Authority proceedings. The commenters Deposit Insurance Corporation (FDIC) in regulations. CME recommended that the encouraged the Commission to work the United States, and with global part 190 provisions relating to the with regulators to permit similar six- standard setters such as CPMI–IOSCO delivery account class should be month grace periods and remove the and the Financial Stability Board and consistent with any such rules the requirement to port ‘‘all or none’’ of the other CCP supervisors and resolution Commission may ultimately adopt. positions instead of allowing partial authorities internationally. The Thus, CME believed that the transfers of customer positions, Commission notes that staff are actively Commission may have to revisit the including those of separately managed doing each of those things. delivery account class definition, and accounts. ISDA also noted that it would be any appropriate subdivisions within the ICI also recommended that the advisable to engage in workshops with account class, along with the definitions Commission engage with SIPC or the both market participants (including of cash delivery property and physical relevant bankruptcy court to ensure that DCOs, FCMs and other clearing delivery property definitions, based on any selected trustee has the experience members and customers) and the FDIC the outcome of such a rulemaking. and knowledge to act in accordance prior to finalizing the Proposal to with the duties contained in part 190 develop examples that illustrate both 209 See CMC, CME. and Subchapter IV of the Bankruptcy how net equity claims would be 210 See CME. CME believed that the Commission Code. has authority to adopt such a rule pursuant to its calculated in a hypothetical DCO anti-fraud authority under CEA section 4b and its Commission staff have and will insolvency under various loss scenarios plenary authority to regulate commodity options continue to work with staff of other and how the claims of creditors and under CEA section 4c(b). regulators to minimize barriers to

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porting, and have worked and will, if customer must receive full a voluntary petition in bankruptcy and when necessary in future, work compensation in the form of a credit or commences the case, which in turn with SIPC and the office of the U.S. equity claim against the DCO, superior constitutes an order for relief. Trustee, to promote the appointment of to that of other creditors. Accordingly, there exists a possibility the most knowledgeable trustees ICI and Vanguard also requested that that, in the highly unlikely event that a available in the context of SIPA or the Commission require DCOs to SIDCO would consider bankruptcy, the Chapter 7 proceedings, respectively, increase their ‘‘skin-in-the-game’’ as a SIDCO could file for bankruptcy before involving a commodity broker. foundational incentive for the DCO to a process to place that SIDCO into a ICI recommended that the set appropriate margin levels and avoid Title II Resolution would have Commission continue its portfolio clearing illiquid or highly volatile completed. While the appointment of margining harmonization efforts with products. Vanguard also recommended the FDIC as receiver under Title II the SEC to further facilitate portfolio that a DCO’s capital should be required would automatically result in the margining, including with respect to to backstop clearing risk, should the dismissal of the prior bankruptcy, if the security-based swaps and swaps. The assets available for DCO recovery prove bankruptcy filing were to necessarily Commission notes that the two inadequate. result in the termination of the SIDCO’s Commissions are actively engaging in FIA requested that the Commission derivatives contracts with its members, such efforts, and, on October 22, 2020, confirm that amendments to part 190, that would undermine the potential held a joint meeting during which they including to appendix B, framework 2, success of any subsequent Title II jointly approved a ‘‘Request for would not prohibit the Commission Resolution. Comment: Portfolio Margining of from amending § 1.49 at a later date to To address the problem, the Uncleared Swaps and Non-Cleared expand the definition of ‘‘money center Commission proposed, in the Security-Based Swaps.’’ 211 currency.’’ Supplemental Proposal, to adopt a ICI and Vanguard recommended that The Commission confirms that the provision that would stay the the Commission extend the ‘‘legally amendments to part 190 that are being termination of SIDCO contracts for a segregated operationally commingled’’ made herein will not prohibit the brief time after bankruptcy in order to (‘‘LSOC’’) model applied to cleared Commission from amending any other provide advance notice to the swaps contracts (and associated regulation, including § 1.49, in the Commission (and, thus, to enable the collateral) within part 22 to also apply future. If future amendments to other Commission to notify the key turners) of to futures, foreign futures, and options parts of the Commission’s regulations the point at which the SIDCO’s thereon (and associated collateral) to lead to a situation where it would be contracts could be terminated, in order limit non-defaulting customer exposure advisable to make conforming changes to foster the success of a Title II to defaulting customers. to part 190, the Commission will resolution by avoiding that termination, ICI also requested that the consider such conforming changes along if the FDIC is appointed receiver in such Commission or Commission staff with those amendments. a Resolution within that time. During provide guidance, such as an this stay, variation margin would H. Supplemental Proposal interpretive letter, that interprets part 22 neither be collected nor paid. Due to to require that OTC transactions cleared In the Supplemental Proposal, the concerns raised by commenters to the by DCOs and carried in a cleared swaps Commission noted a problem to be original Proposal regarding the effect of account be treated as cleared swaps solved: There is a possibility that a any restriction on termination of DCO subject to part 22.212 SIDCO could file for bankruptcy before contracts on treatment, under the capital ICI and Vanguard recommended that the process for placing that SIDCO into regulations of Prudential Regulators of the Commission prohibit non-defaulting Title II resolution is complete. Due to the banks that many clearing members customer gains haircutting, or any other closeout netting rules adopted by many are affiliated with, of SIDCO rules, the margin haircutting, and if such gains DCOs, including the SIDCOs, that filing proposal provided that this provision haircutting is allowed at all, it should be could have the consequence of would become effective only if the limited in scope and duration, overseen terminating all of the SIDCO’s cleared Commission were to find that the by the DCO’s resolution authority and/ contracts. Terminating those contracts Prudential Regulators (i.e., the Federal or the systemic risk authority, and the could undermine the success of any Reserve, the FDIC, and the Office of the subsequent Title II resolution. Comptroller of the Currency) have taken 211 85 FR 70536 (November 5, 2020). The Supplemental Proposal suggested steps to make such a stay consistent 212 Such an interpretation may be superfluous. one approach to solve the problem, and with SIDCO rules retaining status as Previously, the Commission issued an requested comment, inter alia, on better QMNAs.214 ‘‘Interpretative Statement Regarding Funds Related ways to do so. In light of concerns to Cleared-Only Contracts Determined To Be Included in a Customer’s Net Equity.’’ 73 FR 57235 raised in the comments received in FDIC, Federal Reserve, and Secretary of the (October 2, 2008). At the time, prior to Dodd-Frank, response to the Supplemental Proposal, Treasury are often referred to as the ‘‘key turners’’ there were questions as to whether cleared-only and for reasons discussed below, the for Title II resolution). Following such a transactions were commodity contracts. The Commission has determined not to determination, the board of directors of the Commission noted that, in cases where such financial company may acquiesce or consent to the contracts are held in a futures account at an FCM finalize the alternative that was appointment of the FDIC as receiver, or there may and margined as a portfolio with exchange-traded proposed in the Supplemental Proposal. be a period of judicial review which may extend to futures, assets margining that portfolio are likely to The process for placing a financial 24 hours. be includable within ‘‘net equity’’ even if such company into Title II Resolution is 214 Any stay (in bankruptcy) on the termination contracts were found not to be commodity 213 of the SIDCO’s derivatives contracts would—under contracts: Where the assets in an entity’s account deliberate and intricate. By contrast, the regulations of the Prudential Regulators of the collateralize a portfolio containing both commodity banks and bank holding companies that SIDCO contracts and other contracts, the entirety of those 213 In the case of a SIDCO, this would include a clearing members may be affiliated with or part of— serves as performance bond for each type of written recommendation by each of the FDIC and be inconsistent with the status of a DCO’s rules as contracts. See id. at 57236. See also 17 CFR 22.1 the Federal Reserve covering eight statutory factors. a qualifying master netting agreement (‘‘QMNA’’). (defining ‘‘Cleared Swaps Customer Collateral,’’ in Following that recommendation, the Secretary of Qualification of DCO rules as a QMNA is necessary relevant part, as all property that ‘‘[i]s intended to the Treasury would then need to make a in order for the banks and bank holding companies or does margin, guarantee, or secure a Cleared Swap determination, in consultation with the President, that clearing members are affiliated with or part of . . . .’’). that each of seven statutory factors is met. (The Continued

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The Commission requested comment contemplating placing the SIDCO into a Title ‘‘extraordinarily unlikely.’’ Knowledge on all aspects of the Supplemental II resolution proceeding, and doing so is of the SIDCO’s financial distress is Proposal, including as to whether the feasible, it is hard to imagine that a SIDCO distinct from knowledge of the timing of approach proposed ‘‘is the best design could file a voluntary petition for relief under a potential bankruptcy filing. While the subchapter IV of Chapter 7 of the Bankruptcy for such a solution.’’ Code without their prior knowledge. Commission would most likely be aware The Commission received five of the SIDCO’s distress, it is at this point comments on the Supplemental *** In the highly unlike event a SIDCO were not certain that there would be clear Proposal, each of which was from an to face a decision whether to file for communication of the SIDCO’s entity that commented on the bankruptcy, it would be one of last resort, intention to file for bankruptcy Proposal.215 taken only after careful deliberation. The sufficiently in advance that the key Many of the commenters argued that decision to file a voluntary petition for relief turners would have time to act. the proposed stay is unnecessary, is certainly not one that CME, or any DCO, As noted in the Supplemental because the Commission would would take lightly. Proposal, the destructive impact of a full inevitably have received notice of the The Commission agrees that, pursuant tear-up of a SIDCO’s contracts would be impending bankruptcy. For instance, ICI to the DCO oversight framework, significant. The FSOC has found that a (2) commented that: including a SIDCO’s reporting significant disruption or failure of either Although it may indeed take some time for obligations under § 39.19, the SIDCO could have a major adverse the relevant agencies to ‘‘turn the three Commission would promptly be impact on the U.S. financial markets, keys,’’ a DCO’s recovery tools should give the notified of a DCO’s financial distress. the impact of which would be agencies more than enough time. DCOs have Upon learning of such distress— exacerbated by the limited number of clearing fund provisions, operational default whether through notification by the clearing alternatives currently available provisions, and a variety of other risk for the products cleared by each SIDCO. management tools at their disposal. In DCO or by risk surveillance by practice, these tools may not be completely Commission staff—the Commission and A failure or disruption of either SIDCO effective to preclude an insolvency. However, staff would monitor the situation would likely have a significant it seems extraordinarily unlikely that they closely, and, in appropriate cases, detrimental effect on the liquidity of the would be so ineffective as to fail to give the promptly contact and act in futures and options markets (for CME) FDIC, Federal Reserve Board, and Secretary coordination with fellow regulators, or swaps markets (for ICC), and on of the Treasury enough time to decide including the Federal Reserve and FDIC clearing members, which include large whether to trigger OLA proceedings. (and, as appropriate, the Department of financial institutions, and other market Similarly, SIFMA AMG/MFA (2) the Treasury). Moreover, DCOs have participants. These significant effects stated that ‘‘the possibility of a surprise strong and effective ‘‘clearing fund would, in turn, likely threaten the bankruptcy filing [is] implausible given provisions, operational default stability of the broader U.S. financial the regulatory oversight framework.’’ provisions, and other risk management system.216 For those reasons, inter alia, FIA (2) agreed, stating that: tools at their disposal,’’ as noted in the the Commission continues to be A determination with regard to invoking comment letter from ICI (2). The concerned about avoiding a Title II will almost certainly be made before Commission believes it to be circumstance where the derivatives a SIDCO is subject to an order for relief.... ‘‘extraordinarily unlikely’’ that these contracts of a SIDCO are irrevocably [W]e fully anticipate that the Commission, tools would fail, let alone fail before the terminated because the SIDCO files for the FRB, the FDIC, and the Department of the ‘‘key turners’’ have time to act. bankruptcy before a process to place Treasury will be making an assessment It is also true that, given prior that SIDCO into a Title II Resolution. regarding the necessity and feasibility of experience with discussions with DCOs However, the comments expressed recommending that the President invoke Title II and taking appropriate action before concerning defaults of clearing members strong concerns about achieving those the SIDCO concludes that it must file a (none of which resulted in financial goals through the use of a bankruptcy petition for bankruptcy. distress to the DCOs), the Commission stay, especially in light of the fact that fully expects that any DCO that is in variation margin would neither be CME (2) argued that: financial distress would be in close collected nor paid during that period. under the CEA oversight framework, contact with Commission staff. The The Supplemental Proposal including a SIDCO’s reporting obligations, Commission also appreciates the acknowledged that risk levels would surely it is reasonable to expect that the sentiment expressed by CME and increase during the stay period. Commission, FDIC, FRB and Treasury will be quoted above, implying that ‘‘it is hard well aware of any circumstances that could Commenters argued that such increase portend a SIDCO’s failure, whatever the to imagine’’ that a SIDCO would not in risk exposures during the stay period cause, and will be closely monitoring the provide the Commission with prior would pose unacceptable risks. For situation. If the relevant parties are knowledge of a voluntary bankruptcy example, CME (2) stated that filing. Finally, the Commission is ‘‘permitting the accumulation of to net the exposures of their contracts cleared with confident that the decision to file a uncovered risk for 48 hours during an the DCO in calculating bank capital requirements. voluntary petition for relief in extremely volatile time would pose a If they cannot net such exposures, there would be bankruptcy is ‘‘not one that . . . any significantly increased bank capital requirements risk to financial stability.’’ Similarly, associated with such contracts. Such an increase in DCO would take lightly.’’ SIFMA AMG/MFA (2) warned that the bank capital requirements would disrupt both Nevertheless, given the destructive proposed part 190 stay, in conjunction proprietary and customer clearing. See generally impact that termination of the with the Title II stay, ‘‘would result in Supplemental Proposal, 85 FR 60110, 60112 (Sept. derivatives contracts of a SIDCO would 24, 2020). extraordinary market exposures to 215 Comments on the Supplemental Proposal were cause, the Commission remains market participants during highly submitted by: CME Group Inc. (‘‘CME (2)’’); Futures concerned about the effects that a volatile market conditions. The non- Industry Association (‘‘FIA (2)’’); Intercontinental bankruptcy filing would have on the payment of margin could also result in Exchange Inc. (‘‘ICE (2)’’); Investment Company ability to resolve the SIDCO pursuant to a multiple day liquidity problem for Institute (‘‘ICI (2)’’), and Securities Industry and Financial Markets Asset Management Group and Title II successfully. In this context, it Managed Funds Association (‘‘SIFMA AMG/MFA is not enough that such an event is 216 See 2012 FSOC Annual Report, Appendix A, (2)’’). ‘‘implausible,’’ ‘‘hard to imagine,’’ or at 163, 178.

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market participants clearing at the any bankruptcy petition by a SIDCO. We approach would appear to be, as noted SIDCO.’’ believe this notice requirement would by CME, well within the Commission’s The Supplemental Proposal also achieve the same goal in a materially rulemaking authority.218 acknowledged that there is a significant less detrimental manner.’’ However, in light of the concerns cost to the proposed stay, in that ‘‘[f]or CME (2) suggested the same raised with the previous approaches to the duration of the stay period, clearing alternative approach to achieve the addressing this problem, both the one members and clients will be uncertain same regulatory goal, in somewhat more advanced in the Supplemental Proposal whether their contracts will continue (as detail. CME (2) urged that the as well as one advanced in the Proposal, part of a Resolution) or be terminated Commission should address the the Commission concludes that, at this (and thus would need to be replaced). problem: point, it should engage in further That uncertainty would mean that in a more direct manner, consistent with its analysis and development before clearing members and clients would be rulemaking authority. For example, the proposing this, or any other, alternative disadvantaged in determining how best Commission could require a DCO to notify approach. Such further analysis and to protect their positions.’’ Again, the CFTC in advance of its plan to file a development might better enable the commenters agreed that this cost would voluntary petition for relief under subchapter Commission to propose, in detail, a ensue, and argued that it would be IV of Chapter 7 of the Code, to allow solution that is effective, and that Treasury time to determine whether to unacceptable. For example, ICI (2) appoint the FDIC as receiver before the mitigates any attendant costs. Thus, the observed that during the stay: SIDCO files its petition. We note that before Commission will, at present, keep this the price of the relevant underlying assets a commodity broker may file a voluntary issue under advisement. petition for relief under subchapter IV, its could (and if a SIDCO is insolvent, likely III. Cost-Benefit Considerations would) move dramatically. However, board of directors must approve a resolution customers would be precluded from entering authorizing the debtor to take that step. A. Introduction into risk-reducing or replacement The Commission agrees that the transactions to stem potential losses, since Section 15(a) of the CEA requires the alternative suggested by the commenters Commission to consider the costs and they will not know whether their contracts in response to the Commission’s will be terminated or reinstated. Such a benefits of its actions before freeze not only threatens to cause public request—providing the advance notice promulgating a regulation under the customers significant losses that they cannot sought by the Commission, but before a CEA or issuing certain orders.219 mitigate; it would also create a liquidity bankruptcy filing rather than Section 15(a) further specifies that the event because customers will need to thereafter—is one that, as FIA (2) costs and benefits shall be evaluated in preserve as much liquidity as possible during observed, ‘‘deserves the Commission’s light of the following five broad areas of the pendency of the stay in order to meet strong consideration.’’ It appears that it potential margin calls. market and public concern: (1) may achieve the regulatory goals Protection of market participants and Commenters also raised issues specified in the Supplemental Proposal the public; (2) efficiency, relating to legal uncertainty. For while avoiding the concerns raised by competitiveness, and financial integrity instance, FIA (2) acknowledged that the commenters: By providing advance of futures markets; (3) price discovery; section 20 ‘‘authorizes the Commission notice to the Commission, it appears (4) sound risk management practices; to adopt rules ‘[n]otwithstanding title 11 that it may allow the Commission, and (5) other public interest of the United States Code’ ’’ (i.e., the which will be coordinating with the considerations. The Commission Bankruptcy Code). However, FIA ‘‘key-turners,’’ to advise those agencies considers the costs and benefits observed that ‘‘[w]hether a stay of the imminence of a bankruptcy filing, resulting from its discretionary contemplated under the Supplemental and to provide them with warning at a determinations with respect to the Proposal would conflict with section time that may be sufficient to enable section 15(a) factors (collectively 404(a) of FDICIA . . . is unclear.’’ them to act with dispatch to complete referred to herein as ‘‘Section 15(a) In light of the persuasive arguments of the process. Factors’’) below. Because the alternative approach the commenters, the Commission In the Proposal, the Commission would not involve a post-bankruptcy concludes that a bankruptcy stay is not endeavored to assess the expected costs stay, it would appear to avoid affecting an appropriate means of achieving the and benefits of the proposed rulemaking the QMNA status of SIDCO rules (and, goal of fostering the success of a Title in quantitative terms, including costs thus, would appear not to require any II Resolution by avoiding the possibility related to matters addressed in the action by the Prudential Regulators).217 that the SIDCO could file for bankruptcy Paperwork Reduction Act 220 (‘‘PRA- before a process to place that SIDCO Moreover, because this notice would related costs’’), where possible. In into a Title II Resolution would have occur in advance of a bankruptcy filing, situations where the Commission was completed with the result that all of the the suspension of payments and unable to quantify the costs and SIDCO’s contracts were terminated. This collections of variation margin would benefits, the Commission identified and would be true even if action was taken not occur, and there would appear to be considered the costs and benefits of the by the Prudential Regulators to avoid no ambiguity concerning the status of applicable proposed rules in qualitative having such a stay undermine the the cleared contracts of market terms. The lack of data and information QMNA status of SIDCO rules. Thus, participants. By avoiding the to estimate those costs was attributable while the goal remains important, the mechanism of a bankruptcy stay, the in part to the nature of the proposed Commission will not adopt such a stay. Commission would also appear to avoid the legal uncertainty issues raised by the A number of the comments answered 218 See, e.g., CEA section 5b(c)(2)(J), 7 U.S.C. 7a– the Commission’s call for a better way commenters with respect to that 1(c)(2)(J) (reporting core principle); CEA section of achieving that goal. SIFMA AMG/ mechanism. Instead, this notice 3(b), 7 U.S.C. 5(b) (purpose of the CEA is to ensure MFA(II) stated that ‘‘[a]s an alternative the financial integrity of transactions subject to the to the proposed stay, the Commission 217 This also avoids the issue, raised by ICE (2), CEA and the avoidance of systemic risk); CEA that action by the Prudential Regulators with section 8a(5), 7 U.S.C. 12a(5) (general rule-making could require, as part of its Part 39 or respect to QMNA status may not be sufficient to authority). Part 190 rules, that a SIDCO provide a address netting issues for non-U.S. clearing 219 CEA section 15(a), 7 U.S.C. 19(a). 1 or 2 day notice to the Commission of members. 220 44 U.S.C. 3501 et seq.

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rules. None of the comments identified creation of large, publicly held financial tailored to the facts and circumstances quantifiable costs or benefits. holding companies with different of the particular case, rather than In a number of cases, commenters attitudes towards risk. compelling the trustee to follow a suggested alternative approaches or As a result, several of the changes to procrustean framework, or requiring the modifications to the proposed part 190 will address these changed trustee to request formal approval from provisions. The Commission has circumstances. The Commission the bankruptcy court or the Commission carefully considered these alternatives believes that the revisions in proposed before implementing those decisions. and modifications and in a number of part 190 that address the computerized This approach leads to approaches that instances, for reasons discussed in and fast-paced nature of the industry are better tailored to the specifics of the detail above, has adopted such will benefit all parties involved in a circumstances, reductions in alternative approaches or modifications bankruptcy proceeding, since the rules administrative costs (leaving more funds where, in the Commission’s judgment, would reflect how the industry actually available for distribution to public the alternative or modified approach is works today and will avoid unnecessary customers and/or other creditors) and more appropriate to accomplish the delay to the administration of a faster distributions of customer property regulatory objectives. The rationale in bankruptcy proceeding. (to the benefit of public customers). It is also intended to mitigate the negative these cases was discussed in detail b. Trustee Discretion above. externalities arising from the distressed In several places in revised part 190, circumstances that tend to result in 1. Baseline the Commission provides additional further reduction in the value of The baselines for the Commission’s flexibility and discretion to the customer assets.222 consideration of the costs and benefits bankruptcy trustee in taking certain The Commission recognizes, however, of this rulemaking are: (1) The actions.221 This principles-based that with increased discretion comes a Commission’s current regulations in approach is in contrast to the customer risk of trustee mistake or misfeasance; in part 190, which establish bankruptcy notice procedures in current part 190, other words, a trustee making decisions rules in the event of an FCM which are more prescribed and depend that turn out not to be in the best bankruptcy; (2) current appendix A to on the type of notice being given. interests of public customers as a class, part 190, which contains four The Commission has concluded that, or other creditors.223 While this is bankruptcy forms (form 1—Operation of in general, affording more discretion to certainly a potential cost in situations the Debtor’s Estate—Schedule of the bankruptcy trustee in appropriate where the trustee is given increased Trustee’s Duties; form 2—Request for circumstances is beneficial, and indeed discretion or flexibility, the Commission Instructions Concerning Non-Cash necessary, where matters are unique and believes that this potential cost will be property Deposited with (Commodity fast-paced, as they often are in mitigated by (1) the high degree of Broker); form 3—Request for commodity broker bankruptcy informal (and, where necessary, formal) Instructions Concerning Transfer of proceedings. In many areas, it is involvement of Commission staff in 224 Your Hedging Contracts Held by unlikely that a prescriptive approach FCM and DCO bankruptcy matters, (Commodity Broker); and form 4—Proof can be designed that will reliably be ‘‘fit and (2) the fact that such discretion of Claim); and (3) current appendix B to for purpose’’ in all plausible future would not be unbounded and would part 190, which contains two circumstances. apply only in particular circumstances, frameworks setting forth rules Granting the trustee discretion is as discussed below. concerning distribution of customer expected to decrease, though it certainly Moreover, in response to a comment funds or allocation of shortfall to does not eliminate, the number and by ICI, and as discussed further below, customer claims in specific extent of cases in which the trustee will the Commission is adding a clarification in § 190.00 that where a provision in circumstances. petition the bankruptcy court for formal approval of an action. Each formal part 190 affords the trustee discretion, 2. Overarching Concepts approval the trustee is required to that discretion should be exercised in a a. Changes to Structure of Industry obtain—i.e., each time the trustee moves manner that the trustee determines will for an order from the bankruptcy court best achieve the overarching goal of The Commission is making several authorizing the trustee to take a protecting public customers as a class revisions to part 190 in order to reflect particular action in a particular way— by enhancing recoveries for, and the changes to the structure of the takes significant time and involves mitigating disruptions to, public industry since part 190 was originally significant administrative costs—in customers as a class. The Commission is published in 1983. In particular, FCMs particular, the time of professionals of the view that adding this principles- and DCOs now operate in a different such as attorneys and financial experts based provision will further clarify the world, where matters such as market to draft legal pleadings and analyses. duty of trustees in commodity broker moves, transactions, and movements of These professionals charge significant bankruptcy proceedings to act in a funds tend to happen much more hourly fees, and thus their time leads to quickly, in part due to the advances in 222 significant administrative costs. As As discussed above, see section II.B.2, while technology and the global nature of the trustee has discretion as to how they administer discussed further below, administrative underlying markets. the affairs of the bankruptcy estate, a DCO of which costs can be charged against customer that FCM is a member retains its rights to act under These changes include major property, leading to reduced recoveries its rules. structural changes in the financial 223 by public customers. Certain discretionary decisions a trustee may markets, including regulatory reforms take, for example, the frequency with which the Therefore, increased discretion of the following the 2008 financial crisis and trustee provides information. trustee will benefit the estate by 224 consequent changes to the structure of As a formal matter, the Commission has the allowing the trustee to make principles- right to appear and be heard on any issue in any the derivatives markets, changes in the based decisions that are uniquely such case. See 11 U.S.C. 762(b). As a practical governance of the market utilities, such matter, trustees and their counsel have, in previous as DCOs, from non-profit organizations commodity broker bankruptcies, consulted with 221 The alternative, to forego providing such Commission staff frequently and on an ongoing to public companies, and major reforms flexibility or discretion, would invert the benefits basis, particularly in making and implementing in the banking sector, followed by the and costs discussed below. important decisions.

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manner that adds benefits, and reduces precision, on the other hand. Current FCM or a DCO, and that it is important costs, to public customers as a class by, part 190 favors cost effectiveness and that the rules allow the trustee, in respectively, enhancing their recoveries promptness over precision in certain conducting that administration, to take and mitigating disruptions to them. respects, particularly with respect to the into account the unique nature of each However, channeling the trustee’s concept of pro rata treatment. As a of these events. The revisions to discretion towards protecting public result of the policy choice made by proposed part 190, therefore, address customers as a class may well work to Congress in section 766(h) of the the uniqueness of these bankruptcy the detriment of (and thus impose costs Bankruptcy Code, part 190 proceeds events and allow for the bankruptcy upon) individual public customers, or from the principle that it is more trustee to tailor their approach in the classes of public customers, whose important to be cost effective and way that most makes sense given the interests differ from that of the class in prompt in the distribution of customer individual circumstances of the case at general. For example, certain customers property (i.e., in terms of being able to hand.227 History has shown that FCM may have a particular need for current treat public customers as part of a class) bankruptcies play out in very different and precise information about their than it is to value each customer’s ways, and several of the Commission’s account balances and positions.225 It is entitlements on an individual basis. The revisions to part 190 address that possible (though unlikely) that the revisions to part 190 take this concept reality. These new provisions reflect the trustee might determine that it is further, recognizing that there are fact that each FCM and DCO bankruptcy inordinately costly to do so for a additional circumstances where cost presents individual circumstances, and particular time, looking at the interests effectiveness and promptness in the that the proof of claim form will likely of public customers as a class. Such a administration of a bankruptcy have to be modified to fit the unique decision would not be a mistake or proceeding should have higher priority facts and circumstances of each case. malfeasance, though one would expect than precision. However, in response to The Commission believes that the the trustee to endeavor to avoid the ICI’s comment, the Commission has revisions of this type will benefit all necessity for doing so. clarified that where the trustee is parties involved in a bankruptcy An additional risk related to increased directed to exercise ‘‘reasonable efforts’’ proceeding by better tailoring such a discretion is the possibility that parties to meet a standard, those efforts should proceeding to the unique needs of the that are dissatisfied with the trustee’s only be less than ‘‘best efforts’’ to the particular case. exercise of discretion may challenge it extent that the trustee determines that However, by providing for a bespoke in court, potentially leading to increased such an approach would support the tailoring of the approach to commodity litigation costs. The Commission goal of protecting public customers by broker bankruptcy, the Commission believes that this risk is mitigated by (1) enhancing recoveries for, and mitigating inherently provides less transparency, the fact that certain of these decisions disruptions to, public customers as a and thus less certainty, of the would be made in contexts where the class.226 Thus, the Commission particulars of the approach that will be trustee would be seeking an order of the recognizes that there are limits to the followed. bankruptcy court approving the trustee’s extent to which cost effectiveness and approach (and thus the trustee’s e. Administrative Costs are Costs to the promptness will be favored over Estate, and Often to the Customers discretion would be subject to judicial precision as discretion must be review within a proceeding in which exercised in furtherance of the In many instances in this adopting interested parties already have an overarching goal of protecting the release, the Commission is noting that a opportunity to object) and (2) the interests of public customers as a class. certain provision will impose or reduce likelihood that bankruptcy courts would The Commission believes that these administrative costs, that is, the actual respect the Commission’s rules granting revisions favoring cost effectiveness and and necessary costs of preserving the the trustee discretion, rendering such promptness over precision further the bankruptcy estate and administering the litigation less likely to succeed, and policy embodied in section 766(h) of the case. In each of these cases, quicker to resolve. Litigation that is less Bankruptcy Code and benefit parties administrative costs will be a cost to the likely to succeed is less likely to be involved in a bankruptcy proceeding estate of the debtor, since administrative brought, and litigation that is quicker to overall, in that they will in general lead expenses that the bankruptcy trustee resolve is likely to cost less. Thus, by to: (1) A faster administration of the incurs in administering the estate granting the trustee discretion, the proceeding; (2) public customers (including for the time of the trustee, accountants, counsel, consultants, Commission mitigates the cost of such receiving their share of the debtor’s etc.) 228 will be passed onto the estate litigation. customer property more quickly; and (3) Instances where the revisions to a decrease in administrative costs. 227 proposed part 190 will afford more There could, however, be Circumstances that may vary include: The flexibility or discretion to the accuracy of the commodity broker’s records at the corresponding costs to this approach for time of bankruptcy; whether the bulk of an FCM’s bankruptcy trustee are discussed in some public customers in that they may customer accounts were transferred in the days after further detail where they appear in each lose out on being treated precisely in the filing date (or otherwise migrated in the days provision below. before); the number of customer accounts; the terms of their individual circumstances existence and extent of a shortfall in customer c. Cost Effectiveness and Promptness (and, for example, may receive a smaller funds; and the complexity of the positions carried Versus Precision distribution of customer property than by the commodity broker. otherwise). 228 Pursuant to section 503(b)(1) of the Code, In revising part 190, the Commission administrative costs include the actual, necessary has endeavored to effect a proper d. Unique Nature of Bankruptcy Events costs and expenses of preserving the estate; and balance between cost effectiveness and pursuant to section 330(a)(1)(A) of the Code, the The Commission recognizes in Court may award ‘‘reasonable compensation for promptness, on the one hand, and revised part 190 that there is no one- actual, necessary services rendered by the trustee size-fits-all approach to the . . . professional person, or attorney . . . .’’ Factors 225 See ICI at 22 (failure of trustee to provide that are considered in determining ‘‘reasonable account statements or information about funded administration of the bankruptcy of an compensation’’ include the time spent on the balances could ‘‘hinder the ability of a regulated services, the rates charged, the customary fund to confirm the existence and value of its 226 See comparison of best efforts to reasonable compensation charged by comparably skilled transactions and associated margin.’’) efforts in section II.A.1 above. Continued

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itself. This means that, in the event of B. Subpart A—General Provisions closing out and reopening positions for a shortfall, such costs will ultimately be certain customers. Additionally, 1. Regulation § 190.00: Statutory liquidating a mass of customer positions borne by the public customers of the Authority, Organization, Core Concepts, may roil the markets, if any, where debtor, who will receive smaller Scope, and Construction: Consideration those positions are concentrated. dividends on their claims as the value of Costs and Benefits of the debtor’s estate decreases.229 By a Furthermore, § 190.00(c)(4) parity of reasoning, reducing such Section 190.00 contains general establishes a preference for transfer administrative costs will reduce the provisions applicable to all of part 190. rather than a mandate. Thus, if after shortfall, and increase recoveries by These provisions set forth the concepts exerting their best efforts, the trustee public customers. that guide the Commission’s bankruptcy finds that the process of transfer is regulations. All of § 190.00 is new, in indeed too ‘‘difficult and time- To be sure, the actions taken to that current part 190 does not contain consuming,’’ the trustee is not obligated achieve these cost efficiencies that an analogous regulation. However, only to implement a transfer. Moreover, as a enhance the value of the estate for certain provisions within § 190.00 have practical matter, there are narrow limits public customers as a whole may cost-benefit implications, since the bulk to how long a trustee will have to impose costs on individual public of § 190.00 is designed to explain endeavor to transfer before being customers. concepts that are either (1) not different compelled to liquidate positions by the from those contained in current part f. Preference for Public Customers Over DCO at which they are held, or, if 190, but are simply stated more applicable, an FCM through which they Non-Public Customers and for Both explicitly in the revised rules, or (2) are held. (Either the DCO or the FCM, Over General Creditors new, in that they are not contained in whichever is applicable, will have the As noted repeatedly above, and current part 190, but are concepts that discretion to liquidate positions that are consistent with the requirements of are meant to clarify how revised being cleared/carried for an FCM that is section 766(h) of the Bankruptcy Code substantive provisions operate. In the in bankruptcy).230 Pursuant to and longstanding Commission policy, latter case, cost and benefit § 190.04(d), if the trustee is not many provisions in part 190 favor considerations are addressed with successful in transferring an open respect to the substantive provisions. public customers over non-public contract by the seventh calendar day The Commission requested comment after the order for relief consistent with customers, and both over general on all aspects of its cost and benefit creditors, whenever there is a shortfall § 190.04(a), the trustee is directed to considerations with respect to proposed liquidate such contract promptly and in in customer property in any account § 190.00. class for public customers (or, with an orderly manner. Thus, while a There are potential costs associated customer could face uncertainty as to reference to general creditors, for non- with § 190.00(c)(4) which promotes the public customers). how its position and associated transfer or porting of the open collateral will be resolved until a The preference for public customers commodity contract positions of a transfer is complete (or until the benefits them, and provides them with bankrupt FCM’s public customers rather customer’s positions are otherwise incentives to participate in transactions than the liquidation of these positions. liquidated), the time of that uncertainty protected by part 190, and to post For example, OCC commented that is both practically and legally limited. collateral willingly. However, this while liquidating customer positions Finally, a customer who does not wish preference correspondingly disfavors may introduce market risk associated to post additional collateral at a new non-public customers. Accordingly, it with closing out and reopening FCM would be entitled to have the new positions for certain customers, those arguably provides them with incentives FCM liquidate their positions, and risks should be weighed against the to participate less in transactions promptly receive any remaining potential drawbacks of porting, protected by part 190—or, perhaps, to transferred collateral. In this light, the especially if an FCM to accept the clear through unaffiliated FCMs (and Commission believes that the benefits of transfer is not immediately identified. thus, to do so as public customers of continuing the preference for transfer Specifically, OCC identified three those FCMs). remain significant, while the costs of potential drawbacks with the proposed Similarly, the preference for both this preference are mitigated. § 190.00(c)(4). First, that it could be There are potential benefits arising public and non-public customers over difficult for a trustee (or DCO) to general creditors may incentivize from reduced uncertainty as a result of identify a transferee to accept the open clarifications provided in several general creditors to be less willing to positions and collateral, which extend credit to commodity brokers. provisions. For example, depending on the market conditions § 190.00(d)(1)(ii), clearly expresses that However, in light of the fact that could be a difficult and time-consuming commodity brokers are highly regulated part 190 applies to a proceeding process. Second, a customer could face commenced under SIPA with respect to entities subject to stringent capital or uncertainty as to how its position and resource requirements, this incentive a debtor that is registered as a broker or associated collateral will be resolved dealer under the CEA when the debtor effect with respect to general creditors is until a transfer is complete and also may not likely to be strong. also is an FCM. Similarly, § 190.00(e) be unable to exit a position in a timely clarifies how transactions and collateral and efficient manner. Third, a customer that are portfolio margined are treated as practitioners, and whether the services were might need to post additional collateral an important prerequisite to an effective necessary to the administration of the case. See at a new FCM prior to or immediately generally 11 U.S.C. 330(a)(3). portfolio margining program. Cboe’s 229 While such costs may in certain cases be borne after a transfer. comment letter expressed the view that In considering the costs and benefits instead by general creditors, section 766(h) permits the clarity provided in § 190.00(d)(1)(ii) customer property to be used to meet ‘‘claims of a of the preference for transfer versus will be beneficial to the entire kind specified in section 507(a)(2)’’ of the liquidation, the Commission notes first Bankruptcy Code (which in turn include claims for that, as OCC forthrightly acknowledged, the expenses of administering the estate) ‘‘that are 230 For example, as noted above in section II.A.1, attributable to the administration of customer liquidating customer positions may OCC’s own rules would appear to permit it to property.’’ introduce market risk associated with liquidate such positions.

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ecosystem, including customers of costs or benefits explicitly attributed to trustee more flexibility in how a FCMs and broker-dealers, as it furthers the following provisions in § 190.00, it customer could effect delivery outside the ability of market participants to believes that there will be cost-benefit of the debtor’s estate, will benefit utilize portfolio margining and the implications to these provisions: customers by allowing for a more associated efficiencies. CME also saw • Section 190.00(c)(1) states that part bespoke approach to effecting delivery benefits to ‘‘remov[ing] any doubt’’ that 190 is limited to a commodity broker when customers incur delivery part 190 applies to a SIPA proceeding that is (1) an FCM as defined by the CEA obligations under their open commodity involving an FCM that is also registered and Commission regulations, or (2) a contracts. There will, however, be costs with the SEC as a broker-dealer. DCO under the CEA and Commission in acting in such a bespoke fashion in Similarly, ICI’s comment letter regulations. Current part 190 applies to contrast to following standards considered that the ‘‘home field’’ rule in a broader set of ‘‘commodity brokers,’’ established during business as usual. § 190.00(e) is highly beneficial. including FCMs, clearing organizations, • Section 190.00(d)(1)(i)(B) notes that With respect to the remaining commodity options dealers, and while there are currently no registered provisions within proposed § 190.00, leverage transaction merchants. This leverage transaction merchants or the Commission has not received narrowing of the application of part 190 commodity options dealers, the comment letters that identify costs or (by excluding the empty categories of Commission intends to adopt rules with benefits explicitly attributed to these commodity options dealers and leverage respect to leverage transaction provisions, and does not believe that transaction merchants) benefits the merchants or commodity options there are material cost-benefit bankruptcy estate, and the customers, dealers at such time as an entity implications with respect to them: by allowing the Commission to registers as one of those categories of • Proposed § 190.00(a), which sets promulgate regulations that are less commodity brokers. This forward- forth the statutory authority pursuant to complex and better tailored to the looking flexibility will generate benefits which the Commission is proposing to narrower, set of commodity brokers that by fostering bankruptcy rules adopt proposed part 190. are covered by the revised specifically tailored to leverage • Proposed § 190.00(b), which regulations.231 transaction merchants or commodity describes how the proposed rules are • Section 190.00(c)(3) explains the options dealers when and if an entity organized into three subparts. While the distinction between ‘‘public customers’’ registers as such. • addition of DCO-specific rules in this and ‘‘non-public customers,’’ and the Section 190.00(d)(1)(iii), provides proposal is new, the cost-benefit priority that public customers (and, after that part 190 shall serve as guidance as implications of the DCO-specific them, non-public customers) enjoy over to the distribution of customer property provisions (§§ 190.11 through 190.18) all other claimants with respect to and member property in a proceeding in are discussed separately below. distributions of customer property. Both which the FDIC is acting as receiver • 233 Section 190.00(c)(2), which of these concepts exist in current part pursuant to Title II of Dodd-Frank. provides that part 190 establishes four 190 and are clarified and explained This provision has the benefits separate account classes, each of which further in § 190.00(c)(3). In its comment, associated with transparently providing is treated differently under the ICI urged the Commission to take steps to FDIC during business-as-usual the regulations. In the Commission’s view, ‘‘to help ensure that the trustee expertise and guidance of the agency this provision is a mere clarification, as prioritizes the protection of [public] with regulatory and supervisory current part 190 also establishes customers.’’ In response, Commission responsibility for commodity brokers different account classes for different (i.e., FCMs and DCOs).234 has added a provision, • types of cleared commodity contracts, § 190.00(c)(3)(i)(C), directing the trustee Section 190.00(d)(2)(ii) provides and treats each account class differently. to exercise its discretion (where it has that no property that would otherwise • be included in customer property shall Section 190.00(c)(5), which such discretion) in a manner that will be excluded from customer property explains that part 190 applies the best achieve the overarching goal of because it is considered to be held in a concept of pro rata distribution when it protecting public customers by constructive, resulting, or other trust comes to shortfalls of property in a enhancing recoveries for, and mitigating that is implied in equity. It prevents particular account class. This provision disruptions to, public customers as a public customers from evading pro rata is merely explanatory. class.232 This approach has the benefit • exposure to shortfalls in customer Section 190.00(d)(1)(i)(A), which of guiding the trustee’s discretion in a property by keeping their collateral in a provides that the definition of manner consistent with the trust structure. This provision has the ‘‘commodity broker’’ in proposed part Commission’s regulatory and statutory 190 covers both ‘‘futures commission goals. However, it has the limitation of 233 Section 210(m)(1)(B) of title II,12 U.S.C. merchants’’ and ‘‘foreign futures still leaving the trustee with discretion. commission merchants’’ because both 5390(m)(1)(B), requires the FDIC, where the covered As noted above in section III.A.2 above, financial company or bridge financial company is are required to register as FCMs under with discretion comes a risk of trustee a commodity broker, to apply the provisions of the CEA and Commission regulations. mistake or misfeasance. subchapter IV as if the financial company were a • Section 190.00(d)(2)(i), which states debtor for purposes of such subchapter. • Section 190.00(c)(6) addresses the 234 that the bankruptcy trustee may not DCOs operate nearly 24-hours a day, between treatment of commodity contracts that Sunday afternoon and Friday evening. Moreover, recognize any account class that is not require delivery performance. The the risks that a DCO is required to manage are based one of the account classes enumerated revised regulations, in allowing the on market movements and events (including in in proposed § 190.01. OTC markets) that may occur whether or not the • Section 190.00(d)(3), which sets DCO is able to operate. Accordingly, Commission 231 Moreover, prescribing regulations that are staff (in cooperation with FDIC staff) have engaged, forth the transactions that are excluded intended to be applicable to entities that, at some and will continue to engage, in significant efforts from the definition of ‘‘commodity unknown point in the future, enter these empty to plan for the unlikely event that resolution under contract.’’ This provision explains and categories risks poor tailoring due to lack of data Title II would be necessary for a DCO. carries over concepts that are already concerning the characteristics of those unknown Thus, there is a public benefit to facilitating future entrants. FDIC’s efforts in resolution planning for DCOs by embedded in current part 190. 232 As noted above in section III.A.2.vi, the setting forth clear guidance as to the distribution of While the Commission has not preference for public customers over non-public customer property and member property in a DCO received comment letters that identify customers creates incentives for both groups. resolution proceeding.

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benefit of supporting the statutory those implications are discussed in the bankruptcy as a whole. However, policy of pro rata distribution for the more detail below: there may be costs as a result of pool of customers, by ensuring that all • ‘‘Account class,’’ ‘‘cash delivery complications, since the trustee will property that properly belongs in the property,’’ and ‘‘physical delivery have to deal with two delivery account category of ‘‘customer property’’ would property’’: The definition of the term subclasses rather than one delivery be considered such customer property. ‘‘account class’’ is expanded to include account class. Moreover, in the event of It should mitigate costs in cases where definitions of each type of account class a shortfall, some customers could particular customers might structure set forth in proposed part 190: Futures ultimately obtain larger recoveries than their relationships with their FCMs in account, foreign futures account, cleared they would have if the delivery account order to establish such a trust for the swaps account, and delivery account. had not been split into two subclasses, purpose of thwarting their exposure to The ABA Subcommittee recommended while others could obtain smaller pro rata distribution, rather than that the Commission clarify that these recoveries. structuring those relationships in ways types of account classes apply to non- The ABA Subcommittee and CME that otherwise make sense for their public customers in addition to public suggested changes to the definition of business. It would also reduce those customers. The Commission agrees that ‘‘cash delivery property.’’ Under the customers’ incentives to do so, and it is appropriate to clarify this point, current definition, cash falls within the would mitigate the costs of litigation and to include a specific definition for delivery class if, inter alia, it is received within the bankruptcy proceeding over each type of account class. Doing so will on or after three calendar days before the effectiveness of such structures in benefit all parties involved in a the first notice date or exercise date. The achieving that goal. It also benefits the bankruptcy proceeding by ensuring that definition of cash delivery property in remaining customers, since if such all have a common understanding of the Proposal continued that limitation. litigation were successful, it would how these various types of accounts are CME suggested that the three-day spread the pro rata shortfall over a defined for purposes of part 190. limitation should be removed to address smaller volume of customer claims. Accordingly, the Commission is cases where • However, this approach will impose adopting the ABA Subcommittee’s ‘‘a customer will legitimately post cash to its costs on those customers, if any there recommendation. delivery account sooner than the definition be, who would otherwise endeavor to • The definition of ‘‘account class’’ would allow, for example, out of caution to assure that the necessary funds are available rely on the trust concept to shield also removes the category in current part 190 of ‘‘leverage account’’ because, to pay for a delivery when the first notice certain of their property from entering date or exercise date immediately follows a the pool of customer property. Such as noted above, there are currently no weekend or holiday, or to meet payment customers might (despite opposition registered leverage transaction deadlines imposed by the FCM, or based on from the Commission and the trustee) merchants. Rather, the Commission market convention.’’ otherwise be successful in litigation intends to adopt rules with respect to The comments acknowledged that the over the effectiveness of such leverage transaction merchants (and, Commission’s policy objective is to arrangements, or may obtain settlements accordingly, with respect to leverage ‘‘encourage FCMs and their delivery that would benefit their individual accounts) at such time as an entity customers to hold cash intended to pay claims (albeit to the detriment of other registers as such. Removal of the for delivery in a segregated account customers, and to the policy of pro rata category of ‘‘leverage account’’ from the until bilateral delivery obligations are distribution). Such customers may view ‘‘account class’’ definition benefits near at hand’’ (the segregation the inability to protect their collateral market participants by allowing the obligations that apply to futures, foreign under a trust concept as an incentive to Commission to promulgate bankruptcy futures, and cleared swaps accounts do reduce their use of transactions subject rules specifically tailored to leverage not apply to delivery accounts), but to part 190. transaction merchants (and, express some doubt that the limitation accordingly, to leverage accounts) in the is effective in encouraging the desired 2. Regulation § 190.01: Definitions: event an entity registers as such. Consideration of Costs and Benefits • behavior, because parties with delivery The definition of ‘‘account class’’ obligations may not be aware of it. Section 190.01 sets forth definitions also splits ‘‘delivery accounts’’ into Thus, the benefit of retaining the as they are used for purposes of part separate physical and cash delivery three-calendar day limitation is 190. In the Commission’s view, only account classes. Because cash delivery mitigating the time during which cash certain of the definitions in proposed property is, in some cases, more delivery property is held in an account § 190.01 will have cost-benefit difficult to trace to specific customers that is not subject to the protection of implications, and these are discussed in and more vulnerable to loss,235 this segregation requirements, and in more detail below, as are any definitions separate treatment of physical delivery encouraging business models that take concerning which there were comments. property and cash delivery property that approach. The cost of doing so is The remainder of the definitions set should benefit customers with physical the risk that funds may nonetheless be forth in revised § 190.01 do not, in the delivery property by allowing for more transferred earlier into a delivery Commission’s view, impose any costs or prompt distribution of such physical account, and would then be denied benefits, as the changes to the delivery property. This separation protection as delivery property in an definitions are minor (in the vein of, for should also benefit the estate, because FCM bankruptcy.236 example, updating cross-references or the trustee will not have to wait to As discussed above,237 the updating language to reflect the changes distribute physical delivery property to Commission has determined to take a in the rest of revised part 190) or merely customers while attempting to trace middle-ground approach by expanding clarify the current definition. cash delivery property, which could the three-calendar day limitation to a Where, in the Commission’s view, a result in a more prompt resolution of definition in revised § 190.01 has cost- 236 The Commission also notes CME’s suggestion 235 These reasons for this difficulty and that it ‘‘consider adopting more formal benefit implications, and/or where vulnerability are discussed above in section II.B.4 requirements with respect to delivery accounts comments have identified costs or in the explanation of the changes to proposed through separate rulemaking.’’ benefits concerning such a definition, § 190.06(b). 237 See section II.A.2 above.

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seven-calendar day limitation. This class into which they are commingled. under current part 190, it will not be approach has the benefit of addressing The benefit of this treatment in clear which category they fall into. The fully the possibility that delivery bankruptcy is to foster and incentivize pool of customer property would be property is transferred slightly early such risk-reducing (and capital- different for public and non-public because of, e.g., a holiday weekend (and efficient) arrangements during business customers under the new policy regime. especially cases where FCMs and their as usual; there should be no associated Thus, a hypothetical customer who customers or contracts span across costs in bankruptcy. could have been considered ‘‘public’’ jurisdictions with different holidays). Finally, paragraph (3) of the definition under current part 190 but will be By expanding the period by four days, of account class addresses cases where categorized as ‘‘non-public’’ under it should address most of the cases a commodity broker’s account for a revised part 190 could receive less in where there are legitimate reasons to customer is non-current, or otherwise the distribution of customer property transfer the funds in advance of when inaccurate. These are situations over (with other customers receiving more). they are needed, to account for the which public customers have, at best, • ‘‘Futures, futures contract:’’ The possibility of a failure in the transfer limited control, and thus it is ineffective Commission is adding a definition for process.238 Significantly, it avoids the to endeavor to create incentives for the terms ‘‘futures’’ and ‘‘futures cost of encouraging the use of the public customers to police the behavior contract’’ to clarify what those terms delivery account (that is not subject to of their FCM. Paragraph (3) confirms mean for purposes of part 190. This segregation requirements) as a long-term that a commodity broker is considered clarification will lower administrative place to hold cash. to maintain an account for a customer costs by providing clarity and Commenters also suggested technical where it establishes internal books and transparency to the types of transactions additions to the definitions of cash records for the customer’s contracts and that are considered ‘‘futures’’ for delivery property (to address cash collateral and related activity, regardless purposes of proposed part 190 and provided post-petition to facilitate of whether the commodity broker has therefore form part of the futures taking deliveries in cases where kept those internal books or records account or foreign futures account. necessary) to physical delivery property current or accurate. The benefit of this • ‘‘House account:’’ The definition of (to address the possibility of a negative treatment will be to treat customers in the term ‘‘house account’’ will be final settlement price), and (in the case accordance with their entitlements, revised to include a definition of that of both cash delivery property and regardless of whether the commodity term solely for DCOs. This change will physical delivery property) to provide broker has maintained its books and reflect the new organization of part 190, that, for contracts exchanging one fiat records current or accurate. which is revised to include separate currency for another, both ends of the • ‘‘Customer,’’ ‘‘Customer class,’’ provisions for when the debtor is (1) an transaction would be considered cash ‘‘public customer,’’ and ‘‘non-public FCM (subpart B) or (2) a DCO (subpart delivery property. The Commission customer:’’ The definitions of the terms C). CME and the ABA Subcommittee incorporated these suggestions in the ‘‘public customer’’ and ‘‘non-public urged that the term ‘‘house account’’ be definitions as adopted. The benefit of customer’’ are being revised to include deleted in the few cases where it was these approaches is to deal properly separate definitions of those terms for proposed to be used in subpart B in with these scenarios; there are no FCMs and DCOs. This change reflects order to avoid the implication that the discernable material costs. the new organization of part 190, which accounts of non-public customers could • Pursuant to section 4d of the CEA, includes separate provisions for when not be ported. This change would certain contracts and associated the debtor is (1) an FCM (subpart B) and enhance clarity and transparency (and, collateral that would be associated with (2) a DCO (subpart C). The ‘‘public thus, would reduce administrative one account class may instead (pursuant customer’’ definition for FCMs is also costs) by (1) avoiding that incorrect to Commission regulation 239 or order) being revised to define that term with implication, while (2) clarifying what be commingled with a different account respect to each of the relevant account precisely constitutes a house account for class.240 The purpose of these classes.241 a DCO bankruptcy proceeding. arrangements, referred to as portfolio- These changes will generate benefits • ‘‘Primary liquidation date:’’ The margining, is to associate such contracts as they bring clarity to the question of definition of the term ‘‘primary with an account class in which they are who qualifies as a ‘‘public’’ versus a liquidation date’’ is being revised to risk-reducing related to other contracts ‘‘non-public’’ customer, and delete references to holding accounts in that latter account class. transparency to the distribution of open for later transfer. This is consistent Paragraph (2) of the definition of property to which each customer is with the policy of transferring as many account class confirms that these entitled. Furthermore, this clarity and open commodity contracts as possible portfolio-margining arrangements will transparency is likely to reduce the within seven calendar days after entry be respected in bankruptcy, that is, such administrative costs to the estate, and of an order for relief or, if that is not contracts and associated collateral will the costs to claimants, associated with possible, liquidating such commodity be treated as being part of the account the claims allowance process, as well as contracts. 242 This change in policy the likelihood of litigation by should benefit some customers, who 238 The commenters have not identified any dissatisfied claimants (and associated will more quickly have clarity as to how legitimate reason for an FCM to impose a payment their positions and associated collaterals deadline of more than seven days before first notice costs). These changes could, however, 243 or exercise date, or any relevant market convention impose costs on customers for whom, will be resolved. There may, that would require earlier payment, which in either however, be costs to customers who case would require that the funds be held in a 241 CME suggested that the Commission should might have preferred having their open delivery account. include non-U.S. customers of foreign broker commodity contracts held open for 239 See § 39.15(b)(2), which provides a clearing members of a DCO within the public transfer after the primary liquidation mechanism for these arrangements to be customer definition. As discussed above, the implemented pursuant to clearing organization Commission has determined to consider this rules. suggestion as part of a comprehensive review of the 242 See § 190.04(a)(1). 240 Securities positions may also be commingled issues, to be conducted at such time as the model 243 See discussion of § 190.00(c)(4) in section in an account class subject to section 4d of the CEA. of admitting foreign brokers as clearing members for II.B.1 above for concerns about customers lacking 7 U.S.C. 6d. U.S. DCOs becomes empirical. such clarity for an extended time.

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date. 244 In the event that a larger expanded mechanism for a trustee to that the context where this rule would number of contracts is liquidated rather request exemptions should benefit the be applicable—only cases where a than transferred, there will be costs estate and customers by allowing the receiver has been appointed due to resulting from additional downward trustee to request an exemption that violation or imminent violation of pressure on prices. lowers administrative costs and customer property protection • ‘‘Specifically identifiable property:’’ increases timeliness. This change, requirements, or of the FCM’s minimum The Commission is revising the however, may impose administrative capital requirements—minimizes the definition of the term ‘‘specifically costs if the trustee’s request is ill- likelihood that a filing would turn out identifiable property’’ to clarify and founded and the Commission were to be unnecessary, and counsels in favor streamline the current definition of that nonetheless to grant the request. of avoiding delay. term. The use of definitions that are The Commission does not believe that 4. Section 15(a) Factors—Subpart A clearer should reduce administrative there will be any cost-benefit costs. Of course, increasing clarity may implications to § 190.02(a)(2) and (3), No comments were received on the be to the detriment of those customers (b), (c), (d), and (e), as those provisions application of the section 15(a) factors for whom such clarity results in largely align with the provisions in to subpart A. current part 190 from which they are assignment to a category that they view i. Protection of Market Participants and derived. as less favorable. the Public • ‘‘Substitute customer property:’’ Regulation § 190.02(f) is a new The definition of the term ‘‘substitute provision which addresses the context Subpart A of the proposed rules customer property’’ is being added to of a receiver for an FCM appointed due should increase the protection of market refer to cash or cash equivalents to a violation or imminent violation of participants and the public by clearly delivered to the trustee by or on behalf the customer property protection setting forth how customers of FCMs of a customer in order to redeem requirements of section 4d of the CEA and DCOs will be classified and treated, specifically identifiable property or a or of the regulations thereunder, or of and how their accounts will be letter of credit. This provision will the FCM’s minimum capital categorized and treated, in the event of benefit customers who, in a bankruptcy requirements in § 1.17. In this context, an FCM or DCO insolvency. The goal of event, seek to redeem their specifically the FCM has been found to be in subpart A of the proposed rules is to identifiable property or letters of precarious financial condition. This promote an orderly and cost-effective credit.245 Introducing the concept of provision will permit the receiver to file resolution of the insolvency of an FCM substitute customer property may a petition for bankruptcy of such an or DCO, and to increase transparency to impose administrative costs, however, FCM in appropriate cases. This the customers of FCMs and DCOs as to because the trustee may have to expend provision may benefit public customers, how their property would be treated in time and resources on tracking the in that a bankruptcy proceeding may be the event of such an insolvency. substitute customer property and necessary to protect those customers’ However, as noted above, some of the ensuring that such property ends up in interests in customer property from provisions of subpart A provide the proper pool of customer property losses in value. However, this provision discretion to the trustee. While once received. may have distributional effects as there enhanced discretion for the trustee has • ‘‘Swap:’’ The Commission is may be some customers who do not the benefit of permitting a more tailored amending the definition of ‘‘cleared receive as much in bankruptcy as they approach, it also has the cost of swap’’ that appears in the current rules otherwise would have under the increasing the possibility of trustee in order to clarify what this term means receivership. In addition, there could be mistake or misfeasance. additional administrative costs that for purposes of proposed part 190. This ii. Efficiency, Competitiveness, and clarification should serve the goals of result from this provision, as the bankruptcy trustee would have to spend Financial Integrity clarity and transparency (and, time and resources overseeing a Subpart A of the proposed rules consequently, reducing administrative bankruptcy proceeding that might not should promote efficiency (in the sense costs). be entered into absent the power of both cost effectiveness and 3. Regulation § 190.02: General: granted to the receiver under this timeliness) in the administration of Consideration of Costs and Benefits regulation. These costs could possibly insolvency proceedings of FCMs and Section 190.02(a)(1) is revised to be greater than the costs of continuing DCOs and the financial integrity of provide that the bankruptcy trustee to administer the FCM under derivatives transactions carried by may, for good cause shown, request receivership. FCMs and/or cleared by DCOs by clearly Indeed, FIA suggested that the from the Commission an exemption communicating the goals and core Commission should require that the from the requirements of any procedural concepts involved in such insolvencies, receiver must receive permission from provision in proposed part 190. This is and by setting forth clear definitions the Commission before filing a in contrast to current § 190.10(b)(1), that have been updated to account for voluntary petition, given that this action which provides only that a bankruptcy current market practices. These effects ‘‘would effectively close the FCM.’’ trustee may request an exemption from, should, in turn, enhance the Closing the FCM would impose or extension of, any time limit competitiveness and financial integrity significant costs on the FCM and, in a prescribed in current part 190. This of U.S. FCMs and DCOs, by enhancing case where the Commission would have market confidence in the protection of denied permission, those costs could be 244 Given that the clearing organization for such public customer funds and positions contracts may not be willing to permit such unnecessary. entrusted to U.S. FCMs and DCOs, even contracts to be held open for an extended period In considering the costs (discussed if such an entity were to become of time, the existence of such customers is quite above) of what could be an unnecessary insolvent. hypothetical. voluntary filing for bankruptcy in 245 Benefits and costs associated with the use of iii. Price Discovery substitute customer property are addressed further contrast to the benefits of avoiding delay below in connection with § 190.04(d)(3) in section in filing a necessary filing for Price discovery is the process of III.C.2. bankruptcy, the Commission determines determining the price level for an asset

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through the interaction of buyers and records.’’ A generalized and more intent), which could ultimately impose sellers and based on supply and modernized approach to notifying additional costs on customers who demand conditions. To the extent that customers will benefit the debtor’s would have benefited from an earlier the revised regulations should mitigate estate, as the process allows the trustee transfer.247 the need for liquidations in conditions to choose cost effective means of Section 190.03(c)(1) removes the of distress, they will help avoid negative providing notice to customers within requirement that the trustee must impacts on price discovery. the more flexible bounds of the publish notice to customers with proposed regulation, resulting in specifically identifiable property in a iv. Sound Risk Management Practices savings of administrative costs. newspaper of general circulation serving Subpart A of the proposed rules Similarly, it will benefit parties the location of each branch office of the should generally promote sound risk interested in the proceedings, by debtor prior to liquidating such property management practices by setting forth permitting the trustee flexibly to choose and instead establishes a requirement to the core concepts to which the methods of notification that are more notify the customers with specifically bankruptcy trustee must adhere in prompt and effective. On the other identifiable property in accordance with administering an FCM or DCO hand, affording the trustee increased § 190.03(a)(2). The Commission believes bankruptcy. discretion in how to provide notice to that this change will result in lower v. Other Public Interest Considerations customers will carry the potential cost administrative costs, as the trustee will of trustee misfeasance and abuse of such be relieved of the cost of identifying, Some of the FCMs or DCOs that might discretion, as discussed above in section and publishing notice in, such enter bankruptcy are very large financial III.A.2.ii. newspapers. Moreover, the trustee will institutions, and some are (or are part of Section 190.03(b)(1) will revise the no longer be required to wait seven days larger groups that are) considered to be time in which a commodity broker must after the second publication date to systematically important. A bankruptcy notify the Commission of a bankruptcy commence liquidation of specifically process that effectively facilitates the filing. These revisions codify identifiable property. Rather, the trustee proceedings is likely to help to attenuate procedures whereby (1) in a voluntary will be free to commence liquidation of the detrimental effects of the bankruptcy bankruptcy proceeding, the commodity specifically identifiable property on the financial marketplace and thus broker will provide advance notice to starting on the seventh day after entry benefit the financial system and thus the the Commission ahead of the filing to of the order for relief. This will benefit public interest. the extent practicable, and (2) in an the estate, and potentially the affected C. Subpart B—Futures Commission involuntary bankruptcy proceeding, the customers, by allowing the trustee more Merchant as Debtor commodity broker will notify the freedom (from the time constraints set Commission immediately upon the forth in the current regulations) in 1. Regulation § 190.03: Notices and filing. These revisions will foster the liquidating the specifically identifiable Proofs of Claims: Consideration of Costs ability of the Commission and its staff property, which, in turn, is expected and Benefits to perform their duties to protect ultimately to result in a better price. Section 190.03(a)(1) replaces the customers by providing the Commission Moreover, the provisions in requirement in current § 190.10(a) that with notice of any bankruptcy § 190.03(a)(2) that describe the all mandatory or discretionary notices proceeding as soon as possible. notification of customers with be sent to the Commission via overnight Section 190.03(b)(2) removes the specifically identifiable property will mail with the requirement of sending current deadline of three days after the benefit public customers by allowing the notices by electronic mail.246 This order for relief by which the trustee, the them to receive notice on a ‘‘prominent change is expected to result in a benefit relevant DSRO or a clearing website’’ and, more specifically, at their to all parties required to provide notices organization must notify the electronic addresses (to the extent such to the Commission because they will be Commission of an intent to transfer or addresses are in the debtor’s books and able to avoid the costs of sending such to apply to transfer open commodity records), thereby enhancing their ability notice in hardcopy form via overnight contracts in accordance with section to request the return of their specifically mail. These revisions will also allow the 764(b) of the Bankruptcy Code. It identifiable property within the Commission to receive such notices— instead instructs such parties to give specified timeframe. and thus, to act—much more such notice of an intent to transfer ‘‘[a]s Section 190.03(c)(2) provides the expeditiously. soon as possible.’’ To the extent that the bankruptcy trustee with authority to Section 190.03(a)(2) is a new, three-day deadline was limiting transfer treat open commodity contracts of principles-based provision that replaces arrangements, this revision will benefit public customers held in hedging the more specific procedures for the estate and some customers by accounts designated as such in the providing notice to customers that removing time constraints that could be debtor’s records as specifically appear in current § 190.02(b) by construed to prohibit notification after identifiable property.248 This is a allowing the trustee to establish and expiration of the deadline (and thus, change from the current framework, allow the trustee to form the intent to follow procedures ‘‘reasonably under which the trustee treats transfer after such time). designed’’ for giving adequate notice to customers with specifically identifiable customers. Paragraph (a)(2) also The revision will also enhance the orderly functioning of the marketplace property on a bespoke basis. provides that the trustee’s procedures at a time of severe market disruption by Specifically, to the extent the trustee for providing notice to customers facilitating prompt notice of intent to does not receive transfer instructions should include ‘‘the use of a prominent transfer. On the other hand, by giving regarding a customer’s specifically website as well as communication to the trustee, DSRO, or clearing identifiable open commodity contracts, customers’ electronic addresses that are organization more latitude for providing the trustee will be required to liquidate available in the debtor’s books and notice of an intent to transfer, there will 247 See discussion of § 190.00(c)(4) in section 246 See also § 190.03(d), which is adopting this be the potential cost of misfeasance in III.b.1 above. new method of providing notice to the Commission waiting an unreasonable amount of time 248 See proposed § 190.10(b)(2) for the process of for any court filings filed in a bankruptcy. to provide such notice (or to form such designating an account as a ‘‘hedging account.’’

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such contracts within a certain time involved in scanning to determine if modify the customer proof of claim form period. To the extent the trustee there are instructions, there is a set forth in appendix A to part 190. exercises the authority derived from significant benefit in avoiding Specifically, § 190.03(f) allows the revised § 190.03(c)(2), they will (subject duplication, and in avoiding cases trustee to modify the proof of claim to the revision discussed in the next where the customer, having already form to take into account the particular paragraph) be required to notify each provided instructions, does not reply to facts and circumstances of the case. This relevant customer and request a duplicative request in time for that provision should benefit the estate instructions whether to transfer or reply to be acted upon. because the trustee will be able to liquidate the open commodity contracts. The Commission does not believe that modify the proof of claim form in a way To the extent the trustee would not there are any cost-benefit implications that gathers the information necessary exercise such authority, the trustee will to § 190.03(c)(3) or (4) (other than those in a manner that is both effective and treat these open commodity contracts discussed above with respect to the new cost effective based on the specific facts the same as other customer property and notice provision referenced in each) or of the case, and the trustee no longer effect a transfer of such contracts. This to § 190.03(d). will be required to get an order from the new framework should reduce Section 190.03(e), sets forth the bankruptcy court to make such administrative costs and benefit the information required from customers modifications, thereby saving time and bankruptcy estate by allowing the regarding their claims against the resources. This new provision should trustee to rely on hedging designations debtor. As revised, § 190.03(e), also benefit customers, who will be able made during business as usual, thereby reorganizes and adds certain to take advantage of the more allowing the trustee to make swift and information items to those listed in the streamlined and tailored proof of claim cost effective decisions regarding the current regulation. The Commission forms developed by the trustee, and treatment of open commodity contracts anticipates that, while customers are should, therefore, spend less time filling during a bankruptcy situation. likely to have this information at their out such forms. It should also benefit ACLI suggested that § 190.03(c)(2) disposal, there could be costs associated the estate, which should bear less should express a preference for transfer with gathering it all in one place. administrative cost in evaluating such over liquidation with respect to However, this additional and more forms. Again, there may be specifically identifiable property in the detailed information should benefit the corresponding administrative costs if form of positions that are identified as estate, the bankruptcy court and the set of information in a modified hedging positions, and consult (on an customers alike by allowing all parties proof of claim form turns out, in individual basis) each customer’s to have a fuller, more detailed and more retrospect, to be overly narrow (or expressed preferences. However, transparent picture of the customer broad). § 190.00(c)(4) sets forth a preference for claims against the debtor. It should porting (transfer) of all open commodity foster the reduction of administrative 2. Regulation § 190.04: Operation of the contract positions of public customers. costs and the prompt administration of Debtor’s Estate—Customer Property: Thus, while treating customers with the estate. Moreover, the Commission is Consideration of Costs and Benefits hedging positions on a bespoke basis of the view that clarifying several of the Regulation § 190.04(a) explicitly may benefit some of them, it may be at information items listed in proposed provides a policy and a direction by the cost of effectively transferring a § 190.03(e) and revising the proof of which the trustee should use best efforts larger group of customer positions. claim form to match more closely the to transfer open commodity contracts Some of those may be customers with text of the regulation should result in and property held by the failed FCM for hedging positions whose positions are benefits to all parties involved in an or on behalf of its public customers. not transferred due to limited time and FCM bankruptcy—the estate, the This policy and direction is resources available to be devoted to bankruptcy court, and the customers— substantially similar to the policy and bespoke treatment. Indeed, SIFMA by making the bankruptcy claims direction under current regulations.249 AMG/MFA noted that ‘‘permitting the process more prompt and cost effective. The changes set forth a clear policy for trustee this flexibility (subject to the CME sees § 190.03(e) and (f), and the trustees to follow, which should benefit additional customer protections [of revised proof of claim form, as ‘‘major customers of the failed FCM in a consulting existing instructions, as improvements over the current rules streamlined description of the transfer described immediately below]) serves and proof of claim template.’’ process that is consistent with the core the interest of customers as a whole by This regulation also provides that the concepts set forth in this part. The costs facilitating a more rapid transfer of specific items referred to are to be and benefits of the preference for customer positions and property.’’ included ‘‘in the discretion of the transfer are discussed in section III.B.1 SIFMA AMG/MFA suggested that it trustee.’’ This discretion will permit the above, in the context of § 190.00(c)(4). would ‘‘further the goal of expediency’’ trustee to tailor the information In § 190.04(a)(1), the Commission is if the regulation would require the requested to the specifics of the debtor’s clarifying language; these clarifications trustee to ‘‘first consult the instructions prior business, as well as the already- should benefit customers of the failed (regarding preferences with respect to available records. This will permit the FCM by minimizing the likelihood of transfer or liquidation of open trustee to limit or to increase the future disputes concerning qualification commodity contracts) provided by a information requested, in appropriate of property for transfer. The public customer to the debtor at the cases, with a corresponding increase in Commission is also changing the time of opening the relevant hedging cost effectiveness. To be sure, there may direction in current § 190.02(e) that the account, and only if such instructions be corresponding costs (both in trustee ‘‘must immediately use its best are missing or unclear, to then require administrative expense and time) if the efforts to effect a transfer’’ to a direction such customer to provide the trustee set of information requested by the that the trustee ‘‘shall promptly use its with written instructions as trustee in the exercise of their discretion best efforts to effect a transfer.’’ This contemplated by proposed turns out, in retrospect, to be overly modest change in focus will benefit § 190.03(c)(2).’’ The Commission agrees, narrow (or broad). public customers by recognizing that, and has made corresponding changes to Proposed § 190.03(f) is new and the regulation. While there is a cost provides the trustee with flexibility to 249 See current § 190.02(e).

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while effecting transfer is an within the trustee’s control. The revised fully benefit from those payments (and extraordinarily high priority, it is provision recognizes that certain thus incentivize customers to make such possible that there may be higher accounts may be held on an omnibus payments in appropriate priorities at the inception of the basis on behalf of many customers. To circumstances). Moreover, more clearly bankruptcy proceeding, e.g., it may be the extent the trustee is making a margin permitting the trustee, for the purpose of necessary to preserve some portion of payment with respect to such an curing customer margin deficiencies, to customer property from an immediate omnibus account, it may be out of the use funds in an account class that threat.250 Once again, by enhancing the trustee’s control to only make payment exceed the sum of all of the net equity trustee’s discretion as to how to manage with respect to those customer accounts claims for that account class, should the liquidation, there is the cost that the that are not in deficit. The proviso facilitate the orderly transfer of trustee will make a mistake. similarly will clarify that this positions and contracts following the Section 190.04(a)(2) directs the FCM prohibition on making margin payments default, lessening the potential for (or a trustee, if one has been appointed) on behalf of accounts in deficit is not further roiling markets. Finally, these in a case where an involuntary petition intended to prohibit ‘‘upstream’’ entities changes taken together also benefit the for bankruptcy is filed against the FCM (e.g., a CCP or an intermediary through broader group of customers of the FCM to use best efforts to effect a transfer which the debtor clears) from exercising debtor by clarifying the treatment of within seven calendar days. The current legal rights to margin under applicable funds in segregated accounts, and thus regulation limits the commodity broker law. Due to the structure of omnibus mitigating administrative costs. to trading for liquidation unless accounts and the explicit requirement of These changes are designed to clarify otherwise directed by the Commission, lack of trustee control, any payments the statutory requirements applicable to by any applicable self-regulatory that are made under the revised funds in the customer account. While organization or by the court. Revised provision would have been made there may be accounting requirements § 190.04(a)(2) removes this limitation. pursuant to Commission authorization associated with funds in segregated Rather, revised § 190.04(e)(4) more under the current regulation. Thus, accounts, substantially all of the costs of generally covers limitations on the neither provision should add any new such accounting are already incurred business of an FCM in bankruptcy. regulatory burden and the Commission pursuant to the segregation rules. Thus, Similarly, any requirement to transfer does not estimate that there will be any the Commission does not anticipate that customer positions would more additional cost associated with the there should be any material additional properly be addressed by § 1.17(a)(4). proposed changes. costs associated with this change. The Commission believes that these Section 190.04(b)(1)(ii) is a new Section 190.04(b)(2) allows the trustee changes will benefit the estate and the regulation that adds an explicit discretion as to whether to issue margin public customers by mitigating the restriction, that the trustee cannot make calls to customers who are administrative costs by removing a a margin payment with respect to a undermargined, deleting highly redundant regulation. The Commission specific customer account that would prescriptive conditions from the current does not anticipate any resulting exceed the funded balance of that rule. The revision should benefit public increase in cost. account. ICI agrees that this restriction customers of the FCM debtor by giving In § 190.04(b)(1), the Commission is supports the pro rata distribution the trustee the flexibility to recognize clarifying and updating conditions principle, and should benefit the other that there may be situations in which under which the trustee may make customers of the FCM debtor—any issuing a margin call is impracticable payments of variation settlement and payment of customer property in excess because the trustee is operating the FCM initial margin. In sum, the revisions of a particular customer’s funded clarify that payments can be made prior balance is to the detriment of other in ‘‘crisis mode’’ and may be pending to pending transfers or liquidation, not customers.251 wholesale transfer of liquidation of open just pending liquidation. The revision Section 190.04(b)(1)(iii) is a minor, positions. should benefit the customers of the FCM non-substantive clarification of current It is, however, possible that the debtor in clarifying that the trustee has § 190.02(g)(1)(ii), that should not create trustee would exercise their discretion two paths in treating open commodity any changes from the status quo with poorly, or in a manner that, in contracts—transfer, and if transfer is not regards to costs and benefits. retrospect, would be seen to be to the possible, liquidation. The changes In § 190.04(b)(1)(iv)–(v), the detriment of the estate, and that the describe more accurately the types of Commission is clarifying that margin trustee would have failed to issue a payments that the trustee will be must only be used (i.e., paid to a margin call in a situation in which a permitted to make and account clearing organization or upstream public customer would have paid the specifically for the types of entities to intermediary) consistent with section 4d call (and in which the balance of which the trustee is permitted to make of the CEA. Section 190.04(b)(1)(vi) administrative cost and amount the types of payments referred to in this states explicitly the conditions under recovered would mean that, in section. The revisions clarify the current which the trustee may make payments retrospect, it would have profited the regulatory text, which should benefit to meet margin obligations. estate if the call was made). Such failure stakeholders. The Commission does not Together, these changes protect could result in a cost to the estate of the anticipate any increased cost from these customers who make payments after the FCM debtor to the extent that such changes. order for relief by ensuring that they funds are not available. Section 190.04(b)(1)(i) prevents the The balance of the revisions to trustee from making any payments of 251 While there will be a corresponding detriment § 190.04(b) should cause no change to behalf of any commodity contract to the customers who may have benefited from such the related costs and benefits. excess payments, those customers would only be account that is in deficit, to the extent losing something that runs counter to the statutory Section 190.04(b)(3) retains the goal of pro rata distribution. Moreover, there are no concept in current § 190.02(g)(3), with 250 The Commission is implementing the same likely incentive effects because, on this issue, updated cross-references. The change—the addition of the word ‘‘public’’ before customers stand behind the ‘‘veil of ignorance’’— Commission does not anticipate that ‘‘customers’’—to § 190.04(a)(2). The anticipated cost it is difficult to identify, ex ante, which customers and benefit analysis of the change is the same as would be in the group of gaining customers (or in there will be any costs or benefits to the in § 190.04(a)(1). the group of losing customers). proposed minor revisions.

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Section 190.04(b)(4) addresses the Enhancing the trustee’s discretion to subject to the trustee’s exercise of trustee’s obligation to liquidate accounts determine how long a customer has to reasonable business judgement. It is in deficit, or where a mark-to-market meet a margin call, and to rely on the possible that such judgment could be calculation would result in a deficit, or FCM’s books and records in doing—and exercised in a poor manner (or in a where the customer fails to meet a refusing to curtail that discretion (by manner that, in retrospect, turns out to margin call within a reasonable time. forcing the trustee to defer to margin be regrettable), with resultant cost to the The revision will clarify the call timings in pre-bankruptcy FCM debtor estate. applicability of current authority to a agreements, or to give the customer an Section 190.04(c) requires the trustee situation that is already implicit in the opportunity to demonstrate that the a to use its best efforts to liquidate open current rule. The regulation does not margin payment was made) as requested commodity contracts that are not settled require the trustee to make additional by the comment—will benefit other in cash (i.e., those that settle via calculations but, if a calculation made customers of the debtor FCM by giving physical delivery of a commodity) by the trustee reveals that the mark-to- the trustee flexibility to respond to where the contract would move into market value of the account is a deficit, market conditions following an FCM delivery position. These clarifications the trustee is instructed to liquidate the default. It is important to recognize that are likely to reduce administrative costs, account as soon as practicable rather in stressed markets or in situations to the benefit of the estate (and, than to wait for the time that payment where communication protocols cannot ultimately, customers). CME believed would be due. The benefit of this practicably be followed, permitting a that this provision would have the change should be to liquidate accounts customer time to post margin in benefit of avoiding unnecessary in deficit more promptly (thus accordance with a pre-bankruptcy disruptions to the delivery process by mitigating potential further losses); the agreement—or, in some cases, even customers that did not intend to cost will be the cost of engaging in such notice of one hour—may be participate in making or taking delivery. liquidation, as well as the possibility insufficiently prompt to mitigate There should be no cost associated with that, absent prompt liquidation, the appropriately (1) the risk that such the revision because, while there may be deficit would have been mitigated due customers would default, (2) the risk some customers who would prefer to to favorable intervening changes in that delaying liquidation of such a hold their contracts through delivery, market value (or, potentially, an customer’s positions increases the the current regulations, just as the intervening deposit of additional potential for and likelihood that they revised regulations, direct the trustee to collateral by the customer).252 would do so with a debit balance, and liquidate contracts coming into delivery 254 Second, the Commission is adding the (3) the risk that the size of that debit position. concept of ‘‘exigent circumstances’’ as a balance would increase as a result of Section 190.04(d) will clarify new exception to the general and long- that delay, thereby reducing the funded requirements concerning the liquidation and valuation of open positions. Section established rule that a minimum of one balances of those other customers. 190.04(d)(1) and (2) clarify requirements hour is sufficient notice for a trustee to However, customers who are required to for liquidating open commodity liquidate an undermargined account. make payments more promptly would contracts and specifically identifiable SIFMA AMG/MFA urged the bear associated costs, from making such property other than commodity Commission to curtail the trustee’s payments in a reduced time frame, from discretion in § 190.04(b)(4) in a number contracts. having to make duplicate payments Section 190.04(d)(3) codifies the of ways: By requiring the trustee to defer (while these would ultimately be Commission’s longstanding policies of to the margin call timings present in returned in full, this would be without pro rata distribution and equitable applicable underlying agreements interest) or from having contracts treatment of customers in bankruptcy, between the customer and the (pre- liquidated that would otherwise not as described in § 190.00(c)(5) above, as bankruptcy) debtor, and by providing have been liquidated if the customer applied to letters of credit posted as customers with the opportunity to 253 had more time to make payment. margin. Under the new provision, the demonstrate that a margin payment was The Commission is adding trustee may request that a customer made even if the FCM’s books and § 190.04(b)(5) to guide the trustee in deliver substitute customer property records do not yet reflect its receipt. By assigning liquidating positions to the with respect to any letter of credit contrast, ICI noted that it is vital that the FCM debtor’s customers when only a received, acquired or held to margin, trustee be required to swiftly crystallize, portion of the open contracts are guarantee, secure, purchase, or sell a and therefore cap the losses resulting liquidated. The benefit of this new commodity contract. The amount of the from, such deficits by promptly provision is that it presents a clear and substitute customer property to be liquidating accounts in deficit or for transparent mechanism by which the posted may, in the trustee’s discretion, which a customer has failed to meet a trustee is to allocate the positions. This be less than the full-face amount of the margin call. ICI further stated that if the mechanism will protect the customer letter of the credit, if such lesser amount accounts were allowed to remain open, account as a whole, by establishing a is sufficient to ensure pro rata treatment additional losses on the delinquent preference for assigning liquidating consistent with §§ 190.08 and 190.09. If customers’ transactions would be borne transactions to individual customer necessary, the trustee may require the by the FCM’s non-defaulting customers. accounts in a risk-reducing manner. The customer to post property equal to the The Commission has determined not allocation mechanism will, however, be full-face amount of the letter of credit to to make the requested changes. While ensure pro rata treatment. Pursuant to making those changes would benefit 253 SIFMA AMG and MFA also suggested that the paragraph (d)(3)(i), if such a customer those customers who are treated on a regulation should be amended to give customers fails to provide substitute customer more bespoke it would be to the credit for any gains that were haircut due to gains- based haircutting by a DCO. Any such haircutting property within a reasonable time detriment of the FCM’s other customers. of a customer’s gains is due to application of the specified by the trustee, the trustee may customer’s agreement with the FCM. Moreover, draw upon the full amount of the letter 252 This change may also provide incentives for giving some customers credit despite such a customer whose account is in, or is approaching, agreements would increase their recovery, but at the of credit or any portion thereof (if the deficit to make such payments promptly to avoid expense of other customers, as discussed in detail liquidation of their positions. in section II.C.7 above. 254 See, e.g., current § 190.03(b)(5).

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letter of credit has not expired). Under substitute customer property, endeavor credit, it will mitigate the liquidity costs paragraph (d)(3)(ii), the trustee is to mitigate, to the extent practicable, the to such customers. instructed to treat any portion of the adverse effects upon customers that Section 190.04(e)(1) concerns letter of credit that is not fully drawn have posted letters of credit, in a liquidation of open commodity upon as having been distributed to the manner that achieves pro rata treatment contracts in the market, while paragraph customer. However, the amount treated among customer claims. Second, the (e)(2) addresses liquidation by book as having been distributed will be Commission notes the likelihood that entry offset. Both of these revised reduced by the value of any substitute requests for substitute customer regulations delete the requirement in customer property delivered by the property may not apply to the particular the current regulations that a clearing customer to the trustee. Any expiration delivery letters of credit the commenters organization must obtain approval for of the letter of credit after the date of the have expressed concerns about: As its rules regarding liquidation of open order for relief would not affect this requested by CME, the Commission commodity contracts, a requirement that calculation. Pursuant to paragraph confirms that (1) a delivery letter of is superfluous in light of the regulatory framework set forth in part 40 of the (d)(3)(iii), letters of credit drawn by the credit that is posted directly with the Commission’s regulations, and in light trustee, or substitute customer property DCO or with the delivery counterparty, of the notice-filing regime established posted by a customer, are to be rather than with or through the FCM, considered customer property in the by Congress in section 5c(c) of the and for which the FCM is not a named account class applicable to the original CEA.257 This has the benefit of enabling beneficiary, is outside the delivery letter of credit. clearing organizations to avoid the cost ICI, SIFMA AMG/MFA, and Vanguard account class, i.e., it does not constitute of filing a request for rule approval, supported § 190.04(d)(3) on the grounds cash delivery property (or property of pursuant to CEA section 5c(c)(4) and that it has the benefit of treating the debtor’s estate), and (2) the Regulation § 40.5. There are potential customers equitably by avoiding a more provisions in other parts of the part 190 costs, in that an ill-conceived rule could favorable treatment of customers who regulations regarding treatment of letters be more readily identified, and post letters of credit than those who of credit posted with or through the addressed, in a rule approval process. post cash and securities. debtor FCM do not apply such a letter However, Commission staff, as a matter These proposed new provisions could of credit. of practice, closely reviews all notice- impose costs on customers who use The Commission’s priority in this filed clearing organization rules. letters of credit as collateral for their context is to ensure the customers using Section 190.04(e)(3) is new, and positions. Such customers could be letters of credit to meet margin confirms that an FCM or foreign futures considered to have received obligations are treated in an intermediary through which a debtor distributions up to the full amount of economically equivalent manner to FCM carries open commodity contracts the letter of credit, or the trustee may those who have posted other types of may exercise any enforceable draw upon a portion or possibly the full collateral, so that there is no incentive contractual rights that the FCM or amount of the letter of credit. to use such letters of credit to foreign futures intermediary has to Moreover, a number of circumvent the pro rata distribution of liquidate such commodity contracts. It 255 commenters, expressed the concern margin funds as set forth in section provides that the liquidating FCM or that requests for substitute customer 766(h) of the Bankruptcy Code.256 foreign futures intermediary must use property in the special context of Moreover, if there are shortfalls in ‘‘commercially reasonable efforts’’ in the delivery letters of credit could cause customer property in a particular liquidation and provides the trustee a sudden liquidity needs, and substantial account class, and public customers damages remedy if the FCM or foreign hardship to customers. For example, posting letters of credit are protected futures intermediary fails to do so. CME noted that, while they support from sharing in those shortfalls, those Damages are the only remedy; under no § 190.04(d)(3) outside the context of public customers would benefit. circumstance can the liquidation be delivery letters of credit, they see voided. However, the shortfalls would, difficulties in that context, specifically This new provision will benefit in the case of deliveries for certain inevitably, instead be allocated to other carrying FCMs by confirming explicitly energy contracts, often which take place public customers, who would suffer that carrying FCMs are allowed to over 30 days. The delivery letters of corresponding losses. Regulation exercise enforceable contractual rights credit for these contracts can involve § 190.04(d)(3) supports the policy of pro to liquidate contracts, which reduces hundreds of millions of dollars in face rata treatment of public customers ambiguity and thus will reduce amounts, and CME is of the view that embodied in section 766(h) of the administrative costs. At the same time, it would cause substantial liquidity Bankruptcy Code by clarifying that clarification of the availability of the hardship for buyers to have to substitute letters of credit cannot be used to avoid damages remedy will help to protect cash in such amounts. pro rata distribution of margin funds. It creditors of the debtor FCM’s estate in While the discussion above represents therefore avoids concentrating losses on the event that the carrying FCM does potentially important costs, the those public customers (who are likely not use commercially reasonable efforts Commission is noting factors that can to be smaller customers) that cannot in liquidating the open contracts (and alleviate these costs, and is qualify for, or cannot afford the cost of, thus will incentivize carrying FCMs to implementing provisions that it believes letters of credit, or otherwise do not use act in a commercially reasonable substantially mitigate these costs: First, letters of credit as collateral. Moreover, manner). Thus, the regulation itself the Commission is adding a new by directing the trustee to exercise their provides the estate with a potential § 190.04(d)(3)(iv), which provides that discretion, including with respect to mitigant for the costs in the form of a the trustee shall, in exercising their amounts and timing of requests for damages remedy. discretion with regard to addressing customer property, in a manner that The remainder of the revisions to letters of credit, including as to the mitigates adverse effects on those § 190.04(e)(4) and (f) are non- timing and amount of a request for customers that have posted letters of substantive language changes and

255 CMC, CME, FIA. 256 See, e.g., 48 FR at 8718–19. 257 7 U.S.C. 7a–2(c).

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clarifications and updated cross- customer accounts. However, this as the trustee will have to expend time references and should not have revision should also result in a benefit and resources issuing account associated costs or benefits. to those customers whose accounts hold statements to customers. It will benefit property but no open commodity customers because it should help them 3. Regulation § 190.05: Operation of the contracts, in the form of enhanced to keep track of their commodity Debtor’s Estate—General: Consideration information about their financial contracts (and the continued availability of Costs and Benefits position (including with regard to of hedges) and the property in their In § 190.05, the Commission is collateral, the value of which may accounts, including in particular when addressing general issues regarding the change on a daily basis, and with regard such contracts and property are operation of the debtor’s estate. In both to the percentage distribution currently liquidated or transferred, even during a § 190.05(a) and (b), the Commission is available). These customers will, under bankruptcy. ICI noted that this is of making revisions providing the trustee the revised provision, receive daily particular benefit to regulated funds, with more flexibility to act in a computations of the funded balance of providing them with a basis to confirm bankruptcy situation. Section 190.05(a), their accounts with the debtor. the existence and value of their for example, provides that the trustee However, revised § 190.05(b) also transactions and associated margin. ‘‘shall use reasonable efforts’’ to comply narrows the trustee’s duty compared to Section 190.05(e)(1) allows a with the CEA and the Commission’s current § 190.04(b): While the current bankruptcy trustee to effect transfers of regulations. Section 190.05(b) requires provision states that the trustee ‘‘must customer property in accordance with the trustee to ‘‘use reasonable efforts’’ to compute a funded balance for each § 190.07, but requires the trustee to compute a funded balance for each customer account . . . each day,’’ the obtain court approval prior to making customer account that contains open revised provision only requires the any other disbursements to customers. commodity contracts or other property trustee to ‘‘use reasonable efforts’’ to do This provision should benefit the estate as of the close of business each business so. Regulation § 190.00(c)(3)(i)(C) and customers by allowing the trustee, day until such open commodity provides that ‘‘reasonable efforts’’ without court approval, to port contracts and other property in such should only be less than ‘‘best efforts’’ customers’ positions and associated account have been transferred or to the extent that this would benefit property to a solvent FCM as quickly as liquidated, ‘‘which shall be as accurate public customers as a class. Exercises of possible in a bankruptcy situation. In as reasonably practicable under the discretion by a trustee that, on a net the event that too much customer circumstances, including the reliability basis, benefit public customers as a class property (that is, an amount in excess of and availability of information.’’ These may, on a net basis, impose costs on the ultimate pro rata share) is two revisions will benefit the estate by individuals or groups within that class. transferred for those customers whose recognizing that a bankruptcy could be For example, there theoretically may be positions are being ported, and cannot an emergency event, that perfectly cases where, because the administrative be offset or clawed back, it could result reliable information could be cost of computing a funded balance in costs to other customers, for whom unavailable or inordinately expensive to would outweigh the benefit of doing so less than their pro rata share would be obtain, and that therefore the trustee to public customers as a class, the available. should be allowed some measure of trustee, in exerting ‘‘reasonable efforts,’’ Section 190.05(e)(2) allows the flexibility to act reasonably given the determines not to do so on a particular bankruptcy trustee to invest the particular circumstances of the case. day or for a particular time. As ICI proceeds from the liquidation of CME noted that § 190.05(b) will have points out in their comment letter, that commodity contracts or specifically the benefit of allowing the trustee to decision would harm certain customers, identifiable property, and any other transfer more promptly public i.e., regulated funds, who have a customer property, in obligations of or customers’ positions and property than particular need to confirm the existence guaranteed by the United States, so long if the trustee were held to a strict and value of their transactions and as the obligations are maintained in standard of precision. On the other associated margin. depositories located in the United States hand, affording the trustee increased Section 190.05(c) requires the debtor or its territories or possessions. The discretion in complying with the CEA to maintain ‘‘records required under this revised regulation expands the scope of and the Commission’s regulations, and chapter to be maintained by the debtor, customer property that the trustee is in computing a funded balance for each including records of the computations permitted to invest in such a manner to customer account, may carry the required by this part’’ ‘‘until such time include ‘‘any other customer property.’’ potential cost of trustee mistake, as the debtor’s case is closed.’’ This This change should benefit customers, misfeasance, or abuse of such revision expands the scope of records in that additional customer property discretion, as discussed above. that must be maintained, thereby could be invested (in this limited Whereas current § 190.04(b) requires a imposing certain administrative costs, manner). trustee to compute a funded balance but should benefit the estate, because it Section 190.05(f) requires the trustee only for those customer accounts with will limit the amount of time the trustee to apply the residual interest provisions open commodity contracts, revised will have to maintain the relevant contained in § 1.11 ‘‘in a manner § 190.05(b) expands the scope of records. appropriate to the context of their customer accounts for which a trustee is Section 190.05(d) requires the responsibilities as a bankruptcy trustee required to compute a funded balance to bankruptcy trustee to use all reasonable pursuant to’’ the Bankruptcy Code and those accounts with open commodity efforts to continue to issue account ‘‘in light of the existence of a surplus or contracts or other property (including, statements for customer accounts that deficit in customer property available to but not limited to, specifically contain open commodity contracts or pay customer claims.’’ This explicit identifiable property). This expansion of other property, and to issue account requirement to continue to apply the the trustee’s duties represents an statements reflecting any liquidation or residual interest requirements set forth administrative cost, as the trustee will transfer of open commodity contracts or in § 1.11 may result in administrative have to expend time and resources at other property promptly after such costs, since the trustee would require the close of business each business day liquidation or transfer. This provision resources to do so. However, this to compute the funded balance of all will likely result in administrative costs, provision should benefit customers by

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making it more likely that they would account class.’’ This provision again entity to liquidate or transfer open receive what they are entitled to receive will have the benefits and costs of commodity contracts, and (2) should not from the debtor’s estate. Indeed, enhanced discretion discussed above, be interpreted to limit a DCO’s ability Vanguard noted that the residual but includes an outer bound to that adequately to manage risk. The revision interest requirement is a valuable buffer discretion. modifies, in a balanced fashion, the to protect customers. In § 190.06(a)(4), the Commission standard for clearing organization and adds a new provision to reflect that SRO rules that are adopted, maintained, 4. Regulation § 190.06: Making and delivery may need to be made in a Taking Delivery Under Commodity in effect, and enforced and where securities account.259 The new transfers are approved by the Contracts: Consideration of Costs and provision should benefit customers who Benefits Commission. While clearing require the delivery of securities, and organizations and SROs will need to Section 190.06 addresses the making the trustee, by permitting those comply with the revised standard, the and taking of deliveries under securities to be delivered to the proper compliance cost should not be different commodity contracts. type of account. By setting limits, the than under the prior standard. The Specifically, § 190.06(a)(2) requires provision should mitigate the risk of clarification that the regulations do not the trustee to use ‘‘reasonable efforts’’ transferring too much value out of the limit contractual risk management rights (in contrast to the current ‘‘best efforts’’) commodity contract account (and should provide a benefit to clearing to allow a customer to deliver physical creating a risk of an undermargin or organizations and their members in delivery property that is held directly by deficit balance). clarifying that the regulation will not the customer in settlement of a Section 190.06(b) is also new. It nullify the contracts in this regard, and commodity contract, and to allow creates an account class for physical will not have an associated cost. payment in exchange for such delivery, delivery property held in delivery In § 190.07(b)(1), the Commission and for both of these to occur outside accounts and the proceeds of such clarifies that it is the transferee FCM the debtor’s estate, where the rules of physical delivery property. This account itself who has the responsibility to the exchange or clearing organization class is further be sub-divided into determine whether it would be in prescribe a process for delivery that separate physical delivery and cash violation of regulatory minimum allows this. delivery account subclasses. In general, financial requirements upon accepting a Management of contracts in the creating the delivery account class transfer. It is not the trustee’s duty. The delivery positions involves a significant should help protect customers with Commission does not anticipate any degree of tailored administration. Under property in delivery accounts following material cost from this revision. the best efforts standard, the trustee may a default, because delivery accounts are Section 190.07(b)(3) permits a spend more time (and thus incur higher not subject to the Commission’s transferee to accept open commodity costs) focusing on the needs of a few segregation requirements. The further contracts and associated property prior customers, which could detract from the sub-division into sub-classes recognizes to completing customer diligence trustee’s ability to manage the estate that cash is more vulnerable to loss, and requirements, provided that such more broadly. Accordingly, the change more difficult to trace, as compared to diligence is completed as soon as from ‘‘best efforts’’ to ‘‘reasonable physical delivery property. This will practicable thereafter, and no later than efforts’’ should benefit creditors of the likely benefit those with physical six months after transfer. It is intended estate (as a whole) as the trustee should delivery claims; customers in the cash to incentivize potential transferees to not need to provide a disproportionate delivery sub-class would be likely get a accept transfers by making it more amount of individualized treatment to pro rata distribution that is less. The practicable to do so. It recognizes that such contracts.258 However, particular benefits and costs of creating these sub- customer diligence processes would customers that would otherwise have classes were discussed more fully above have already been required to have been received the trustee’s focused treatment in reference to the definition of account completed by the debtor FCM with under the ‘‘best efforts’’ standard could class in proposed § 190.01. respect to each of its customers as part suffer a cost from the change. Section 190.06(a)(3) provides 5. Regulation § 190.07: Transfers: of opening their accounts. CME, ICI and guidance to address situations when the Consideration of Costs and Benefits Vanguard agree that the proposal would provide a benefit to customers and trustee determines that it is not Section 190.07(a) works to promote practicable to effect delivery outside the transferee clearing members and transfers of commodity contracts from a trustees, by facilitating the transfer estate and therefore, delivery is made or debtor FCM. It does so by prohibiting 260 taken within the debtor’s estate. The process. If such flexibility were not any clearing organization or self- provided, under the current regulations, revisions provide the trustee with the regulatory organization from adopting, flexibility to act ‘‘as it deems reasonable transfer might not be accomplished, or maintaining in effect, or enforcing rules may not be accomplished promptly. The under the circumstances of the case,’’ that interfere with the acceptance by its but set an outer bound to the trustee’s provision recognizes the importance of members of transfers of open the account opening diligence discretion in requiring them to act commodity contracts and the equity ‘‘consistent with the pro rata margining or securing of such contracts 260 The customer diligence requirements in distribution of customer property by from FCMs with respect to which a question focus on anti-money-laundering petition in bankruptcy has been filed, if requirements and ensuring that risk disclosures 258 As discussed above in section II.A.1, the the transfers have been approved by the have been provided to customers and trustee in exerting best efforts to meet a standard acknowledgements of such disclosures have been must diligently exert efforts to meet that standard Commission. received. The corresponding costs would arise from ‘‘to the extent of its own total capabilities.’’ By The revised regulation includes the the possibility that the transferee’s diligence would contrast, in exerting ‘‘reasonable efforts’’ to meet a provisos that it (1) does not limit the have revealed problems that had been missed by the standard, the Commission expects that the trustee exercise of any contractual right of a debtor FCM’s customer diligence process, or arose will work in good faith to meet the standard, but subsequent to the time that the original process was will also take into account other considerations, clearing organization or other registered conducted, and that conducting the revised including the impact of the effort necessary to meet diligence more promptly would sooner reveal the the standard on the overarching goal of protecting 259 This is only relevant for debtor FCMs that are concerns, thus permitting them to be addressed public customers as a class. also broker-dealers. more expeditiously.

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requirements and would mitigate the the risk of being under-inclusive or include any open commodity contracts risk from delay by requiring the over-inclusive, and thus failing to at the time of the order for relief. The diligence to be performed as soon as achieve the regulatory goals. revision clarifies the current language practicable and setting an outer limit at Moreover, as to both the second and and will not change the types of six months, unless that time is extended third categories, there may be a more accounts that can be transferred. by the Commission. tailored approach to achieving the goal: Accordingly, the Commission does not FIA has requested that the As the Commission explicitly notes anticipate that there will be material Commission provide transferee FCMs above, any further relief that might be added cost associated with the revision. with more specific relief from appropriate in a particular situation can Section 190.07(d) revises special rules applicable law relating to ‘‘customer be requested by the transferee in light of for transfers under section 764(b) of the diligence’’ and to add specific the relevant facts and circumstances. Bankruptcy Code. The revision is being references to certain rules, in order to The Commission observed that its staff made to promote transfer. Cost and provide certainty, and to mitigate have traditionally responded to requests benefit considerations related to transfer regulatory risk, to a transferee. FIA for relief in emergency situations with are as discussed above.262 The revised requested various points of specific great dispatch, and expects, and has regulation permits partial transfers, but relief under five headings: (i) Rules instructed staff, to continue to do so in (to the extent practicable) not in cases relating to anti-money laundering this context in the future.261 While this where netting sets for spreads or requirements; (ii) rules relating to risk approach provides less certainty in straddles would be broken or where and other disclosures; (iii) rules relating advance, it has the benefit of making customers’ net equity claims would to capital and residual interest tailored relief available (and mitigating increase. The revised regulation should requirements; (iv) rules relating to the possibility that relief leads to provide a benefit to customers by account statements; and (v) rules unintended consequences). codifying this limitation. This relating to margin. Section 190.07(b)(4) clarifies that recognizes that there may be As discussed in more detail in Section account agreements governing a circumstances where partial transfer is II.B.5 above, the Commission has transferred account are deemed assigned not practicable and implies that the decided that, with respect to certain to the transferee until and unless a new trustee makes that decision. It is points of the requested relief, providing agreement is reached. At the request of therefore possible that certain customers the relief is warranted, and there are no FIA, the Commission is confirming that holding spread or straddle positions material associated costs from doing so. if there is a pre-existing account could have positions liquidated or not Thus, for example, § 190.07(b)(3) is agreement between a transferred transferred under the revised provision, being amended to refer explicitly to the customer and the transferee FCM, that or could have spreads or straddles risk disclosure requirements in pre-existing agreement will govern the broken because of the trustee’s exercise § 1.65(a)(3). relationship rather than the agreement of discretion. With respect to the other points of between the customer and the transferor The Commission has declined to requested relief, the comment requests (debtor) FCM. The provision also adopt ICI’s suggestion to provide relief that the Commission has decided confirms that consequences for breaches guidance to the effect that the trustee carries unacceptable costs. Thus, the pre-transfer are borne by the transferor should not effectuate a transfer that will Commission is not providing a general rather than the transferee. Section result in a separately managed account exemption from undermargined account 190.07(b)(4) provides important having a significant deficit following the capital charges in accordance with transparency regarding the agreement porting, in order to avoid a § 1.17, nor is the Commission extending between a transferred customer and a circumstance where ‘‘the manager of the time to comply with capital or transferee FCM pending the negotiation that account would likely need to residual interest requirements. While of a new agreement between them, or, liquidate the bulk of the account’s such relief might have the advantage of if such negotiation is unsuccessful, until portfolio and other positions in order to further incentivizing FCMs to accept either party decides to terminate the eliminate or reduce the deficit.’’ While transferred accounts, it would do so at relationship. adopting such a suggestion might the cost of potentially causing or Section 190.07(b)(5) provides that in benefit the beneficial owner by enabling accepting financial weakness at the event of transfer, customer the account manager to manage the transferee FCMs. instructions that are received by the separate account in accord with the In a third group of points of requested debtor with respect to any open account manager’s investment program, relief, the Commission notes that commodity contracts or specifically it may instead have the opposite effect, interpretations of existing regulations identifiable property should be in that it may prevent any transfer of the should adequately address the concerns. transmitted to the transferee, who customer’s positions before the seventh Thus, transferred accounts are (based on should comply with such instructions to calendar day after the order for relief, in the terms of the regulations) excluded the extent practicable. The slight which event the trustee will be required from the Customer Identification revisions to current § 190.02(c) are to liquidate the entirety of the Program requirements of 31 CFR merely clarifications, and there should customer’s account, promptly and in an 1026.220, while the provisions of be no costs or benefits associated with orderly manner, causing the very § 190.07(b)(3) adequately inform what such revisions. disruptions that the transfer provisions constitutes ‘‘appropriate risk-based Section 190.07(c) provides that ‘‘all (and ICI’s suggestion) are designed to procedures for conducting ongoing commodity contract accounts (including avoid. Moreover, many FCMs carry customer due diligence’’ (emphasis accounts with no open commodity hundreds or even thousands of supplied) in the context of 31 CFR contract positions) are eligible for separately managed accounts. It may 1026.210(b)(5)(i). While providing more transfer. . . .’’ This recognizes well not be practical for a trustee, in specific regulatory provisions might explicitly that accounts can be addition to their numerous other enhance regulatory certainty (and thus transferred if the accounts are intended responsibilities (and in a context where redound to the benefit of transferee for trading commodities, but do not they need to learn those responsibilities FCMs, and potentially incentivize FCMs to accept transferred accounts), it carries 261 See discussion in Section II.B.5 above. 262 See section III.B.1 above.

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in a compressed timeframe) to take ‘‘due equivalent percentage distribution to all clarifications and should not have any account’’ of the particular circumstances customers in the applicable account associated costs. of each of these separately managed class (taking into account all previous 6. Regulation § 190.08: Calculation of accounts in the hours, or perhaps a transfers and distributions). The Funded Net Equity: Consideration of small number of days, that the trustee Commission is further clarifying that the Costs and Benefits may be allowed by the clearing trustee should make determinations in organizations carrying the FCMs this context based on customer claims In § 190.08, the Commission accounts to negotiate and effectuate a reflected in the FCM’s records, and, for addresses calculation of funded net transfer. Endeavoring to do so might customer claims that are not consistent equity. Section 190.08(a) simply states well have the cost of diverting the with those records, should make that a customer’s funded net equity trustee and their assistants from estimates using reasonable discretion claim is equal to the aggregate of such carrying out more pressing tasks. based in each case on available customers funded net equity claims for Section 190.07(d)(3) permits a letter of information as of the calendar day each account class. credit associated with a commodity immediately preceding transfer. This Section 190.08(b) sets forth the steps contract to be transferred with an will support achieving the statutory for a trustee to follow when calculating eligible commodity contract account. If policy of pro rata distribution and give each customer’s net equity. SIFMA the letter of credit cannot be transferred the trustee discretion to make decisions AMG/MFA requested that the and the customer does not deliver based on the overarching principle set Commission amend proposed substitute property, the provision will forth above, valuing cost effectiveness § 190.08(b)(2)(xii) to treat accounts of permit the trustee to draw upon all or over precise values of entitlement. the same principal or beneficial owner a portion of the letter of credit and treat However, this is designed to work to the maintained by different agents or the proceeds as customer property in detriment of any customer who, absent nominees as separate accounts and not the applicable account class. The the provision, would otherwise benefit all held in the individual capacity of revised regulation ensures that letters of from a larger distribution. Moreover, in such principal or beneficial owner, credit are treated in an economically giving the trustee discretion, it carries suggesting that this would have the similar fashion to other types of the risk of mistake or misfeasance. benefit of reducing the administrative collateral and that customers using Section 190.07(e) will add language to difficulties the trustee would face in letters of credit will not receive any clarify that certain transfers are consolidating all accounts of the same differential economic advantages, thus approved by the Commission pursuant principal or beneficial owner, and it serving the goal of pro rata distribution. to the procedure set forth in the would have the further benefit of If the trustee does draw upon the letter Bankruptcy Code (and thus protected avoiding any confusion as to treatment of credit, there may be administrative from avoidance) and will prohibit the of separate accounts that could arise costs incurred by the estate, as well as trustee from avoiding such transfers, with the overlay of the time-limited costs to the customer that posted the unless the transfer is disapproved by the relief provided by Letter 19–17. letter of credit as collateral. These costs Commission. These include a transfer The Commission declined to make may be mitigated if the customer made by ‘‘a receiver that has been this change. The change would not delivers substitute property, as set forth appointed for the FCM that is now a achieve those benefits and would have in the proposed regulation. Moreover, debtor.’’ The new provision is being associated costs: First, the FCM, to the consistent with § 190.04(d)(3)(iv), the added in order to respect the actions of extent it does treat such accounts trustee is directed to ‘‘endeavor to a receiver that is acting to protect the separately pursuant to the relief set forth achieve pro rata treatment among property of the FCM that has become in Letter 19–17, will already be customer claims in a manner that the debtor in bankruptcy. It will provide consolidating (for purposes of certain mitigates, to the extent practicable, the certainty to the actions of such a calculations) all accounts of the same adverse effects upon customers that principal or beneficial owner, in that the 263 receiver, whose duties, among others, have posted letters of credit.’’ include protecting the customer Letter conditions its relief on the FCM Section 190.07(d)(4) will require a property of the FCM. However, to the applying credit limits and stress testing trustee to use reasonable efforts to 265 extent that the receiver takes actions on a combined account basis. prevent physical delivery property from that are, considered in retrospect, Second, given that Letter 19–17 also being separated from commodity mistaken or ill-advised, the revised conditions relief on the FCM disclosing contract positions under which the provision will prevent the correction of that ‘‘under CFTC [p]art 190 rules all property is deliverable. While this such actions unless the Commission separate accounts of the beneficial provision will impose an administrative acts affirmatively to disapprove them.264 owner will be combined in the event of cost on the estate, it is already a best an FCM bankruptcy,’’ amending Section 190.07(f) will clarify that the practice for trustees; keeping delivery § 190.08(b)(2)(xii) to treat them Commission may prohibit the transfer of property with the underlying contract separately would be inconsistent with a particular set or sets of the commodity positions is necessary for (and thus that disclosure, and would cause, rather contract accounts, or permit the transfer should benefit) the delivery process. than relieve, inconsistency with the of a particular set or sets of commodity Therefore, the additional administrative approach taken under the Letter. cost from the revised regulation should contract accounts that do not comply with the requirements of the section. In While the Commission is making be minimal. certain revisions in § 190.08(b)(3), (4), In § 190.07(d)(5), the Commission addition, the Commission is clarifying that the transfers of the commodity and (5), the Commission views such prohibits the trustee from making a revisions as non-substantive and merely transfer that would result in insufficient contract accounts include the associated customer property. These revisions are clarifying the text in the current remaining customer property to make an analogous provisions. Thus, the Commission does not expect these 263 The costs and benefits of allowing the trustee 264 Regulation § 190.02(b)(1) explicitly excepts to draw upon the letter of credit have been from the delegation to the Director of the Division discussed above in section III.C.2 with respect to of Clearing and Risk the authority to disapprove a 265 See CFTC Letter 19–17, https://www.cftc.gov/ § 190.04(d)(3). pre-relief transfer pursuant to § 190.07(e)(1). node/217076 at 4.

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changes to result in any costs or impracticable to translate an auction property that was property received, benefits. price for a portfolio to prices for acquired or held to margin, guarantee, Section 190.08(c) sets forth individual contracts within that secure, purchase, or sell a commodity instructions for calculating each portfolio. contract and that is subsequently customer’s funded balance, while in recovered by the avoidance powers of 7. Regulation § 190.09: Allocation of § 190.08(d), the Commission is in the trustee or is otherwise recovered by Property and Allowance of Claims: general implementing changes to the trustee on any other claim or basis Consideration of Costs and Benefits provide more flexibility to the trustee in constitutes customer property. The valuing commodity contracts and other In § 190.09, the Commission is current version of this provision refers property held by or for a commodity addressing allocation of property and only to the trustee’s avoidance powers broker. For instance, in § 190.08(d)(5), allowance of claims. Section (leaving out the possibility for recovery the Commission is deleting the 190.09(a)(1) defines the scope of other than through avoidance powers). requirement that the trustee seek ‘‘customer property’’ that is available to The Commission’s revisions to this approval of the court prior to enlisting pay the claims of a debtor FCM’s section will benefit the estate, by professional assistance to value customers, and § 190.09(a)(1)(i) sets assuring that any property they recover customer property. These changes forth the categories of ‘‘cash, securities, will be included in the pool of customer should benefit the estate by providing or other property or the proceeds of property, rather than going to some the trustee with more flexibility to such cash, securities, or other property other creditor (to be sure, those other determine how to value certain received, acquired, or held by or for the creditors will receive correspondingly customer property, including whether account of the debtor, from or for the less). or not to enlist professional assistance account of a customer’’ that are • Second, § 190.09(a)(1)(ii)(G) is new, in doing so. Likewise, these revisions included in customer property. In and provides that any current assets of should serve the goal of a pro rata § 190.09(a)(1)(i), the Commission is the debtor in the greater of (i) the distribution to customers, as the making certain substantive changes to amount that the debtor is obligated to be accurate valuation of customer property the categories listed in current set aside as its targeted residual interest can benefit from the input of a § 190.08(a)(1)(i), as discussed below: amount, pursuant to § 1.11, or (ii) the professional. On the other hand, • First, § 190.09(a)(1)(i)(D) is new and debtor’s obligations to cover debit affording the trustee increased provides that customer property balances or undermargined amounts, discretion in how to value commodity includes any property ‘‘received by the pursuant to § 1.20, § 1.22, § 22.2, or contracts and other property held by a debtor as payment for a commodity to § 30.7, constitute customer property. debtor carries the potential cost of be delivered to fulfill a commodity This new provision will result in mistake, misfeasance, or abuse of contract from or for the commodity administrative costs, because the trustee discretion by the trustee, as discussed customer account of a customer.’’ will need to take the extra step of above, or possibly by the professional Clarifying this point explicitly should determining whether any current assets whose service is retained. benefit both the estate and customers by of the debtor need to be set aside as With respect to commodity contracts avoiding confusion or potential customer property and, if so, how much. that have been transferred, litigation. This provision should benefit public § 190.08(d)(1)(i) provides that such • Second, § 190.09(a)(1)(i)(F) customers (and serve the policy of contracts be valued at the end of the last provides that letters of credit, including protecting customer collateral), settlement cycle on the day preceding proceeds of letters of credit drawn by however, because it will mitigate the such transfer, rather than at the end of the trustee, or substitute customer risk of a shortfall in customer funds by the settlement cycle in which it is property, constitute ‘‘customer transferred. Again, this revision should ensuring that the trustee fulfills the property.’’ This section is being revised Commission’s regulations that require benefit both the estate and customers by to be consistent with the other letters of making it practical to calculate the value an FCM to put certain funds into credit provisions that are being added segregation on behalf of customers. ICI of the transferred commodity contracts throughout part 190. The Commission prior to the transfer. and Vanguard agreed that this provision does not anticipate that this provision will benefit customers, while CME The Commission has declined to will result in any material costs or accept ICE’s suggestion that it adopt a considered it a ‘‘substantial benefits, as current § 190.08(a)(1)(i) improvement over the current rule.’’ ‘‘more flexible approach’’ because ‘‘the already includes a provision regarding market may move significantly on the This approach will result in such funds letters of credit.266 being included in the pool of customer date of the transfer.’’ While prices may Section 190.09(a)(1)(ii) sets forth the move intra-day during the period property, rather than going to some categories of ‘‘[a]ll cash, securities, or other creditor. It will, to the same between opening and the time of other property’’ that would be included auction, they may also move between extent, operate to the detriment of in customer property. In the time of auction and closing. general creditors. § 190.09(a)(1)(ii), the Commission is • Therefore, there is no ex ante reason to Third, § 190.09(a)(1)(ii)(K) is also making certain substantive changes to expect that the previous day’s price is new, and provides that any cash, the categories listed in current less reflective of the price at the time of securities, or other property that is § 190.08(a)(1)(ii), as discussed below: the auction than the closing price on the payment from an insurer to the trustee • First, § 190.09(a)(1)(ii)(D) provides auction day. Moreover, an alternative arising from or related to a claim related that any cash, securities, or other approach, using the price set in the to the conversion or misuse of customer property constitutes customer property. auction as the price for individual 266 The costs and benefits of the underlying contracts, is unlikely to be practicable. policy decision to take steps to ensure that This provision should benefit customers Units auctioned will frequently contain customers posting letters of credit are treated (with (and, again, the policy of protecting a heterogenous (though risk-related) set respect to pro rata allocation of losses) in a manner customer collateral), since any consistent with the manner in which customers insurance payment as described in this of products, tenors (e.g., contract posting other forms of collateral are treated are months), and directions (e.g., long or discussed in connection with § 190.04(d)(3) in proposed section will enlarge the pool short). Thus, it will often be section III.C.2 above. of customer property, rather than going

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to general creditors.267 It could result in ensuring that any amount deposited by take time and resources to properly administrative costs, however, as the a customer after the entry of an order for allocate any property that is recovered trustee will need to spend time and relief that is necessary to meet that after the time the bankruptcy is filed.270 resources in order to determine whether customer’s margin requirements will be Section 190.09(c)(1)(ii) is a new any such insurance payments exist, and included in the pool of customer provision that instructs the trustee, in in prosecuting such insurance claims. property. This provision would the event there is property remaining • Fourth, the second sentence of correspondingly act to the detriment of allocated to a particular account class § 190.09(a)(1)(ii)(L) is new, and will general creditors. after payment in full of all allowed provide that customer property for • Third, § 190.09(a)(2)(viii), which is customer claims in that account class, to purposes of these regulations includes new, provides that any money, allocate the excess in accordance with any ‘‘customer property,’’ as that term is securities, or other property held in a proposed § 190.09(c)(2), which in turn defined in SIPA, that remains after securities account to fulfill delivery, sets forth the order of allocation for any satisfaction of the provisions in SIPA under a commodity contract that is a customer property that cannot be traced regarding allocation of customer security futures product, from or for the to a specific customer account class. property constitutes customer property. account of a customer, is excluded from These provisions will benefit public This provision should benefit customer property. This provision customers who would otherwise face commodity customers (and act to the avoids conflict with the resolution, shortfalls (and then, non-public detriment of general creditors) because under SIPA, of claims for securities and customers who would otherwise face any securities customer property related collateral. shortfalls). Since these provisions make remaining after full allocation to Section 190.09(a)(3), which is new, explicit what is implicit in current part securities customers will enlarge the gives the trustee the authority to assert 190, an additional benefit of these pool of commodity customer property. It claims against any person to recover the provisions will result from the increased could result in administrative costs, shortfall of customer property clarity over what to do with any excess however, since the trustee could need to enumerated in certain paragraphs customer property. However, the spend time and resources determining elsewhere in § 190.09(a). This provision provisions will act to the detriment of the extent to which such property is left could impose administrative costs, since non-public customers (relative to public over after allocation to customers in a the trustee could have to expend time customers) and general creditors SIPA proceeding.268 and resources to assert and prosecute (relative to both) who, under the current Section 190.09(a)(2) sets forth the such claims to make up for any shortfall regime, could have been more likely to categories of property that are not in customer property. The provision receive any excess customer property in included in customer property. In will, however, benefit customers, since the absence of an explicit provision § 190.09(a)(2), the Commission has it will ensure that the trustee is in a providing what to do with any such made certain substantive changes to the position to recover any such shortfalls excess customer property.271 categories listed in current and gives the trustee authority to act to Section 190.09(d) governs the § 190.08(a)(2), as discussed below: do so. Moreover, since this provision distribution of customer property. The • First, in § 190.09(a)(2)(iii), the makes explicit what is implicit in only substantive change in § 190.09(d) Commission is adding explicit language current part 190, an additional benefit of from its analog in current § 190.08(d) is to state that only those forward this provision may be reduced litigation in § 190.09(d)(1)(i) and (ii), which contracts that are not cleared by a costs over a trustee’s authority to engage import the concept of ‘‘substitute clearing organization are excluded from in attempts to recover shortfalls in customer property.’’ Whereas current the pool of customer property. This customer property.269 § 190.08(d)(1)(i) and (ii) require revision will benefit customers (and act Section 190.09(b) adds the phrase ‘‘or customers to deposit cash in order to to the detriment of general creditors), attributable to’’ to the language that is in obtain the return of specifically since the pool of customer property current § 190.08(b), when describing identifiable property, § 190.09(d)(1)(i) would increase by explicitly including how to treat property segregated on and (ii) allow the posting of ‘‘substitute any cleared forward contracts. behalf of or attributable to non-public customer property.’’ This term, which is • Second, § 190.09(a)(2)(v) provides customers, namely, as part of the public defined in § 190.01, means cash or cash that any property deposited by a customer estate; the addition of this equivalents. This revision will benefit customer with a commodity broker after phrase, as described above, will clarify customers because it makes it easier for the entry of an order for relief that is not that § 190.09(b)(1) applies both to customers to redeem their specifically necessary to meet the margin property that is in the debtor’s estate at identifiable property by no longer requirements of such customer is not the time of the bankruptcy filing, as well limiting customers to only using cash to customer property. The deletion of the as property that is later recovered by the do so. It could, however, impose word ‘‘maintenance’’ before ‘‘margin’’ trustee and becomes part of the debtor’s administrative costs in the form of time will eliminate any distinction between estate at the time of recovery. This and resources of the trustee, who, in the initial and variation margin; this additional phrase would benefit public event a customer chooses to post cash deletion will benefit customers by customers and the statutory policy in equivalents to redeem their specifically favor of them (and correspondingly act identifiable property, will be required to 267 It will, again, to the same extent, act to the to the detriment of non-public detriment of general creditors. customers and general creditors), since 270 Section 190.09(c)(1) will have a similar change 268 The Commission further notes that the first it could increase the amount of property in the addition of the phrase ‘‘or recovered by the sentence of § 190.09(a)(1)(ii)(L), which provides that that is treated as part of the public trustee on behalf of or for the benefit of an account customer property includes any cash, securities, or customer estate. It could impose class,’’ which is meant to clarify that any property other property in the debtor’s estate, but only to the recovered by the trustee on behalf of or for the extent that the customer property under the other administrative costs because it could benefit of a particular account class after the definitional elements is insufficient to satisfy in full bankruptcy filing must be allocated to the customer all claims of the debtor’s public customers, will 269 Of course, these recoveries are derived from estate of that account class. This revision will impose no new costs or benefits because such persons against whom such claims are successfully present similar costs and benefits to those discussed provision already appears in current § 190.08, and asserted. The transfer to customers from these above. the only changes to the provision would be non- individuals advances the goal of pro-rata 271 The incentive effects of such preferences are substantive updates to cross-references. distribution. discussed in section III.A.2.vi, above.

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value (and potentially to liquidate) such hedging, it will be more cost effective to using such accounts is twofold: To cash equivalents. Moreover, while ‘‘cash designate the account at opening than to protect customer assets during the equivalents’’ are required to be assets monitor the transactions for the first delivery process, and to foster the well- ‘‘that are highly liquid such that they qualifying transaction to provide the functioning of the delivery process. may be converted into United States opportunity to make the designation, as The regulation proposed as dollar cash within one business day applicable under the current regulation. § 190.10(d) addresses letters of credit, without material discount in value,’’ it Thus, the regulation should reduce the and will prohibit an FCM from is possible that such assets could probability that the opportunity to accepting a letter of credit as collateral nonetheless decrease in value, designate the account as a hedging during business as usual unless certain potentially to the detriment of other account will be missed. conditions are met at the time of customers. Section 1.41(b) sets forth the acceptance and remain true through the conditions for treating an account as a date of expiration. It is being codified as 8. Regulation § 190.10: Provisions hedging account, permitting such § 1.43. Applicable to Futures Commission treatment upon the customer’s written The first condition is that the trustee Merchants During Business as Usual: must be able to draw upon the letter of Consideration of Costs and Benefits representation that their trading would constitute hedging as defined under any credit in full or in part in the event of As proposed, § 190.10 addresses relevant Commission rule or the rule of a bankruptcy proceeding, the entry of a provisions applicable to FCMs during a DCO, DCM, SEF, or FBOT. There will protective decree under SIPA, or the business as usual. The ABA be record-keeping costs for FCMs and appointment of FDIC as receiver Subcommittee and CME recommended customers associated with the pursuant to Title II of the Dodd-Frank that these ordinary course provisions provision. Act. Second, if the letter of credit is should be codified in part 1 of the Section 1.41(c) provides that the permitted to be and in fact is passed Commission’s regulations, to be more foregoing requirements do not apply to through to a clearing organization, the transparent to FCM compliance commodity contract accounts opened trustee for such clearing organization (or personnel. As discussed further below, prior to the effective date of this final the FDIC) must be able to draw upon the the Commission has accepted that rulemaking, and that an FCM can letter of credit in full or in part in the suggestion and is adopting in part 1 of continue to designate such existing event of a bankruptcy proceeding for its regulations the provisions that were accounts as hedging accounts based on such clearing organization (or where the proposed as § 190.10 (b), (c), (d), and (e). written hedging instructions obtained FDIC is appointed as receiver). In the regulation proposed as under current regulations. This Section 1.43 will ensure that an § 190.10(a), the Commission notes that provision should mitigate the impact of FCM’s treatment and acceptance of an FCM is required to maintain current the changes to current requirements in letters of credit during business as usual records related to its customer accounts, § 1.41(a) and (b) by not applying those is consistent with and does not preclude consistent with current Commission provisions to already opened hedging the trustee’s treatment of letters of credit regulations, and in a manner that will accounts, instead relying upon the in accordance with §§ 190.00(c)(5) and permit them to be provided to another information collected and maintained 190.04(d)(3). The Commission FCM in connection with the transfer of during the current regulatory understands that under industry open customer contracts and other framework. practice, most existing letter of credit customer property. This regulation does Section 1.41(d) will permit an FCM to arrangements are consistent with the not impose new obligations, but rather designate an existing customer account Joint Audit Committee Forms of informs the trustee regarding their as a hedging account for purposes of Irrevocable Standby Letter of Credit, duties by incorporating references to the bankruptcy treatment, provided that the both Pass-Through and Non Pass- Commission’s existing regulations. FCM obtains the necessary customer Through,273 and that these forms are Thus, this provision is remaining in part representation. This provision will give consistent with these new requirements. 190, and, as the sole remaining FCMs and customers flexibility to apply Nevertheless, FCMs will need to review paragraph, will be codified as § 190.10. the proposed regulations to existing the existing letters of credit for The regulation proposed as accounts where the impact would not be consistency with the regulation, and it § 190.10(b) addresses designation of overly burdensome. is plausible that some could need to be accounts as intended for the purpose of The regulation proposed as re-negotiated to be consistent therewith. hedging. It is being codified as § 1.41. § 190.10(c) addresses the establishment To mitigate the costs of this change, An FCM will be permitted to rely upon of delivery accounts during business as the Commission has considered the a customer’s written representation of usual. It is being codified as § 1.42, and extent of the use of letters of credit in hedging intent regarding the designation recognizes that when an FCM facilitates the industry and has determined that of a hedging account, without being delivery under a customer’s physical upon the effective date of the regulation, required to look behind that delivery contract and such delivery is § 1.43 will apply only to new letters of representation, thus mitigating effected outside of a futures account, credit and customer agreements. The administrative costs. foreign futures account, or cleared Commission further is including a Section 1.41(a) requires an FCM to swaps account, it must be effected transition period of one year from the provide a customer an opportunity to through (and the associated property effective date until § 1.43 will apply to designate an account as a hedging held in) a delivery account. While there existing letters of credit and customer account when the customer first opens are costs associated with the opening agreements. The transition period is the account, allowing for clear and maintenance of delivery accounts, intended to give FCMs an adequate instruction to FCMs at the outset of the the Commission views that the use of opportunity to conduct the necessary relationship. Clear instruction at the such accounts is cost effective in review of existing letters of credit and outset will facilitate the ability properly facilitating delivery.272 The benefit of customer agreements, and to make any to account for customer property. There will be some disclosure and accounting 272 The Commission further understands that it is with mandating the use of such accounts should be costs associated with this provision. For already industry practice to use such accounts, mitigated. those customers that do engage in therefore, as a practical matter, the cost associated 273 See section II.B.8 above.

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necessary changes. SIFMA AMG/MFA certain provisions (thereby promoting bankruptcy regulations for an FCM have urged the Commission to shorten transparency for customers, other insolvency to reflect current market that one-year transition period, claimholders, and the general public), practices and thereby make it easier for questioning how a (non-conforming) by providing, in certain other the trustee to act effectively to protect letter of credit would be treated if an provisions, discretion to the trustee in customer property in the event of such FCM that is holding such a letter of determining how best to achieve the an insolvency. goal of protecting public customers as a credit went into bankruptcy during that e. Other Public Interest Considerations period. Nonetheless, the Commission class, by fostering transfer (and therefore has concluded that the one-year time mitigating the market risk associated Subpart B of the revised regulations period appropriately balances the goals with closing out and reopening supports the implementation of of mitigating burden on FCMs who are positions for certain customers), by statutory policy such as promoting required to conduct such reviews, and enhancing the likelihood that customer protection of public customers and make such changes, with the goal of net equity claims will be fully funded, ensuring pro rata distribution of mitigating the risk that an FCM that has and by promoting fairness to customers customer funds. Moreover, some of the accepted one or more letters of credit as a class by achieving pro rata FCMs that might enter bankruptcy are that do not conform to the new distribution. very large financial institutions, and requirements becomes a debtor during some are (or are part of larger groups b. Efficiency, Competitiveness, and that are) considered to be systematically that transition period. Even if such a Financial Integrity situation occurs, the risk that the important. A well-structured and customer who posted that letter of credit Subpart B of the revised regulations effective bankruptcy process that would obtain treatment that is not will promote efficiency (in the sense of efficiently facilitates the proceedings is consistent with (i.e., better than) pro both cost effectiveness and timeliness) likely to benefit the financial system rata treatment (at the expense of other in the administration of insolvency (and thus the public interest), as that public customers) is mitigated by the proceedings of FCMs and the financial process will help to attenuate the provision in § 190.04(d)(3)(ii)—which is integrity of derivatives transactions detrimental effects of the bankruptcy on not subject to the one-year transition carried by FCMs by setting forth clear the financial system and reduce the period—that, for a letter of credit posted and well-thought-out instructions for a likelihood that uncertainty as to the as collateral, ‘‘the trustee shall treat any bankruptcy trustee to follow in the outcome of the insolvency could cause disruption to financial markets. portion that is not drawn upon (less the event of an FCM insolvency, and by value of any substitute customer ensuring that these instructions are and D. Subpart C—Clearing Organization as property delivered by the customer) as remain consistent with current market Debtor having been distributed to the customer practices. Moreover, subpart B will provide the bankruptcy trustee with Subpart C to part 190 is intended to for purposes of calculating entitlements create a tailored set of regulations to to distribution or transfer.’’ discretion, in certain circumstances, to react flexibly to the particulars of the govern a proceeding under subchapter It is possible that some letters of IV of chapter 7 of the Bankruptcy Code credit could become more expensive for insolvency proceeding, guided by the goal of protecting public customers as a in which the debtor is a clearing customers to obtain, as there will be an organization. As discussed further increased likelihood that the letter of class, thereby promoting cost-effective administration of the proceeding. These below, while these regulations are fitted credit will be drawn upon. (As to the context of a commodity broker discussed above, this appears to not effects will, in turn, enhance the competitiveness of U.S. FCMs, by that is a clearing organization, they are apply to the majority of existing principles-based rather than arrangements). As noted in the enhancing market confidence in the protection of customer funds and prescriptive, and flexible rather than discussion of § 190.04(d)(3), the benefit rigid. of the regulation is ensuring that letters positions entrusted to U.S. FCMs, even in the case of insolvency. The overarching benefits of this of credit are treated in an economically approach include the following. First, consistent manner with other types of c. Price Discovery uncertainty will be reduced during collateral, thus promoting the goal of Price discovery is the process of business-as-usual (thus enhancing the pro rata distribution. However, it could determining the price level for an asset ability of both clearing members and create incentives for customers who through the interaction of buyers and their customers better to understand had, or who would prefer to, post letters sellers and based on supply and their exposures to the possible of credit that could not be drawn upon demand conditions. The revised insolvency of a clearing organization, unless the customer defaulted, to reduce regulations work to promote the and to tailor their risk management their participation in transactions transfer, rather than liquidation, of practices (and use of clearing services) cleared through FCMs. customer positions. To the extent that in light of this enhanced The provision proposed as § 190.10(e) they therefore mitigate the likelihood of understanding). This better concerns the disclosure statement for the need for liquidations of customer understanding may well foster greater non-cash margin, and is being codified positions, particularly in conditions of trust in the cleared derivatives as § 1.55(p). It largely aligns with the market distress, they will mitigate the marketplace, and thus greater provisions in current part 190 from negative impacts of bankruptcy participation therein. To be sure, it is which it was derived; there will be no proceedings on price discovery. also possible that some market additional cost or benefit implications. participants, upon achieving a greater d. Sound Risk Management Practices 9. Section 15(a) Factors—Subpart B understanding, may decide not to Subpart B of the revised regulations participate. There are other limitations a. Protection of Market Participants and will promote sound risk management to these benefits, noted below. Second, the Public practices by facilitating the bankruptcy by developing a more detailed, yet Subpart B of the revised regulations trustee’ effective management of the risk flexible, framework and procedures for will increase the protection of market of the debtor FCM. Subpart B will the bankruptcy of a DCO, the costs (to participants and the public by clarifying accomplish this by revising the the estate, to clearing members, and to

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public customers) of the case should be Default rules and procedures are (including money managers) are willing reduced. intended to, inter alia, ensure that the to and do participate in cleared markets. Third, the resolution regime DCO can take timely action to contain To the extent that subpart C of part established under Title II of Dodd-Frank losses and liquidity pressures and to 190 applies those rules, plans and provides that the maximum liability of continue meeting its obligations in the arrangements, even if flexibly, then the FDIC as receiver of a covered financial event of a clearing member default. incentive effects described above may company to a claimant is the amount Recovery plans address credit losses be felt more strongly by clearing the claimant would have received if the that exceed the DCO’s available members and their public customers, FDIC had not been appointed receiver resources, as well as the manifestation albeit only marginally so.278 The level of and the covered financial company had of other risks, as necessary to maintain that enhanced incentive is difficult to been liquidated under chapter 7 of the the derivatives clearing organization’s measure, since it depends, in significant Bankruptcy Code. By establishing a viability as a going concern, while part, on the perception of those entities clearer counterfactual, subpart C will: wind-down involves the actions of the as to the effect of referring to those (a) Enhance the ability of FDIC to plan DCO to effect the permanent cessation rules, plans, and procedures in for and to execute its responsibilities as or sale or transfer of one or more bankruptcy under part 190, subpart C: receiver; (b) enhance the ability of services. Those rules, plans, and procedures, market participants to predict in Commission regulations require DCOs which they dislike, are and will be advance their exposures in the unlikely to: Take steps to ensure their resilience, applicable in cases where the DCO event of the resolution as a DCO; and (c) have effective rules and procedures to engages in either default management or mitigate the cost of litigation over the manage defaults, address fully any recovery outside of bankruptcy. The value of such claims. The Commission individual or combined default loss, references to these rules, plans, and notes that there can, to a certain extent, and maintain viable plans for recovery procedures in part 190 increases the be costs imposed by proposed subpart in the event that they suffer a default likelihood that they will be used 276 C, in that there may be a corresponding loss or any other (non-default) loss. (because bankruptcy represents an reduction in flexibility with the DCOs’ rules and arrangements for additional circumstance in which they addition of rules specifically tailored to default management and their recovery would be applicable). The incentive address a DCO bankruptcy, but the plans work to allocate losses that are not effects also depend on the perception of Commission has drafted these proposed covered by the resources of the defaulter clearing members and their public rules with the intent of maintaining between the DCOs themselves, their customers on the effect of such use in significant flexibility, where warranted. clearing members, and (in some cases bankruptcy. It is apposite to note an important such as gains-based haircutting), will A note on terminology: As discussed issue that affects incentives: A have the effect (along with clearing above in section II.C, the customers of agreements between FCMs and their a clearing organization are its members, significant group of commenters have public customers) of allocating certain considered separately in two roles: (1) expressed strong concerns, both in losses to public customers. These Each member may have a proprietary comments to this rulemaking 274 and include default losses that are not (also known as ‘‘house’’) account at the elsewhere,275 that clearing members and covered by margin posted by the clearing organization, on behalf of itself their customers have no meaningful role defaulter (or the defaulter’s own and its non-public customers (i.e., in DCO risk governance, and, most contribution to mutualized loss affiliates). The property that the clearing relevant here, that DCOs’ default rules arrangements) or by the DCO’s ‘‘skin-in- organization holds in respect of these and procedures and recovery and wind- the-game,’’ as well as certain investment accounts is referred to as ‘‘member down plans are developed without or custody losses. All of this would property.’’ (2) Each member may have sufficient input from members and their occur outside of bankruptcy.277 an account for that members’ public customers. As discussed in detail in Those rules, plans, and customers. The property that the section II.C above and in this section arrangements—and the extent to which clearing organization holds in respect of II.D, subpart C is based, in large part, on they are considered helpful or these accounts is referred to as a debtor DCO’s ex ante default rules and noxious—thus influence the incentives ‘‘customer property other than member procedures and recovery and wind- of DCOs, their clearing members, and property.’’ Many clearing members will down plans, though applied flexibly by the customers of those clearing have both such accounts, although some the trustee—that is, only to the extent members. Accordingly, the concerns may have only one or the other. they determine is ‘‘reasonable’’ and that these clearing members and money ‘‘practicable.’’ managers have raised with respect to 1. Regulation § 190.11: Scope and Most of those concerns transcend the their limited ability to influence these Purpose of Subpart C: Consideration of topic of this rulemaking: As a general rules, plans, and arrangements that have Costs and Benefits matter, risk governance is intended to effects outside of bankruptcy are likely Section 190.11(a) will simply state mitigate the possibility of default and, to have important incentive effects on that the new subpart C of part 190 will where default does occur, to foster the how, and the extent to which, clearing apply to a proceeding commenced result that it is the defaulter that pays members and their public customers under subchapter IV of chapter 7 of the for all of the losses; skin-in-the-game Bankruptcy Code in which the debtor is provides an additional layer of loss- 276 See generally part 39 of the Commission’s a clearing organization. Therefore, the absorbency that (i) comes before regulations. Only SIDCOs, or other DCOs that have costs and benefits of § 190.11(a) are the mutualizing costs to non-defaulters and elected to become subject to the provisions of overarching costs and benefits stated (ii) creates incentives for DCOs to subpart C of part 39, are required to address fully any default loss, or to maintain recovery and wind- above. engage in successful risk management. down plans. However, among DCOs based in the United States, the vast majority of activity is 278 The effects of those rules on incentives for 274 See ACLI, FIA, ICI, SIFMA AMG/MFA, and conducted on DCOs that fall within one of those DCOs is even more difficult to measure, since a Vanguard. two categories. chapter 7 liquidation (the only bankruptcy available 275 See, e.g., A Path Forward for CCP Resilience, 277 Moreover, among U.S. DCOs (and among all to a commodity broker, see 11 U.S.C. 109(d)) is Recovery, and Resolution (published by a group of DCOs registered with the Commission), no loss has highly likely to reduce severely, if it does not prominent clearing members and money managers). ever been so large that it was mutualized. eliminate, the DCO’s value to its shareholders.

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ICE and SIFMA AMG/MFA noted 2. Regulation § 190.12: Required Reports notice of any DCO bankruptcy that, in the case of the bankruptcy of a and Records: Consideration of Costs and proceeding. DCO organized outside the United Benefits Section 190.12(b) and (c) involve the States, there may be conflicts with a Section 190.12(a)(1) is analogous to provision of certain reports and records bankruptcy proceeding in the home § 190.03(a), in that it provides to the trustee and/or the Commission by the debtor clearing organization. In jurisdiction unless the applicability of instructions regarding how to give particular: § 190.12(b) sets forth the part 190 is limited. For example, there notice to the Commission and to a reports and records that the clearing may be differing—and irreconcilable— clearing organization’s members, where organization will be required to provide rules for distributing property. Such such notice is required under subpart C. to the Commission and to the trustee differing rules could incentivize, e.g. a For a discussion of the costs and within three hours following the later of benefits of this section, please refer to customer of a non-FCM clearing the commencement of the proceeding or the discussion of the cost and benefit member to bring litigation seeking to the appointment of the trustee, and implications of § 190.03(a). apply part 190’s customer protection § 190.12(c) sets forth the records to be Section 190.12(a)(2) will revise the rules to what they might describe as the provided to the Commission and to the time in which a debtor clearing customer claims of their non-FCM trustee no later than the next business organization must notify the clearing member.279 day following commencement of a Commission of a bankruptcy filing. In bankruptcy proceeding. These The Commission has determined to particular: (1) In the event of a voluntary provisions will impose administrative adopt a suggestion by ICE and, in a bankruptcy filing, the debtor will be costs on the debtor clearing organization newly created § 190.11(b), to limit the required to notify the Commission at or and/or the trustee, which will be applicability of part 190, in the case of before the time of filing, and (2) in the obligated to spend time and resources a foreign DCO subject to a proceeding in event of an involuntary bankruptcy its home jurisdiction, to provisions that transmitting copies of the required filing, the debtor must notify the reports and records to the trustee and/ (a) focus on the contracts and property Commission as soon as possible, but in or Commission. However, these of public customers of FCM members 280 any event no later than three hours after provisions should both benefit the or (b) general provisions, and those that the receipt of the notice of such filing. estate, and enhance the Commission’s provide notice and reports to the These revisions codify expectations that ability to fulfil its responsibilities, by Commission and a U.S. bankruptcy (1) in a voluntary bankruptcy providing them with the most current trustee.281 By limiting the applicability proceeding, the debtor clearing information about the clearing of part 190 in this manner, the organization will provide advance organization, and by allowing the Commission will foster the goal of notice to the Commission ahead of the trustee to begin to understand the mitigating such conflicts,282 while by filing to the extent practicable, and (2) business of the clearing organization as including those provisions (rather than in an involuntary bankruptcy soon as possible following a bankruptcy disapplying part 190 entirely to the proceeding, the debtor clearing filing, which is critically necessary to bankruptcy of a foreign-based clearing organization will notify the Commission the administration of the debtor clearing organization), the Commission will immediately upon receiving notice of organization’s estate. This would in turn foster the goal of protecting customers of the filing, or within at the most three promote confidence in the clearing hours thereafter. U.S. FCM members of such a foreign- system in particular, and financial With respect to a voluntary based DCO. markets more broadly. bankruptcy filing, the Commission OCC indicated that, while they expects that the DCO will have reported ‘‘maintain[ ] this information in a 279 As noted immediately below, public its financial distress in the lead-up to a customers of FCM clearing members will benefit readily accessible place and do[ ] not from protection under part 190. bankruptcy filing in accordance with foresee any challenge in identifying and 280 I.e., §§ 190.13, 190.17, and 190.18, but only the mandatory reporting requirements providing this information without with respect to: (1) Claims of FCM clearing in § 39.19(c)(4); the revision in proposed delay,’’ they believe that the three hour members on behalf of their public customers; and § 190.12(a) merely codifies the time period is ‘‘overly prescriptive’’ (2) property that is or should have been segregated expectation that the clearing for the benefit of FCM clearing members’ public because of the possibility of ‘‘unforeseen customers, or that has been recovered for the benefit organization will notify the Commission delays that could occur on the day in of FCM clearing members’ public customers. of an intent to file for bankruptcy which a DCO enters bankruptcy.’’ The 281 I.e., subpart A, and § 190.12. protection as soon as practicable before, Commission has declined to modify the 282 The Commission notes that conflicts involving and in no event later than, the time of proposal, because the Commission a DCO based outside the United States with the the filing. In addition, § 190.12(a) also believes that setting this specific insolvency law in that DCO’s home jurisdiction as will allow a debtor clearing organization applied to claims of FCM clearing members on deadline will result in significant behalf of their public customers should be mitigated to provide the relevant docket number benefits: Providing this information to by the fact that, pursuant to § 39.27(c)(3) and of the bankruptcy proceeding to the the trustee and the Commission with Exhibit R to appendix A to part 39, the DCO is Commission ‘‘as soon as available,’’ much-needed expediency, and required to submit and to keep current a while not delaying notifying the memorandum demonstrating, inter alia, the basis facilitating DCOs’ contingency planning. for the conclusion that the DCO’s arrangements to Commission of the filing itself, to By comparison, the burden of providing ring-fence the customer funds of FCM clearing account for the potential for a time lag the reports, which as the commenter member are effective under the relevant non-U.S. between the filing of a proceeding and notes, are already in existence and are law in the event of the insolvency of the DCO, and the assignment by the relevant court of readily accessible, appears modest. the basis for the conclusion that a local court or a docket number. These revisions will insolvency official in the DCO’s jurisdiction of 3. Regulation § 190.13: Prohibitions on domicile would respect the choice of U.S. law in enhance the ability of the Commission that context, and the basis for the conclusion that to perform its responsibilities to support Avoidance of Transfers: Consideration the DCO would be able to comply with relevant the interests of clearing members, of Costs and Benefits provisions of the Bankruptcy Code and Commission regulations with respect to pro rata distribution and customers of clearing members, markets, Section 190.13 implements section relevant orders of a U.S. court regarding the and the broader financial system, by 764(b) of the Bankruptcy Code with distribution of customer funds. providing the Commission with prompt respect to DCOs, and prohibits the

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avoidance of certain transfers made Thus, the Commission has not proposed timeframe rather than being held open either before or shortly after entry of the a prescribed proof of claim form. There for an undetermined amount of time. A order for relief. While the prohibition of could, however, be corresponding deadline for liquidation or transfer of avoidance of pre- and post-relief administrative costs to both the estate open contracts may benefit the broader transfers in the context of FCM debtors and the customers if the set of financial markets by mitigating in § 190.07(e) applies so long as the information requested by the trustee in uncertainty. transfer is not disapproved by the exercise of their discretion turns out Section 190.14(c)(2), which is derived Commission, the same prohibition on in retrospect to be overly narrow or from current § 190.08(d)(3), will provide avoidance of pre- and post-relief broad. that the trustee may, at their discretion, transfers in § 190.13(a) and (b) will ICE believed that the proposal did not make distributions in the form of require the affirmative approval of the clearly take into account non-CFTC- securities that are equivalent to the Commission (though such approval can regulated clearing, and that claims of securities originally delivered to the be given either before or after the members with respect to such activity debtor by a clearing member or such transfer is made). This distinction will should be properly accounted for in clearing member’s customer, rather than impose administrative costs on the bankruptcy and should not be liquidating the securities and making clearing organization or the trustee, who disadvantaged. As the Commission distributions in cash. Unlike current will have to expend time and resources noted above,285 to the extent that the § 190.08(d)(3), § 190.14(c)(2) will not to seek affirmative approval from the DCO is conducting non-CFTC-regulated allow the customer to request that the Commission for such a transfer in the activity, the Commission expects that trustee purchase like-kind securities and context of administering a DCO, the proof of claim form will include the distribute those instead of cash, but respectively, either before or after opportunity to claim for debts of the instead will leave it to the discretion of bankruptcy. As noted above,283 a DCO related to activity that is not the trustee whether to do so. This clearing organization is mandated to regulated by the CFTC. Thus, no change change could impose costs on customers maintain a ‘‘balanced book.’’ Thus, a is necessary to address this concern. who would prefer to have a distribution transferee clearing organization may Section 190.14(b) provides that a of equivalent securities rather than cash, only accept transfer of all of the debtor clearing organization will cease since it will remove their option to making calls for variation settlement or request such a distribution. However, it transferor’s customer positions (or at 286 least all positions in a given product initial margin. Under current could benefit the estate by allowing the set).284 Any such transfer will have regulations, it would not be possible to trustee to use their discretion as to significant effects on the markets continue the operations of a debtor whether to purchase and distribute cleared, and on the broader financial clearing organization for any amount of equivalent securities, rather than being system. There are important benefits time after entry of the order for relief, obligated to do so at the request of a as there is no clear and coherent from requiring the Commission’s customer. mechanism to do so. Thus, § 190.14(b) Section 190.14(d) will require the approval of such a significant affirms current legal requirements and trustee to use reasonable efforts to transaction, and thus permitting the maintains the status quo. Section compute the funded balance of each administrative agency responsible for 190.14(c)(1) provides that the trustee customer account immediately prior to oversight of the derivatives markets to shall liquidate all open commodity the distribution of any property in the maintain a level of discretion which contracts that have not been terminated, account, ‘‘which shall be as accurate as will help accomplish the goal of an liquidated or transferred no later than reasonably practicable under the orderly functioning of the marketplace. seven calendar days after the entry of circumstances, including the reliability 4. Regulation § 190.14: Operation of the the order for relief. This provision will and availability of information.’’ This Estate of the Debtor Subsequent to the impose administrative costs in that the requirement applies with respect to Filing Date: Consideration of Costs and trustee will have a hard deadline for accounts of the customers of the Benefits terminating, liquidating or transferring clearing organization: That is, its any open commodity contracts within a Section 190.14(a) provides that the members, separately in respect of each certain timeframe, whereas under trustee may, in their discretion based such member’s (1) house account (on current part 190 there was no specified upon the facts and circumstances of the behalf of the member and its non-public timeframe for such termination, case, instruct each customer to file a customers and (2) customer account or liquidation or transfer. It could, proof of claim containing such accounts (on behalf of the member’s however, benefit clearing members and information as is deemed appropriate by public customers, one such account for customers, who will have certainty that the trustee. Allowing the bankruptcy each account class, to the extent their open commodity contracts would trustee to use their discretion in relevant). be liquidated within a particular This requirement will impose tailoring the proof of claim form to the administrative costs due to the time and specific facts and circumstances of the 285 See section II.C.4. effort involved in making such case should benefit both the trustee and 286 As originally proposed, § 190.14(b) also calculations. However, the regulation customers by limiting the information contained provisions that were intended to provide gives the trustee a certain amount of requested to only that which is a brief opportunity, after the order for relief, to discretion, and this calculation will be necessary for purposes of administering enable paths alternative to liquidation—that is, resolution under Title II of the Dodd-Frank Act, or necessary to achieve the goal of making the debtor’s estate and thereby transfer of clearing operations to another DCO—in distributions that are consistent with increasing cost effectiveness, cases where a short delay (i.e., less than or equal each customer’s proportionate share. particularly given the bespoke nature of to six days) might facilitate such an alternative a clearing organization bankruptcy. path. The Commission subsequently issued the 5. Regulation § 190.15: Recovery and Supplemental Proposal, which withdrew those proposed provisions—§ 190.14(b)(2) and (3)—and Wind-Down Plans; Default Rules and 283 See section II.C.3 above. proposed a new alternative to facilitate the potential Procedures: Consideration of Costs and 284 If the transferor clearing organization does not resolution of a SIDCO pursuant to Title II of the Benefits have a balanced book, e.g., because of a member Dodd-Frank Act. As discussed in section II.C.4 default, it could nonetheless only transfer a above, the Commission is not adopting the Section 190.15 provides that (1) the balanced book. Supplemental Proposal. trustee shall not avoid or prohibit any

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action taken by a debtor that was within The Commission has considered the ongoing supervision, which apply to a the scope of and was provided for in the potential interplay of the amendments DCO’s operations and rules outside of debtor’s recovery and wind-down plans; to part 190 with other Commission bankruptcy. (2) in administering a DCO bankruptcy, regulations and applicable statutes. As Other commenters are concerned with the trustee shall, subject to the noted above, these commenters’ the inclusion in those DCO rules and reasonable discretion of the trustee and concerns predominantly relate to the plans of ‘‘drastic measures as Variation to the extent practicable, implement the economic interests of clearing members Margin Gains Haircutting (VMGH) and default rules and procedures maintained and their customers in contexts outside Partial Tear-Up (PTU) of open by the debtor; and (3) in administering of bankruptcy. positions.’’ Gains haircutting, however, a DCO bankruptcy, the trustee shall, to A DCO’s operations and rules outside is part of the ex ante allocation of losses, the extent reasonable and practicable, of bankruptcy are governed by parts 39 and thus is an inherent part of the way and consistent with the protection of and 40 of the Commission’s regulations. in which losses will be allocated in customers, take actions in accordance The Commission, in particular through bankruptcy. Moreover, there is a limited with the debtor’s recovery and wind- its Division of Clearing and Risk, amount of customer property available. down plans. applies these regulations and conducts Thus, to the extent the application of The Commission considered two a rigorous program of oversight of DCOs VMGH were to be disallowed, and some alternatives to directing the trustee to designed to protect the interests of customers would realize corresponding implement the debtor’s own default market participants and of the financial benefits through increases in the rules and procedures and recovery and system, including through careful allowed amounts of their claims (and wind-down plans: First, continuing to reviews of their rules (including default thus a greater share of customer allow a bankruptcy trustee to develop, rules) and their recovery and wind- property), other customers would suffer in the moment, a plan for liquidating down plans, through detailed daily and corresponding costs, through a the debtor clearing organization, and periodic risk surveillance, and through decreased share of customer property— second, prescribing an across-the-board in-depth remote and on-site indeed, the latter customers may receive method for liquidating a debtor clearing examinations addressing a wide less than the amount of their claims for organization. spectrum of risk management issues. initial margin.289 Accordingly, the A number of commenters appeared to As noted by a commenter above, they Commission concludes that it is support the first alternative approach. ‘‘rely heavily on the Commission to inadvisable to prohibit VMGH, or to Some (e.g., ACLI, FIA, ICI, SIFMA protect the interests of our investors in mandate that its effects be reversed, in AMG/MFA, Vanguard) expressed the mandated cleared market.’’ Over the cases of DCO bankruptcy. concern that they lack transparency years, the Commission has taken Partial tear-up, on the other hand, is with regard to the DCO risk seriously its responsibilities in this inapplicable in a clearing organization management decisions and DCOs’ regard, through its regulatory, bankruptcy: § 190.14(b) prohibits further default rules and procedures and surveillance, and examinations collection of variation margin, while recovery and wind-down plans are programs. § 190.14(c) requires the trustee to developed without sufficient input from As discussed above, there are liquidate all open commodity contracts. clearing members and their customers. important costs to addressing, in the Together, they effectively mandate full For example, Vanguard argued that the context of part 190, market participants’ tear-up of open positions. Thus, the existing DCO governance regime concerns regarding DCOs’ rules, question of whether partial tear-up provides them with no meaningful voice procedures, and plans for allocating should be prohibited is moot. in critical DCO risk management losses that apply outside of a DCO Other commenters were concerned practices and new cleared product bankruptcy: Establishing a bankruptcy that these plans do not prescribe a introductions; and since public regime where some market participants specific course of action, but rather customers have only a very limited would be allocated a smaller amount of ‘‘present a menu of options.’’ See, e.g., ability to mitigate clearing risks losses in bankruptcy than outside of FIA, Vanguard. The Commission is of contractually, they ‘‘rely heavily on the bankruptcy would risk creating the view that, given the complexity of Commission to protect the interests of incentives for those participants to act the operations of a DCO, and the need [their] investors in the mandated cleared in a manner that promotes the for extremely prompt action, having the market.’’ Commenters also expressed likelihood that the DCO will enter trustee develop an entire plan in the the concern that there is a risk that, as bankruptcy. moment would be likely to turn out to a DCO begins to fail, otherwise prudent In view of these considerations, the be impracticable. By contrast, being DCO rules could be changed without the Commission believes the commenters’ presented with a ‘‘menu of options’’ appropriate vetting by clearing members concerns are effectively mitigated by the among which the trustee may select and public customers who, given existing provisions of parts 39 and 40 of (and adapt) in a manner that is mutualized allocation of losses, bear the its regulations and by the Commission’s ‘‘reasonable and practicable’’ provides risk of poor risk management choices supervision of DCOs.288 Therefore, the the benefit of a helpful roadmap to undertaken by the DCO.287 adoption of part 190, subpart C, which determine strategy and tactics. is applicable to a DCO’s potential The commenters, and potentially 287 With respect to DCO rules adopted as the DCO bankruptcy, appropriately complements other clearing members and public is on the threshold of failure: DCO rules are subject parts 39 and 40 and the Commission’s to review by the Commission. In all cases, they are customers who share the concerns of the subject to review for consistency with the CEA and commenters, appeared to view DCO Commission regulations (see § 40.6). In the case of trustee’s judgment of the extent to which it is default rules and procedures and SIDCOs, they are additionally subject to review for ‘‘reasonable’’ to apply those rules. recovery and wind-down plans that they consistency with the purposes of the Dodd-Frank 288 Nonetheless, the Commission is sensitive to Act or any applicable rules, orders, or standards the concerns raised by commenters with respect to believe have been adopted with prescribed under section 805(a) thereof. Moreover, the development and maintenance of DCO recovery to the extent commenters are concerned that such and wind-down plans and default rules and 289 Cf. ISDA: Safeguarding Clearing: The Need for late-enacted rules will be unfair to clearing procedures, and is actively reviewing these issues, a Comprehensive CCP Recovery and Resolution members or their customers, the Commission in particular with respect to governance, as they Framework (2017) at 2 (‘‘Initial margin haircutting expects that such unfairness would affect the relate to parts 39 and 40. should never be permitted.’’)

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

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assessments, and remaining default and procedures provide that clearing Section 190.17(d) sets forth a losses. As FIA noted in its comment members are entitled to payments due definition of the term ‘‘funded balance’’ letter, the inclusion of uncalled to portions of mutualized default that is taken directly from the relevant assessments ‘‘appears to have the effect resources that are either prefunded, or Bankruptcy Code provisions. Clarifying of reducing a clearing member’s assessed and collected, but in either the meaning of the term ‘‘funded potential recovery.’’ However, all losses case not used, or to the clearing balance’’ in the context of a clearing will ultimately be allocated, and if organization’s recoveries on claims organization bankruptcy will benefit uncalled assessments are not taken into against others (including recoveries on clearing members, in that they will account, any remaining losses that claims against defaulting clearing know ex ante what is and is not haven’t been covered by other default members), then ‘‘appropriate included in their funded balance and resources will be allocated through adjustments shall be made to the net how that amount is calculated. In gains-based haircutting. Thus, the equity claims of clearing members that addition, § 190.17(d) adopts by commenters’ preferred approach would are so entitled.’’ These provisions will reference the methodology for be at the cost of the customers of benefit the estate by providing the calculating funded balance that is set clearing members, who would bear trustee with tools to act promptly and forth in § 190.08(c).297 additional losses even as the clearing efficiently, with lower administration 8. Regulation § 190.18: Treatment of members would benefit. costs. The trustee will have a clear Relative to the alternative suggested Property: Consideration of Costs and roadmap to calculate net equity in the Benefits by these commenters, the direct effect of bankruptcy of a clearing organization § 190.17(b)(1) is to ensure that the and will not be obligated to come up Section 190.18(a) is analogous to uncalled assessment will make up more with an ad hoc methodology for doing § 190.17(a), in that it will provide that of the default losses, and conversely that so. The provisions would also benefit property of the debtor clearing haircutting of the gains (of both clearing clearing members (and, therefore, their organization’s estate will be allocated members and customers) will make up customers) by providing transparency as between member property and customer less of that loss. Hence, the rule could to how their net equity will be property other than member property in harm clearing members, and calculated, as well as facilitating the order to satisfy the proprietary and correspondingly benefit their customers. efficient administration of the estate.295 customer claims, respectively, of In addition, there can be indirect effects. In those cases where the debtor has clearing members. In the Commission’s While the maximum amount of excess mutualized default funds, or view, the provisions in § 190.18(a) are assessments that clearing members are recovers on claims against defaulters, mere clarifications and do not impose exposed to will not increase, there is a application of the debtor’s ‘‘reverse any costs or benefits on any parties. 292 Section 190.18(b)(1)(i) and (ii) set out marginally increased likelihood that waterfall’’ rules will benefit clearing 293 the scope of customer property for a those assessments will be used. members (and, in certain cases, their Because clearing members’ potential clearing organization, and are largely customers) by increasing the net equity 298 assessments are more likely to be used, based on § 190.09(a). claims of the entitled clearing members. Section 190.18(b)(1)(iii) provides that they will have a marginally increased In addition to the potential for these customer property for a clearing incentive to reduce their level of transfers between general creditors and organization includes any guaranty fund exposure to assessments—for example, clearing members and their customers, deposit, assessment or similar payment by reducing their clearing activity for this rule can create incentives for or deposit made by a clearing member themselves or on behalf of their clearing members and their customers. or recovered by a trustee, to the extent customers. While it is conceivable that In particular, it makes clearing clearing members could work to any remains following administration of members’ contributions to mutualized the debtor’s default rules and influence DCOs to reduce their own resources (and the possibility that gains- procedures, and any other property of a assessment powers as a result of these based haircutting will affect clearing member available under the debtor’s incentives, there are mitigants in the members and their customers) less rules and procedures to satisfy claims Commission’s regulations.294 onerous, because they enhance the made by or on behalf of public Section 190.17(b)(2) provides that possibility that if the clearing member’s where the debtor’s loss allocation rules customers of a member. This provision contribution to mutualized default supports the goal of making customers resources (or gains-based haircutting of the clearing organization whole, since 292 ‘‘Marginal’’ because this happens only if (a) affecting clearing members or their there is a DCO bankruptcy, (b) there is a default loss it clarifies that any property described suffered by the DCO in connection with the customers) is used to meet a default, it in this section will be included in the bankruptcy, and (c) not all of the assessments ultimately will come back to the scope of customer property, rather than necessary to address that default loss were called clearing member or their customers as it ultimately going to some other creditor before that bankruptcy. is recovered by the DCO (or the DCO’s of the debtor. It would result in 293 While § 190.17(b)(1) will not result in uncalled trustee) from the (bankruptcy) estate of assessments being ‘‘called’’—the clearing members corresponding costs to non-customer will not have to pay them to the estate—uncalled the defaulter. creditors, and could result in assessments will be ‘‘used’’ to reduce the clearing Section 190.17(c) adopts by reference administrative costs, however, since the member’s net equity claim. the net equity calculations set forth in trustee could need to spend time and 294 For example, § 39.39(b)(1) requires SIDCOs proposed § 190.08, to the extent resources in order to determine whether and Subpart C DCOs to have viable plans for applicable.296 recovery necessitated by uncovered credit losses, any such property exists in order to and the extent of a DCO’s assessment power properly allocate such property to 295 contributes to the viability of its recovery plan. See also 17 CFR 39.16 (requiring each DCO to, customers. Moreover, the two SIDCOs, CME and ICE Clear among other things, ‘‘adopt rules and procedures Credit, already have significant assessment powers, designed to allow for the efficient, fair, and safe and any proposed rule change to reduce those management of events during which clearing 297 For a discussion of the cost and benefit powers would need to withstand review under members become insolvent or default on the considerations for § 190.08(c), please see section § 40.10 for consistency with inter alia, the purposes obligations of such clearing members to the’’ DCO). III.C.6 above. of the CEA and the Dodd-Frank Act, which include 296 For a discussion of the cost and benefit 298 For a discussion of the cost and benefit the mitigation of systemic risk and the promotion considerations for § 190.08, please see section considerations for § 190.09(a), please see section of financial stability. IV.C.6 above. III.C.7 above.

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A number of commenters (CME, provides the benefit of ex ante Section 190.18(e) provides that, where SIFMA AMG/MFA) have suggested that transparency to the estate, the debtor’s the debtor has, prior to the order for the Commission make it explicit that clearing members, and their customers, relief, kept initial margin for house customer property should include the who would know during business-as- accounts in accounts without separation amounts of its own funds a debtor DCO usual how customer property would be by account class, then member property had committed as part of its loss allocated in the event of a bankruptcy. will be considered to be in a single allocation rules. The Commission has However, the ABA Subcommittee, account class.301 This provision will accepted this suggestion in the final CME, FIA, and ICE objected to proposed benefit the estate in those cases, because rule, incorporating this provision in § 190.18(c)(1), which would apply the the trustee will not be put to the § 190.18(b)(1)(iv). This will benefit debtor’s mutualized (and, in general, considerable task of separating in customers, who will have additional member-funded) default fund to bankruptcy that which was treated as a funds allocated to their claims, thereby customer property other than member single account during business-as-usual. increasing the payment that they receive property, that is, to the customer class Paragraph (e) will also benefit the on their claims and/or increasing the for members’ public customers, to the debtor’s clearing members, who will likelihood of full payment of their extent the funded balance is less than have increased transparency as to how claims (due to an increase in customer one hundred percent for members’ their member property will be treated. property). However, this benefit would public customers in any account class. Section 190.18(f) gives the trustee the accrue at the possible expense of general CME raised a particularly trenchant authority to assert claims against any creditors, as there will be an equivalent point: Devoting member-funded person to recover the shortfall of reduction in assets in the general estate. guarantee funds to purposes other than customer property enumerated in An indirect consequence of this change mutualizing member defaults may result certain paragraphs elsewhere in might be to marginally incentivize in more onerous capital treatment for § 190.18, analogous to § 190.09(a)(3). customers to retain open positions in the contributions of bank- or bank- This provision could impose contracts that are cleared by a affiliated-members to such funds, administrative costs, since the trustee potentially-failing DCO, which might increasing the capital charges for such will need to expend time and resources marginally contribute to preserving exposures manifold.300 to assert claims to make up for any liquidity in those markets. As noted, the costs and benefits shortfall in customer property. The Regulation § 190.18(b)(2) adopts by discussed above will only accrue if provision will, however, benefit reference, in the context of a DCO as a there is both a clearing organization customers, since it will support the debtor, the exclusions from customer bankruptcy and a shortfall in customer trustee’s efforts to recover any such property applied in the context of funds in one or more of the account shortfalls by giving the trustee authority debtor FCMs in § 190.09(a)(2), as if the classes for members’ public customers to act to do so. Moreover, since this term debtor used therein would refer to for that clearing organization in that provision will make explicit what is a clearing organization as debtor and to bankruptcy. The costs and benefits at implicit in current part 190, an the extent relevant to a clearing that potential future time would be additional benefit of this provision is a organization.299 balanced, in that the costs to clearing reduction in potential litigation costs Regulation § 190.18(c) sets forth the members (whose guarantee funds were over a trustee’s attempts to recover 302 allocation of customer property among devoted to claims of the clearing shortfalls in customer property. customer classes (i.e., allocation members’ customers) would be benefits 9. Regulation § 190.19: Support of Daily between (1) customer property other to those customers. By contrast, less Settlement: Consideration of Costs and than member property, and (2) member favorable capital treatment would have Benefits property). This provision, in general, a present-day effect, in the form of applies the principle, consistent with Section 190.19 deals with the higher capital costs for clearing treatment of variation settlement in a the Commission’s policy to favor public members. Moreover, those higher costs customers over non-public customers, clearing organization bankruptcy, and would not create any direct benefit sets forth the approach for the trustee to that allocation to customer property (present day or otherwise) for, e.g., other than member property is favored follow when there is a shortfall in customers. In light of these factors, the variation settlement owed to a debtor over allocation to member property, so Commission has decided not to adopt long as the funded balance in any clearing organization’s clearing proposed § 190.18(c)(1) and to renumber members and customers. Specifically, account class for members’ public the remaining paragraphs of § 190.18(c). customers is less than one hundred § 190.19(a) provides that any variation Section 190.18(d) sets forth the settlement payments received by the percent of net equity claims. This allocation of customer property among provision would, in the event and at the clearing organization after entry of an account classes. This provision is order for relief shall be included in time it applied, benefit the public similar in concept to § 190.09(c). This customers of the debtor’s clearing customer property, and shall promptly provision will benefit clearing members be distributed to the member and members, since it makes clear that and their customers, who will have allocation to such customers is preferred customer accounts entitled to such increased transparency, ex ante, into payments. Section 190.19(b) deals with over allocation to the clearing members’ how customer property will be a situation where there is a shortfall in house accounts. It imposes allocated. Prescribing this allocation corresponding costs on the debtor’s will, however, impose administrative 301 ‘‘Account class’’ is defined in § 190.01 as clearing members and affiliates to the costs, because the trustee will lose some meaning one or more of each of the following types extent that, under the current regime, amount of flexibility in terms of how to of accounts, as described in greater detail in that there is a possibility that more customer allocate customer property between provision: (1) Futures account; (2) foreign futures property would be allocated to their account; (3) cleared swaps account; and (4) delivery account classes. account. house accounts. Overall, this provision 302 As discussed above in section III.C.7, while 300 As discussed in detail in a footnote in section the persons against whom claims are successfully 299 For a discussion of the cost and benefit II.C.8, those capital charges could increase by asserted may perceive a subjective cost, the considerations for proposed § 190.09(a)(2), please literally hundreds of times, for a total impact of Commission does not find these costs relevant to see section III.C.7 above. billions of dollars in increased capital charges. the analysis.

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variation settlement received by the bankruptcy will provide better management practices by instructing a clearing organization, and provides that protections to market participants by bankruptcy trustee to implement the such funds shall be supplemented with accounting for the unique position of debtor DCO’s default rules and four specified categories of funds clearing members (and the customers of procedures and to take actions in (margin, to the extent permissible under such clearing member) of a DCO that is accordance with the debtor DCO’s parts 1, 22, and 30, assets of the debtor, going through an insolvency recovery and wind-down plans, which to the extent dedicated to such purpose, proceeding. Finally, provisions such as rules, procedures and plans are prefunded guarantee funds, and § 190.18(c), which preferentially developed and overseen by the assessments) in accordance with the allocate excess property in any account Commission, though subject to the clearing organization’s default rules and class to the customer class that benefits trustee’s discretion. Some portions of procedures and (with respect to assets of public customers, to the extent there is subpart C may make additional the debtor) any recovery and wind- a shortfall in any account class in that resources available to the trustee. On the down plans maintained by the clearing customer class, will further protect other hand, some commenters expressed organization. public customers. concern about changes (such as § 190.15) that they believe might lead to Section 190.19 will benefit clearing ii. Efficiency, Competitiveness, and inappropriate risk management choices members and their customers because it Financial Integrity will ensure that any variation settlement by DCOs. Subpart C of the part 190 regulations received by the clearing organization v. Other Public Interest Considerations will be sent to those member and will promote efficiency (in the sense of customer accounts that would be both cost effectiveness and timeliness) By favoring the implementation of the entitled to payment of variation in the administration of insolvency clearing organization’s default rules, settlement, and that the trustee would proceedings of DCOs, and the financial recovery plans, and procedures be able to supplement any shortfall in integrity of transactions cleared by established ex ante under the variation settlement amounts with the DCOs by setting forth clear instructions supervision of the Commission, and by property listed in proposed § 190.19(b). for a bankruptcy trustee to follow in the supporting daily settlement, the part This approach will also benefit the event of a DCO insolvency. Moreover, 190 regulations will support financial financial system more broadly, by subpart C will provide the bankruptcy stability. Moreover, some of the DCOs mitigating the effect of the bankruptcy trustee with discretion, in certain that might enter bankruptcy are very of the debtor on settlement payments. circumstances, to react flexibly to the large financial institutions, and some There will be corresponding costs to particulars of the insolvency are considered to be systematically general creditors of the clearing proceeding, guided by the goal of important. An effective bankruptcy organization since, under current part protecting public customers as a class, process that efficiently facilitates the 190, it is conceivable that, contrary to thereby promoting efficiency of the proceedings is likely to benefit the the Commission’s interpretation of the administration of the proceeding. These financial system (and thus the public current rules, variation settlement effects will, in turn, enhance the interest), as that process will help to received by the clearing organization competitiveness of U.S. DCOs and their attenuate the detrimental effects of the could be diverted to the pool of general FCM clearing members, by enhancing bankruptcy on the financial network. market confidence in the protection of creditors rather than becoming customer E. Changes to Appendices A and B property (even though such diversion customer funds and positions entrusted The Commission is deleting forms 1 would be contrary to the expectations of to U.S. DCOs through their clearing through 3 contained in appendix A, both the Commission and the industry). members, even in the case of which contain outdated provisions that In clarifying how variation settlement insolvency. require the collection of unnecessary received by the clearing organization is iii. Price Discovery information, and is replacing form 4 to be treated by the bankruptcy trustee, Price discovery is the process of with a streamlined template proof of § 190.19 will also benefit clearing determining the price level for an asset claim form, which the trustee can use in members and their customers by through the interaction of buyers and a flexible manner. CME considered the providing enhanced transparency. sellers and based on supply and template proof of claim ‘‘a major 10. Section 15(a) Factors—Subpart C demand conditions. Because a DCO improvement’’ over the current version. bankruptcy inevitably leads to full i. Protection of Market Participants and These changes have the benefit of close-out of the positions carried at the the Public reducing administrative costs, and there DCO, the part 190 regulations will not are no obvious increased costs. Subpart C of the part 190 regulations contribute to avoiding the resultant Similarly, the Commission is making will increase the protection of market negative impacts on price discovery. clarifying changes to framework 1 of participants and the public by setting appendix B, and making, consistent iv. Sound Risk Management Practices forth a bespoke framework for how the with the suggestions of the ABA bankruptcy trustee is expected to treat Subpart C of the part 190 regulations Subcommittee and the Subcommittee the property of DCO clearing members will promote sound risk management Members, a significant set of clarifying and their customers in the event of a practices by facilitating the bankruptcy changes to framework 2. These changes DCO insolvency, thereby promoting ex trustee’s efforts to manage effectively have the benefit of having framework 2 ante transparency for such clearing the risk of the debtor DCO. Subpart C work in a more accurate, and less members and customers, and by will accomplish this by adding confusing manner, thus reducing providing, in certain provisions, bankruptcy regulations to part 190 for a administrative costs, and there are no discretion to the trustee in determining DCO insolvency that reflect current obvious increased costs. how best to address the bankruptcy of market practices and thereby make it the DCO, and to achieve the goal of easier for the trustee to act effectively to F. Technical Corrections to Parts 1, 4, protecting public customers as a class. protect customer property in the event and 41 Moreover, the addition in part 190 of of such an insolvency. Moreover, The Commission is making technical bespoke bankruptcy rules for a DCO subpart C will promote sound risk corrections to parts 1, 4, and 41 to

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update cross-references. These bankruptcy could be considered to be in the Commission’s bankruptcy corrections are clarifying and do not small entities for purposes of the RFA. regulations for commodity broker have any impact on the substantive The Commission believes, however, that liquidations (17 CFR part 190). These obligations related to these sections. the amendments to part 190 are regulations apply to liquidations under Thus, there are no increased costs designed so that they can be chapter 7, subchapter IV of the associated with these minor technical implemented without imposing a Bankruptcy Code.309 The Commission updates. significant economic burden on a promulgated part 190 pursuant to the substantial number of small entities. IV. Related Matters authority of 7 U.S.C. 24. The These regulations take into account Commission is amending Information A. Antitrust Considerations existing trading practices and the Collection 3038–0021 as a result of Section 15(b) of the CEA requires the logistical considerations of these final regulations to (1) Commission to take into consideration implementing the regulations. accommodate new information the public interest to be protected by the Accordingly, the Commission collection requirements for FCMs and antitrust laws and endeavor to take the Chairman, on behalf of the Commission, DCOs, and (2) revise the existing least anticompetitive means of hereby certifies pursuant to 5 U.S.C. information collection requirements for achieving the purposes of the CEA in 605(b), that the rule adopted herein will FCMs and DCOs. The Commission did issuing any order or adopting any not have a significant economic impact not receive any comments regarding its Commission rule or regulation.303 on a substantial number of small PRA burden analysis in the preamble to The Commission believes that the entities. the proposal. public interest to be protected by the C. Paperwork Reduction Act 1. Reporting Requirements in an FCM antitrust laws is the promotion of The Paperwork Reduction Act of 1995 Bankruptcy competition. The Commission has 307 considered this rulemaking to determine (PRA) imposes certain requirements Regulation § 190.03(b)(1) requires whether it might have anticompetitive on Federal agencies (including the FCMs that file a petition in bankruptcy effects, and has not identified any effect Commission) in connection with their to notify the Commission and the this rulemaking, which would apply conducting or sponsoring a collection of relevant DSRO, as soon as practicable only in the rare instance of an FCM or information as defined by the PRA. The before and in any event no later than the DCO bankruptcy, would have on regulations adopted herein would result time of such filing, of the anticipated or competition. Accordingly, the in such a collection, as discussed below. actual filing date, the court in which the Commission has not identified any less A person is not required to respond to proceeding will be or has been filed anticompetitive means of achieving the a collection of information unless it and, as soon as known, the docket purposes of the CEA. displays a currently valid control number assigned to that proceeding. It number issued by the Office of further requires an FCM against which B. Regulatory Flexibility Act Management and Budget (OMB). The an involuntary bankruptcy petition or The Regulatory Flexibility Act regulations include a collection of application for a protective decree (‘‘RFA’’) requires that agencies consider information for which the Commission under SIPA is filed to notify the whether the regulations they propose has previously received control Commission and the relevant DSRO will have a significant economic impact numbers from OMB. The title of this immediately upon the filing of such on a substantial number of small entities collection of information is: OMB petition or application. and, if so, provide a regulatory Control Number 3038–0021, Regulation § 190.03(b)(2) requires the flexibility analysis on the impact.304 ‘‘Regulations Governing Bankruptcies of trustee, the relevant DSRO, or an The regulations being adopted by the Commodity Brokers.’’ applicable clearing organization to Commission affect clearing Information Collection 3038–0021 308 notify the Commission if such person organizations, FCMs, bankruptcy contains the reporting, recordkeeping intends to transfer or apply to transfer trustees, and customers. The and third-party disclosure requirements open commodity contracts or customer Commission has previously established property on behalf of the public certain definitions of ‘‘small entities’’ to 307 44 U.S.C. 3501 et seq. customers of the debtor. 308 There are two information collections Based on its experience, the be used in evaluating the impact of its associated with OMB Control No. 3038–0021. The regulations in accordance with the first includes the reporting, recordkeeping, and Commission anticipates that an FCM RFA.305 third-party disclosure requirements applicable to a bankruptcy would occur once every The Commission has previously single respondent in a commodity broker three years.310 The Commission has determined that clearing organizations liquidation (e.g., a single FCM, DCO, or trustee) estimated the burden hours for the within the relevant time period. This includes both and FCMs are not small entities for (1) requirements on a single FCM or a single trustee reporting requirements in an FCM purposes of the RFA.306 In the event of in an FCM bankruptcy which correspond to current bankruptcy as follows: a bankruptcy, a trustee is appointed as requirements on a single FCM or a single trustee in Estimated number of respondents: 1. receiver to manage the estate of the an FCM bankruptcy, as provided for in Estimated annual number of §§ 190.03(b)(1) and (2) and (c)(1), (2), and (4), responses per respondent: 1.311 insolvent FCM or clearing organization. 190.05(b) and (d), and 190.07(b)(5); and (2) new Accordingly, since the trustee is requirements on a single DCO or a single trustee in representing the estate of either an FCM a DCO bankruptcy as provided for in 309 11 U.S.C. 761 et seq. 310 or clearing organization, the trustee is §§ 190.12(a)(2), (b)(1) and (2), and (c)(1) and (2) and These estimates express the burdens in terms 190.14(a) and (d). The second information of those that would be imposed on one respondent not a small entity for purposes of the collection includes the third-party disclosure during the three-year period. RFA. The Commission recognizes that requirements that are applicable during business as 311 The Commission estimates that (1) under many customers of an FCM or DCO in usual to multiple respondents (e.g., multiple FCMs). § 190.03(b)(1), an FCM would make two These requirements were proposed as § 190.10(b) notifications per bankruptcy (one to the and (e) (which are analogs to current §§ 190.06(d) Commission and one to its DSRO), and (2) under 303 Section 15(b) of the CEA, 7 U.S.C. 19(b). and 190.10(c)), as well as a new third-party § 190.03(b)(2), an FCM would make one notification 304 5 U.S.C. 601 et seq. disclosure requirement provided for in § 190.10(d) per bankruptcy. Dividing those numbers by three 305 47 FR 18618 (Apr. 30, 1982). (regarding letters of credit); however, the third-party (since the Commission anticipates an FCM 306 See 66 FR 45604, 45609 (Aug. 29, 2001); 67 disclosure requirements are being adopted as bankruptcy occurring once every three years) FR 53146, 53171 (Aug. 14, 2002). §§ 1.41, 1.43, and 1.55(p). results in 0.67 notifications annually pursuant to

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Estimated total annual number of Estimated total annual burden hours Estimated total annual number of responses for all respondents: 1. for all respondents: 266.67. responses for all respondents: 10,003.32. Estimated annual number of burden Estimated annual number of burden 3. Third-Party Disclosure Requirements hours per respondent: 1.312 hours per respondent: 1,336.67.319 Applicable to a Single Respondent in an Estimated total annual burden hours Estimated total annual burden hours FCM Bankruptcy for all respondents: 1. for all respondents: 1,336.67. Regulation § 190.03(c)(1) requires the 4. Reporting Requirements in a 2. Recordkeeping Requirements in an trustee to use all reasonable efforts to Derivatives Clearing Organization (DCO) FCM Bankruptcy promptly notify any customer whose Bankruptcy Regulation § 190.05(b) requires the futures account, foreign futures account, trustee to use reasonable efforts to or cleared swaps account includes Regulation § 190.12(a)(2) requires a compute a funded balance for each specifically identifiable property, and clearing organization that files a petition customer account that contains open that such specifically identifiable in bankruptcy to notify the Commission, commodity contracts or other property property may be liquidated on and after at or before the time of such filing, of as of the close of business each business the seventh day after the order for relief the filing date, the court in which the day subsequent to the order for relief if the customer has not instructed the proceeding will be or has been filed until the date all open commodity trustee in writing before the deadline and, as soon as known, the docket contracts and other property in such specified in the notice to return such number assigned to that proceeding. It account has been transferred or property pursuant to the terms for further requires a clearing organization liquidated. distribution of customer property against which an involuntary Regulation § 190.05(d) requires the contained in part 190. bankruptcy petition is filed to similarly trustee to use reasonable efforts to Regulation § 190.03(c)(2) allows the notify the Commission within three continue to issue account statements trustee to treat open commodity hours after the receipt of notice of such with respect to any customer for whose contracts of public customers identified filing. account open commodity contracts or on the books and records of the debtor Regulation § 190.12(b)(1) requires the other property is held that has not been has held in an account designated as a debtor clearing organization to provide liquidated or transferred. hedging account as specifically to the trustee, no later than three hours Based on its experience, the identifiable property of such following the later of the Commission anticipates that an FCM customer.316 commencement of a bankruptcy bankruptcy would occur once every Regulation § 190.03(c)(4) requires the proceeding or the appointment of the three years.313 The Commission has trustee to promptly notify each trustee, copies of each of the most recent estimated the burden hours for the customer that an order for relief has reports that the debtor was required to recordkeeping requirements in an FCM been entered and instruct each customer file with the Commission under bankruptcy as follows: to file a proof of customer claim § 39.19(c). Estimated number of respondents: 1. containing the information specified in Regulation § 190.12(b)(2) requires the Estimated annual number of § 190.03(e). debtor clearing organization to provide responses per respondent: 26,666.67.314 Regulation § 190.07(b)(5) requires the to the trustee and the Commission, no Estimated total annual number of trustee, in the event that specifically later than three hours following the responses for all respondents: 26,666.67. identifiable property has been or will be commencement of a bankruptcy Estimated annual number of burden transferred, to transmit any customer proceeding, copies of (1) the most recent hours per respondent: 266.67.315 instructions previously received by the recovery or wind-down plans of the trustee with respect to such specifically debtor maintained pursuant to § 190.03(b)(1), and 0.33 notifications annually identifiable property to the transferee of § 39.39(b), and (2) the most recent pursuant to § 190.03(b)(2), for a total of one such property. version of the debtor’s default notification annually per respondent. Based on its experience, the management plan and default rules and 312 The Commission estimates that (1) the Commission anticipates that an FCM procedures maintained pursuant to notifications required under § 190.03(b)(1) would § 39.16 and, as applicable, § 39.35. take 0.5 hours to make, and (2) the notification bankruptcy would occur once every required under § 190.03(b)(2) would take 2 hours to three years.317 The Commission has Regulations § 190.12(c)(1) and (2) make. In terms of burden hours, this amounts to estimated the burden hours for the require the debtor clearing organization (0.5*0.67 under § 190.03(b)(1)) plus (2*0.33 under third-party disclosure requirements § 190.03(b)(2)), or a total of one burden hour bankruptcy. Dividing those numbers by three (since annually per respondent. applicable to a single respondent in an the Commission anticipates an FCM bankruptcy 313 These estimates express the burdens in terms FCM bankruptcy as follows: occurring once every three years) results in 3,333.33 of those that would be imposed on one respondent Estimated number of respondents: 1. disclosures annually pursuant to each of during the three-year period. Estimated annual number of § 190.03(c)(1), (2), and (4). The Commission further 314 The Commission estimates that (1) under 318 estimates that a trustee would make the required § 190.05(b), a trustee would compute a funded responses per respondent: 10,003.32. disclosure under § 190.07(b)(5) 10 times per balance for customer accounts 40,000 times; and (2) bankruptcy. Dividing this number by three results under § 190.05(d), a trustee would issue 40,000 316 The Commission no longer assigns burden in 3.33 disclosures annually pursuant to account statements for customer accounts. Dividing hours to the discretionary notice that a trustee may § 190.07(b)(5). This amounts to a total of 10,003.32 those numbers by three (since the Commission provide to customers in an involuntary FCM disclosures annually per respondent. anticipates an FCM bankruptcy occurring once bankruptcy proceeding pursuant to § 190.03(c)(3). 319 The Commission estimates that (1) each every three years) results in 13,333.33 records There have been no involuntary FCM liquidations disclosure required under § 190.03(c)(1) and (2) and annually pursuant to § 190.05(b), and 13,333.33 and none are anticipated. Accordingly, continuing (b) would take 0.1 hours to prepare; (2) each records annually pursuant to § 190.05(d), for a total to assign burden hours to this voluntary disclosure required under § 190.03(c)(4) would take of 26,666.67 records annually per respondent. requirement would inappropriately inflate the 0.2 hours to prepare; and (3) each disclosure 315 The Commission estimates that each record burden hours of this information collection. required under § 190.07(b)(5) would take 1 hour to required under § 190.05(b) and 190.05(d) would 317 These estimates express the burdens in terms prepare. In terms of burden hours, this amounts to take 0.01 hours to prepare. In terms of burden of those that would be imposed on one respondent (0.1*3,333.33 under § 190.03(c)(1)) plus hours, this amounts to (0.01*13,333.33 under during the three-year period. (0.1*3,333.33 under § 190.03(c)(2)) plus § 190.05(b)) plus (0.01*13,333.33 under 318 The Commission estimates that a trustee (0.2*3,333.33 under § 190.03(c)(4)) plus (1*3.33 § 190.05(d)), or a total of 266.67 burden hours would make the required disclosures under each of under § 190.07(b)(5)), or a total of 1336.66 burden annually per respondent. § 190.03(c)(1), (2), and (4) 10,000 times per hours annually per respondent.

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to make available to the trustee and the Estimated total annual burden hours hours for the third-party disclosure Commission, no later than the next for all respondents: 0.61. requirements applicable to a single business day following commencement respondent in a DCO bankruptcy as 5. Recordkeeping Requirements in a of a bankruptcy proceeding, copies of follows: DCO Bankruptcy (1) all records maintained by the debtor Estimated number of respondents: 1. pursuant to § 39.20(a), and (2) any Regulation § 190.14(d) requires the Estimated annual number of opinions of counsel or other legal trustee to use reasonable efforts to responses per respondent: 0.9.327 memoranda provided to the debtor in compute a funded balance for each Estimated total annual number of the five years preceding the bankruptcy customer account that contains open responses for all respondents: 0.9. proceeding relating to the enforceability commodity contracts or other property Estimated annual number of burden 328 of the rules and procedures of the debtor as of the close of business each business hours per respondent: 0.18. Estimated total annual burden hours in the event of an insolvency proceeding day subsequent to the order for relief on for all respondents: 0.18. involving the debtor. which liquidation of property within Based on its experience, the the account has been completed or 7. Third-Party Disclosure Requirements Commission anticipates that a clearing immediately prior to any distribution of Applicable to Multiple Respondents organization bankruptcy would occur property within the account. During Business as Usual once every fifty years.320 The Based on its experience, the Commission anticipates that a clearing As discussed in Section II.B.8 above, Commission has estimated the burden the Commission is codifying the hours for the reporting requirements in organization bankruptcy would occur once every fifty years.323 The provisions proposed as § 190.10(b), (d), a DCO bankruptcy as follows: and (e) in part 1, along with other Estimated number of respondents: 1. Commission has estimated the burden hours for the recordkeeping regulations that pertain to an FCM’s Estimated annual number of business as usual. Regulation § 1.41, 321 requirements in a DCO bankruptcy as responses per respondent: 2.98. which was proposed as § 190.10(b), Estimated total annual number of follows: Estimated number of respondents: 1. requires an FCM to provide an responses for all respondents: 2.98. opportunity to each of its customers, Estimated annual number of burden Estimated annual number of 324 upon first opening a futures account or hours per respondent: 0.61.322 responses per respondent: 9. Estimated total annual number of cleared swaps account with such FCM, responses for all respondents: 9. to designate such account as a hedging 320 No U.S. clearing organization has ever been the subject of a bankruptcy proceeding, and none Estimated annual number of burden account. has come anywhere near insolvency. While there hours per respondent: 0.9.325 Regulation § 1.43, which was have been less than a handful of central Estimated total annual burden hours proposed as § 190.10(d), prohibits an counterparties worldwide that became functionally for all respondents: 0.9. FCM from accepting a letter of credit as insolvent during the twentieth century, none of collateral unless such letter of credit those were subject to modern resiliency 6. Third-Party Disclosure Requirements may be exercised under certain requirements. Accordingly, the Commission Applicable to a Single Respondent in a believes that an estimate of one DCO bankruptcy conditions specified in the regulation. every fifty years is an appropriate estimate. These DCO Bankruptcy Regulation § 1.55(p), which was burden estimates express the burdens in terms of Regulation § 190.14(a) allows the proposed as § 190.10(e), requires an those that would be imposed on one respondent during the fifty-year period. trustee, in their discretion based upon FCM to provide any customer with the 321 The Commission estimates that (1) under the facts and circumstances of the case, disclosure statement set forth in § 190.12(a)(2), a clearing organization would make to instruct each customer to file a proof § 1.55(p) prior to accepting property two notifications per bankruptcy; (2) under of claim containing such information as other than cash from or for the account § 190.12(b)(1), a clearing organization would is deemed appropriate by the trustee, provide 40 reports to the trustee; (3) under of a customer to margin, guarantee, or § 190.12(b)(2), a clearing organization would and seek a court order establishing a bar secure a commodity contract. provide 5 reports to the trustee and the date for the filing of such proofs of The requirements described above are Commission; (4) under § 190.12(c)(1), a clearing claim. applicable on a regular basis (i.e., during organization would provide 100 records to the Based on its experience, the business as usual) to multiple trustee and the Commission; and (5) under § 190.12(c)(2), a clearing organization would Commission anticipates that a clearing respondents. The Commission has provide 2 records to the trustee and the organization bankruptcy would occur estimated the burden hours for the Commission. Dividing those numbers by 50 (since once every fifty years.326 The third-party disclosure requirements the Commission anticipates a clearing organization Commission has estimated the burden applicable to multiple respondents bankruptcy occurring once every 50 years) results in (1) 0.04 reports annually pursuant to during business as usual as follows: § 190.12(a)(2); (2) 0.8 reports annually pursuant to 323 These estimates express the burdens in terms Estimated number of respondents: § 190.12(b)(1); (3) 0.1 reports annually pursuant to of those that would be imposed on one respondent 125. § 190.12(b)(2); (4) 2 reports annually pursuant to during the fifty-year period. 324 Estimated annual number of § 190.12(c)(1); and (5) 0.04 reports annually The Commission estimates that, under 329 pursuant to § 190.12(c)(2), for a total of 2.98 reports § 190.14(d), a clearing organization would compute responses per respondent: 3,000. annually per respondent. a funded balance for customer accounts 450 times 322 The Commission estimates that (1) each during a bankruptcy. This number is based on an 327 The Commission estimates that, under notification required under § 190.12(a)(2) and (d)(2) average of 45 clearing members, each with two § 190.14(a), a trustee would make the disclosure 45 would take 0.5 hours to make; (2) gathering the accounts (house and customer). Dividing that times during a bankruptcy. This number is based reports required under § 190.12(b)(1) would take 0.2 number by 50 (since the Commission anticipates a on an average of 45 clearing members. Dividing that hours; (3) gathering the reports required under clearing organization bankruptcy occurring once number by 50 (since the Commission anticipates a § 190.12(b)(2) would take 0.2 hours; (4) gathering every 50 years) results in 9 records annually per clearing organization bankruptcy occurring once the reports required under § 190.12(c)(1) would take respondent. every 50 years) results in 0.9 records annually per 0.2 hours; and (5) gathering the reports required 325 The Commission estimates that computing the respondent. under § 190.12(c)(2) would take 0.2 hours. In terms funded balance of customer accounts pursuant to 328 The Commission estimates that instructing of burden hours, this amounts to (0.5*0.04 under § 190.14(d) would take 0.1 hours per computation. customers to file a proof of claim pursuant to § 190.12(a)(2)) plus (0.2*0.8 under § 190.12(b)(1)) In terms of burden hours, this amounts to (0.1*9), § 190.14(a) would take 0.2 hours. In terms of burden plus (0.2*0.1 under § 190.12(b)(2)) plus (0.2*2 or 0.9 burden hours annually per respondent. hours, this amounts to (0.2*0.9), or 0.18 burden under § 190.12(c)(1)) plus (0.2*0.04 under 326 These estimates express the burdens in terms hours annually per respondent. § 190.12(c)(2)), or a total of 0.61 burden hours of those that would be imposed on one respondent 329 The Commission estimates that under §§ 1.41, annually per respondent. during the fifty-year period. 1.43, and 1.55(p), an FCM would make the required

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Estimated total annual number of cleared swaps account with such futures § 1.43 Letters of credit as collateral. responses for all respondents: 375,000. commission merchant, to designate such A futures commission merchant shall Estimated annual number of burden account as a hedging account. The not accept a letter of credit as collateral hours per respondent: 60.330 futures commission merchant must unless such letter of credit may be Estimated total annual burden hours indicate prominently in the accounting exercised, through its stated date of for all respondents: 7,500. records in which it maintains open expiry, under the following conditions, trade balances whether, for each regardless of whether the customer List of Subjects customer account, the account is posting that letter of credit is in default 17 CFR Part 1 designated as a hedging account. in any obligation: (b) A futures commission merchant Brokers, Commodity futures, (a) In the event that an order for relief may permit the customer to open an under chapter 7 of the Bankruptcy Code Consumer protection, Reporting and account as a hedging account only if it recordkeeping requirements. or a protective decree pursuant to obtains the customer’s written section 5(b)(1) of SIPA is entered with 17 CFR Part 4 representation that the customer’s respect to the futures commission trading of futures or options on futures, Brokers, Commodity futures, merchant, or if the FDIC is appointed as foreign futures or options on foreign Consumer protection, Reporting and receiver for the futures commission futures, or cleared swaps (as applicable) recordkeeping requirements. merchant pursuant to 12 U.S.C. 5382(a), in the account constitutes hedging as the trustee for that futures commission 17 CFR Part 41 such term may be defined under any merchant (or, as applicable, FDIC) may relevant Commission regulation or rule Brokers, Reporting and recordkeeping draw upon such letter of credit, in full of any clearing organization, designated requirements, Securities. or in part, in accordance with contract market, swap execution facility § 190.04(d)(3) of this chapter. 17 CFR Part 190 or foreign board of trade. (b) If the letter of credit is passed (c) The requirements set forth in Bankruptcy, Brokers, Reporting and through to a clearing organization, then paragraphs (a) and (b) of this section do recordkeeping requirements. in the event that an order for relief not apply to a futures commission For the reasons stated in the under chapter 7 of the Bankruptcy Code merchant with respect to any preamble, the Commodity Futures is entered with respect to the clearing commodity contract account that the Trading Commission amends 17 CFR organization, or if the FDIC is appointed futures commission merchant opened chapter I as follows: as receiver for the clearing organization prior to May 13, 2021. The futures pursuant to 12 U.S.C. 5382(a), the PART 1—GENERAL REGULATIONS commission merchant may continue to trustee for that clearing organization (or, UNDER THE COMMODITY EXCHANGE designate as a hedging account any as applicable, FDIC) may draw upon ACT account with respect to which the such letter of credit, in full or in part, futures commission merchant received in accordance with § 190.04(d)(3) of this ■ 1. The authority citation for part 1 written hedging instructions from the chapter. continues to read as follows: customer in accordance with former (c) A futures commission merchant § 190.06(d) of this chapter. shall not accept a letter of credit from Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, (d) A futures commission merchant 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, a customer as collateral if it has any 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, may designate an existing futures agreement with the customer that is 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and account, foreign futures account or inconsistent with this section. 24 (2012). cleared swaps account of a particular ■ customer as a hedging account, 6. In § 1.55: ■ 2. In § 1.25, revise paragraph ■ a. Revise paragraphs (d) and (f); (a)(2)(ii)(B) to read as follows: provided that it has obtained the ■ b. Remove the parenthetical control representation set out in paragraph (b) number sentence and parenthetical § 1.25 Investment of customer funds. of this section from such customer. authority citation following paragraph ■ (a) * * * 4. Add § 1.42 to read as follows: (h); ■ (2) * * * § 1.42 Delivery accounts. c. Remove the paragraph (k) heading; (ii) * * * In connection with the making or and (B) Securities subject to such ■ d. Add paragraph (p). taking of delivery of a commodity under repurchase agreements must not be The revision and addition read as a commodity contract whose terms ‘‘specifically identifiable property’’ as follows: require settlement via physical delivery, defined in § 190.01 of this chapter. if a futures commission merchant § 1.55 Public disclosures by futures * * * * * facilitates or effects the transfer of the commission merchants. ■ 3. Add § 1.41 to read as follows: physical delivery property and payment * * * * * therefor on behalf of the customer, and § 1.41 Designation of hedging accounts. (d) Any futures commission does so outside the futures account, merchant, or (in the case of an (a) A futures commission merchant foreign futures account or cleared swaps introduced account) any introducing must provide an opportunity to each account in which the commodity broker, may open a commodity futures customer, when it first opens a futures contract was held, the futures account for a customer without account, foreign futures account or commission merchant must do so in a obtaining the separate acknowledgments delivery account, provided, however, of disclosure and elections required by disclosures 1,000 times per year. This amounts to that when the commodity subject to a total of 3,000 responses annually per respondent. this section and by §§ 1.33(g) and 33.7 330 The Commission estimates that each delivery is a security, a futures of this chapter, provided that: disclosure required under §§ 1.41, 1.43, and 1.55(p) commission merchant may, consistent (1) Prior to the opening of such would take 0.02 hours to make. In terms of burden with any applicable regulatory account, the futures commission hours, this amounts to (0.02*1,000 under § 1.41) requirements, do so in a securities plus (0.02*1,000 under § 1.43 plus (0.02*1,000 merchant or introducing broker obtains under § 1.55(p)), or 60 burden hours annually per account. an acknowledgement from the customer, respondent. ■ 5. Add § 1.43 to read as follows: which may consist of a single signature

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at the end of the futures commission 1.55(p) OF THE COMMODITY PART 4—COMMODITY POOL merchant’s or introducing broker’s FUTURES TRADING COMMISSION OPERATORS AND COMMODITY customer account agreement, or on a REQUIRES IT FOR REASONS OF FAIR TRADING ADVISORS separate page, of the disclosure NOTICE UNRELATED TO THIS statements, consents, and elections COMPANY’S CURRENT FINANCIAL ■ 8. The authority citation for part 4 specified in this section and § 1.33(g), CONDITION. continues to read as follows: and in §§ 33.7, 155.3(b)(2), and 1. YOU SHOULD KNOW THAT IN Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 155.4(b)(2) of this chapter, and which THE UNLIKELY EVENT OF THIS 6m, 6n, 6o, 12a, and 23. may include authorization for the COMPANY’S BANKRUPTCY, ■ 9. In § 4.5, revise paragraph transfer of funds from a segregated PROPERTY, INCLUDING PROPERTY (c)(2)(iii)(A) to read as follows: customer account to another account of SPECIFICALLY TRACEABLE TO YOU, § 4.5 Exclusion for certain otherwise such customer, as listed directly above WILL BE RETURNED, TRANSFERRED the signature line, provided the regulated persons from the definition of the OR DISTRIBUTED TO YOU, OR ON term ‘‘commodity pool operator.’’ customer has acknowledged by check or YOUR BEHALF, ONLY TO THE other indication next to a description of * * * * * EXTENT OF YOUR PRO RATA SHARE (c) * * * each specified disclosure statement, OF ALL PROPERTY AVAILABLE FOR consent, or election that the customer (2) * * * DISTRIBUTION TO CUSTOMERS. (iii) * * * has received and understood such 2. THE COMMISSION’S (A) Will use commodity futures or disclosure statement or made such REGULATIONS CONCERNING commodity options contracts, or swaps consent or election; and solely for bona fide hedging purposes (2) The acknowledgment referred to in BANKRUPTCIES OF COMMODITY within the meaning and intent of the paragraph (d)(1) of this section is BROKERS CAN BE FOUND AT 17 definition of bona fide hedging accompanied by and executed CODE OF FEDERAL REGULATIONS transactions and positions for excluded contemporaneously with delivery of the PART 190. commodities in §§ 1.3 and 151.5 of this disclosures and elective provisions (3) The statement contained in chapter; Provided however, That, in required by this section and § 1.33(g), paragraph (p)(2) of this section need be addition, with respect to positions in and by § 33.7 of this chapter. furnished only once to each customer to commodity futures or commodity whom it is required to be furnished by * * * * * options contracts, or swaps which do this section. (f) A futures commission merchant or, not come within the meaning and intent in the case of an introduced account, an ■ 7. In § 1.65, revise paragraphs (a)(3) of the definition of bona fide hedging introducing broker, may open a introductory text and (a)(3)(iii) to read transactions and positions for excluded commodity futures account for an as follows: commodities in §§ 1.3 and 151.5 of this ‘‘institutional customer’’ as defined in chapter, a qualifying entity may § 1.3 without furnishing such § 1.65 Notice of bulk transfers and disclosure obligations to customers. represent that the aggregate initial institutional customer the disclosure margin and premiums required to statements or obtaining the (a) * * * establish such positions will not exceed acknowledgments required under (3) Where customer accounts are five percent of the liquidation value of paragraph (a) of this section, or transferred to a futures commission the qualifying entity’s portfolio, after §§ 1.33(g), 1.55(p), and 1.65(a)(3), and merchant or introducing broker, other taking into account unrealized profits §§ 30.6(a), 33.7(a), 155.3(b)(2), and than at the customer’s request, the and unrealized losses on any such 155.4(b)(2) of this chapter. transferee introducing broker or futures contracts it has entered into; and, * * * * * commission merchant must provide Provided further, That in the case of an (p)(1) Except as provided in § 1.65, no each customer whose account is option that is in-the-money at the time commodity broker (other than a clearing transferred with the risk disclosure of the purchase, the in-the-money organization) may accept property other statements and acknowledgments amount as defined in § 190.01of this than cash from or for the account of a required by § 1.55 (domestic futures and chapter may be excluded in computing customer, other than a customer foreign futures and options trading) and such five percent; or specified in paragraph (f) of this section, § 33.7 of this chapter (domestic * * * * * to margin, guarantee, or secure a exchange-traded commodity options) ■ 10. In § 4.12, revise the section commodity contract unless the and receive the required commodity broker first furnishes the heading and paragraph (b)(1)(i)(C) to acknowledgments within sixty days of read as follows: customer with the disclosure statement the transfer of accounts. This paragraph set forth in paragraph (p)(2) of this (a)(3) shall not apply: § 4.12 Exemption from provisions of this section in boldface print in at least 10 part. * * * * * point type which may be provided as * * * * * either a separate, written document or (iii) If the transfer of accounts is made (b) * * * incorporated into the customer from one introducing broker to another (1) * * * agreement, or with another statement introducing broker guaranteed by the (i) * * * approved under paragraph (c) of this same futures commission merchant (C) Will not enter into commodity section and set forth in appendix A to pursuant to a guarantee agreement in interest transactions for which the this section which the Commission accordance with the requirements of aggregate initial margin and premiums, finds satisfies the requirement of this § 1.10(j) and such futures commission and required minimum security deposit paragraph (p)(1). merchant maintains the relevant for retail forex transactions (as defined (2) The disclosure statement required acknowledgments required by in § 5.1(m) of this chapter) exceed 10 by paragraph (p)(1) of this section is as §§ 1.55(a)(1)(ii) and 33.7(a)(1)(ii) of this percent of the fair market value of the follows: chapter and can establish compliance pool’s assets, after taking into account THIS STATEMENT IS FURNISHED with § 1.55(p). unrealized profits and unrealized losses TO YOU BECAUSE REGULATION * * * * * on any such contracts it has entered

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into; Provided, however, That in the PART 190—BANKRUPTCY RULES are to be included in or excluded from case of an option that is in-the-money at customer property or member property; the time of purchase, the in-the-money Subpart A—General Provisions (2) That certain cash, securities, or amount as defined in § 190.01 of this Sec. other property, or commodity contracts, chapter may be excluded in computing 190.00 Statutory authority, organization, are to be specifically identifiable to a such 10 percent; and core concepts, scope, and construction. particular customer in a particular 190.01 Definitions. * * * * * capacity; 190.02 General. (3) The method by which the business ■ 11. In § 4.13, revise paragraph Subpart B—Futures Commission Merchant of the commodity broker is to be (a)(3)(ii)(A) to read as follows: as Debtor conducted or liquidated after the date of § 4.13 Exemption from registration as a 190.03 Notices and proofs of claims. the filing of the petition under chapter commodity pool operator. 190.04 Operation of the debtor’s estate— 7 of the Bankruptcy Code, including the * * * * * customer property. payment and allocation of margin with 190.05 Operation of the debtor’s estate— (a) * * * respect to commodity contracts not general. specifically identifiable to a particular (3) * * * 190.06 Making and taking delivery under customer pending their orderly (ii) * * * commodity contracts. liquidation; (A) The aggregate initial margin, 190.07 Transfers. (4) Any persons to which customer 190.08 Calculation of funded net equity. premiums, and required minimum property and commodity contracts may security deposit for retail forex 190.09 Allocation of property and allowance of claims. be transferred under section 766 of the transactions (as defined in § 5.1(m) of 190.10 Current records during business as Bankruptcy Code; and this chapter) required to establish such usual. (5) How a customer’s net equity is to positions, determined at the time the be determined. most recent position was established, Subpart C—Clearing Organization as (b) Organization. This part is Debtor will not exceed 5 percent of the organized into three subparts. This liquidation value of the pool’s portfolio, 190.11 Scope and purpose of this subpart. subpart contains general provisions after taking into account unrealized 190.12 Required reports and records. applicable in all cases. Subpart B of this profits and unrealized losses on any 190.13 Prohibition on avoidance of transfers. part contains provisions that apply such positions it has entered into; 190.14 Operation of the estate of the debtor when the debtor is a futures commission Provided, That in the case of an option subsequent to the filing date. merchant (as that term is defined in the that is in-the-money at the time of 190.15 Recovery and wind-down plans; Act or Commission regulations). This purchase, the in-the-money amount as default rules and procedures. includes acting as a foreign futures defined in § 190.01 of this chapter may 190.16 Delivery. commission merchant, as defined in be excluded in computing such 5 190.17 Calculation of net equity. section 761(12) of the Bankruptcy Code, percent; or 190.18 Treatment of property. but excludes a person that is ‘‘notice- 190.19 Support of daily settlement. * * * * * registered’’ as a futures commission Appendix A to Part 190—Customer Proof of merchant pursuant to section 4f(a)(2) of PART 41—SECURITY FUTURES Claim Form the Act. Subpart C contains provisions PRODUCTS Appendix B to Part 190—Special that apply when the debtor is registered Bankruptcy Distributions as a derivatives clearing organization ■ 12. The authority citation for part 41 under the Act. continues to read as follows: Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a– (c) Core concepts. The regulations in Authority: Sections 206, 251 and 252, Pub. 1, 12, 12a, 19, and 24; 11 U.S.C. 362, 546, this part reflect several core concepts. L. 106–554, 114 Stat. 2763, 7 U.S.C. 1a, 2, 6f, 548, 556, and 761–767, unless otherwise The descriptions of core concepts in 6j, 7a–2, 12a; 15 U.S.C. 78g(c)(2). noted. paragraphs (c)(1) through (6) of this ■ 13. In § 41.41, revise paragraph (d) to Subpart A—General Provisions section are subject to the further specific read as follows: requirements set forth in this part, and § 190.00 Statutory authority, organization, the specific requirements in this part § 41.41 Security futures products core concepts, scope, and construction. should be interpreted and applied accounts. (a) Statutory authority. The consistently with these core concepts. (1) Commodity brokers. Subchapter IV * * * * * Commission has adopted the regulations of chapter 7 of the Bankruptcy Code (d) Recordkeeping requirements. The in this part pursuant to its authority applies to a debtor that is a commodity Commission’s recordkeeping rules set under sections 8a(5) and 20 of the Act. broker, against which a customer holds forth in §§ 1.31, 1.32, 1.35, 1.36, 1.37, Section 8a(5) provides general a ‘‘net equity’’ claim relating to a 4.23, 4.33, and 18.05 of this chapter rulemaking authority to effectuate the commodity contract. This part is limited shall apply to security futures product provisions and accomplish the purposes to a commodity broker that is: transactions and positions in a futures of the Act. Section 20 provides that the account (as that term is defined in § 1.3 (i) A futures commission merchant; or Commission may, notwithstanding title (ii) A derivatives clearing organization of this chapter). The rules in the 11 of the United States Code, adopt registered under the Act and § 39.3 of preceding sentence shall not apply to certain rules or regulations governing a this chapter. security futures product transactions proceeding involving a commodity (2) Account classes. The Act and and positions in a securities account (as broker that is a debtor under subchapter Commission regulations in parts 1, 22, that term is defined in § 1.3 of this IV of chapter 7 of the Bankruptcy Code. and 30 of this chapter provide differing chapter); provided, that the SEC’s Specifically, the Commission is treatment and protections for different recordkeeping rules apply to those authorized to adopt rules or regulations types of cleared commodity contracts. transactions and positions. specifying: This part establishes three account * * * * * (1) That certain cash, securities, or classes that correspond to the different ■ 14. Revise part 190 to read as follows: other property, or commodity contracts, types of accounts that futures

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commission merchants and clearing public customers is, given the priority balances for members’ public customer organizations are required to maintain for public customers in section 766(h) of claims. Moreover, to the extent that under the regulations in the preceding the Bankruptcy Code, relevant for the there are excess funded balances for sentence, specifically, the futures purpose of making distributions to members’ claims in any customer class/ account class (including options on delivery account class customers account class combination, that excess futures), the foreign futures account pursuant to this part. is also preferentially assigned to class (including options on foreign (C) Where a provision in this part ‘‘customer property other than member futures), and the cleared swaps account affords the trustee discretion, that property’’ to the extent of any shortfall class (including cleared options other discretion should be exercised in a in funded balances for members’ public than options on futures or foreign manner that the trustee determines will customer claims. futures). This part also establishes a best achieve the overarching goal of (B) Where property is assigned to a fourth account class, the delivery protecting public customers as a class particular customer class with more account class (which may be further by enhancing recoveries for, and than one account class, it is assigned to subdivided as provided in this part), for mitigating disruptions to, public the account class for which the funded property held in an account designated customers as a class. In seeking to balance percentage is the lowest until within the books and records of the achieve that overarching goal, the there are two account classes with equal debtor as a delivery account, for trustee has discretion to balance those funded balance percentages, then to effecting delivery under commodity two sub-goals when they are in tension. both such account classes, keeping the contracts whose terms require Where the trustee is directed to exercise funded balance percentage the same, settlement via delivery when the ‘‘reasonable efforts’’ to meet a standard, and so forth following the analogous commodity contract is held to those efforts should only be less than approach if the debtor has more than expiration or, in the case of a cleared ‘‘best efforts’’ to the extent that the two account classes within the relevant option, is exercised. trustee determines that such an customer class. (3) Public customers and non-public approach would support the foregoing (4) Porting of public customer customers; Commission segregation goals. commodity contract positions. In a requirements; member property—(i) (ii) Clearing organization proceeding in which the debtor is a Public customers and non-public bankruptcies: Member property and futures commission merchant, this part customers. This part prescribes separate customer property other than member sets out a policy preference for treatment of ‘‘public customers’’ and property. For a clearing organization, transferring to another futures ‘‘non-public customers’’ (as these terms ‘‘customer property’’ is divided into commission merchant, or ‘‘porting,’’ are defined in § 190.01) within each ‘‘member property’’ and ‘‘customer open commodity contract positions of account class in the event of a property other than member property.’’ the debtor’s public customers along proceeding under this part in which the The term member property is used to with all or a portion of such customers’ debtor is a futures commission identify the cash, securities, or property account equity. Porting mitigates risks merchant. Public customers of a debtor available to pay the net equity claims of to both the customers of the debtor futures commission merchant are clearing members based on their house futures commission merchant and to the entitled to a priority in the distribution account at the clearing organization. markets. To facilitate porting, this part of cash, securities, or other customer Thus, in the event of a proceeding under addresses the manner in which the property over non-public customers, this part in which the debtor is a debtor’s business is to be conducted on and both have priority over all other clearing organization, the classification and after the filing date, with specific claimants (except for claims relating to of customers as public customers or provisions addressing the collection and the administration of customer non-public customers also is relevant, in payment of margin for open commodity property) pursuant to section 766(h) of that each member of the clearing contract positions prior to porting. the Bankruptcy Code. organization will have separate claims (5) Pro rata distribution. (i) The (A) The cash, securities, or other against the clearing organization (by commodity broker provisions of the property held on behalf of the public account class) with respect to: Bankruptcy Code, subchapter IV of customers of a futures commission (A) Commodity contract transactions chapter 7, in particular section 766(h), merchant in the futures, foreign futures, cleared for its own account or on behalf have long revolved around the principle or cleared swaps account classes are of any of its non-public customers of pro rata distribution. If there is a subject to special segregation (which are cleared in a ‘‘house account’’ shortfall in the cash, securities or other requirements imposed under parts 1, 22, at the clearing organization); and property in a particular account class and 30 of this chapter for each account (B) Commodity contract transactions needed to satisfy the net equity claims class. Although such segregation cleared on behalf of any public of public customers in that account requirements generally are not customers of the clearing member class, the customer property in that applicable to cash, securities, or other (which are cleared in accounts at the account class will be distributed pro property received from or reflected in clearing organization that is separate rata to those public customers (subject the futures, foreign futures, or cleared and distinct from house accounts). to appendix B of this part). Any swaps accounts of non-public customers (iii) Preferential assignment among customer property not attributable to a of a futures commission merchant, such customer classes and account classes specific account class, or that exceeds transactions and property are customer for clearing organization bankruptcies. the amount needed to pay allowed property within the scope of this part. Section 190.18 is designed to support customer net equity claims in a (B) While parts 1, 22, and 30 of this the interests of public customers of particular account class, will be chapter do not impose special members of a debtor that is a clearing distributed to public customers in other segregation requirements with respect to organization. account classes so long as there is a treatment of cash, securities, or other (A) Certain customer property is shortfall in those other classes. Non- property of public customers carried in preferentially assigned to ‘‘customer public customers will not receive any a delivery account, such property does property other than member property’’ distribution of customer property so constitute customer property. Thus, the instead of ‘‘member property’’ to the long as there is any shortfall, in any distinction between public and non- extent that there is a shortfall in funded account class, of customer property

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needed to satisfy public customer net (iv) In a proceeding in which the where the debtor also is a commodity equity claims. debtor is a futures commission broker, has the same duties as a trustee (ii) The pro rata distribution principle merchant, the delivery provisions in in a proceeding under subchapter IV of means that, if there is a shortfall of this part reflect policy preferences to: chapter 7 of the Bankruptcy Code, to the customer property in an account class, (A) Liquidate commodity contracts extent consistent with the provisions of all customers within that account class that settle via delivery before they move SIPA or as otherwise ordered by the will suffer the same proportional loss into a delivery position; and court. This part therefore also applies to relative to their allowed net equity (B) When such contracts are in a a proceeding commenced under SIPA claims. The principle in this paragraph delivery position, to allow delivery to with respect to a debtor that is (c)(5)(ii) applies to all customers, occur, where practicable, outside registered as a broker or dealer under including those who post as collateral administration of the debtor’s estate. section 15 of the Securities Exchange specifically identifiable property or (v) The delivery provisions in this Act of 1934 when the debtor also is a letters of credit. The pro rata part apply to any commodity that is futures commission merchant. distribution principle is subject to the subject to delivery under a commodity (iii) Commodity brokers subject to an special distribution provisions set forth contract, as the term commodity is FDIC proceeding. Section 5390(m)(1)(B) in framework 1 in appendix B of this defined in section of 1a(9) of the Act, of title 12 of the United States Code part for cross-margin accounts and whether the commodity itself is tangible provides that the FDIC must apply the framework 2 in appendix B of this part or intangible, including agricultural provisions of subchapter IV of chapter 7 for funds held outside of the U.S. or commodities as defined in § 1.3 of this of the Bankruptcy Code in respect of the held in non-U.S. currency. chapter, other non-financial distribution of customer property and (6) Deliveries. (i) Commodity contracts commodities (such as metals or energy member property in connection with the may have terms that require a customer commodities) covered by the definition liquidation of a covered financial owning the contract: of exempt commodity in section 1a(20) company or a bridge financial company (A) To make or take delivery of the of the Act, and commodities that are (as those terms are defined in section underlying commodity if the customer financial in nature (such as foreign 5381(a) of title 12) that is a commodity holds the contract to a delivery position; currencies) covered by the definition of broker as if such person were a debtor or excluded commodity in section 1a(19) for purposes of subchapter IV, except as (B) In the case of an option on a of the Act. The delivery provisions also specifically provided in section 5390 of commodity: apply to virtual currencies that are title 12. This part therefore shall serve (1) To make delivery upon exercise subject to delivery under a commodity as guidance as to such distribution of (as the buyer of a put option or seller of contract. property in a proceeding in which the a call option); or (d) Scope—(1) Proceedings—(i) FDIC is acting as a receiver pursuant to (2) To take delivery upon exercise (as Certain commodity broker proceedings title II of the Dodd-Frank Wall Street seller of a put option or buyer of a call under subchapter IV of chapter 7 of the Reform and Consumer Protection Act option). Bankruptcy Code. (A) Section 101(6) of with respect to a covered financial (ii) Depending upon the the Bankruptcy Code recognizes company or bridge financial company circumstances and relevant market, ‘‘futures commission merchants’’ and that is a commodity broker whose delivery may be effected via a delivery ‘‘foreign futures commission liquidation otherwise would be account, a futures account, a foreign merchants,’’ as those terms are defined administered by a trustee under futures account or a cleared swaps in section 761(12) of the Bankruptcy subchapter IV of chapter 7 of the account, or, when the commodity Code, as separate categories of Bankruptcy Code. subject to delivery is a security, in a commodity broker. The definition of (2) Account class and implied trust securities account (in which case commodity broker in § 190.01, as it limitations. (i) The trustee may not property associated with the delivery applies to a commodity broker that is a recognize any account class that is not held in a securities account is not part futures commission merchant under the one of the account classes enumerated of any customer account class for Act, also covers foreign futures in § 190.01. purposes of this part). commission merchants because a (ii) No property that would otherwise (iii) Although commodity contracts foreign futures commission merchant is be included in customer property, as with delivery obligations are typically required to register as a futures defined in § 190.01, shall be excluded offset before reaching the delivery stage commission merchant under the Act. from customer property because such (i.e., prior to triggering bilateral delivery (B) Section 101(6) of the Bankruptcy property is considered to be held in a obligations), when delivery obligations Code recognizes ‘‘commodity options constructive, resulting, or other trust do arise, a delivery default could have dealers,’’ and ‘‘leverage transaction that is implied in equity. a disruptive effect on the cash market merchants’’ as defined in sections (3) Commodity contract exclusions. for the commodity and adversely impact 761(6) and (13) of the Bankruptcy Code, For purposes of this part, the following the parties to the transaction. This part as separate categories of commodity are excluded from the term ‘‘commodity therefore sets out special provisions to brokers. There are no commodity contract’’: address open commodity contracts that options dealers or leverage transaction (i) Options on commodities (including are settled by delivery, when those merchants as of December 8, 2020. swaps subject to regulation under part positions are nearing or have entered Note 1 to paragraph (b)(1)(i)(B). The 32 of this chapter) that are not centrally into a delivery position at the time of or Commission intends to adopt rules with cleared by a clearing organization or after the filing date. The delivery respect to commodity options dealers or foreign clearing organization. provisions in this part are intended to leverage transaction merchants, (ii) Transactions, contracts or allow deliveries to be completed in respectively, at such time as an entity agreements that are classified as accordance with the rules and registers as such. ‘‘forward contracts’’ under the Act established practices for the relevant (ii) Futures commission merchants pursuant to the exclusion from the term commodity contract market or clearing subject to a SIPA proceeding. Pursuant ‘‘future delivery’’ set out in section organization, as applicable and to the to section 7(b) of SIPA, 15 U.S.C. 78fff– 1a(27) of the Act or the exclusion from extent permitted under this part. 1(b), the trustee in a SIPA proceeding, the definition of a ‘‘swap’’ under section

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1a(47)(B)(ii) of the Act, in each case that (ii) The concept in paragraph (e)(3)(i) related cash, securities or other are not centrally cleared by a clearing of this section, that the rules of the property), on behalf of that member’s organization or foreign clearing ‘‘home field’’ will apply, also pertains to 30.7 customers (as that latter term is organization. securities positions that are, pursuant to defined in § 30.1(f) of this chapter). (iii) Security futures products as an approved cross margining program, (B) With respect to non-public defined in section 1a(45) of the Act held in a commodities account class (in customers: when such products are held in a which case the rules of that (1) With respect to a futures securities account. commodities account class will apply) commission merchant, an account (iv) Any off-exchange retail foreign and to commodities positions that are, maintained on the books and records of currency transaction, contract or pursuant to an approved cross- the futures commission merchant for the agreement described in sections margining program, held in a securities purpose of accounting for a person’s 2(c)(2)(B) or (C) of the Act. account (in which case, the rules of the transactions in futures or options on (v) Any security-based swap or other securities account will apply, consistent futures contracts executed on or subject security (as defined in section 3 of the with section 16(2)(b)(ii) of SIPA, 15 to the rules of a foreign board of trade Exchange Act), but a security futures U.S.C. 78lll(2)(b)(ii)). (and related cash, securities, or other product or a mixed swap (as defined in property); and 1a(47)(D) of the Act) that is, in either § 190.01 Definitions. (2) With respect to a clearing case, carried in an account for which For purposes of this part: organization, an account maintained on there is a corresponding account class Account class: the books and records of the clearing under this part is not so excluded. (1) Means one or more of each of the organization for the purpose of (vi) Any off-exchange retail following types of accounts maintained accounting for transactions in futures or commodity transaction, contract or by a futures commission merchant or options on futures contracts executed on agreement described in section clearing organization (as applicable), or subject to the rules of a foreign board 2(c)(2)(D) of the Act, unless such each type of which must be recognized of trade, cleared or settled by the transaction, contract or agreement is as a separate account class by the clearing organization for a member or a traded on or subject to the rules of a trustee: member’s non-public customers (and designated contract market or foreign (i) Futures account means: related cash, securities, or other board of trade as, or as if, such (A) With respect to public customers, property). transaction, contract, or agreement is a the same definition as set forth in § 1.3 (iii) Cleared swaps account means: futures contract. of this chapter. (A) With respect to public customers, (e) Construction. (1) A reference in (B) With respect to non-public a cleared swaps customer account, as this part to a specific section of a customers: such term is defined in § 22.1 of this Federal statute or specific regulation (1) With respect to a futures chapter. refers to such section or regulation as commission merchant, an account (B) With respect to non-public the same may be amended or maintained on the books and records of customers: superseded. the futures commission merchant for the (1) With respect to a futures (2) Where they differ, the definitions purpose of accounting for a person’s commission merchant, an account set forth in § 190.01 shall be used transactions in futures or options on maintained on the books and records of instead of defined terms set forth in futures contracts executed on or subject the futures commission merchant for the section 761 of the Bankruptcy Code. In to the rules of a designated contract purpose of accounting for a person’s many cases, these definitions are based market registered under the Act (and transactions in cleared swaps (as on definitions in parts 1, 22, and 30 of related cash, securities, or other defined in § 22.1 of this chapter) (and this chapter. Notwithstanding the use of property); and related cash, securities, or other different defined terms, the regulations (2) With respect to a clearing property); and in this part are intended to be consistent organization, an account maintained on (2) With respect to a clearing with the provisions and objectives of the books and records of the clearing organization, an account maintained on subchapter IV of chapter 7 of the organization for the purpose of the books and records of the clearing Bankruptcy Code. accounting for transactions in futures or organization for the purpose of (3) In the context of portfolio options on futures contracts cleared or accounting for transactions in cleared margining and cross margining settled by the clearing organization for swaps (as defined in § 22.1 of this programs, commodity contracts and a member or a member’s non-public chapter) (or in other contracts permitted associated collateral will be treated as customers (and related cash, securities, to be cleared in the account) cleared or part of the account class in which, or other property). settled by the clearing organization for consistent with part 1, 22, 30, or 39 of (ii) Foreign futures account means: a member or a member’s non-public this chapter, or Commission Order, they (A) With respect to public customers: customers (including any property are held. (1) With respect to a futures related thereto). (i) Thus, as noted in paragraph (2) of commission merchant, a 30.7 account, (iv)(A) Delivery account means (for the definition of account class in as such term is defined in § 30.1(g) of both public and non-public customers, § 190.01, where open commodity this chapter; and considered separately): contracts (and associated collateral) that (2) With respect to a clearing (1) An account maintained on the would be attributable to one account organization, an account maintained on books and records of a futures class are, instead, commingled with the the books and records of the clearing commission merchant for the purpose of commodity contracts (and associated organization for the purpose of accounting for the making or taking of collateral) in a second account class (the accounting for transactions in futures or delivery under commodity contracts ‘‘home field’’), then the trustee must options on futures contracts executed on whose terms require settlement by treat all such commodity contracts and or subject to the rules of a foreign board delivery of a commodity, and which is collateral as part of, and consistent with of trade, cleared or settled by the designated as a delivery account on the the regulations applicable to, the second clearing organization for a member that books and records of the futures account class. is a futures commission merchant (and commission merchant; and

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(2) An account maintained on the liquidation of commodity contract fiat currency, each such currency, to the books and records of a clearing positions or adjustments to reflect mark- extent that it is recorded in a delivery organization for a clearing member (or a to-market gains or losses on commodity account, will be considered cash customer of a clearing member) for the contract positions), regardless whether delivery property. purpose of accounting for the making or the commodity broker has kept such Cash equivalents means assets, other taking of delivery under commodity books and records current or accurate. than United States dollar cash, that are contracts whose terms require Act means the Commodity Exchange highly liquid such that they may be settlement by delivery of a commodity, Act. converted into United States dollar cash as well as any account in which the Bankruptcy Code means, except as the within one business day without clearing organization holds physical context of the regulations in this part material discount in value. delivery property represented by otherwise requires, those provisions of Cleared swaps account has the electronic title documents or otherwise title 11 of the United States Code meaning set forth under account class in existing in an electronic relating to ordinary bankruptcies this section. (dematerialized) form in its capacity as (chapters 1 through 5) and liquidations Clearing organization means a a central depository, in each case where (chapter 7 with the exception of derivatives clearing organization that is the account is designated as a delivery subchapters III and V), together with the registered with the Commission as such account on the books and the records of Federal Rules of Bankruptcy Procedure under the Act. the clearing organization. relating thereto. Commodity broker means any person (B) The delivery account class is Business day means weekdays, not that is: further divided into a ‘‘physical delivery including Federal holidays as (1) A futures commission merchant account class’’ and a ‘‘cash delivery established annually by 5 U.S.C. 6103. under the Act, but excludes a person account class,’’ as provided in A business day begins at 8:00 a.m. in that is ‘‘notice-registered’’ as a futures § 190.06(b), each of which shall be Washington, DC, and ends at 7:59:59 commission merchant under section recognized as a separate class of account a.m. on the next day that is a business 4f(a)(2) of the Act; or by the trustee. day. (2) A clearing organization, in each (2)(i) If open commodity contracts Calendar day means the time from case with respect to which there is a that would otherwise be attributable to midnight to midnight in Washington, ‘‘customer’’ as that term is defined in one account class (and any property DC. this section. margining, guaranteeing, securing or Cash delivery account class has the Commodity contract means: accruing in respect of such commodity meaning set forth under account class in (1) A futures or options on futures contracts) are, pursuant to a this section. contract executed on or subject to the Commission rule, regulation, or order, Cash delivery property means any rules of a designated contract market; or a clearing organization rule approved cash or cash equivalents recorded in a (2) A futures or option on futures in accordance with § 39.15(b)(2) of this delivery account that is, as of the filing contract executed on or subject to the chapter, held separately from other date: rules of a foreign board of trade; commodity contracts and property in (1) Credited to such account to pay for (3) A swap as defined in section that account class and are commingled receipt of delivery of a commodity 1a(47) of the Act and § 1.3 of this with the commodity contracts and under a commodity contract; chapter, that is directly or indirectly property of another account class, then (2) Credited to such account to submitted to and cleared by a clearing the trustee must treat the former collateralize or guarantee an obligation organization and which is thus a cleared commodity contracts (and any property to make or take delivery of a commodity swap as that term is defined in section margining, guaranteeing, securing, or under a commodity contract; or 1a(7) of the Act and § 22.1 of this accruing in respect of such commodity (3) Has been credited to such account chapter; or contracts), for purposes of this part, as as payment received in exchange for (4) Any other contract that is a swap being held in an account of the latter making delivery of a commodity under for purposes of this part under the account class. a commodity contract. It also includes definition in this section and is (ii) The principle in paragraph (2)(i) of property in the form of commodities submitted to and cleared by a clearing this definition will be applied to that have been delivered after the filing organization. securities positions and associated date in exchange for cash or cash (5) Notwithstanding paragraphs (1) collateral held in a commodity account equivalents held in a delivery account through (4) of this definition, a security class pursuant to a cross margining as of the filing date. The cash or cash futures product as defined in section program approved by the Commission equivalents must be identified on the 1a(45) of the Act is not a commodity (and thus treated as part of that books and the records of the debtor as contract for purposes of this part when commodity account class) and to having been received, from or for the such contract is held in a securities commodity positions and associated account of a particular customer, on or account. Moreover, a contract, collateral held in a securities account after seven calendar days before the agreement, or transaction described in pursuant to a cross margining program relevant: § 190.00(d)(3) as excluded from the term approved by the Commission (and thus (i) First notice date in the case of a ‘‘commodity contract’’ is excluded from treated as part of the securities account). futures contract; or this definition. (3) For the purpose of this definition, (ii) Exercise date in the case of a Commodity contract account means: a commodity broker is considered to (cleared) option. (1) A futures account, foreign futures maintain an account for another person (4) Cash delivery property also account, cleared swaps account, or by establishing internal books and includes any cash transferred by a delivery account; or records in which it records the person’s customer to the trustee on or after the (2) If the debtor is a futures commodity contracts and cash, filing date for the purpose of paying for commission merchant, for purposes of securities or other property received delivery, consistent with identifying customer property for the from or on behalf of such person or § 190.06(a)(3)(ii)(B)(1). foreign futures account class (subject to accruing to the credit of such person’s (5) In the case of a contract where one § 190.09(a)(1)), an account maintained account, and related activity (such as fiat currency is exchanged for another for the debtor by a foreign clearing

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organization or a foreign futures Delivery account has the meaning set Foreign futures commission merchant intermediary reflecting futures or forth under account class in this shall have the same meaning as that set options on futures executed on or section. forth in section 761(12) of the subject to the rules of a foreign board of Distribution of property to a customer Bankruptcy Code. trade, including any account maintained includes transfer of property on the Foreign futures intermediary refers to on behalf of the debtor’s public customer’s behalf, return of property to a foreign futures and options broker, as customers. a customer, as well as distributions to a such term is defined in § 30.1(e) of this Court means the court having customer of valuable property that is chapter, acting as an intermediary for jurisdiction over the debtor’s estate. different than the property posted by foreign futures contracts between a Cover has the meaning set forth in that customer. foreign futures commission merchant § 1.17(j) of this chapter. Equity means the amount calculated and a foreign clearing organization. Customer means: as equity in accordance with Funded balance means the amount (1)(i) With respect to a futures § 190.08(b)(1). calculated as funded balance in commission merchant as debtor Exchange Act means the Securities accordance with § 190.08(c) and, as (including a foreign futures commission Exchange Act of 1934, as amended, 15 applicable, § 190.17(d). merchant as that term is defined in U.S.C. 78a et seq. Funded net equity means, for section 761(12) of the Bankruptcy FDIC means the Federal Deposit purposes of subpart B of this part, the Code), the meaning set forth in sections Insurance Corporation. amount calculated as funded net equity 761(9)(A) and (B) of the Bankruptcy Filing date means the date a petition in accordance with § 190.08(a), and for Code. under the Bankruptcy Code or purposes of subpart C of this part, the (ii) With respect to a clearing application under SIPA commencing a amount calculated as funded net equity organization as debtor, the meaning set proceeding is filed or on which the in accordance with § 190.17(c). forth in section 761(9)(D) of the FDIC is appointed as a receiver pursuant Futures and futures contract are used Bankruptcy Code. to 12 U.S.C. 5382(a). interchangeably to mean any contract (2) The term customer includes the Final net equity determination date for the purchase or sale of a commodity owner of a portfolio cross-margining means the latest of: (as defined in section 1a(9) of the Act) account covering commodity contracts (1) The day immediately following the for future delivery that is executed on or and related positions in securities (as day on which all commodity contracts subject to the rules of a designated defined in section 3 of the Exchange held by or for the account of customers contract market or on or subject to the Act) that is carried as a futures account of the debtor have been transferred, rules of a foreign board of trade. The or cleared swaps customer account liquidated, or satisfied by exercise or term also covers, for purposes of this pursuant to an appropriate rule, delivery; part: regulation, or order of the Commission. (2) The day immediately following the (1) Any transaction, contract or Customer claim of record means a day on which all property other than agreement described in section customer claim that is determinable commodity contracts held for the 2(c)(2)(D) of the Act and traded on or solely by reference to the records of the account of customers has been subject to the rules of a designated debtor. transferred, returned or liquidated; contract market or foreign board of Customer class means each of the (3) The bar date for filing customer trade, to the extent not covered by the following two classes of customers, proofs of claim as determined by rule foregoing definition; and which must be recognized as separate 3002(c) of the Federal Rules of (2) Any transaction, contract, or classes by the trustee: Public customers Bankruptcy Procedure, the expiration of agreement that is classified as a and non-public customers; provided, the six-month period imposed pursuant ‘‘forward contract’’ under the Act however, that when the debtor is a to section 8(a)(3) of SIPA, or such other pursuant to the exclusion from the term clearing organization the references to date (whether earlier or later) set by the ‘‘future delivery’’ set out in section public customers and non-public court (or, in the case of the FDIC acting 1a(27) of the Act or the exclusion from customers are based on the as a receiver pursuant to 12 U.S.C. the definition of a ‘‘swap’’ under section classification of customers of, and in 5382(a), the deadline set by the FDIC 1a(47)(B)(ii) of the Act, provided that relation to, the members of the clearing pursuant to 12 U.S.C. 5390(a)(2)(B); or such transaction, contract, or agreement organization. (4) The day following the allowance is traded on or subject to the rules of a Customer property and customer (by the trustee or by the bankruptcy designated contract market or foreign estate are used interchangeably to mean court) or disallowance (by the board of trade and is cleared by, the property subject to pro rata bankruptcy court) of all disputed respectively, a clearing organization or distribution in a commodity broker customer net equity claims. foreign clearing organization the same bankruptcy in the priority set forth in Foreign board of trade has the same as if it were a futures contract. sections 766(h) or (i), as applicable, of meaning as set forth in § 1.3 of this Futures account has the meaning set the Bankruptcy Code, and includes chapter. forth under account class in this cash, securities, and other property as Foreign clearing organization means a section. set forth in § 190.09(a). clearing house, clearing association, House account means, in the case of Debtor means a person with respect to clearing corporation or similar entity, a clearing organization, any commodity which a proceeding is commenced facility, or organization clears and contract account of a member at such under subchapter IV of chapter 7 of the settles transactions in futures or options clearing organization maintained to Bankruptcy Code or under SIPA, or for on futures executed on or subject to the reflect trades for the member’s own which the Federal Deposit Insurance rules of a foreign board of trade. account or for any non-public customer Corporation is appointed as a receiver Foreign future shall have the same of such member. pursuant to 12 U.S.C. 5382, provided, meaning as that set forth in section In-the-money means: however, that this part applies only to 761(11) of the Bankruptcy Code. (1) With respect to a call option, when such a proceeding if the debtor is a Foreign futures account has the the value of the underlying interest commodity broker as defined in this meaning set forth under account class in (such as a commodity or futures section. this section. contract) which is the subject of the

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option exceeds the strike price of the the appointment of the FDIC as receiver make or take delivery of physical option; and pursuant to 12 U.S.C. 5382(a)(1)(A). delivery property pursuant to § 190.06. (2) With respect to a put option, when Person means any individual, As this property is held outside of the the value of the underlying interest association, partnership, corporation, debtor’s estate, it is not subject to pro (such as a commodity or futures trust, or other form of legal entity. rata distribution. contract) which is the subject of the Physical delivery account class has (2) Special cases. (i) In the case of a option is exceeded by the strike price of the meaning set forth under account contract where one fiat currency is the option. class in this section. exchanged for another fiat currency, Joint account means any commodity Physical delivery property means: neither such currency, to the extent that contract account held by more than one (1) In general. A commodity, whether it is recorded in a delivery account, will person. tangible or intangible, held in a form be considered physical delivery that can be delivered to meet and fulfill Member property means, in property. delivery obligations under a commodity connection with a clearing organization (ii) In a case where the final contract that settles via delivery if held bankruptcy, the property which may be settlement price is negative, i.e., where to a delivery position (as described in used to pay that portion of the net the party obliged to deliver physical § 190.06(a)(1)), including warehouse equity claim of a member which is delivery property under an expiring receipts, other documents of title, or based on the member’s house account at futures contract or an expired options shipping certificates (including the clearing organization, including any contract is also obliged to make a cash electronic versions of any of the claims on behalf of non-public payment to the buyer, such cash or cash foregoing) for the commodity, or the customers of the member. equivalents constitute physical delivery commodity itself: Net equity means, for purposes of property. (i) That the debtor holds for the Primary liquidation date means the subpart B of this part, the amount account of a customer for the purpose of calculated as net equity in accordance first business day immediately making delivery of such commodity on following the day on which all with § 190.08(b), and for purposes of the customer’s behalf, which as of the subpart C of this part, the amount commodity contracts (including any filing date or thereafter, can be commodity contracts that are calculated as net equity in accordance identified on the books and records of with § 190.17(b). specifically identifiable property) have the debtor as held in a delivery account been liquidated or transferred. Non-public customer means: for the benefit of such customer. Cash or (1) With respect to a futures Public customer means: cash equivalents received after the filing (1) With respect to a futures commission merchant, any customer date in exchange for delivery of such commission merchant and in relation to: that is not a public customer; and physical delivery property shall also (i) The futures account class, a futures (2) With respect to a clearing constitute physical delivery property; customer as defined in § 1.3 of this organization, any person whose account (ii) That the debtor holds for the chapter whose futures account is subject carried on the books and records of: account of a customer and that the to the segregation requirements of (i) A member of the clearing customer received or acquired by taking section 4d(a) of the Act and the organization that is a futures delivery under an expired or exercised regulations in this chapter that commission merchant, is classified as a commodity contract and which, as of implement section 4d(a), including as proprietary account under § 1.3 of this the filing date or thereafter, can be applicable §§ 1.20 through 1.30 of this chapter (in the case of the futures or identified on the books and records of chapter; foreign futures account class) or as a the debtor as held in a delivery account (ii) The foreign futures account class, cleared swaps proprietary account for the benefit of such customer, a 30.7 customer as defined in § 30.1 of under § 22.1 of this chapter (in the case regardless how long such property has this chapter whose foreign futures of the cleared swaps account class); or been held in such account; or accounts is subject to the segregation (ii) A member of the clearing (iii) Where property that the debtor requirements of § 30.7 of this chapter; organization that is a foreign broker, is holds in a futures account, foreign (iii) The cleared swaps account class, classified or treated as proprietary under futures account, or cleared swaps a Cleared Swaps Customer as defined in and for purposes of: account, or, if the commodity is a § 22.1 of this chapter whose cleared (A) The rules of the clearing security, in a securities account, would swaps account is subject to the organization; or meet the criteria listed in paragraph (1) segregation requirements of part 22 of (B) The jurisdiction of incorporation or (2) of this definition, but for the fact this chapter; and of such member. of being held in such account rather (iv) The delivery account class, a Open commodity contract means a than a delivery account, such property customer that is or would be classified commodity contract which has been will be considered physical delivery as a public customer if the property established in fact and which has not property solely for purposes of the reflected in the customer’s delivery expired, been redeemed, been fulfilled obligations to make or take delivery of account had been held in an account by delivery or exercise, or been offset physical delivery property pursuant to described in paragraph (1)(i), (ii), or (iii) (i.e., liquidated) by another commodity § 190.06. of this definition. contract. (iv) Commodities or documents of (2) With respect to a clearing Order for relief has the same meaning title that are not held by the debtor and organization, any customer of that set forth in section 301 of the are delivered or received by a customer clearing organization that is not a non- Bankruptcy Code, in the case of the in accordance with § 190.06(a)(2) (or in public customer. filing of a voluntary bankruptcy accordance with § 190.06(a)(2) in Securities account means, in relation petition, and means the entry of an conjunction with § 190.16(a) if the to a futures commission merchant that order granting relief under section 303 debtor is a clearing organization) to is registered as a broker or dealer under of the Bankruptcy Code in an fulfill a customer’s delivery obligation the Exchange Act, an account involuntary case. It also means, where under a commodity contract will be maintained by such futures commission applicable, the issuance of a protective considered physical delivery property merchant in accordance with the decree under section 5(b)(1) of SIPA or solely for purposes of the obligations to requirements of section 15(c)(3) of the

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Exchange Act and § 240.15c3–3 of this Substitute customer property means including an extension of any time limit title. cash or cash equivalents delivered to the prescribed by this part or an exemption Security has the meaning set forth in trustee by or on behalf of a customer in subject to conditions, provided that the section 101(49) of the Bankruptcy Code. connection with: Commission shall not grant an SIPA means the Securities Investor (1) The return of specifically extension for any time period Protection Act of 1970, 15 U.S.C 78aaa identifiable property by the trustee; or established by the Bankruptcy Code. et seq. (2) The return of, or an agreement not (2) A request pursuant to paragraph Specifically identifiable property to draw upon, a letter of credit received, (a)(1) of this section— means: acquired or held to margin, guarantee, (i) May be made ex parte and by any (1)(i) The following property received, secure, purchase, or sell a commodity means of communication, written or acquired, or held by or for the account contract. oral, provided that the trustee must of the debtor from or for the futures Swap has the meaning set forth in confirm an oral request in writing account, foreign futures account, or section 1a(47) of the Act and § 1.3 of within one business day and such cleared swaps account of a customer: this chapter, and, in addition, also confirmation must contain all the (A) Any security which as of the filing means any other contract, agreement, or information required by paragraph (b)(3) date is: transaction that is carried in a cleared of this section. The request or (1)(i) Held for the account of a swaps account pursuant to a rule, confirmation of an oral request must be customer; regulation, or order of the Commission, given to the Commission as provided in (ii) Registered in such customer’s provided, in each case, that it is cleared paragraph (a) of this section. name; by a clearing organization as, or the (ii) Must state the particular provision (iii) Not transferable by delivery; and of this part with respect to which the (iv) Has a duration or maturity date of same as if it were, a swap. Trustee means, as appropriate, the exemption or extension is sought, the more than 180 days; or reason for the requested exemption or (2)(i) Fully paid; trustee in bankruptcy or in a SIPA (ii) Non-exempt; and proceeding, appointed to administer the extension, the amount of time sought if (iii) Identified on the books and debtor’s estate and any interim or the request is for an extension, and the records of the debtor as held by the successor trustee, or the FDIC, where it reason why such exemption or debtor for or on behalf of the commodity has been appointed as a receiver extension would not be contrary to the contract account of a particular pursuant to 12 U.S.C. 5382. purposes of the Bankruptcy Code and customer for which, according to such Undermargined means, with respect this part. books and records as of the filing date, to a futures account, foreign futures (3) The Director of the Division of no open commodity contracts were held account, or cleared swaps account Clearing and Risk, or members of the in the same capacity. carried by the debtor, the funded Commission staff designated by the (B) Any warehouse receipt, bill of balance for such account is below the Director, shall grant, deny, or otherwise lading, or other document of title which minimum amount that the debtor is respond to a request, on the basis of the as of the filing date: required to collect and maintain for the information provided in any such (1) Can be identified on the books and open commodity contracts in such request and after consultation with the records of the debtor as held for the account under the rules of the relevant Director of the Market Participants account of a particular customer; and clearing organization, foreign clearing Division or members of the Commission (2) Is not in bearer form and is not organization, designated contract staff designated by the Director, unless otherwise transferable by delivery; market, swap execution facility or exigent circumstances require (ii) Any open commodity contracts foreign board of trade. If any such rules immediate action precluding such prior treated as specifically identifiable establish both an initial margin consultation, and shall communicate property in accordance with requirement and a lower maintenance that determination by the most § 190.03(c)(2); and margin requirement applicable to any appropriate means to the person making (iii) Any physical delivery property commodity contracts (or to the entire the request. described in paragraphs (1) through (3) portfolio of commodity contracts or any (b) Delegation of authority to the of the definition of physical delivery subset thereof) in a particular Director of the Division of Clearing and property in this section. commodity contract account of the Risk. (1) Until such time as the (2) Notwithstanding paragraphs (1) customer, the trustee will use the lower Commission orders otherwise, the and (3) of this definition, security maintenance margin level to determine Commission hereby delegates to the futures products, and any money, the customer’s minimum margin Director of the Division of Clearing and securities, or property held to margin, requirement for such account. Risk, and to such members of the guarantee, or secure such products, or Variation settlement means variation Commission’s staff acting under the accruing as a result of such products, margin as defined in § 1.3 of this Director’s direction as they may shall not be considered specifically chapter plus all other daily settlement designate, after consultation with the identifiable property for the purposes of amounts (such as price alignment Director of the Market Participants subchapter IV of the Bankruptcy Code payments) that may be owed or owing Division, or such members of the or this part, if held in a securities on the commodity contract. Commission’s staff under the Director’s account. direction as they may designate, unless (3) No property that is not explicitly § 190.02 General. exigent circumstances require included in this definition may be (a) Request for exemption. (1) The immediate action, all the functions of treated as specifically identifiable trustee (or, in the case of an involuntary the Commission set forth in this part, property. petition pursuant to section 303 of the except the authority to disapprove a pre- Strike price means the price per unit Bankruptcy Code, any other person relief transfer of a public customer multiplied by the total number of units charged with the management of a commodity contract account or at which a person may purchase or sell commodity broker) may, for good cause customer property pursuant to a futures contract or a commodity or shown, request from the Commission an § 190.07(e)(1). other interest underlying an option that exemption from the requirements of any (2) The Director of the Division of is a commodity contract. procedural provision in this part, Clearing and Risk may submit to the

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Commission for its consideration any otherwise by the Commission, all (c) Notices to customers—(1) matter which has been delegated to the mandatory or discretionary notices to be Specifically identifiable property other Director pursuant to paragraph (b)(1) of given to the Commission under this than open commodity contracts. In any this section. subpart shall be directed by electronic case in which an order for relief has (3) Nothing in this section shall mail to [email protected]. For been entered, the trustee must use all prohibit the Commission, at its election, purposes of this subpart, notice to the reasonable efforts to promptly notify, in from exercising its authority delegated Commission shall be deemed to be accordance with paragraph (a)(2) of this to the Director of the Division of given only upon actual receipt. section, any customer whose futures Clearing and Risk under paragraph (2) To Customers. The trustee, after account, foreign futures account, or (b)(1) of this section. consultation with the Commission, and cleared swaps account includes (c) Forward contracts. For purposes of unless otherwise instructed by the specifically identifiable property, other this part, an entity for or with whom the Commission, will establish and follow than open commodity contracts, which debtor deals who holds a claim against procedures reasonably designed for has not been liquidated, that such the debtor solely on account of a giving adequate notice to customers specifically identifiable property may be forward contract, that is not cleared by under this subpart and for receiving liquidated commencing on and after the a clearing organization, will not be claims or other notices from customers. seventh day after the order for relief (or deemed to be a customer. Such procedures should include, absent such other date as is specified by the (d) Other. The Bankruptcy Code will good cause otherwise, the use of a trustee in the notice with the approval not be construed by the Commission to prominent website as well as of the Commission or court) if the prohibit a commodity broker from doing communication to customers’ electronic customer has not instructed the trustee business as any combination of the addresses that are available in the in writing before the deadline specified following: Futures commission debtor’s books and records. in the notice to return such property merchant, commodity options dealer, (b) Notices to the Commission and pursuant to the terms for distribution of foreign futures commission merchant, or designated self-regulatory specifically identifiable property leverage transaction merchant, nor will organizations—(1) Of commencement of contained in § 190.09(d)(1). Such notice the Commission construe the a proceeding. Each commodity broker must describe the specifically Bankruptcy Code to permit any that is a futures commission merchant identifiable property and specify the operation, trade, or business, or any and files a petition in bankruptcy shall terms upon which that property may be combination of the foregoing, otherwise as soon as practicable before, and in any returned, including if applicable and to prohibited by the Act or by any of the event no later than, the time of such the extent practicable any substitute Commission’s regulations in this filing, notify the Commission and such customer property that must be chapter, or by any order of the commodity broker’s designated self- provided by the customer. Commission. regulatory organization of the (2) Open commodity contracts carried (e) Rule of construction. Contracts in anticipated or actual filing date, the in hedging accounts. To the extent security futures products held in a court in which the proceeding will be or reasonably practicable under the securities account shall not be has been filed and, as soon as known, circumstances of the case, and following considered to be ‘‘from or for the the docket number assigned to that consultation with the Commission, the commodity futures account’’ or ‘‘from or proceeding. Each commodity broker that trustee may treat open commodity for the commodity options account’’ of is a futures commission merchant and contracts of public customers identified such customers, as such terms are used against which a bankruptcy petition is on the books and records of the debtor in section 761(9) of the Bankruptcy filed or with respect to which an as held in a futures account, foreign Code. application for a protective decree futures account, or cleared swaps (f) Receivers. In the event that a under SIPA is filed shall immediately account designated as a hedging account receiver for a futures commission upon the filing of such petition or in the debtor’s records, as specifically merchant is appointed due to the application notify the Commission and identifiable property of such customer. violation or imminent violation of the such commodity broker’s designated (i) If the trustee does not exercise such customer property protection self-regulatory organization of the filing authority, such open commodity requirements of section 4d of the Act, or date, the court in which the proceeding contracts do not constitute specifically of the regulations in part 1, 22, or 30 of has been filed, and, as soon as known, identifiable property. this chapter that implement section 4d the docket number assigned to that (ii) If the trustee exercises such or 4(b)(2) of the Act, or of the futures proceeding. authority: commission merchant’s minimum (2) Of transfers under section 764(b) (A) The trustee shall use reasonable capital requirements in § 1.17 of this of the Bankruptcy Code. As soon as efforts to promptly notify, in accordance chapter, such receiver may, in an possible, the trustee of a commodity with paragraph (a)(2) of this section, appropriate case, file a petition for broker that is a futures commissions each relevant public customer of such merchant, the relevant designated self- bankruptcy of such futures commission determination. regulatory organization, or the merchant pursuant to section 301 of the (B)(1) Where, in the judgment of the applicable clearing organization must Bankruptcy Code. trustee, the books and records of the (g) Definition of ‘‘allowed.’’ The term notify the Commission, and in the case debtor reveal a clear preference by a ‘‘allowed’’ in this part shall have the of a futures commission merchant, the relevant public customer with respect to meaning ascribed to it in the trustee shall also notify its designated transfer or liquidation of open Bankruptcy Code. self-regulatory organization and clearing commodity contracts, the trustee shall organization(s), if such person intends endeavor, to the extent reasonably Subpart B—Futures Commission to transfer or to apply to transfer open practicable, to comply with that Merchant as Debtor commodity contracts or customer preference. property on behalf of the public (2) Where, in the judgment of the § 190.03 Notices and proofs of claims. customers of the debtor in accordance trustee, the books and records of the (a) Notices-means of providing—(1) with section 764(b) of the Bankruptcy debtor do not reveal a clear preference To the Commission. Unless instructed Code and § 190.07(c) or (d). by a relevant public customer with

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respect to transfer or liquidation of open (e) Proof of customer claim. The would be specifically identifiable commodity contracts, the trustee will trustee shall request that customers property as defined in § 190.01; request the customer to provide written provide, to the extent reasonably (8) Whether the claimant holds instructions whether to transfer or practicable, information sufficient to positions in security futures products, liquidate such open commodity determine a customer’s claim in and, if so, whether those positions are contracts. Such notice must specify the accordance with the regulations held in a futures account, a foreign manner for providing such instructions contained in this part, including in the futures account, or a securities account; and the deadline by which the customer discretion of the trustee: (9) Whether the claimant wishes to must provide instructions. (1) The class of commodity contract receive payment in kind, to the extent (C) Such notice must also inform the account upon which each claim is based practicable, for any claim for customer that: (i.e., futures account, foreign futures unliquidated securities or other (1) (Where instructions have been account, cleared swaps account, or unliquidated property; and requested pursuant to paragraph delivery account (and, in the case of a (10) Copies of any documents which (c)(2)(ii)(B)(2) of this section), if the delivery account, how much is based on support the information contained in customer does not provide instructions cash delivery property and how much is the proof of customer claim, including in the prescribed manner and by the based on the value of physical delivery without limitation, customer prescribed deadline, the customer’s property); confirmations, account statements, and open commodity contracts will not be (2) Whether the claimant is a public statements of purchase or sale. treated as specifically identifiable customer or a non-public customer; (f) Proof of claim form. A template property under this part; (3) The number of commodity customer proof of claim form which (2) Any transfer of the open contract accounts held by each may (but is not required to) be used by commodity contracts is subject to the claimant, and, for each such account: the trustee is set forth in appendix A to terms for distribution contained in (i) The account number; this part. § 190.09(d)(2); (ii) The name in which the account is (1) If there are no open commodity (3) Absent compliance with any terms held; contracts that are being treated as imposed by the trustee or the court, the (iii) The balance as of the last account specifically identifiable property (e.g., if trustee may liquidate the open statement for the account, and the customer proof of claim form was commodity contracts; and information regarding any activity in the distributed after the primary liquidation (4) Providing (or having provided) account from the date of the last account date), the trustee should modify the instructions may not prevent the open statement up to and including the filing customer proof of claim form to delete commodity contracts from being date that affected the balance of the references to open commodity contracts liquidated. account; as specifically identifiable property. (3) Involuntary cases. Prior to entry of (iv) The capacity in which the (2) In the event the trustee determines an order for relief, and upon leave of the account is held; that the debtor’s books and records court, a trustee appointed in an (v) Whether the account is a joint reflecting customer transactions are not involuntary proceeding pursuant to account and, if so, the amount of the reasonably reliable, or account section 303 of the Bankruptcy Code may claimant’s percentage interest in that statements are not available from which notify customers, in accordance with account and whether participants in the account balances as of the date of paragraph (a)(2) of this section, of the joint account are claiming jointly or transfer or liquidation of customer commencement of such proceeding and separately; property may be determined, the proof may request customer instructions with (vi) Whether the account is a of claim form used by the trustee should respect to the return, liquidation, or discretionary account; be modified to take into account the transfer of specifically identifiable (vii) Whether the account is an particular facts and circumstances of the property. individual retirement account for which case. (4) Notice of bankruptcy and request there is a custodian; and for proof of customer claim. The trustee (viii) Whether the account is a cross- § 190.04 Operation of the debtor’s estate— shall promptly notify, in accordance margining account for futures and customer property. with paragraph (a)(2) of this section, securities; (a) Transfers—(1) All cases. The each customer that an order for relief (4) A description of any accounts held trustee for a commodity broker shall has been entered and instruct each by the claimant with the debtor that are promptly use its best efforts to effect a customer to file a proof of customer not commodity contract accounts; transfer in accordance with § 190.07(c) claim containing the information (5) A description of all claims against and (d) no later than the seventh specified in paragraph (e) of this the debtor not based upon a commodity calendar day after the order for relief of section. Such notice may be given contract account of the claimant or an the open commodity contracts and separately from any notice provided in account listed in response to paragraph property held by the commodity broker accordance with paragraph (c) of this (e)(4) of this section; for or on behalf of its public customers. section. The trustee shall cause the (6) A description of all claims of the (2) Involuntary cases. A commodity proof of customer claim form referred to debtor against the claimant not included broker against which an involuntary in paragraph (e) of this section to set in the balance of a commodity contract petition in bankruptcy is filed, or the forth the bar date for its filing. account of the claimant; trustee if a trustee has been appointed (d) Notice of court filings. The trustee (7) A description of and the value of in such case, shall use its best efforts to shall promptly provide the Commission any open positions, unliquidated effect a transfer in accordance with with copies of any complaint, motion, securities, or other unliquidated § 190.07(c) and (d) of all open or petition filed in a commodity broker property held by the debtor on behalf of commodity contracts and property held bankruptcy which concerns the the claimant, indicating the portion of by the commodity broker for or on disposition of customer property. Court such property, if any, which was behalf of its public customers and such filings shall be directed to the included in the information provided in other property as the Commission in its Commission addressed as provided in paragraph (e)(3) of this section, and discretion may authorize, on or before paragraph (a)(1) of this section. identifying any such property which the seventh calendar day after the filing

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date, and immediately cease doing such account class whose account is manner in any other accounts, and business; provided, however, that if the under-margined (as described in finally to liquidate any remaining open commodity broker demonstrates to the paragraph (b)(4) of this section) but not commodity contracts in any accounts. If Commission within such period that it in deficit, provided that the trustee more than one commodity contract was in compliance with the segregation issues a margin call to such customer account reflects open commodity and financial requirements of this and provided further that the trustee contracts in a particular account class chapter on the filing date, and the shall liquidate such customer’s open for which liquidating transactions have Commission determines, in its sole commodity contracts if the customer been executed, the trustee shall to the discretion, that such transfer is neither fails to make the margin payment within extent practicable allocate the appropriate nor in the public interest, a reasonable time as provided in liquidating transactions to such the commodity broker may continue in paragraph (b)(4) of this section. commodity contract accounts pro rata business subject to applicable (2) Margin calls. The trustee (or, prior based on the number of open provisions of the Bankruptcy Code and to appointment of the trustee, the debtor commodity contracts of such of this chapter. against which an involuntary petition commodity contract accounts. For (b) Treatment of open commodity was filed) may issue a margin call to any purposes of this section, the term ‘‘a contracts—(1) Payments by the trustee. public customer whose commodity risk-reducing manner’’ is measured by Prior to the primary liquidation date, contract account contains open margin requirements set using the the trustee may make payments of commodity contracts if such account is margin methodology and parameters initial margin and variation settlement under-margined. followed by the derivatives clearing to a clearing organization, commodity (3) Margin payments by the customer. organization at which such contracts are broker, foreign clearing organization, or The full amount of any margin payment cleared. foreign futures intermediary, carrying by a customer in response to a margin (c) Contracts moving into delivery the account of the debtor, pending the call under paragraph (b)(2) of this position. After entry of the order for transfer, or liquidation of any open section must be credited to the funded relief and subject to paragraph (a) of this commodity contracts, whether or not balance of the particular account for section, which requires the trustee to such contracts are specifically which it was made. attempt to make transfers to other identifiable property of a particular (4) Trustee obligation to liquidate commodity brokers permitted by customer, provided, that: certain open commodity contracts. The § 190.07 and section 764(b) of the (i) To the extent within the trustee’s trustee shall, as soon as practicable Bankruptcy Code, the trustee shall use control, the trustee shall not make any under the circumstances, liquidate all its best efforts to liquidate any open payments on behalf of any commodity open commodity contracts in any commodity contract that settles upon contract account on the books and commodity contract account that is in expiration or exercise via the making or records of the debtor that is in deficit; deficit, or for which any mark-to-market taking of delivery of a commodity: provided, however, that the provision in calculation would result in a deficit, or (1) If such contract is a futures this paragraph (b)(1) shall not be for which the customer fails to meet a contract or a cleared swaps contract, construed to prevent a clearing margin call made by the trustee within before the earlier of the last trading day organization, foreign clearing a reasonable time. Except as otherwise or the first day on which notice of intent organization, futures commission provided in this part, absent exigent to deliver may be tendered with respect merchant, or foreign futures circumstances, a reasonable time for thereto, or otherwise before the debtor intermediary carrying an account of the meeting margin calls made by the or its customer incurs an obligation to debtor from exercising its rights to the trustee shall be deemed to be one hour, make or take delivery of the commodity extent permitted under applicable law; or such greater period not to exceed one under such contract; (ii) Any margin payments made by the business day, as the trustee may (2) If such contract is a long option on trustee with respect to a specific determine in its sole discretion. a commodity and has value, before the customer account shall not exceed the (5) Partial liquidation of open first date on which the contract could be funded balance for that account; commodity contracts by others. In the automatically exercised or the last date (iii) The trustee shall not make any event that a clearing organization, on which the contract could be payments on behalf of non-public foreign clearing organization, futures exercised if not subject to automatic customers of the debtor from funds that commission merchant, foreign futures exercise; or are segregated for the benefit of public intermediary, or other person carrying a (3) If such contract is a short option customers; commodity customer account for the on a commodity that is in-the-money in (iv) If the trustee receives payments debtor in the nature of an omnibus favor of the long position holder, before from a customer in response to a margin account has liquidated only a portion of the first date on which the long option call, then to the extent within the open commodity contracts in such position could be exercised. trustee’s control, the trustee must use account, the trustee will exercise (d) Liquidation or offset. After entry of such payments to make margin reasonable business judgment in the order for relief and subject to payments for the open commodity assigning the liquidating transactions to paragraph (a) of this section, which contract positions of such customer; the underlying commodity customer requires the trustee to attempt to make (v) The trustee may not use payments accounts carried by the debtor. transfers to other commodity brokers received from one public customer to Specifically, the trustee should permitted by § 190.07 and section 764(b) meet the margin (or any other) endeavor to assign the contracts as of the Bankruptcy Code, and except as obligations of any other customer; and follows: First, to liquidate open otherwise set forth in this paragraph (d), (vi) If funds segregated for the benefit commodity contracts in a risk-reducing the following commodity contracts and of public customers in a particular manner in any accounts that are in other property held by or for the account class exceed the aggregate net deficit; second, to liquidate open account of a debtor must be liquidated equity claims for all public customers in commodity contracts in a risk-reducing in the market in accordance with such account class, the trustee may use manner in any accounts that are paragraph (e)(1) of this section or such excess funds to meet the margin undermargined; third, to liquidate open liquidated via book entry in accordance obligations for any public customer in commodity contracts in a risk-reducing with paragraph (e)(2) of this section by

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the trustee promptly and in an orderly customer) as having been distributed to futures commission merchant (as manner: the customer for purposes of calculating defined in § 1.3 of this chapter) or (1) Open commodity contracts. All entitlements to distribution or transfer. foreign futures intermediary, the trustee open commodity contracts, except for: The expiration of the letter of credit on shall use commercially reasonable (i) Commodity contracts that are or at any time after the date of the order efforts to liquidate the open commodity specifically identifiable property (if for relief shall not affect such contracts to achieve competitive pricing, applicable) and are subject to customer calculation. to the extent feasible under market instructions to transfer (in lieu of (iii) Any proceeds of a letter of credit conditions at the time of liquidation and liquidating) as provided in drawn by the trustee, or substitute subject to any rules or orders of the § 190.03(c)(2), provided that the customer property posted by a relevant clearing organization, foreign customer is in compliance with the customer, shall be considered customer clearing organization, designated terms of § 190.09(d)(2); and property in the account class applicable contract market, swap execution facility, (ii) Open commodity contract to the original letter of credit. or foreign board of trade governing the positions that are in a delivery position, (iv) The trustee shall, in exercising liquidation of open commodity which shall be treated in accordance their discretion with regard to contracts. with the provisions of § 190.06. addressing letters of credit, including as (2) By the trustee or a clearing (2) Specifically identifiable property, to the timing and amount of a request organization via book entry offset. Upon other than open commodity contracts or for substitute customer property, application by the trustee or clearing physical delivery property. Specifically endeavor to mitigate, to the extent organization, the Commission may identifiable property, other than open practicable, the adverse effects upon permit open commodity contracts to be commodity contracts or physical customers that have posted letters of liquidated, or settlement on such delivery property, to the extent that: credit, in a manner that achieves pro contracts to be made, by book entry. (i) The fair market value of such rata treatment among customer claims. Such book entry shall offset open property is less than 75% of its fair (4) All other property. All other commodity contracts, whether matched market value on the date of entry of the property, other than physical delivery or not matched on the books of the order for relief; property held for delivery in accordance commodity broker, using the settlement (ii) Failure to liquidate the with the provisions of § 190.06, which price for such commodity contracts as specifically identifiable property may is not required to be transferred or determined by the clearing organization result in a deficit balance in the returned pursuant to customer in accordance with its rules. Such rules applicable customer account; or instructions and which has not been shall be designed to establish, to the (iii) The trustee has not received liquidated in accordance with extent feasible under market conditions instructions to return pursuant to paragraphs (d)(1) through (3) of this at the time of liquidation, such § 190.03(c)(1), or has not returned such section. settlement prices in a competitive property upon the terms contained in (e) Liquidation of open commodity manner. § 190.09(d)(1). contracts—(1) By the trustee or a (3) By a futures commission merchant (3) Letters of credit. The trustee may clearing organization in the market—(i) or foreign futures intermediary. For request that a customer deliver Debtor as a clearing member. For open open commodity contracts cleared by substitute customer property with commodity contracts cleared by the the debtor through one or more accounts respect to any letter of credit received, debtor as a member of a clearing established with a futures commission acquired, or held to margin, guarantee, organization, the trustee or clearing merchant or a foreign futures secure, purchase, or sell a commodity organization, as applicable, shall intermediary, such futures commission contract, whether the letter of credit is liquidate such open commodity merchant or foreign futures held by the trustee on behalf of the contracts pursuant to the rules of the intermediary may exercise any debtor’s estate or a derivatives clearing clearing organization, a designated enforceable contractual rights it has to organization or a foreign intermediary or contract market, or a swap execution liquidate such commodity contracts, foreign clearing organization on a pass- facility, if and as applicable. Any such provided, that it shall use commercially through or other basis, including in rules providing for liquidation other reasonable efforts to liquidate the open cases where the letter of credit has than on the open market shall be commodity contracts to achieve expired since the date of the order for designed to achieve, to the extent competitive pricing, to the extent relief. The amount of the request may feasible under market conditions at the feasible under market conditions at the equal the full face amount of the letter time of liquidation, a process for time of liquidation and subject to any of the credit or any portion thereof, to liquidating open commodity contracts rules or orders of the relevant clearing the extent required or may be required that results in competitive pricing. For organization, foreign clearing in the trustee’s discretion to ensure pro open commodity contracts that are organization, designated contract rata treatment among customer claims futures or options on futures that were market, swap execution facility, or within each account class, consistent established on or subject to the rules of foreign board of trade governing its with §§ 190.08 and 190.09. a foreign board of trade and cleared by liquidation of such open commodity (i) If a customer fails to provide the debtor as a member of a foreign contracts. If a futures commission substitute customer property within a clearing organization, the trustee shall merchant or foreign futures reasonable time specified by the trustee, liquidate such open commodity intermediary fails to use commercially the trustee may, if the letter of credit has contracts pursuant to the rules of the reasonable efforts to liquidate open not expired, draw upon the full amount foreign clearing organization or foreign commodity contracts to achieve of the letter of credit or any portion board of trade or, in the absence of such competitive pricing in accordance with thereof. rules, in the manner the trustee this paragraph (e)(3), the trustee may (ii) For any letter of credit referred to determines appropriate. seek damages reflecting the difference in this paragraph (d)(3), the trustee shall (ii) Debtor not a clearing member. For between the price (or prices) at which treat any portion that is not drawn upon open commodity contracts submitted by the relevant commodity contracts would (less the value of any substitute the debtor for clearing through one or have been liquidated using customer property delivered by the more accounts established with a commercially reasonable efforts to

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achieve competitive pricing and the required under this chapter to be property, if such commodity contracts price (or prices) at which the maintained by the debtor, including are in a delivery position on the filing commodity contracts were liquidated, records of the computations required by date, or the trustee is unable to liquidate which shall be the sole remedy available this part, shall be maintained by the such commodity contracts in to the trustee. In no event shall any such trustee until such time as the debtor’s accordance with § 190.04(c) to prevent liquidation be voided. case is closed. them from moving into a delivery (4) Liquidation only. (i) Nothing in (2) Accessibility. The records required position, i.e., before the debtor or its this part shall be interpreted to permit to be maintained by paragraph (c)(1) of customer incurs bilateral contractual the trustee to purchase or sell new this section shall be available during obligations to make or take delivery commodity contracts for the debtor or business hours to the Commission and under such commodity contracts. its customers except to offset open the U.S. Department of Justice. The (2) Delivery made or taken on behalf commodity contracts or to transfer any trustee shall give the Commission and of a customer outside of the transferable notice received by the the U.S. Department of Justice access to administration of the debtor’s estate. (i) debtor or the trustee under any all records of the debtor, including The trustee shall use reasonable efforts commodity contract; provided, however, records required to be retained in to allow a customer to deliver physical that the trustee may, in its discretion accordance with § 1.31 of this chapter delivery property that is held directly by and with approval of the Commission, and all other records of the commodity the customer and not by the debtor (and cover uncovered inventory or broker, whether or not the Act or this thus not recorded in any commodity commodity contracts of the debtor chapter would require such records to contract account of the customer) in which cannot be liquidated immediately be maintained by the commodity broker. settlement of a commodity contract, and because of price limits or other market (d) Customer statements. The trustee to allow payment in exchange for such conditions, or may take an offsetting shall use all reasonable efforts to delivery, to occur outside the position in a new month or at a strike continue to issue account statements administration of the debtor’s estate, price for which limits have not been with respect to any customer for whose when the rules of the exchange or other reached. account open commodity contracts or market listing the commodity contract, (ii) Notwithstanding paragraph other property is held that has not been or the clearing organization or the (e)(4)(i) of this section, the trustee may, liquidated or transferred. With respect foreign clearing organization clearing with the written permission of the to such accounts, the trustee must also the commodity contract, as applicable, Commission, operate the business of the issue an account statement reflecting prescribe a process for delivery that debtor in the ordinary course, including any liquidation or transfer of open allows the delivery to be fulfilled: the purchase or sale of new commodity commodity contracts or other property (A) In the normal course directly by contracts on behalf of the customers of promptly after such liquidation or the customer; the debtor under appropriate transfer. (B) By substitution of the customer for circumstances, as determined by the (e) Other matters—(1) Disbursements. the commodity broker; or Commission. With the exception of transfers of (C) Through agreement of the buyer (f) Long option contracts. Subject to customer property made in accordance and seller to alternative delivery paragraphs (d) and (e) of this section, with § 190.07, the trustee shall make no procedures. the trustee shall use its best efforts to disbursements to customers except with (ii) Where a customer delivers assure that a commodity contract that is approval of the court. physical delivery property in settlement a long option contract with value does (2) Investment. The trustee shall of a commodity contract outside of the not expire worthless. promptly invest the proceeds from the administration of the debtors’ estate in liquidation of commodity contracts or accordance with paragraph (a)(2)(i) of § 190.05 Operation of the debtor’s estate— specifically identifiable property, and this section, any property of such general. may invest any other customer property, customer held at the debtor in (a) Compliance with the Act and in obligations of the United States and connection with such contract must regulations in this chapter. Except as obligations fully guaranteed as to nonetheless be included in the net specifically provided otherwise in this principal and interest by the United equity claim of that customer, and, as part, the trustee shall use reasonable States, provided that such obligations such, can only be distributed pro rata at efforts to comply with all of the are maintained in a depository located the time of, and as part of, any provisions of the Act and of the in the United States, its territories or distributions to customers made by the regulations in this chapter as if it were possessions. trustee. the debtor. (f) Residual interest. The trustee shall (3) Delivery as part of administration (b) Computation of funded balance. apply the residual interest provisions of of the debtor’s estate. When the trustee The trustee shall use reasonable efforts § 1.11 of this chapter in a manner determines that it is not practicable to to compute a funded balance for each appropriate to the context of their effect delivery as provided in paragraph customer account that contains open responsibilities as a bankruptcy trustee (a)(2) of this section: commodity contracts or other property pursuant subchapter IV of chapter 7 of (i) To facilitate the making or taking as of the close of business each business the Bankruptcy Code and this part, and of delivery directly by a customer, the day subsequent to the order for relief in light of the existence of a surplus or trustee may, as it determines reasonable until the date all open commodity deficit in customer property available to under the circumstances of the case and contracts and other property in such pay customer claims. consistent with the pro rata distribution account have been transferred or of customer property by account class: liquidated, which shall be as accurate as § 190.06 Making and taking delivery under (A) When a customer is obligated to reasonably practicable under the commodity contracts. make delivery, return any physical circumstances, including the reliability (a) Deliveries—(1) General. The delivery property to the customer that is and availability of information. provisions of this paragraph (a) apply to held by the debtor for or on behalf of the (c) Records—(1) Maintenance. Except commodity contracts that settle upon customer under the terms set forth in as otherwise ordered by the court or as expiration or exercise by making or § 190.09(d)(1)(ii), to allow the customer permitted by the Commission, records taking delivery of physical delivery to deliver such property to fulfill its

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delivery obligation under the (2) If the value of the cash or cash (ii) Cash delivery property in delivery commodity contract; or equivalents that may be used to pay for accounts as of the filing date, along with (B) When a customer is obligated to deliveries as described in paragraph any physical delivery property for take delivery: (a)(3)(i)(B) of this section is less than the which delivery is subsequently taken on (1) Return any cash delivery property amount required to be paid for taking behalf of a customer in accordance with to the customer that is reflected in the delivery, the trustee shall issue a paragraph (a)(3) of this section, as part customer’s delivery account, provided payment call to the customer. The full of a separate cash delivery account that cash delivery property returned amount of any payment made by the class. under this paragraph (a)(3)(i)(B)(1) shall customer in response to a payment call (2)(i) If the debtor holds any cash or not exceed the lesser of: must be credited to the funded balance cash equivalents in an account (i) The amount the customer is of the particular account for which such maintained at a bank, clearing required to pay for delivery of the payment is made. organization, foreign clearing commodity; or (3) If the customer fails to meet a call organization, or other person, under a (ii) The customer’s net funded balance for payment under paragraph name or in a manner that clearly for all of the customer’s commodity (a)(3)(ii)(B)(2) of this section before indicates that the account holds contract accounts; payment is made for delivery, the property for the purpose of making (2) Return cash, securities, or other trustee must convert any physical payment for taking delivery, or property held in the customer’s non- delivery property received on behalf of receiving payment for making delivery, delivery commodity contract accounts, the customer to cash as promptly as of a commodity under commodity provided that property returned under possible. contracts, such property shall (subject to this section shall not exceed the lesser (4) Deliveries in a securities account. § 190.09) be considered customer If an open commodity contract held in of: property— a futures account, foreign futures (i) The amount the customer is (A) In the cash delivery account class account, or cleared swaps account required to pay for delivery of the if held for making payment for taking requires delivery of a security upon commodity; or delivery; and expiration or exercise of such (ii) The net funded balance for all of (B) In the physical delivery account commodity contract, and delivery is not class, if held as a result of receiving the customer’s commodity contract completed pursuant to paragraph (a)(2) such payment for a making delivery accounts reduced by any amount or (a)(3)(i) of this section, the trustee after the filing date. returned to the customer pursuant to may make or take delivery in a paragraph (a)(3)(i)(B)(1) of this section, securities account in a manner (ii) Any other property (excluding and provided further, however, that the consistent with paragraph (a)(3)(ii) of property segregated for the benefit of trustee may distribute such property this section, provided, however, that the customer in the futures, foreign futures only to the extent that the customer’s trustee may transfer property from the or cleared swaps account class) that is funded balance for each such account customer’s commodity contract traceable as having been held or exceeds the minimum margin accounts to the securities account to received for the purpose of making obligations for such account (as fulfill the delivery obligation only to the delivery, or as having been held or described in § 190.04(b)(2)); and extent that the customer’s funded received as a result of taking delivery, (C) Impose such conditions on the balance for such commodity contract of a commodity under commodity customer as it considers appropriate to account exceeds the customer’s contracts, shall (subject to § 190.09) be assure that property returned to the minimum margin obligations for such considered customer property— customer is used to fulfill the accounts (as described in § 190.04(b)(2)) (A) In the cash delivery account class customer’s delivery obligations. and provided further that the customer if received after the filing date in (ii) If the trustee does not return is not under-margined or does not have exchange for taking delivery; and physical delivery property, cash a deficit balance in any other (B) Otherwise shall be considered delivery property, or other property in commodity contract accounts. customer property in the physical the form of cash or cash equivalents to (5) Delivery made or taken on behalf delivery account class. the customer as provided in paragraph of proprietary account. If delivery of § 190.07 Transfers. (a)(3)(i) of this section, subject to physical delivery property is to be made paragraph (a)(4) of this section: or taken on behalf of the debtor’s own (a) Transfer rules. No clearing (A) To the extent practical, the trustee account or the account of any non- organization or self-regulatory shall make or take delivery of physical public customer of the debtor, the organization may adopt, maintain in delivery property in the same manner as trustee shall make or take delivery, as effect, or enforce rules that: if no bankruptcy had occurred, and the case may be, on behalf of the (1) Are inconsistent with the when making delivery, the party to debtor’s estate, provided that if the provisions of this part; which delivery is made must pay the trustee takes delivery of physical (2) Interfere with the acceptance by its full price required for taking such delivery property it must convert such members of transfers of commodity delivery; or property to cash as promptly as contracts, and the property margining or (B) When taking delivery of physical possible. securing such contracts, from futures delivery property: (b) Special account class provisions commission merchants that are required (1) The trustee shall pay for the for delivery accounts. (1) Within the to transfer accounts pursuant to delivery first using the customer’s cash delivery account class, the trustee shall § 1.17(a)(4) of this chapter; or delivery property or other property, treat— (3) Interfere with the acceptance by its limited to the amounts set forth in (i) Physical delivery property held in members of transfers of commodity paragraph (a)(3)(i)(B) of this section, delivery accounts as of the filing date, contracts, and the property margining or along with any cash transferred by the and the proceeds of any such physical securing such contracts, from a futures customer to the trustee on or after the delivery property subsequently commission merchant that is a debtor as filing date for the purpose of paying for received, as part of the physical delivery defined in § 190.01, if such transfers delivery. account class; and have been approved by the Commission,

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provided, however, that this paragraph agreement by the debtor existing at or (ii) Of a customer’s commodity (a)(3) shall not— before the time of the transfer contract account. If all of a customer’s (i) Limit the exercise of any (including, but not limited to, any open commodity contracts and property contractual right of a clearing failure to segregate sufficient customer cannot be transferred under this section, organization or other registered entity to property) shall not constitute a default a partial transfer of contracts and liquidate or transfer open commodity or breach of the agreement on the part property may be made so long as such contracts; or of the transferee, or constitute a defense transfer would not result in an increase (ii) Be interpreted to limit a clearing to the enforcement of the agreement by in the amount of any customer’s net organization’s ability adequately to the transferee. equity claim. One, but not the only, manage risk. (ii) Paragraph (b)(4)(i) of this section means to effectuate a partial transfer is (b) Requirements for transferees. (1) It shall not apply where the customer has by liquidating a portion of the open is the duty of each transferee to assure a pre-existing account agreement with commodity contracts held by a customer that it will not accept a transfer that the transferee futures commission such that sufficient value is realized, or would cause the transferee to be in merchant. In such a case, the transferred margin requirements are reduced to an violation of the minimum financial account will be governed by that pre- extent sufficient, to permit the transfer requirements set forth in this chapter. existing account agreement. of some or all of the remaining open (2) Any transferee that accepts a (5) If open commodity contracts or commodity contracts and property. If transfer of open commodity contracts any specifically identifiable property any open commodity contract to be from the estate of the debtor— has been, or is to be, transferred in transferred in a partial transfer is part of (i) Accepts the transfer subject to any accordance with section 764(b) of the a spread or straddle, to the extent loss that may arise in the event the Bankruptcy Code and this section, practicable under the circumstances, transferee cannot recover from the customer instructions previously each side of such spread or straddle customer any deficit balance that may received by the trustee with respect to must be transferred or none of the open arise related to the transferred open open commodity contracts or with commodity contracts comprising the commodity contracts. respect to specifically identifiable spread or straddle may be transferred. (ii) If the commodity contracts were property, shall be transmitted to the (3) Letters of credit. A letter of credit held for the account of a customer: transferee of property, which shall received, acquired, or held to margin, (A) Must keep such commodity guarantee, secure, purchase, or sell a contracts open at least one business day comply therewith to the extent practicable. commodity contract may be transferred after their receipt, unless the customer with an eligible commodity contract (c) Eligibility for transfer under for whom the transfer is made fails to account if it is held by a derivatives section 764(b) of the Bankruptcy Code— respond within a reasonable time to a clearing organization on a pass-through accounts eligible for transfer. All margin call for the difference between or other basis or is transferable by its commodity contract accounts (including the margin transferred with such terms, so long as the transfer will not accounts with no open commodity commodity contracts and the margin result in a recovery which exceeds the contract positions) are eligible for which such transferee would require amount to which the customer would be transfer after the order for relief with respect to a similar set of entitled under §§ 190.08 and 190.09. If pursuant to section 764(b) of the commodity contracts held for the the letter of credit cannot be transferred Bankruptcy Code, except: account of a customer in the ordinary as provided for in the foregoing course of business; and (1) The debtor’s own account or the sentence, and the customer does not (B) May not collect commissions with accounts of general partners of the deliver substitute customer property to respect to the transfer of such debtor if the debtor is a partnership; and the trustee in accordance with commodity contracts. (2) Accounts that are in deficit. § 190.04(d)(3), the trustee may draw (3) A transferee may accept open (d) Special rules for transfers under upon a portion or all of the letter of commodity contracts and property, and section 764(b) of the Bankruptcy Code— credit, the proceeds of which shall be open accounts on its records, for (1) Effecting transfer. The trustee for a treated as customer property in the customers whose commodity contracts commodity broker shall use its best applicable account class. and property are transferred pursuant to efforts to effect a transfer to one or more (4) Physical delivery property. The this part prior to completing customer other commodity brokers of all eligible trustee shall use reasonable efforts to diligence, provided that account commodity contract accounts, open prevent physical delivery property held opening diligence as required by law commodity contracts and property held for the purpose of making delivery on a (including the risk disclosures referred by the debtor for or on behalf of its commodity contract from being to in § 1.65(a)(3) of this chapter) is customers, based on customer claims or transferred separate and apart from the performed, and records and information record, no later than the seventh related commodity contract, or to a required by law are obtained, as soon as calendar day after the order for relief. different transferee. practicable, but in any event within six (2) Partial transfers; multiple (5) No prejudice to other customers. months of the transfer, unless this time transferees—(i) Of the customer estate. No transfer shall be made under this is extended for a particular account, If all eligible commodity contract part by the trustee if, after taking into transferee, or debtor by the Commission. accounts held by a debtor cannot be account all customer property available (4)(i) Any account agreements transferred under this section, a partial for distribution to customers in the governing a transferred account transfer may nonetheless be made. The applicable account class at the time of (including an account that has been Commission will not disapprove such a the transfer, such transfer would result partially transferred) shall be deemed transfer for the sole reason that it was in insufficient remaining customer assigned to the transferee by operation a partial transfer. Commodity contract property to make an equivalent of law and shall govern the transferee accounts may be transferred to one or percentage distribution (including all and customer’s relationship until such more transferees, and, subject to previous transfers and distributions) to time as the transferee and customer paragraph (d)(4) of this section, may be all customers in the applicable account enter into a new agreement; provided, transferred to different transferees by class, based on— however, that any breach of such account class. (i) Customer claims of record; and

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(ii) Estimates of other customer claims the direction of the Commission on or (2) Disbursements to or on behalf of made in the trustee’s reasonable before the seventh calendar day after the the customer (including, for these discretion based on available order for relief, upon such terms and purposes, transfers made pursuant to information, in each case as of the conditions as the Commission may §§ 190.04(a) and 190.07); and calendar day immediately preceding deem appropriate and in the public (3) The normal costs attributable to transfer. interest. the payment of commissions, brokerage, (e) Prohibition on avoidance of (f) Commission action. interest, taxes, storage, transaction fees, transfers under section 764(b) of the Notwithstanding any other provision of insurance, and other costs and charges Bankruptcy Code—(1) Pre-relief this section (other than paragraphs lawfully incurred in connection with transfers. Notwithstanding the (d)(2)(ii) and (d)(5) of this section), in the purchase, sale, exercise, or provisions of paragraphs (c) and (d) of appropriate cases and to protect the liquidation of any commodity contract this section, the following transfers are public interest, the Commission may: in such account. approved and may not be avoided under (1) Prohibit the transfer of a particular (iii) For purposes of this paragraph sections 544, 546, 547, 548, 549, or set or sets of commodity contract (b)(1), the open trade balance of a 724(a) of the Bankruptcy Code: accounts and customer property; or customer’s account shall be computed (i) The transfer of commodity contract (2) Permit transfers of a particular set by subtracting the unrealized loss in accounts or customer property prior to or sets of commodity contract accounts value of the open commodity contracts the entry of the order for relief in and customer property that do not held by or for such account from the compliance with § 1.17(a)(4) of this comply with the requirements of this unrealized gain in value of the open chapter unless such transfer is section. commodity contracts held by or for such disapproved by the Commission; account. (ii) The transfer, withdrawal, or § 190.08 Calculation of funded net equity. (iv) For purposes of this paragraph settlement, prior to the order for relief For purposes of this subpart, funded (b)(1), in calculating the ledger balance at the request of a public customer, net equity shall be computed as follows: or open trade balance of any customer, including a transfer, withdrawal, or (a) Funded claim. The funded net exclude any security futures products, settlement at the request of a public equity claim of a customer shall be any gains or losses realized on trades in customer that is a commodity broker, of equal to the aggregate of the funded such products, any property received to commodity contract accounts or balances of such customer’s net equity margin, guarantee, or secure such customer property held from or for the claim for each account class. products (including interest thereon or account of such customer by or on (b) Net equity. Net equity means a the proceeds thereof), to the extent any behalf of the debtor unless: customer’s total customer claim of of the foregoing are held in a securities (A) The customer acted in collusion record against the estate of the debtor account, and any disbursements to or on with the debtor or its principals to based on the customer property, behalf of such customer in connection obtain a greater share of customer including any commodity contracts, with such products or such property property or the bankruptcy estate than held by the debtor for or on behalf of held in a securities account. that to which it would be entitled under such customer less any indebtedness of (2) Step 2-customer determination this part; or the customer to the debtor. Net equity (aggregation). Aggregate the credit and (B) The transfer is disapproved by the shall be calculated as follows: debit equity balances of all accounts of Commission; (1) Step 1-equity determination. (i) the same class held by a customer in the (iii) The transfer prior to the order for Determine the equity balance of each same capacity. Paragraphs (b)(2)(i) relief by a clearing organization, or by commodity contract account of a through (xii) of this section prescribe a receiver that has been appointed for customer by computing, with respect to which accounts must be treated as being the futures commission merchant (FCM) such account, the sum of: held in the same capacity and which that is now a debtor, of one or more (A) The ledger balance; accounts must be treated as being held accounts held for or on behalf of (B) The open trade balance; and in a separate capacity. customers of the debtor, or of (C) The realizable market value, (i) Except as otherwise provided in commodity contracts and other determined as of the close of the market this paragraph (b)(2), all accounts that customer property held for or on behalf on the last preceding market day, of any are maintained with a debtor in a of customers of the debtor, provided securities or other property held by or person’s name and that, under this that the transfer is not disapproved by for the debtor from or for such account, paragraph (b)(2), are deemed to be held the Commission. plus accrued interest, if any. by that person in its individual capacity (2) Post-relief transfers. (ii) For the purposes of this paragraph shall be deemed to be held in the same Notwithstanding the provisions of (b)(1), the ledger balance of a customer capacity. paragraphs (c) and (d) of this section, account shall be calculated by: (ii) An account maintained with a the following transfers are approved and (A) Adding: debtor by a guardian, custodian, or may not be avoided under sections 544, (1) Cash deposited to purchase, conservator for the benefit of a ward, or 546, 547, 548, 549, or 724(a) of the margin, guarantee, secure, or settle a for the benefit of a minor under the Bankruptcy Code: commodity contract; Uniform Gift to Minors Act, shall be (i) The transfer of a commodity (2) Cash proceeds of liquidations of deemed to be held in a separate capacity contract account or customer property any securities or other property referred from accounts held by such guardian, eligible to be transferred under to in paragraph (b)(1)(i)(C) of this custodian or conservator in its paragraphs (c) and (d) of this section section; individual capacity. made by the trustee or by any clearing (3) Gains realized on trades; and (iii) An account maintained with a organization on or before the seventh (4) The face amount of any letter of debtor in the name of an executor or calendar day after the entry of the order credit received, acquired or held to administrator of an estate in its capacity for relief, as to which the Commission margin, guarantee, secure, purchase or as such shall be deemed to be held in has not disapproved the transfer; or sell a commodity contract; and a separate capacity from accounts held (ii) The transfer of a commodity (B) Subtracting from the result: by such executor or administrator in its contract account or customer property at (1) Losses realized on trades; individual capacity.

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(iv) An account maintained with a account; provided, however, that if such (again, x-y) must be allocated and offset debtor in the name of a decedent, in the account is not transferred in accordance against each positive equity balance in name of the decedent’s estate, or in the with §§ 190.04(a) and 190.07, it shall be the same proportion as that positive name of the executor or administrator of deemed to be held in the same capacity equity balance bears to the total of all such estate in its capacity as such shall as any other joint account held by positive equity balances of accounts of be deemed to be accounts held in the identical participants and a participant’s different classes held by such customer. same capacity. percentage interest therein shall be (iii) A negative equity balance (v) An account maintained with a deemed to be held in the same capacity obtained with respect to one customer debtor by a trustee shall be deemed to as any account held in an individual account class must be set off against a be held in the individual capacity of the capacity by such participant. positive equity balance in any other grantor of the trust unless the trust is (xi) An account maintained with a account class of such customer held in created by a valid written instrument for debtor in the name of a plan that is the same capacity, provided, that if a a purpose other than avoidance of an subject to the terms of the Employee customer owns more than one class of offset under the regulations contained in Retirement Income Security Act of 1974 accounts with a positive equity balance, this part. A trust account which is not and the regulations in 29 CFR chapter such negative equity balance must be deemed to be held in the individual XXV, or similar state, Federal, or foreign offset against each positive equity capacity of its grantor under this laws or regulations applicable to balance in the same proportion as that paragraph (b)(2)(v) shall be deemed to retirement or pension plans, shall be positive equity balance bears to the total be held in a separate capacity from deemed to be held in a separate capacity of all positive equity balances in accounts held in an individual capacity from an account held in an individual accounts of different classes held by by the trustee, by the grantor or any capacity by the plan administrator, any such customer. successor in interest of the grantor, or by employer, employee, participant, or (iv) To the extent any indebtedness of any trust beneficiary, and from accounts beneficiary with respect to such plan. the debtor to the customer which is not held by any other trust. (xii) Except as otherwise provided in required to be included in computing (vi) An account maintained with a this section, an account maintained the equity of such customer under debtor by a corporation, partnership, or with a debtor by an agent or nominee for paragraph (b)(1) of this section exceeds unincorporated association shall be a principal or a beneficial owner shall such indebtedness of the customer to deemed to be held in a separate capacity be deemed to be an account held in the the debtor, the customer claim therefor from accounts held by the shareholders, individual capacity of such principal or will constitute a general creditor claim partners or members of such beneficial owner. rather than a customer property claim, corporation, partnership, or (xiii) With respect to the cleared and the net equity therefor shall be unincorporated association, if such swaps account class, each individual separately calculated. entity was created for purposes other cleared swaps customer account within (v) The rules pertaining to separate than avoidance of an offset under the each cleared swap omnibus customer capacities and permitted setoffs regulations contained in this part. account referred to in paragraph contained in this section shall only be (vii) A hedging account of a person (b)(2)(viii) of this section shall be applied subsequent to the entry of an shall be deemed to be held in the same deemed to be held in a separate capacity order for relief; prior to that date, the capacity as a speculative account of from each other such individual cleared provisions of § 1.22 of this chapter and such person. swaps customer account, subject to the of sections 4d(a)(2) and 4d(f) of the Act (viii) Subject to paragraphs (b)(2)(ix) provisions of paragraphs (b)(2)(i) (and, in each case, the regulations in and (xiv) of this section, the futures through (xi) of this section. part 1, 22, or 30 of this chapter that accounts, foreign futures accounts, (xiv) Accounts held by a customer in implement sections 4d(a)(2) and 4d(f)) delivery accounts, and cleared swaps separate capacities shall be deemed to shall govern what setoffs are permitted. accounts of the same person shall not be be accounts of different customers. The (4) Step 4-correction for distributions. deemed to be held in separate burden of proving that an account is The value on the date of transfer or capacities: Provided, however, that such held in a separate capacity shall be distribution of any property transferred accounts may be aggregated only in upon the customer. or distributed subsequent to the filing accordance with paragraph (b)(3) of this (3) Step 3-setoffs. (i) The net equity of date and prior to the primary section. one customer account may not be offset liquidation date with respect to each (ix) An omnibus customer account for against the net equity of any other class of account held by a customer public customers of a futures customer account. must be added to the equity obtained for commission merchant maintained with (ii) Any obligation to the debtor owed that customer for accounts of that class a debtor shall be deemed to be held in by a customer which is not required to after performing the steps contained in a separate capacity from any omnibus be included in computing the equity of paragraphs (b)(1) through (3) of this customer account for non-public that customer under paragraph (b)(1) of section: Provided, however, that if all customers of such futures commission this section (defined as x), must be accounts for which there are customer merchant and from any account deducted from any obligation to the claims of record and 100% of the equity maintained with the debtor on its own customer owed by the debtor which is pertaining thereto is transferred in behalf or on behalf of any non-public not required to be included in accordance with § 190.07 and section customer. computing the equity of that customer 764(b) of the Bankruptcy Code, net (x) A joint account maintained with (defined as y). If the former amount (x) equity shall be computed based solely the debtor shall be deemed to be held exceeds the latter (y), the excess (x-y) upon those allowed customer claims, if in a separate capacity from any account must be deducted from the equity any, filed subsequent to the order for held in an individual capacity by the balance of the customer obtained after relief which are not claims of record on participants in such account, from any performing the preceding calculations the filing date. account held in an individual capacity required by paragraph (b) of this section, (5) Step 5-correction for ongoing by a commodity pool operator or provided, that if the customer owns events. Compute any adjustments to the commodity trading advisor for such more than one class of accounts with a steps in paragraphs (b)(1) through (4) of account, and from any other joint positive equity balance, the excess this section required to correct

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misestimates or errors including, (iii) Liquidation of unliquidated may determine is appropriate) as part of without limitation, corrections for claims at a value other than their a general liquidation of securities, but ongoing events such as the liquidation estimated value; and cannot be liquidated at the same price, of unliquidated claims or specifically (iv) Recovery of property. the trustee may use the weighted identifiable property at a value different (d) Valuation. In computing net average of the liquidation prices in from the estimated value previously equity, commodity contracts and other computing the net equity of each used in computing net equity. property held by or for a commodity customer for which the debtor held such (c) Calculation of funded balance. broker must be valued as provided in securities. Securities which are not Funded balance means a customer’s pro this paragraph (d). publicly traded shall be valued by the rata share of the customer estate with (1) Commodity contracts—(i) Open trustee pursuant to paragraph (d)(5) of respect to each account class available contracts. Unless otherwise specified in this section. for distribution to customers of the same this paragraph (d), the value of an open (3) Commodities held in inventory. customer class. commodity contract shall be equal to Commodities held in inventory, as the settlement price as calculated by the (1) Funded balance computation. The collateral or otherwise, shall be valued clearing organization pursuant to its at their fair market value. If such fair funded balance of any customer claim rules; provided, however, that if an open market value is not readily ascertainable shall be computed (separately by commodity contract is transferred to based upon public sources of prices, the account class and customer class) by: another commodity broker, its value on trustee shall value such commodities (i) Multiplying the ratio of the amount the debtor’s books and records shall be pursuant to paragraph (d)(5) of this of the net equity claim of such customer determined as of the end of the last section. (defined as x) less the amounts referred settlement cycle on the day preceding to in paragraph (c)(1)(ii) of this section such transfer. (4) Letters of credit. The value of any of such customer for any account class (ii) Liquidated contracts. Except as letter of credit received, acquired or (defined as y) divided by the sum of the specified in paragraphs (d)(1)(ii)(A) and held to margin, guarantee, secure, net equity claims of all customers for (B) of this section, the value of a purchase, or sell a commodity contract accounts of that class (defined as p) less commodity contract liquidated on the shall be its face amount, less the the amounts referred to in paragraph open market shall equal the actual value amount, if any, drawn and outstanding, (c)(1)(ii) of this section of all customers realized on liquidation of the provided that, if the trustee makes a for accounts of that class (defined as q) commodity contract. determination in good faith that a draw (thus, ((x-y)/(p-q)) by the sum of: (A) Weighted average. If identical on a letter of credit is unlikely to be (A) The value of letters of credit commodity contracts are liquidated honored on either a temporary or a received, acquired, or held to margin, within a 24-hour period or business day permanent basis, the trustee shall value guarantee, secure, purchase, or sell a (or such other period as the bankruptcy the letter of credit pursuant to paragraph commodity contract relating to all court may determine is appropriate) as (d)(5) of this section. customer accounts of the same class; part of a general liquidation of (5) All other property. Subject to the (B) The value of the money, securities, commodity contracts, but cannot be other provisions of this paragraph (d), or other property segregated on behalf of liquidated at the same price, the trustee all other property shall be valued by the all customer accounts of the same class may use the weighted average of the trustee using such professional less the amounts referred to in liquidation prices in computing the net assistance as the trustee deems paragraph (c)(1)(ii) of this section; equity of each customer for which the necessary in its sole discretion under (C) The value of any money, debtor held such commodity contracts. the circumstances; provided, however, securities, or other property which must (B) Bulk liquidation. The value of a that if such property is sold, its value for be allocated under § 190.09 to all commodity contract liquidated as part purposes of the calculations required by customer accounts of the same class; of a bulk auction, taken into inventory this part shall be equal to the actual and or under management by a clearing value realized on the sale of such (D) The amount of any add-back organization, or similarly liquidated property; and, provided further, that the required under paragraph (b)(4) of this outside of the open market shall be sale shall be made in compliance with section; and equal to the settlement price calculated all applicable statutes, rules, and orders by the clearing organization as of the of any court or governmental entity with (ii) Then adding 100% of— end of the settlement cycle during jurisdiction there over. (A) Any margin payment made which the commodity contract was between the entry of the order for relief liquidated. § 190.09 Allocation of property and (or, in an involuntary case, the date on (2) Securities. The value of a listed allowance of claims. which the petition for bankruptcy is security shall be equal to the closing The property of the debtor’s estate filed) and the primary liquidation date; price for such security on the exchange must be allocated among account provided, however, that if margin is upon which it is traded. The value of all classes and between customer classes as posted to substitute for a letter of credit, securities not traded on an exchange provided in this section. (Property such margin does not increase the shall be equal in the case of a long connected with certain cross-margining funded balance; and position, to the average of the bid prices arrangements is subject to the (B) For cash delivery property, any for long positions, and in the case of a provisions of framework 1 in appendix cash transferred to the trustee on or after short position, to the average of the B to this part.) The property so allocated the filing date for the purpose of paying asking prices for the short positions. If will constitute a separate estate of the for delivery. liquidated, the value of such security customer class and the account class to (2) Corrections to funded balance. The shall be equal to the actual value which it is allocated, and will be funded balance must be adjusted to realized on liquidation of the security; designated by reference to such correct for ongoing events including, provided, however, that if identical customer class and account class. without limitation: securities are liquidated within a 24- (a) Scope of customer property. (1) (i) Added claimants; hour period or business day (or such Customer property includes the (ii) Disallowed claims; other period as the bankruptcy court following:

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(i) All cash, securities, or other residual interest amount pursuant to fulfill the customer’s delivery obligation property or the proceeds of such cash, § 1.11 of this chapter and the debtor’s under a commodity contract; securities, or other property received, residual interest policies adopted (v) Property deposited by a customer acquired, or held by or for the account thereunder, with respect to each of the with a commodity broker after the entry of the debtor, from or for the account of futures account class, the foreign futures of an order for relief which is not a customer, including a non-public account class, and the cleared swaps necessary to meet the margin customer, which is: account class; or requirements applicable to the accounts (A) Property received, acquired, or (2) The debtor’s obligations to cover of such customer; held to margin, guarantee, secure, debit balances or under-margined (vi) Property hypothecated pursuant purchase or sell a commodity contract; amounts as provided in §§ 1.20, 1.22, to § 1.30 of this chapter to the extent of (B) Open commodity contracts; 22.2, and 30.7 of this chapter; the loan of margin with respect thereto; (C) Physical delivery property as that (H) Is other property of the debtor that (vii) Money, securities, or property term is defined in paragraphs (1) any applicable law, rule, regulation, or held to margin, guarantee or secure through (3) in the definition of that term order requires to be set aside for the security futures products, or accruing as in § 190.01; benefit of customers; a result of such products, if held in a (D) Cash delivery property, or other (I) Is property of the debtor’s estate securities account; and cash, securities, or other property recovered by the Commission in any (viii) Money, securities, or property received by the debtor as payment for a proceeding brought against the held in a securities account to fulfill commodity to be delivered to fulfill a principals, agents, or employees of the delivery, under a commodity contract commodity contract from or for the debtor; from or for the account of a customer, commodity customer account of a (J) Is proceeds from the investment of as described in § 190.06(b)(2). customer; customer property by the trustee (3) Nothing contained in this section, (E) Profits or contractual rights pending final distribution; including, but not limited to, the accruing to a customer as the result of (K) Is a payment from an insurer to satisfaction of customer claims by a commodity contract; the trustee arising from or related to a operation of this section, shall prevent (F) Letters of credit, including any claim related to the conversion or a trustee from asserting claims against proceeds of a letter of credit drawn by misuse of customer property; or any person to recover the shortfall of the trustee, or substitute customer (L) Is cash, securities, or other property enumerated in paragraphs property posted by the customer, property of the debtor’s estate, including (a)(1)(i)(F) and (a)(1)(ii)(A) through (L) pursuant to § 190.04(d)(3); the debtor’s trading or operating of this section. (G) Securities held in a portfolio accounts and commodities of the debtor (b) Allocation of customer property margining account carried as a futures held in inventory, but only to the extent between customer classes. No customer account or a cleared swaps customer that the property enumerated in property may be allocated to pay non- account; or paragraphs (a)(1)(i)(F) and (a)(1)(ii)(A) public customer claims until all public (H) Property hypothecated under through (K) of this section is insufficient customer claims have been satisfied in § 1.30 of this chapter to the extent that to satisfy in full all claims of public full. Any property segregated on behalf the value of such property exceeds the customers. Such property includes of or attributable to non-public proceeds of any loan of margin made ‘‘customer property,’’ as defined in customers must be treated initially as with respect thereto; and (ii) All cash, securities, or other section 16(4) of SIPA, 15 U.S.C. 78lll(4), part of the public customer estate and property which: that remains after allocation in allocated in accordance with paragraph (A) Is segregated for customers on the accordance with section 8(c)(1)(A)–(D) (c)(2) of this section. filing date; of SIPA, 15 U.S.C. 78fff–2(c)(1)(A)–(D) (c) Allocation of customer property (B) Is a security owned by the debtor and that is allocated to the debtor’s among account classes—(1) Property to the extent there are customer claims general estate in accordance with identified to an account class—(i) for securities of the same class and section 8(c)(1) of SIPA, 15 U.S.C. 78fff– Segregated property. Subject to series of an issuer; 2(c)(1). paragraph (b) of this section, property (C) Is specifically identifiable to a (2) Customer property will not held by or for the account of a customer, customer; include: which is segregated on behalf of a (D) Was property of a type described (i) Claims against the debtor for specific account class, or readily in paragraph (a)(1)(i)(A) of this section damages for any wrongdoing of the traceable on the filing date to customers that is subsequently recovered by the debtor, including claims for of such account class, or recovered by avoidance powers of the trustee or is misrepresentation or fraud, or for any the trustee on behalf of or for the benefit otherwise recovered by the trustee on violation of the Act or of the regulations of an account class, must be allocated to any other claim or basis; in this chapter; the customer estate of the account class (E) Represents recovery of any debit (ii) Other claims for property which for which it is segregated, to which it is balance, margin deficit, or other claim of are not based upon property received, readily traceable, or for which it is the debtor against a customer; acquired, or held by or for the account recovered. (F) Was unlawfully converted but is of the debtor, from or for the account of (ii) Excess property. If, after payment part of the debtor’s estate; the customer; in full of all allowed customer claims in (G) Constitutes current assets of the (iii) Forward contracts (unless such a particular account class, any property debtor (as of the date of the order for contracts are cleared by a clearing remains allocated to that account class, relief) within the meaning of § 1.17(c)(2) organization or, in the case of forward such excess shall be allocated in of this chapter, including the debtor’s contracts treated as foreign futures, a accordance with paragraph (c)(2) of this trading or operating accounts and foreign clearing organization); section. commodities of the debtor held in (iv) Physical delivery property that is (2) All other property. Money, inventory, in the greater of— not held by the debtor, and is delivered securities, and property received from (1) The amount that the debtor is or received by a customer in accordance or for the account of customers which obligated to set aside as its targeted with § 190.06(a)(2) or § 190.16(a) to cannot be allocated in accordance with

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paragraph (c)(1)(i) of this section, must the greater of the value of the portion of the funded balance of such be allocated in the following order: specifically identifiable property to be customer’s allowed net equity claim that (i) To the estate of the account class transferred or returned on the date of constitutes a claim for securities, if like- for which, after the allocation required such transfer or return or the balance kind securities can be purchased in a in paragraph (c)(1) of this section, the due on the return date on any loan by fair and orderly manner. percentage of each public customer net the debtor to the customer for which (4) Proof of customer claim. No equity claim which is funded is the such property constitutes security, distribution shall be made pursuant to lowest, until the funded percentage of together with any other disbursements paragraphs (d)(1) and (3) of this section net equity claims of such class equals made, or to be made, to such customer, prior to receipt of a completed proof of the percentage of each public customer’s plus a reasonable reserve in the trustee’s customer claim as described in net equity claim which is funded for the sole discretion, exceeds the estimated § 190.03(e) or (f). account class with the next lowest aggregate of the funded balances for (5) No differential distributions. No percentage of the funded claims; and each class of account of such customer further disbursements may be made to then less the value on the date of its transfer customers with respect to a particular (ii) To the estate of the two account or return of any property transferred or account class for whom transfers have classes referred to in paragraph (c)(2)(i) returned prior to the primary been made pursuant to § 190.07 and of this section so that the percentage of liquidation date with respect to the paragraph (d)(2) of this section, until a the net equity claims which are funded customer’s net equity claim for such percentage of each net equity claim for each class remains equal until the account; provided, however, that equivalent to the percentage distributed percentage of each public customer net adequate security to assure the recovery to such customers is distributed to all equity claim which is funded equals the of any overpayments by the trustee is public customers in such account class. percentage of each public customer net provided to the debtor’s estate by the Partial distributions, other than the equity claim which is funded for the customer. transfers referred to in § 190.07 and account class with the next lowest (2) Transfers of specifically paragraph (d)(2) of this section, with percentage of funded claims, and so identifiable commodity contracts under respect to a particular account class forth, until the percentage of each section 766 of the Bankruptcy Code. made prior to the final net equity public customer net equity claim which Any open commodity contract that is determination date must be made is funded is equal for all classes of specifically identifiable property and pursuant to a preliminary plan of accounts; and then, which is not required to be liquidated distribution approved by the court, (iii) Among account classes in the under § 190.04(d), and which is not upon notice to the parties and to all same proportion as the public customer otherwise liquidated, may be transferred customers, which plan requires net equity claims for each such account on behalf of a public customer, adequate security to the debtor’s estate class bears to the total of public provided, however, that such customer to assure the recovery of any customer net equity claims of all must first deposit substitute customer overpayments by the trustee and account classes until the public property with the trustee with a value distributes an equal percentage of net customer claims of each account class equal to the amount by which the equity equity to all public customers in such are paid in full; and, thereafter, to be transferred to margin such contract account class. (iv) To the non-public customer estate together with any other transfers or for each account class in the same order § 190.10 Current records during business returns of specifically identifiable as usual. as is prescribed in paragraphs (c)(2)(i) property or disbursements made, or to through (iii) of this section for the be made, to such customer, plus a A person that is a futures commission allocation of the customer estate among reasonable reserve in the trustee’s sole merchant is required to maintain account classes. discretion, exceeds the estimated current records relating to its customers’ (d) Distribution of customer aggregate of the funded balances for accounts, including copies of all property—(1) Return or transfer of each class of account of such customer account agreements and related account specifically identifiable property. less the value on the date of its transfer documentation, and ‘‘know your Specifically identifiable property not or return of any property transferred or customer’’ materials, pursuant to required to be liquidated under returned prior to the primary §§ 1.31, 1.35, 1.36, and 1.37 of this § 190.04(d)(2) may be returned or liquidation date with respect to the chapter, which may be provided to transferred on behalf of the customer to customer’s net equity claim for such another futures commission merchant to which it is identified: account; and, provided further, that facilitate the transfer of open (i) If it is margining an open adequate security to assure the recovery commodity contracts or other customer commodity contract, only if substitute of any overpayments by the trustee is property held by such person for or on customer property is first deposited provided to the debtor’s estate by the behalf of its customers to the other with the trustee with a value equal to customer. futures commission merchant, in the the greater of the full fair market value (3) Distribution in kind of specifically event an order for relief is entered with of such property on the return date or identifiable securities. If any securities respect to such person. the balance due on the return date on of a customer are specifically Subpart C—Clearing Organization as any loan by the debtor to the customer identifiable property as defined in Debtor for which such property constitutes paragraph (1)(i)(A) of the definition of security; or that term in § 190.01 of this chapter, but § 190.11 Scope and purpose of this (ii) If it is not margining an open the customer has no open commodity subpart. commodity contract, at the option of the contracts, the customer may request that (a) This subpart applies to a customer, either pursuant to the terms the trustee purchase or otherwise obtain proceeding commenced under of paragraph (d)(1)(i) of this section, or the largest whole number of like-kind subchapter IV of chapter 7 of the pursuant to the following terms: Such securities (i.e., securities of the same Bankruptcy Code in which the debtor is customer first deposits substitute class and series of an issuer), with a fair a clearing organization. customer property with the trustee with market value (inclusive of transaction (b) If the debtor clearing organization a value equal to the amount by which costs) which does not exceed that is organized outside the United States,

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and is subject to a foreign proceeding, no later than three hours following the property margining or securing such as defined in 11 U.S.C. 101(23), in the later of the commencement of such contracts made to another clearing jurisdiction in which it is organized, proceeding or the appointment of the organization on or before the seventh then only the following provisions of trustee, the debtor shall provide to the calendar day after the entry of the order this part shall apply: trustee copies of each of the most recent for relief, that was made with the (1) Subpart A. reports that the debtor was required to approval of the Commission, either (2) Section 190.12. file with the Commission under before or after such transfer. (3) Section 190.13, but only with § 39.19(c) of this chapter, including respect to futures contracts and cleared copies of any reports required under § 190.14 Operation of the estate of the debtor subsequent to the filing date. swaps contracts cleared by FCM § 39.19(c)(2), (3), and (4) of this chapter clearing members on behalf of their (including the most up-to-date version (a) Proofs of claim. The trustee may, public customers and the property of any recovery and wind-down plans of in its discretion based upon the facts margining or securing such contracts. the debtor maintained pursuant to and circumstances of the case, instruct (4) Sections 190.17 and 190.18, but § 39.39(b) of this chapter) that the debtor each customer to file a proof of claim only with respect to claims of FCM filed with the Commission during the containing such information as is clearing members on behalf of their preceding 12 months. deemed appropriate by the trustee, and public customers, as well as to property (2) As soon as practicable following seek a court order establishing a bar date that is or should have been segregated the commencement of a proceeding that for the filing of such proofs of claim. for the benefit of FCM clearing is subject to this subpart and in any (b) Operation of the derivatives members’ public customers, or that has event no later than three hours clearing organization. Subsequent to the been recovered for the benefit of FCM following the commencement of such order for relief, the derivatives clearing clearing members’ public customers. proceeding (or, with respect to the organization shall cease making calls for variation settlement or initial margin. § 190.12 Required reports and records. trustee, the appointment of the trustee), the debtor shall provide to the trustee (c) Liquidation. (1) The trustee shall (a) Notices—(1) Means of providing— and the Commission copies of the most liquidate all open commodity contracts (i) To the Commission. Unless up-to-date versions of the default that have not been terminated, instructed otherwise by the management plan and default rules and liquidated, or transferred no later than Commission, all mandatory or procedures maintained by the debtor seven calendar days after entry of the discretionary notices to be given to the pursuant to § 39.16 and, as applicable, order for relief. Such liquidation of open Commission under this subpart shall be § 39.35 of this chapter. commodity contracts shall be conducted directed by electronic mail to (c) Records to be provided to the in accordance with the rules and [email protected]. For trustee and the Commission by the next procedures of the debtor, to the extent purposes of this subpart, notice to the business day. As soon as practicable applicable and practicable. Commission shall be deemed to be following commencement of a (2) In lieu of liquidating securities given only upon actual receipt. proceeding that is subject to this subpart held by the debtor and making (ii) To members. The trustee, after and in any event no later than the next distributions in the form of cash, the consultation with the Commission, and business day, the debtor shall make trustee may, in its reasonable discretion, unless otherwise instructed by the available to the trustee and the make distributions in the form of Commission, will establish and follow Commission copies of the following securities that are equivalent (i.e., procedures reasonably designed for records: securities of the same class and series of giving adequate notice to members (1) All records maintained by the an issuer) to the securities originally under this subpart and for receiving debtor described in § 39.20(a) of this delivered to the debtor by a clearing claims or other notices from members. chapter; and member or such clearing member’s Such procedures should include, absent (2) Any opinions of counsel or other customer. good cause otherwise, the use of a legal memoranda provided to the debtor (d) Computation of funded balance. prominent website as well as (whether by external or internal The trustee shall use reasonable efforts communication to members’ electronic counsel) in the five years preceding the to compute a funded balance for each addresses that are available in the commencement of such proceeding customer account immediately prior to debtor’s books and records. relating to the enforceability of the rules any distribution of property within the (2) Of commencement of a and procedures of the debtor in the account, which shall be as accurate as proceeding. A debtor that files a petition event of an insolvency proceeding reasonably practicable under the in bankruptcy that is subject to this involving the debtor. circumstances, including the reliability subpart shall, at or before the time of and availability of information. such filing, and a debtor against which § 190.13 Prohibition on avoidance of such a petition is filed shall, as soon as transfers. § 190.15 Recovery and wind-down plans; possible, but in any event no later than The following transfers are approved default rules and procedures. three hours after the receipt of notice of and may not be avoided under sections (a) Prohibition on avoidance of such filing, notify the Commission of 544, 546, 547, 548, 549, or 724(a) of the actions taken pursuant to recovery and the filing date, the court in which the Bankruptcy Code: wind-down plans. Subject to the proceeding has been or will be filed, (a) Pre-relief transfers. Any transfer of provisions of section 766 of the and, as soon as available, the docket open commodity contracts and the Bankruptcy Code and §§ 190.13 and number assigned to that proceeding by property margining or securing such 190.18, the trustee shall not avoid or the court. contracts made to another clearing prohibit any action taken by a debtor (b) Reports and records to be provided organization that was approved by the subject to this subpart that was to the trustee and the Commission Commission, either before or after such reasonably within the scope of and was within three hours. (1) As soon as transfer, and was made prior to entry of provided for in any recovery and wind- practicable following the the order for relief; and down plans maintained by the debtor commencement of a proceeding that is (b) Post-relief transfers. Any transfers and filed with the Commission pursuant subject to this subpart and in any event of open commodity contracts and the to § 39.39 of this chapter.

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(b) Implementation of debtor’s default § 190.06(a)(3), as part of the separate have not been paid. Such loss allocation rules and procedures. In administering cash delivery account class. arrangements shall be applied to the a proceeding under this subpart, the (2) If the debtor holds any cash or extent necessary to address losses trustee shall implement, in consultation property in the form of cash equivalents arising from default by clearing with the Commission, the default rules in an account with a bank or other members. and procedures maintained by the person under a name or in a manner (2) Appropriate adjustments shall be debtor under § 39.16 and, as applicable, that clearly indicates that the account made to the net equity claims of the § 39.35 of this chapter and any holds property for the purpose of clearing members that are so entitled termination, close-out and liquidation making payment for taking physical under the following circumstances: provisions included in the rules of the delivery, or receiving payment for Where the debtor’s loss allocation rules debtor, subject to the reasonable making physical delivery, of a and procedures would entitle clearing discretion of the trustee and to the commodity under any commodity members to additional payments of cash extent that implementation of such contracts, such property shall (subject to or other property due to— default rules and procedures is § 190.19) be considered customer (i) Portions of mutualized default practicable. property in the cash delivery account resources that are prefunded, or (c) Implementation of recovery and class if held for making payment for assessed and collected, but in either wind-down plans. In administering a taking delivery, or in the physical event not used; or proceeding under this subpart, the delivery account class, if held for the (ii) The debtor’s recoveries on claims trustee shall, in consultation with the purpose of receiving such payment. against others (including, but not Commission, take actions in accordance limited to, recoveries on claims against with any recovery and wind-down plans § 190.17 Calculation of net equity. (a) Net equity–separate capacities and clearing members who have defaulted maintained by the debtor and filed with on their obligations to the debtor). the Commission pursuant to § 39.39 of calculations. (1) If a member of the (c) Net equity—general. Subject to this chapter, to the extent reasonable clearing organization clears trades in paragraph (b) of this section, net equity and practicable, and consistent with the commodity contracts through a shall be calculated in the manner protection of customers. commodity contract account carried by the debtor as a customer account for the provided in § 190.08, to the extent § 190.16 Delivery. benefit of the clearing member’s public applicable. (a) General. In the event that a customers and separately through a (d) Calculation of funded balance. commodity contract, cleared by the house account, the clearing member Funded balance means a clearing derivatives clearing organization, that shall be treated as having customer member’s pro rata share of customer settles upon expiration or exercise by claims against the debtor in separate property other than member property making or taking delivery of physical capacities with respect to the customer (for accounts for a clearing member’s delivery property, has moved into account and house account at the customer accounts) or member property delivery position prior to the date and clearing organization, and by account (for a clearing member’s house time of the order for relief, or moves class. A member shall be treated as part accounts) with respect to each account into delivery position after that date and of the public customer class with class available for distribution to time, but before being terminated, respect to claims based on any customers of the same customer class, liquidated, or transferred, then, in either commodity customer accounts carried calculated in the manner provided in such event, the trustee must use as ‘‘customer accounts’’ by the clearing § 190.08(c) to the extent applicable. reasonable efforts to facilitate and organization for the benefit of the § 190.18 Treatment of property. cooperate with the completion of member’s public customers, and as part delivery on behalf of the clearing of the non-public customer class with (a) General. The property of the member or the clearing member’s respect to claims based on its house debtor’s estate must be allocated customer in a manner consistent with account. between member property and customer § 190.06(a) and the pro rata distribution (2) Net equity shall be calculated property other than member property as principle addressed in § 190.00(c)(5). separately for each separate customer provided in this section to satisfy claims (b) Special provisions for delivery capacity in which the clearing member of clearing members, as customers of the accounts. (1) Consistent with the has a claim against the debtor, i.e., debtor. The property so allocated will separation of the physical delivery separately by the member’s customer constitute a separate estate of the property account class and the cash account and house account and by customer class (i.e., member property, delivery account class set forth in account class. and customer property other than § 190.06(b), the trustee shall treat— (b) Net equity—application of debtor’s member property) and the account class (i) Physical delivery property held in loss allocation rules and procedures. to which it is allocated, and will be delivery accounts as of the filing date, (1)(i) The calculation of a clearing designated by reference to such along with the proceeds from any member’s net equity claim shall include customer class and account class. subsequent sale of such physical the full application of the debtor’s loss (b) Scope of customer property. delivery property in accordance with allocation rules and procedures, Customer property is the property § 190.06(a)(3) to fulfill a clearing including the default rules and available for distribution within the member’s or its customer’s delivery procedures referred to in § 39.16 and, if relevant account class in respect of obligation or any other subsequent sale applicable, § 39.35 of this chapter. claims by clearing members, as of such property, as part of the physical (ii) The calculation in paragraph customers of the clearing organization, delivery account class; and (b)(1)(i) of this section will include, based on customer accounts carried by (ii) Cash delivery property in delivery with respect to the clearing member’s the debtor for the benefit of such accounts as of the filing date, along with house account, any assessments or members’ public customers or, any physical delivery property for similar loss allocation arrangements considered separately, such members’ which delivery is subsequently taken on provided for under those rules and house accounts. behalf of a clearing member or its procedures that were not called for (1) Customer property includes the customer in accordance with before the filing date, or, if called for, following:

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(i) All cash, securities, or other member available under the debtor’s is segregated, to which it is readily property, or the proceeds of such cash, rules and procedures to satisfy claims traceable, or for which it is recovered. securities, or other property, that is made by or on behalf of public (2) All other property. Customer received, acquired, or held by or for the customers of a member; and property which cannot be allocated in account of the debtor, from or for any (iv) Amounts of its own funds that the accordance with paragraph (d)(1) of this commodity contract account of a debtor had committed as part of its loss section, shall be allocated within clearing member carried by the debtor, allocation rules, to the extent that such customer classes, but between account which is: amounts have not already been applied classes, in the following order: (A) Property received, acquired, or under such rules. (i) To the estate of the account class held, in order to margin, guarantee, (2) Customer property will not for which the percentage of each secure, purchase, or sell a commodity include property of the type described members’ net equity claim which is contract; in § 190.09(a)(2), as if the term debtor funded is the lowest, until the funded (B) Open commodity contracts; used therein refers to a clearing percentage of net equity claims of such (C) Physical delivery property as that organization and to the extent relevant account class equals the percentage of term is defined in paragraphs (1) to a clearing organization. each members’ net equity claim which through (3) of the definition of that term (c) Allocation of customer property is funded for the account class with the in § 190.01; between customer classes. (1) Where the next lowest percentage of the funded (D) Cash, securities or other property funded balance for members’ house claims; and then received by the debtor as payment for a accounts is greater than one hundred (ii) To the estate of the two account commodity to be delivered to fulfill a percent with respect to any account classes so that the percentage of the net commodity contract from or for the class: equity claims which are funded for each commodity customer account of a (i) Any excess should be allocated to such account class remains equal until clearing member or a customer of a customer property other than member the percentage of each net equity claim clearing member; property to the extent that the funded which is funded equals the percentage (E) Profits or contractual rights balance is less than one hundred of each net equity claim which is accruing as a result of a commodity percent of net equity claims for funded for the account class with the contract; members’ public customers in any next lowest percentage of funded (F) Letters of credit, including any account class; and claims, and so forth, until all account proceeds of a letter of credit drawn (ii) Any remaining excess after the classes within the customer class are upon by the trustee, or substitute application of paragraph (c)(1)(i) of this fully funded. customer property posted by a clearing section should be allocated to member (e) Accounts without separation by member or a customer of a clearing property to the extent that the funded account class. Where the debtor has, member, pursuant to § 190.04(d)(3); or balance is less than one hundred prior to the order for relief, kept initial (G) Securities held in a portfolio percent of net equity claims for margin for house accounts in accounts margining account carried as a futures members’ house accounts in any other without separation by account class, account or a cleared swaps customer account class. then member property will be account; (2) Where the funded balance for considered to be in a single account (ii) All cash, securities, or other members’ public customers in any class. property which: account class is greater than one (f) Assertion of claims by trustee. (A) Is segregated by the debtor on the hundred percent: Nothing in this section, including, but filing date for the benefit of clearing (i) Any excess should be allocated to not limited to, the satisfaction of members’ house accounts or clearing customer property other than member customer claims by operation of this members’ public customer accounts; property to the extent that the funded section, shall prevent a trustee from (B) Was of a type described in balance is less than one hundred asserting claims against any person to paragraph (b)(1)(i)(A) of this section that percent of net equity claims for recover the shortfall of property is subsequently recovered by the members’ public customers in any other enumerated in paragraphs (b)(1)(i)(E) avoidance powers of the trustee or is account class; and and (b)(1)(ii) and (iii) of this section. otherwise recovered by the trustee on (ii) Any remaining excess after the any other claim or basis; application of paragraph (c)(2)(i) of this § 190.19 Support of daily settlement. (C) Represents a recovery of any debit section should be allocated to member (a) Notwithstanding any other balance, margin deficit or other claim of property to the extent that the funded provision of this part, funds received the debtor against any commodity balance is less than one hundred (whether from clearing members’ house contract account carried for the benefit percent of net equity claims for or customer accounts) by a debtor of a member’s house accounts or a members’ house accounts in any clearing organization as part of the daily member’s public customer accounts; account class. settlement required pursuant to § 39.14 (D) Was unlawfully converted but is (d) Allocation of customer property of this chapter shall, upon and after an part of the debtor’s estate; or among account classes—(1) Segregated order for relief, be included as customer (E) Was of a type described in property. Subject to paragraph (b) of this property that is reserved for and paragraphs (a)(1)(ii)(H) through (K) of section, property held by or for the traceable to, and promptly shall be § 190.09 (as if the term debtor used account of a customer, which is distributed to, members entitled to therein refers to a clearing organization segregated on behalf of a specific payments of such funds with respect to as debtor); account class within a customer class, such members’ house and customer (iii) Any guaranty fund deposit, or readily traceable on the filing date to accounts as part of that same daily assessment, or similar payment or customers of such account class within settlement. Such funds when received, deposit made by a clearing member, or a customer class, or recovered by the other than deposits of initial margin recovered by the trustee, to the extent trustee on behalf of or for the benefit of described in § 39.14(a)(1)(iii) of this any remains following administration of an account class within a customer chapter, shall be considered member the debtor’s default rules and class, must be allocated to the customer property and, separately, customer procedures, and any other property of a estate of the account class for which it property other than member property, in

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proportion to the ratio of total gains in chapter, and (with respect to paragraph debtor’s default rules and procedures, member accounts with net gains, and (b)(1)(ii) of this section) any recovery and any recovery and wind-down plans, total gains in clearing members’ and wind-down plans maintained described in this paragraph (b)(1). customer accounts with net gains, pursuant to § 39.39 of this chapter and (iii) Prefunded guarantee or default respectively. Deposits of initial margin submitted pursuant to § 39.19 of this funds maintained pursuant to the described in § 39.14(a)(1)(iii) of this chapter. Such funds shall be included as debtor’s default rules and procedures. chapter shall be considered member member property and customer property (iv) Payments made by members property and, separately, customer other than member property in the pursuant to assessment powers property other than member property, to proportion described in paragraph (a) of maintained pursuant to the debtor’s the extent deposited on behalf of, this section, and shall be distributed default rules and procedures. respectively, clearing members’ house promptly to members’ house accounts (2) If the funds that are included as accounts and customer accounts. and members’ customer accounts which customer property pursuant to (b) To the extent there is a shortfall in accounts are entitled to payment of such paragraph (a) of this section, funds received pursuant to paragraph (a) funds as part of that daily settlement. supplemented as described in paragraph of this section: (i) Initial margin held for the account (b)(1) of this section, are insufficient to (1) Such funds shall be supplemented of a member, including initial margin pay in full members entitled to payment with the property described in segregated for the customers of such of such funds as part of daily settlement, paragraphs (b)(1)(i) through (iv) of this member, that has defaulted on payments then such funds shall be distributed pro section, as applicable, to the extent required pursuant to a daily settlement, rata to such members’ house accounts necessary to meet the shortfall, in but only to the extent that such margin and customer accounts in proportion to accordance with the derivatives clearing is permitted to be used pursuant to parts the ratio of total gains in member organization’s default rules and 1, 22, and 30 of this chapter. accounts with net gains, and total gains procedures adopted pursuant to § 39.16 (ii) Assets of the debtor, to the extent in customer accounts with net gains, and, as applicable, § 39.35 of this dedicated to such use as part of the respectively.

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Appendix A to Part 190-Customer Proof of Claim Form

[CASE CAPTION]

CLAIM FORM FOR COMMODITY BROKER CUSTOMERS OF [DEBTOR)

Debtor: [INSERT] Customer Name:

COURT USE ONLY Account Number(s): D Check this box if this claim amends a previously filed claim.

Court Claim Number: Daytime Telephone number: (If known)

Email: Filed on:

Name and address where payment should be sent (if D Check this box if you are aware different from above): that anyone else has filed a proof of claim relating to this claim. Attach copy of statement giving particulars.

Telephone number:

Email:

THIS CLAIM FORM SHOULD BE USED ONLY IF YOU ARE A CUSTOMER HOLDING A CLAIM BASED ON A COMMODITY CONTRACT ACCOUNT (A FUTURES, FOREIGN FUTURES, CLEARED SWAPS OR DELIVERY ACCOUNT) AT THE DEBTOR. A DIFFERENT CLAIM FORM MUST BE USED TO ASSERT OTHER TYPES OF CLAIMS AGAINST THE DEBTOR.

THE DEADLINE FOR FILING ALL CUSTOMER CLAIMS BASED ON COMMODITY CONTRACT ACCOUNTS IS [BAR DATE]. NO CUSTOMER CLAIM WILL BE ALLOWED IF IT IS RECEIVED AFTER THIS DATE. CLAIMS MUST BE RECEIVED BY 11:59 P.M. ([TIME ZONE]) ON ______TO BE CONSIDERED TIMELY.

[Include case-specific instructions for how to file a claim]

If you require additional space to answer any question, please attach separate pieces of paper and label the answers to the corresponding questions.

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I. CLAIM AMOUNT

For each type of commodity contract account that is applicable, state the amount of your claim against the Debtor.

(1) Futures account claim:$____ [§ 190.03(e)(1)]331

(2) Foreign futures account claim:$____ [§ 190.03(e)(l)]

(3) Cleared swaps account claim:$____ [§ 190.03(e)(l)]

(4) Delivery account claim:$____ [§ 190.03(e)(l)]

Of the amount in ( 4), please note how much is in the form of cash or cash equivalents($ ) and how much is the value of commodities that have been or were/are to be delivered ($ ___~

(5) Total claim: $______

(6) Date on which your claim is valued (see instructions): ______

II. ACCOUNT INFORMATION

For each commodity contract account with the Debtor, please provide the following information. To the extent you have multiple commodity contract accounts with the Debtor, please provide the following information for each account separately in an attachment.

(1) Account number: ______[§ 190.03(e)(3)(i)]

(2) Name in which the account is held: ______[§ 190.03(e)(3)(ii)]

(3) Please specify all capacities in which you hold the account (check all that are applicable) [§ 190.03(e)(3)(iv)]:

D a. Individual capacity

D b. Guardian, custodian, or conservator for the benefit of a ward or a minor under the Uniform Gift to Minors Act

D c. Executor or administrator of an estate

D d. Trustee for a trust beneficiary

D e. Corporation, partnership, or unincorporated association

D f. Omnibus customer account of a futures commission merchant

D g. Part owner of a joint account

D h. Individual retirement account

331 Bracketed references are to the corresponding provision in § 190.03(e) where the relevant information item is listed.

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D i. Agent or nominee for a principal or beneficial owner (and not described in Items (a)-(h))

D j. In any other capacity not described above in Items (a)-(i) (please specify the capacity): ______

Ifyou selected more than one box, please attach an explanation.

(4) Please specify whether the account is a joint account[§ 190.03(e)(3)(v)]:

Check one: 0 YES ONO

Ifyou selected "YES," please specify your percentage interest in the account, and whether all participants in the joint account are claiming jointly. In addition, please see the instructions for additional information required for joint accounts.

a. My percentage interest in the joint account is: ___%

b. Participants in the joint account are claiming:

Check one: 0 SEP ARATEL Y □ JOINTLY

(5) Please specify whether the account is a discretionary account (i.e., does another person have trading authority over the account)[§ 190.03(e)(3)(vi)]:

Check one: 0 YES ONO

Ifyou selected "YES," please see the instructions for additional information required for discretionary accounts.

(6) Please specify whether the account is an individual retirement account for which there is a custodian[§ 190.03(e)(3)(vii)]:

Check one: 0 YES ONO

1. Ifyou selected "YES," please see the instructions for additional information required for individual retirement accounts for which there is a custodian.

(7) Please specify whether the account is a cross-margining account for futures and securities [§ 190.03(e)(3)(viii)]:

Check one: 0 YES ONO

Ifyou selected "YES, "please see the instructions for additional information required for cross-margining accounts for futures and securities.

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III. ACCOUNT STATEMENT: OPEN POSITIONS, UNLIOUIDATED SECURITIES AND OTHER UNLIOUIDATED PROPERTY

(1) Account balance per most recent account statement: $ ___ [§ 190.03(e)(3)(iii)]

a. Date of the most recent account statement: ------PLEASE ATTACH A COPY OF THIS STATEMENT (NOT THE ORIGINAL)

b. Do you agree with the account balance(s) on your most recent account statement(s), as set forth above?

Check one: 0 YES O NO

Ifyou selected "NO, "please explain in an attachment the reasons why you disagree with the account balance reflected on your most recent statement.

c. Has there been activity in the account since the date of the last account statement up to and including the filing date that has affected the balance of the account ("subsequent activity")?

Check one: 0 YES O NO

Ifyou selected "YES, "please provide full information regarding any such subsequent activity in an attachment.

(2) On the date on which your claim is valued, did you have any open positions, unliquidated securities and/or other unliquidated property in or associated with any of your commodity contract accounts?[§ 190.03(e)(7)]

2. Check one: 0 YES O NO

Ifyou selected "YES, "please state below the value ofyour open positions, unliquidated securities and/or other unliquidated property. In addition, please see the instructions for additional information required regarding open positions, unliquidated securities and other unliquidated property.

Value of all open positions, unliquidated securities and/or other unliquidated property: $ ------(3) To the extent you are claiming unliquidated securities or other unliquidated property held in your account, do you wish to receive payment in kind, if possible?[§ 190.03(e)(9)]

Check one: 0 YES O NO

Ifyou selected "YES," please see the instructions for additional required information.

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IV. CONNECTIONS WITH THE DEBTOR[§ 190.03(e)(2)]

(1) Is the customer making this claim one of the following persons (check all that are applicable):

D a. Officer, director, general partner or owner often percent or more of the capital stock of the Debtor. Db. An employee, limited partner or special partner of the Debtor whose duties include (1) the management of the business of the Debtor or any part thereof; (2) the handling of the trades or customer funds; (3) the keeping of records pertaining to the trades or funds of customers; or ( 4) the signing or cosigning of checks or drafts on behalf of Debtor. D c. A spouse or minor dependent living in the same household as any person listed in this section. D d. A business affiliate that directly or indirectly controls the Debtor, or is directly or indirectly controlled by or is under common control with the Debtor.

(2) Is the customer making the claim on behalf of any account that is owned 10% or more by the Debtor or by any of the persons, alone or jointly, identified in IV.(1)?

Check one: 0 YES ONO

lfyou selected "YES, "please identify such person(s) and the category identified in IV (I) under which they fit.

V. SECURITY FUTURES PRODUCTS[§ 190.03(e)(8)]332

Is any portion of your claim based on security futures products (i.e. futures whose underlying instrument is either a single security or a narrow-based security index) held in a securities account with the Debtor?

Check one: 0 YES O NO

lfyou selected "YES, "you will need to file a separate claim in accordance with the procedures established for claims based on securities accounts at the Debtor.

332 This section is for use only in cases where the debtor is jointly registered as a futures commission merchant and securities broker-dealer.

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VI. OTHER ACCOUNTS WITH DEBTOR[§ 190.03(e)(4)]

Do you have any accounts with the Debtor that are not commodity contract accounts listed in response to Section III above?

Check one: 0 YES ONO

Ifyou selected "YES," specify the other account number(s) and the type ofeach such account.

Account Number Type of Account

1. ------

2. ------(Attach additional page(s) if necessary)

VII. OTHER CLAIMS AGAINST DEBTOR[§ 190.03(e)(5)]

Do you have any other claims against the Debtor not already taken into account in the claim and account information provided in response to Sections I, II, III and VI above?

Check one: 0 YES ONO

Ifyou selected "YES," please provide a detailed description in an attachment ofany such claim or claims, and attach any supporting documentation you have.

VIII. AMOUNTS OWED TO DEBTOR[§ 190.03(e)(6)]

Do you owe any amounts to the Debtor not already taken into account in the claim and account balance information provided in response to the questions in sections I and II above?

Check one: YES O NO 0

Ifyou selected "YES," please provide a detailed description in an attachment ofany such claim or claims, and attach any supporting documentation you have.

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IX. VERIFICATION

CHECK THE APPROPRIATE BOX:

DI am the customer DI am the customer's authorized agent.

D I am a guarantor, surety, indorser or other (See Bankruptcy Rule 3005.)

I declare under penalty ofperjury that the information provided in this claim is true and correct to the best of my knowledge, information, and reasonable belief.

Print Name: ------

Title: ------Company:------

Address and telephone number (if different from notice address above):

Telephone number: ______

Email: ------

Signature (Date)

Penalty for presenting fraudulent claim: Fine ofup to $500,000 or imprisonment for up to 5 years, or both. 18 U.S.C. §§ 152 and 3571.

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INSTRUCTIONS FOR CUSTOMER PROOF OF CLAIM FORM Customer's Name and Address: Date on Which Claim is Valued: Fill in the name of the person or entity asserting the claim, Your claim should be valued as of[the last date on which and the name and address of the person who should any contracts or property not liquidated to cash balances receive notices issued during the bankruptcy case. A remained in your account. Do not include the value of separate space is provided for the payment address if it any contracts, funds or other property transferred to

differs from the notice address. The customer has a another commodity broker] [1', the date established by the continuing obligation to keep the court informed of its Court as the date on which customer accounts should be current address. See Federal Rule of Bankruptcy valued]. Procedure (FRBP) 2002(g).

• Types of Customer Accounts: Estimated Claim Amount: If you cannot compute the amount of your claim, you must file an estimated claim. • A "futures account" is an account In that case, please be sure to indicate that your claim is opened for the purpose of trading futures or an estimated claim. options on futures on a U.S. futures exchange. Your account statement for a "futures account" Joint Accounts: If any commodity contract account for would typically include the term "SEG" in the which you are making a claim is a joint account, please title or description of the account. include an attachment listing the account number and the • A "foreign futures account" is an name, address and contact information for each joint account opened for the purpose of trading futures account holder other than yourself. or options on futures on an exchange located outside the U.S. Your account statement for a If you are making a claim with respect to multiple joint "foreign futures account" would typically include accounts, and those joint accounts are not owned by the the term "30.7" in the title or description of the same holders in the same legal capacities and in identical account. ownership percentages, please complete a separate claim form for each joint account. • A "cleared swaps account" is an account opened for the purpose of holding swaps traded Discretionary Accounts: If any commodity contract bilaterally or in off-exchange markets that are account for which you are making a claim is a submitted to a CFTC-registered derivatives discretionary account, please include an attachment clearing organization for settlement and clearing. listing the account number and the name, address, and A "cleared swaps account" also is an account contact information for all persons with trading authority opened for the purpose of trading swaps or over any of those accounts. If different persons have options on swaps on a designated contract market trading authority over different accounts, please provide or swap execution facility and cleared by a this information for each such account, listing applicable CFTC-registered derivatives clearing account numbers. organization. Your account statement for a "cleared swaps account" would typically include Individual Retirement Accounts for which there is a the term "swap" in the title or description of the Custodian: If any commodity contract account for account. which you are making a claim is an individual retirement account for which there is a custodian, please include an • A "delivery account" is an account attachment listing the account number and the name, denominated as such and through which address, and contact information for both the custodian deliveries of commodities, whether tangible or and the account owner. intangible, occur or have occurred under expiring Cross-Margining Accounts for Futures and futures contracts. A delivery account also may Securities: If any commodity contract account for which hold cash balances, title documents for you are making a claim is a cross-margining account for commodities such as metals warehouse receipts, futures and securities, please include an attachment or other commodities, whether tangible or listing the account number and whether the securities intangible, that are deliverable under an positions are held in an account with the debtor or in an exchange's futures contract. account with an affiliate of the debtor. If such positions are held in an account with an affiliate of the debtor, • Your account statement may include please identify and include contact information for such multiple types of customer accounts in a single affiliate. account statement.

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Other types of derivatives trading accounts that you may have with the debtor, such as accounts holding off­ exchange retail forex positions subject to part 5 of the regulations of the CFTC and funds to margin such positions, are not customer accounts entitled to special protection under the Bankruptcy Code.

Claim in foreign currencies: If some or all of your claim is based on a currency other than U.S. dollars, please file you claim in U.S. dollars based on the exchange rate in effect as of the petition date ([INSERT]), and identify the exchange rate used in calculating your claim in a separate attachment.

Open positions, Unliquidated Securities and Other Unliquidated Property: To the extent you have any open • Documentation: positions, unliquidated securities and/or other unliquidated • Please attach a copy (not the original) of the property in a commodity contract account, please include most recent account statement for each account on which an attachment (i) describing each such open position, this claim is based. unliquidated security and/or other item of unliquidated property (e.g., for positions, by contract, delivery date, • Please enclose copies (not originals) of any long/short, quantity, and strike price for options; for documentation or correspondence you believe will be of securities, by CUSIP and quantity); (ii) identifying assistance in processing your claim, including, but not whether such open position, unliquidated security and/or limited to, customer confirmations, account statements, other unliquidated property is specifically identifiable and statements of purchase or sale. property; and (iii) identifying whether you would prefer, if practicable, payment in kind for each unliquidated security If, at any time, you complained in writing about the or other item ofunliquidated property or to have it handling of your account to any person or entity or liquidated. regulatory authority, and the complaint relates to the claim that you are asserting in this claim form, please If the position, unliquidated security or other item of provide copies of the complaint and all related unliquidated property is already reflected in the account correspondence, as well as any replies that you received. statement that you attached in response to Section III of this form, and you agree with the quantity and any value set forth therein, please say so. Otherwise, please (i) state the quantity and value you claim with respect to such open position, unliquidated security and/or other unliquidated property, and explain the basis for that quantity and value; and (ii) attach any documentary evidence supporting such value.

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Verification: Credits: The individual completing this proof of claim must sign An authorized signature on this proof of claim serves as and date it. If the claim is filed electronically, the an acknowledgment that when calculating the amount of Bankruptcy Code authorizes courts to establish local rules the claim, the customer gave the Debtor credit for any specifying what constitutes a signature. If you sign this obligations of the customer to the Debtor. form, you declare under penalty of perjury that the information provided is true and correct to the best of your knowledge, information, and reasonable belief. Your signature is also a certification that the claim meets the requirements of FRBP 9011 (b ). Whether the claim is filed electronically or in person, if your name is on the signature line, you are responsible for the declaration.

• Print the name and title, if any, of the customer or other person authorized to file this claim. State the filer's address and telephone number ifit differs from the address given on the top of the form for purposes ofreceiving notices. If the claim is filed by an authorized agent, provide both the name of the individual filing the claim and the name of the agent. Criminal penalties apply for making a false statement on a proof of claim.

ADDITIONAL INFORMATION

Acknowledgment of Receipt of Claim Offers to Purchase a Claim Certain entities are in the business of purchasing claims [Instructions for acknowledgment of filing] for an amount less than the face value of the claims. One or more of these entities may contact you and offer to purchase the claim. Some of the written communications from these entities may easily be confused with official court documentation or communications from the Debtor. These entities do not represent the Bankruptcy Court or the Debtor. A customer has no obligation to sell its claim. However, if a customer decides to sell its claim, any transfer of such claim is subject to FRBP 3001(e), any applicable provisions of the Bankruptcy Code (11 U.S.C. § 101 et seq.), and any applicable orders of the Bankruptcy Court.

Appendix B to Part 190—Special section 4d(a) of the Act, from the by the Commission, that refers to this Bankruptcy Distributions positions and property of: distributional rule. (1) The futures commission merchant; (c) A futures commission merchant is Framework 1—Special Distribution of deemed to receive securities held in an (2) If applicable, any affiliate carrying Customer Funds When the Cross- XM account, including securities and the securities positions as a participant Margining Account Is a Futures other property held by an Affiliate in an in the XM program (‘‘Affiliate’’); and Account XM account, as ‘‘futures customer (3) Other futures customers of the funds’’ (as defined in § 1.3 of this (a) This framework 1 applies when a futures commission merchant (such chapter) that margin, guarantee or debtor futures commission merchant segregated accounts, the ‘‘XM secure commodity contracts in the XM has participated in a cross-margining accounts’’). account (or paired XM accounts at the (‘‘XM’’) program for futures and (b) The futures commission merchant futures commission merchant and an securities under which the cross- may, and any Affiliate that holds the Affiliate). Under the agreement signed margined positions of its futures securities positions in an XM account by the customer, in the event that the customers (as defined in § 1.3 of this that it directly carries will, be registered futures commission merchant (or chapter) and the property received to as a broker-dealer under the Exchange Affiliate) is the subject of a SIPA margin, secure or guarantee such Act. The Commission order approving proceeding, the customer agrees that positions are held in one or more the XM program may limit participating securities in an XM account are accounts pursuant to a Commission customers to market professionals and excluded from the securities estate for order that requires such positions and will require a participating customer to purposes of SIPA, and that its claim for property to be segregated, pursuant to sign an agreement, in a form approved return of the securities will not be

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treated as a customer claim under SIPA. circumstances in which the futures (i) If the non-XM shortfall as a These restrictions apply to the customer commission merchant does not meet its percentage of the segregation only, and should not be read to limit segregation requirements. The requirement for the non-XM pool is any action that the trustee may take to segregation requirement is the amount greater than or equal to the XM shortfall seek recovery of property in an XM of futures customer funds that the as a percentage of the segregation account carried by an Affiliate as part of futures commission merchant is requirement for the XM pool, all the customer estate of the futures required by the Act and Commission customer net equity claims will be paid commission merchant. regulations in part 1 of this chapter or pro rata out of the combined XM and (d) XM accounts, and other futures Commission orders to hold on deposit non-XM pools of futures customer accounts that are subject to segregation in segregated accounts on behalf of its property; and under section 4d(a) of the Act (pursuant futures customers (exclusive of its to the Commission’s regulations in part targeted residual amount obligations (ii) If the XM shortfall as a percentage 1 of this chapter) (‘‘non-XM accounts’’), pursuant to § 1.3 of this chapter). of the segregation requirement for the are treated as two subclasses of futures (f)(1) If there is a shortfall in the non- XM pool is greater than the non-XM account with two separate pools of XM pool and no shortfall in the XM shortfall as a percentage of the segregated futures customer property, an pool, all customer net equity claims, segregation requirement for the non-XM XM pool and a non-XM pool, each of whether or not they arise out of the XM pool, non-XM customer net equity which constitutes a segregated pool subclass of accounts, will be combined claims will be paid pro rata out of the under section 4d(a) of the Act. If the and paid pro rata out of the combined available non-XM pool, and XM futures commission merchant has XM and non-XM pools of futures customer net equity claims will be paid participated in multiple XM programs, customer property. pro rata out of the available XM pool. the XM accounts in the different (2) If there is a shortfall in the XM (4) In this way, non-XM customers pool and no shortfall in the non-XM programs are combined and treated as will never be adversely affected by an pool, customer net equity claims arising part of the same XM subclass of futures XM shortfall. accounts. A futures customer could hold from the XM subclass of accounts must both non-XM and XM accounts. be satisfied first from the XM pool, and (g) The following examples illustrate (e) Customer claims under this part customer net equity claims arising from the operation of this framework 1. The arising out of the XM subclass of the non-XM subclass of accounts must examples assume that the FCM has two accounts are subordinated to customer be satisfied first from the non-XM pool. futures customers, one with exclusively claims arising out of the non-XM (3) If there is a shortfall in both the XM accounts and one with exclusively subclass of accounts in certain non-XM and XM pools: non-XM accounts.

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1. Sufficient Funds to Meet Non-XM and XM Customer Claims: Non-XM XM Total Funds in 4d(a) se!lfe2ation 150 150 300 4d(a) Segregation requirement 150 150 300 Shortfall (dollars) 0 0 Shortfall (nercent) 0 0 Distribution 150 150 300 There are adequate funds available and both the non-XM and the XM customer claims will be paid in full. 2. Sh0 rtfia 11 m. N on-XM Onl1y: Non-XM XM Total Funds in 4d(a) seg:re2ation 100 150 250 4d(a) Se!lfegation requirement 150 150 300 Shortfall (dollars) 50 0 Shortfall foercent) 50/150=33.3 0 Pro rata (percent) 150/300=50 150/300=50 Pro rata (dollars) 125 125 Distribution 125 125 250 Due to the non-XM account, there are insufficient funds available to meet both the non-XM and the XM customer claims in full. Each customer will receive his pro rata share of the funds available, or 50% of the $250 available, or $125.

3. Sh0 rtfall m. XM Onttv: Non-XM XM Total Funds in 4d(a) se2re2ation 150 100 250 4d(a)Seg:reaationreauirement 150 150 300 Shortfall (dollars) 0 50 Shortfall foercent) 0 50/150=33.3 Pro rata (percent) 150/300=50 150/300=50 Pro rata (dollars) 125 125 Distribution 150 100 250 Due to the XM account, there are insufficient funds available to meet both the non­ XM and the XM customer claims in full. Accordingly, the XM funds and non-XM funds are treated as separate pools, and the non-XM customer will be paid in full, receiving $150 while the XM customer will receive the remaining $100.

4 . ShOrt fall m. B 0 th' w·th1 XM Short fall E xceed" mg N on-XM ShOrt fla II . Non-XM XM Total Funds in 4d(a) se1Zre2ation 125 100 225 4d(a) Se1Zre12:ation requirement 150 150 300 Shortfall (dollars) 25 so Shortfall foercent) 25/150=16.7 50/150=33.3 Pro rata (oercent) 150/300=50 150/300=50 Pro rata (dollars) 112.50 112.50 Distribution 125 100 225 There are insufficient funds available to meet both the non-XM and the XM customer claims in full, and the XM shortfall exceeds the non-XM shortfall. The non-XM

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customer will receive the $125 available with respect to non-XM claims while the XM customer will receive the $100 available with respect to XM claims.

5. Sh ort fia II m. B0 th ' w·1 th Non- XM Sh Ort fia 11 Exce e

Framework 2—Special Allocation of depository outside the United States to a shortfall in customer property, Shortfall to Customer Claims When (‘‘U.S.’’) or in a foreign currency. If a applying the allocation convention will Customer Funds for Futures Contracts futures commission merchant enters result in a reallocation of distributions and Cleared Swaps Customer Collateral into bankruptcy and maintains futures of futures customer funds or Cleared are Held in a Depository Outside of the customer funds or Cleared Swaps Swaps Collateral to take into account United States or in a Foreign Currency Customer Collateral in a depository the impact of the sovereign action. For The Commission has established the outside the U.S. or in a depository purposes of this bankruptcy convention, following allocation convention with located in the U.S. in a currency other sovereign action of a foreign government respect to futures customer funds (as than U.S. dollars, the trustee shall use or court would include, but not be § 1.3 of this chapter defines such term) the following allocation procedures to limited to, the application or and Cleared Swaps Customer Collateral calculate the claim of each public enforcement of statutes, rules, (as § 22.1 of this chapter defines such customer in the futures account class or regulations, interpretations, advisories, term) (both of which are customer funds each public customer in the cleared decisions, or orders, formal or informal, (as § 1.3 of this chapter defines such swaps account class, as applicable, by a Federal, state, or provincial term) that are segregated pursuant to the when a sovereign action of a foreign executive, legislature, judiciary, or Act and Commission rules thereunder), government or court has occurred that government agency. The trustee should which applies in certain circumstances contributes to shortfalls in the amounts perform the allocation procedures when futures customer funds or Cleared of futures customer funds or Cleared separately with respect to each public Swaps Customer Collateral are held by Swaps Customer Collateral. In the event customer in the futures account class or a futures commission merchant in a a sovereign action creates or contributes cleared swaps account class.

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I. Reduction In Distributions For General Shortfall

A. Determination of losses not attributable to sovereign action

1. Convert the claim of each futures customer or Cleared Swaps Customer in each currency to U.S. Dollars at the exchange rate in effect on the Final Net Equity Determination Date, as defined in §190.0l(s) (the "Exchange Rate").

2. Determine the amount of assets available for distribution to futures customers or Cleared Swaps Customers. In making this calculation, include customer funds for futures contracts and Cleared Swaps Customer Collateral that would be available for distribution but for the sovereign action.

3. Convert the amount of customer funds for futures contracts and Cleared Swaps Customer Collateral available for distribution to U.S. Dollars at the Exchange Rate.

4. Determine the Shortfall Percentage that is not attributable to sovereign action, as follows:

I Total Customer Assets Shortfall Percentage = ( 1- [ ] ) Total Customer Claims

B. Allocation ofLosses Not Attributable to Sovereign Action

1. Reduce the claim of each futures customer or Cleared Swaps Customer by the Short fall Percentage.

II. Reduction in Distributions for Sovereign Loss

A. Determination of Losses Attributable to Sovereign Action ("Sovereign Loss'?

1. If any portion of the claim of a futures customer or Cleared Swaps Customer is required to be kept in U.S. dollars in the U.S., that portion of the claim is not exposed to Sovereign Loss.

2. If any portion of the claim of a futures customer or Cleared Swaps Customer is authorized to be kept in only one location and that location is:

a. The U.S. or a location in which there is no Sovereign Loss, then that portion of the claim is not exposed to Sovereign Loss.

b. A location in which there is Sovereign Loss, then that entire portion of the claim is exposed to Sovereign Loss.

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3. If any portion of the claim of a futures customer or Cleared Swaps Customer is authorized to be kept in only one currency and that currency is:

a. U.S. dollars or a currency in which there is no Sovereign Loss, then that portion of the claim is not exposed to Sovereign Loss.

b. A currency in which there is Sovereign Loss, then that entire portion of the claim is exposed to Sovereign Loss.

4. If any portion of the claim of a futures customer or Cleared Swaps Customer is authorized to he kept in more than one location and:

a. There is no Sovereign Loss in any of those locations, then that portion of the claim is not exposed to Sovereign Loss.

b. There is Sovereign Loss in one of those locations, then that entire portion of the claim is exposed to Sovereign Loss.

c. There is Sovereign Loss in more than one of those locations, then an equal share of that portion of the claim will be exposed to Sovereign Loss in each such location.

5. If any portion of the claim of a futures customer or Cleared Swaps Customer is authorized to be kept in more than one currency and:

a. There is no Sovereign Loss in any of those currencies, then that portion of the claim is not exposed to Sovereign Loss.

b. There is Sovereign Loss in one of those currencies, then that entire portion of the claim is exposed to Sovereign Loss.

c. There is Sovereign Loss in more than one of those currencies, then an equal share of that portion of the claim will be exposed to Sovereign Loss.

B. Calculation of Sovereign Loss

1. The total Sovereign Loss for each location is the difference between:

a. The total customer funds for futures contracts or Cleared Swaps Customer Collateral deposited in depositories in that location and

b. The amount of customer funds for futures contracts or Cleared Swaps Customer Collateral in that location that is available to be distributed to futures customers or Cleared Swaps Customers, after taking into account any sovereign action.

2. The total Sovereign Loss for each currency is the difference between:

a. The value, in U.S. dollars, of the customer funds for futures contracts or Cleared Swaps Customer Collateral held in that currency on the day before the sovereign action took place and

b. The value, in U.S. dollars, of the customer funds for futures contracts or Cleared Swaps Customer Collateral held in that currency on the date of the calculation.

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C. Allocation ofSovereign Loss

1. Each distribution on account of the claim of a futures customer or Cleared Swaps Customer exposed to Sovereign Loss in a location will be reduced by:

Portion of the customer's claim exposed to loss in that location Total Sovereign Loss x >------< All portions of customer claims exposed to loss in that location

2. Each distribution on account of the claim of a futures customer or Cleared Swaps Customer exposed to Sovereign Loss in a currency will be reduced by:

Portion of the customer's claim exposed to loss in that Total Sovereign Loss x >-c_ur_re_n_c~------< All portions of customer claims exposed to loss in that currency

3. A distribution to a futures customer or Cleared Swaps Customer exposed to Sovereign Loss in a location or currency will not be reduced below zero. (The above calculations might yield a result below zero where the FCM kept more customer funds for futures contracts or Cleared Swaps Customer Funds in a location or currency than it was authorized to keep.)

4. Any amount of Sovereign Loss from a location or currency in excess of the total amount of customer funds for futures contracts or Cleared Swaps Customer Funds authorized to be kept in that location or currency (calculated in accord with section II. I above) ("Total Excess Sovereign Loss") will be allocated among all futures customers or Cleared Swaps Customer that have authorized funds to be kept outside the U.S., or in currencies other than U.S. dollars, with each such futures customer or Cleared Swaps Customer distribution reduced by the following amount:

This customer's total claim-The portion of

this Customer's claim required to be kept in

Total Excess Sovereign U.S. dollars, in the U.S.

Lossx Total customer claims - Total of all

customer claims required to be kept in U.S.

dollar, in the U.S.

The following examples illustrate the operation of this convention.

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Example 1. No shortfall in any location.

Customer Claim Location(s) customer has consented to havin2 funds held A $50 U.S. B €50 U.K. C €50 Germany D £300 U.K. Location Actual asset balance U.S. $50 U.K. £300 U.K. €50 Germany €50 Note: Conversion Rates: €1 = $1; £1=$1.5.

Convert the claim of each futures customer or Cleared Swaps Customer in each currency to U.S. Dollars:

Customer Claim Conversion rate Claim in U.S. dollars A $50 1.0 $50 B €50 1.0 50 C €50 1.0 50 D £300 1.5 450 Total $600

Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars: Shortfall due Actual Assets in Amount Conversion to sovereign shortfall due Location Assets U.S. actually rate action to sovereign dollars available percenta2e action U.S. $50 1.0 $50 $50 U.K. £300 1.5 450 450 U.K. €50 1.0 50 50 Germany €50 1.0 50 50 Total $600 0 $600

There are no shortfalls in funds held in any location. Accordingly, there will be no reduction in distributions to holders of futures or Cleared Swaps Customer claims.

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Claims: Claim in U.S. dollars after Allocation of shortfall Distributions after Customer allocated non-sovereign due to sovereign action all reductions shortfall A $50 $0 $50 B 50 0 50 C 50 0 50 D 450 0 450 Total $600 $0 $600

Example 2. Shortfall in funds held in the U.S.

Customer Claim Location(s) customer has consented to havine: funds held A $100 U.S. B €50 U.K. C €100 U.S., Germany, or Japan Location Actual asset balance U.S. $50 U.K. €100 Germany €50 Note: Conversion Rates: €1 =$1.

REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL There is a shortfall in the funds held in the U.S. such that only 1/2 of the finds are available. Convert the claim of each futures customer or Cleared Swaps Customer in each currency to U.S. Dollars:

Convert each customer's claim in each currency to U.S. Dollars: Customer Claim Conversion rate Claim in US$ A $100 1.0 $100 B €50 1.0 50 C €100 1.0 100 Total $250

Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars:

Shortfall due Actual Assets in Amount Conversion to sovereign shortfall due Location Assets U.S. actually rate action to sovereign dollars available percentae:e action U.S. $50 1.0 $50 $50 U.K. €100 1.0 100 100 Germany €50 1.0 50 50 Total $200 $200

Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage= (1---(200/250)) = (1-80%) = 20%.

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Reduce each distribution to the holder of a futures or Cleared Swaps Customer claim by the Shortfall Percentage:

Claim in Allocation shortfall Distribution in U.S. dollars Customer US$ (non-sovereign) after allocated shortfall A $100 $20 $80 B 50 10 40 C 100 20 80 Total $250 $50 $200

REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION There is no shortfall due to sovereign action. Accordingly, distributions to holders of futures or Cleared Swaps Customer claims will not be further reduced.

DISTRIBUTIONS AFTER REDUCTIONS

Distribution in US$ Allocation of shortfall Distribution after Customer before allocation of due to sovereign action all reductions soverei2n shortfall A $80 $80 B 40 40 C 80 80 Total $200 $0 $200

Example 3. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, not due to sovereign action.

Customer Claim Location(s) customer has consented to having funds held A $150 U.S. B €100 U.K. C €50 Germany D $100 U.S. D €100 U.K. or Germany Location Actual asset balance U.S. $250 U.K. €50 Germany €100 Note: Conversion Rates: €1=$1.

REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL Convert the claim of each futures customer or Cleared Swaps Customer in each currency to U.S. Dollars: Customer Claim Conversion rate Claim in US$ A $150 1.0 $150 B €100 1.0 100 C €50 1.0 50 D $100 1.0 100 D €100 1.0 100 Total $500

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Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars: Shortfall due Actual Assets in Amount Conversion to sovereign shortfall due Location Assets U.S. actually rate action to sovereign dollars available percentae:e action U.S. $250 1.0 $250 $250 U.K. €50 1.0 50 50 Germany €100 1.0 100 100 Total $400 $0 $400

Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage= (1--400/500) = (1-80%) = 20%.

Reduce each distribution to the holder of a futures customer or Cleared Swaps Customer by the Shortfall Percentage:

Claim in Allocation shortfall Distribution in U.S. dollars Customer US$ (non-sovereie:n) after allocated shortfall A $150 $30 $120 B 100 20 80 C 50 10 40 D 200 40 160 Total $500 $100 $400

REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION There is no shortfall due to sovereign action. Accordingly, the distributions will not be further reduced.

DISTRIBUTIONS AFTER REDUCTIONS

Distribution in US$ Allocation of shortfall Distribution after Customer before allocation of due to sovereign action all reductions sovereie:n shortfall A $120 $120 B 80 80 C 40 40 D 160 0 160 Total $400 $0 $400

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Example 4. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action.

Customer Claim Location(s) customer has consented to havine funds held A $50 U.S. B €50 U.K. C €50 Germany D $100 U.S. D €100 U.K. or Germany Location Actual asset balance U.S. $150 U.K. 100 Germany 100 Notice: Conversion Rates: €1 = $1; £1 = $1.5.

REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S. Dollars: Customer Claim Conversion rate Claim in US$ A $50 1.0 $50 B €50 1.0 50 C €50 1.0 50 D $100 1.0 100 D €100 1.0 100 Total $350

Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars:

Shortfall due Actual Assets in Amount Conversion to sovereign shortfall due Location Assets U.S. actually rate action to sovereign dollars available percentage action U.S. $150 1.0 $150 $150 U.K. €100 1.0 100 100 Germany €100 1.0 100 50% 50 50 Total $350 $50 $300

Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage= (1-350/350) = (1-100%) = 0%.

Reduce each distribution to the holder of a futures customer or Cleared Swaps Customer claim by the Shortfall Percentage:

Allocation shortfall Distribution in U.S. dollars Customer Claim in US$ (non-sovereien) after allocated shortfall A $50 $0 $50 B 50 0 50 C 50 0 50 D 200 0 200 Total $350 $0 $350

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REDUCTION IN DISTRIBUTIONS FOR DUE TO SOVEREIGN ACTION Due to sovereign action, only 1/2 of the funds in Germany are available. Presumed location of funds Customer U.S. U.K. Germany A $50 B $50 C $50 D 100 100 Total $150 $50 $150

Calculation of the allocation of the shortfall due to sovereign action--Germany ($50 shortfall to be allocated):

Allocation Allocation share of Actual shortfall Customer share actual shortfall allocated C $50/$150 33.3% of $50 $16.67 D $100/$150 66.7% of$50 33.33 Total $50.00

DISTRIBUTIONS AFTER REDUCTIONS

Distribution in US$ Allocation of shortfall Distribution after Customer before allocation of due to sovereign action all reductions sovereie;n shortfall from Germany A $50 $50 B 50 50 C 50 $16.67 33.33 D 200 33.33 166.67 Total $350.00 $50.00 $300.00

Example 5. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action and a shortfall in funds held in the U.S.

Customer Claim Location(s) customer has consented to havine; funds held A $100 U.S. B €50 V.K. C €150 Germany D $100 U.S. D £300 V.K. D €150 U.K. or Germany Location Actual asset balance U.S. $100 U.K. £300 U.K. €200 Germany €150 Conversion Rates: €1 = $1; £1 = $1.5.

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REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL

Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S. Dollars: Customer Claim Conversion rate Claim in US$ A $100 1.0 $100 B €50 1.0 50 C €150 1.0 150 D $100 1.0 100 D £300 1.5 450 D €150 1.0 150 Total $1000

Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars:

Assets Shortfall due Actual Amount Conversion in to sovereign shortfall due Location Assets actually rate U.S. action to sovereign available dollars oercenta2e action U.S. $100 1.0 $100 $100 U.K. £300 1.5 450 450 U.K. €200 1.0 200 200 Germany €150 1.0 150 100% $150 0 Total $900 $150 $750

Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage = (1 - 900 / 1000) = (1 - 90%) = 10%.

Reduce each distribution to the holder ofa futures customer or Cleared Swaps Customer claim by the Shortfall Percentage:

Claim in Allocation shortfall Distribution in U.S. dollars Customer US$ ( non-soverei2n) after allocated shortfall A $100 $10 $90 B 50 5 45 C 150 15 135 D 700 70 630 Total $1000 $100 $900

REDUCTION IN DISTRIBUTIONS FOR SHORTFALL DUE TO SOVEREIGN ACTION

Due to sovereign action, none of the money in Germany is available. Presumed location of funds Customer U.S. U.K. Germany A $100 B $50 C $150 D 100 450 150 Total $200 $500 $300

Calculation of the allocation of the shortfall due to sovereign action Germany ($150 shortfall to be allocated):

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Allocation Allocation Share of actual Actual shortfall Customer share shortfall allocated C $150/$300 50% of$150 $75 D $150/$300 50% of$150 75 Total $150

DISTRIBUTIONS AFTER REDUCTIONS

Distribution in US$ Allocation of shortfall Distributions Customer before allocation of due to sovereign action after all sovereie:n shortfall from Germany reductions A $90 $90 B 45 45 C 135 $75 60 D 630 75 555 Total $900 $150 $750

Example 6. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action, shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, not due to sovereign action, and a shortfall in funds held in the U.S.

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Customer Claim Location(s) customer has consented to havine: funds held A $50 U.S. B €50 U.K. C $20 U.S. C €50 Germany D $100 U.S. D £300 U.K. D €100 U.K., Germany, or Japan E $80 U.S. E ¥10,000 Japan Location Actual asset balance U.S. $200 U.K. £200 U.K. €100 Germany €50 Japan ¥10,000 Conversion Rates: €1 = $1; ¥1 = $0.01, £1 = $1.5. REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S. Dollars: Customer Claim Conversion rate Claim In US$ A $50 1.0 $50 B €50 1.0 50 C $20 1.0 20 C €50 1,0 50 D $100 1.0 100 D £300 1.5 450 D €100 1.0 100 E $80 1.0 80 E ¥10,000 0.01 100 Total $1000

Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars:

Shortfall Actual Assets in due Amount Conversio shortfall due Location Assets U.S. to sovereign actually n rate to sovereign dollars action available action percentae:e U.S. $200 1.0 $200 $200 U.K. £200 1.5 300 300 U.K. €100 1.0 100 100 Germany €50 1.0 50 100% $50 0 Japan ¥10,000 O.ol 100 50% 50 50 Total $750 $100 $650

Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage= (1 =750/1000) = (1 =75%) = 25%.

Reduce each distribution to the holder of a futures or Cleared Swaps Customer claim by the Shortfall Percentage:

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Allocation shortfall Distributions in U.S. dollars Customer Claim in US$ ( non-sovereie:n) after allocated shortfall A $50 $12.50 $37.50 B 50 12.50 37.50 C 70 17.50 52.50 D 650 162.50 487.50 E 180 45.00 135.00 Total $1000.00 $250.00 $750.00

REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION Due to sovereign action, none of the money in Germany and only 1/2 of the funds in Japan are available. Presumed location of funds Customer U.S. U.K. Germany Japan A $50 B $50 C 20 $50 D 100 450 50 $50 E 80 100 Total $250 $500 $100 $150

Calculation of the allocation of the shortfall due to sovereign action-Germany ($50 shortfall to be allocated): Customer Allocation Allocation Share of Actual shortfall allocated Allocation share actual shortfall C $50/$100 50% of$50 $25 D 50/100 50% of 50 25 Total 50

Japan ($50 shortfall to be allocated): Customer Allocation Allocation Share of Actual shortfall allocated Allocation share actual shortfall D $50/$150 33.3% of$50 $16.67 E 100/150 66.6% of50 33.33 Total $50.00

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DISTRIBUTIONS AFTER REDUCTIONS

Allocation of Allocation of Distributi Distribution in US$ shortfall due to shortfall due to on after Customer before allocation of sovereign action sovereign action all sovereign shortfall from Germany from Japan reductions A $37.50 37.50 B 37.50 37.50 C 52.50 $25 27.50 D 487.50 $25 16.67 445.83 E 135.00 33.33 101.67 Total $750.00 $50.00 $50.00 $650.00

Example 7. Shortfall in funds held outside the U.S., or in a currency other than U.S. dollar, due to sovereign action, where the FCM kept more funds than permitted in such location or currency.

Customer Claim Location(s) customer has consented to havine: funds held A $50 U.S. B 50 U.S. B €50 U.K. C €50 Germany D 100 U.S. C €100 U.K. or Germany E 50 U.S. E €50 U.K.

Location Actual asset balance U.S. $250 U.K. €50 Germany €200 Conversion Rates: 1 = $1.

REDUCTION IN DISTRIBUTIONS FOR GENERAL SHORTFALL Convert each futures customer or Cleared Swaps Customer claim in each currency to U.S. Dollars: Customer Claim Conversion rate Claim in US$ A $50 1.0 $50 B 50 1.0 50 B €50 1.0 50 C €50 1.0 50 D €100 1.0 100 D €100 1.0 100 E 50 1.0 50 E €50 1.0 50 Total 500.00

Determine assets available for distribution to futures customers or Cleared Swaps Customers, converting to U.S. dollars:

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Shortfall due Actual Assets in Amount Conversion to sovereign shortfall due Location Assets U.S. actually rate action to sovereign dollars available percenta~e action U.S. $250 1.0 $250 $250 U.K. €50 1.0 50 50 Germany €200 1.0 200 100% 200 0 Total $500 $200 $300

Determine the percentage of shortfall that is not attributable to sovereign Shortfall Percentage= (1-500/500) = (1-100%) = 0%. Reduce each distribution to the holder of a futures or Cleared Swaps Customer claim by the Shortfall Percentage:

Claim in Allocation shortfall (non- Distribution in U.S. dollars Customer US$ sovereign) after allocated shortfall A $50 $0 $50 B 100 0 100 C 50 0 50 D 200 0 200 E 100 0 100 Total $500 $0 $500

REDUCTION IN DISTRIBUTIONS DUE TO SOVEREIGN ACTION Due to sovereign action, none of the money in Germany is available. Presumed location of funds Customer U.S. U.K. Germanv A $50 B 50 50 C 50 D 100 100 E 50 50 Total $250 $100 $150

Calculation of the allocation of the shortfall due to sovereign action-Germany ($200 shortfall to be allocated): Allocation Allocation Share of Actual shortfall Customer share actual shortfall allocated C $50/$150 33.3% of$200 $66.67 D $100/$150 66. 7% of $200 $133.33 Total $200.00 This would result in the distributions to customers C and D being reduced below zero.

Accordingly, the distributions to customer C and D will only be reduced to zero, or $50 allocated to C and $100 allocated to D. This results in a Total Excess Shortfall of$50. Actual Allocation of shortfall Allocation of shortfall Total excess shortfall for customer C for customer D shortfall $200 $50 $100 $50

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This shortfall will be allocated among the remaining futures customers or Cleared Swaps Customers who have authorized funds to be held outside the U.S. or in a currency other than U.S. dollars. Total claims Allocation share Portion of Allocation Actual of customers (column B- claim share of total permitting C/column B Customer required to actual total excess funds to be Total-all be in the excess shortfall held outside customer claims U.S. shortfall allocated the U.S. in U.S.) B $100 $50 $50/$200 25% of$50 $12.50 C 50 0 (1) 0 D 200 100 $100/200 50% of $50 25 E 100 50 50/100 25% of$50 12.50 Total $450.00 $50.00 1Claim already reduced to $0.

DISTRIBUTIONS AFTER REDUCTIONS Allocation of Distribution in US$ Allocation of Distribution shortfall due to Customer before allocation of total excess after all sovereign action sovereign shortfall shortfall reductions Germany A $50 $50.00 B 100 12.50 87.50 C 50 50 0 D 200 100 25 75.00 E 100 12.50 87.50 Total $500.00 $150.00 $50.00 $300.00

Issued in Washington, DC, on December anatomy of a typical bankruptcy. In the bankruptcies, was finalized in 1983. 17, 2020, by the Commission. novel, the character Mike Campbell is Since that time, the commodity broker Christopher Kirkpatrick, asked how he went bankrupt. He bankruptcy process and the state of the Secretary of the Commission. answers: ‘‘two ways . . . gradually and industry have gradually changed. Yet in Note: The following appendices will not then suddenly.’’ 2 the nearly four decades since, Part 190 appear in the Code of Federal Regulations. As Hemingway’s dialogue succinctly has never been comprehensively describes, bankruptcies often come on updated. This regime is intended to Appendices to Bankruptcy unexpectedly. A business’s relatively protect customer funds, but having Regulations—Commission Voting minor financial or operational troubles antiquated rules does not help achieve Summary, Chairman’s Statement, and may be exacerbated by a sudden crisis— that goal. Commissioners’ Statements whether a firm-level issue, or a national CFTC staff has accordingly embarked Appendix 1—Commission Voting or even global event. Many catalysts for on a process of updating Part 190 over Summary insolvency are entirely unpredictable. the last several years, when a then- On this matter, Chairman Tarbert and We must therefore be prepared with a healthy economy made bankruptcies Commissioners Quintenz, Behnam, bankruptcy regime that fosters a swift relatively unlikely. Now that we find Stump, and Berkovitz voted in the and equitable resolution to protect ourselves in the midst of the COVID–19 affirmative. No Commissioner voted in customer funds and promote financial pandemic and its economic the negative. stability. ramifications, the fruits of our investment arguably could have not Background on the CFTC’s Bankruptcy Appendix 2—Statement of Support of been better timed. The good news is that Regime Chairman Heath P. Tarbert during 2020, U.S. derivatives markets When our Commission considered the Part 190 of the CFTC’s rules, and their participants have weathered proposal to amend the CFTC’s addressing commodity broker 3 the volatility associated with the bankruptcy rules in Part 190,1 I noted coronavirus pandemic admirably. But as that, in his 1926 novel The Sun Also 2 See Statement of Chairman Heath P. Tarbert in I just noted, we cannot know for certain Rises, Ernest Hemingway offered what Support of Long-Awaited Updates to the CFTC’s what the future holds—for bankruptcy Bankruptcy Regime (Apr. 14, 2020), available at is perhaps the best chronicle of the https://www.cftc.gov/PressRoom/ often comes ‘‘gradually and then SpeechesTestimony/tarbertstatement041420. 1 Bankruptcy Regulations, 85 FR 36000 (June 12, 3 The term ‘‘commodity broker’’ may refer either derivatives clearing organization (‘‘DCO’’). 11 2020). to a futures commission merchant (‘‘FCM’’) or a U.S.C. 101(6).

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suddenly.’’ We must therefore be customer’s account on a bespoke basis. precluding the trustee from voiding any prepared for all contingencies. This aggregate treatment has in practice such action. Accordingly, I am pleased to support proven unavoidable in more recent I support codifying these and other today’s final rule to update Part 190 for commodity broker bankruptcies, which practices within our rules in order to the 21st century.4 The final rule is a have required disposition of hundreds provide greater transparency and product of both hard work by CFTC staff of thousands of derivatives contracts— predictability to brokers, customers, and and Commissioners as well as on behalf of thousands or tens of other key stakeholders regarding contributions from external stakeholders thousands of customers—within days or permissible and expected procedures in and subject matter experts, including a even hours. By making clear that such a bankruptcy scenario. subcommittee of the American Bar aggregate disposition of accounts is Forward Thinking on Future Association. The final rule promotes the permissible and may even be more Insolvencies CFTC’s core values in a number of ways, likely to occur than the alternative, the particularly the values of clarity and final rule provides greater clarity on The final rule updates a number of forward thinking. It also furthers the potential outcomes for trustees, brokers, provisions to reflect changes in financial agency’s strategic goal of regulating our and customers. technology since Part 190 was enacted derivatives markets to promote the 37 years ago. The enhanced discretion interests of all Americans.5 For example, the final rule expressly discussed above would in many cases permits the trustee—following help the trustee to account for the Clarity for Customers and Creditors consultation with CFTC staff—to increase in transaction execution and The final rule serves our core value of determine whether to treat open processing speed, as well as the clarity by incorporating key principles positions of public customers in a potential for large and unpredictable and actual practice as they have evolved designated hedging account as market moves given the rise of global in commodity broker bankruptcies and specifically identifiable property trading and the 24-hour trading cycle. In related judicial decisions in the years (requiring the trustee to solicit and addition, the final rule acknowledges since 1983. comply with individual customer digital assets as a physically deliverable A new introductory section of the rule instructions), or instead transfer or asset class, in light of the listing of a enumerates certain ‘‘core concepts’’ of ‘‘port’’ all such positions to a solvent number of physically delivered ‘‘virtual commodity broker bankruptcies. This commodity broker where possible. This currency’’ derivatives contracts. section is intended to offer a readily provision recognizes that requiring the The final rule also reflects advances understandable primer on relevant law, trustee to identify hedging accounts and in communications technology. For policy, and practical considerations in provide account holders the opportunity example, under the final rule, notice of this area, thereby providing a common to give individual instructions is often a bankruptcy filing and related filed mental framework for brokers, a resource-intensive endeavor, which documents will be provided to the customers, bankruptcy trustees, courts, could interfere with the trustee’s ability CFTC by electronic rather than paper and the public. Among other things, this to act in a timely and effective manner means. Furthermore, required customer section provides an overview of the to protect all the broker’s customers.6 notice procedures no longer include various classes of customer segregated The final rule also includes explicit publication in a ‘‘newspaper of general accounts held by a commodity broker; rules governing the bankruptcy of a circulation’’ in light of the downward the priority of public customers over clearinghouse, otherwise known as a trend in newspaper readership. The insiders; the requirement of pro rata derivatives clearing organization or final rule similarly recognizes changes distribution; and the preference to DCO. Since its inception, Part 190 has from paper-based to electronic recording transfer rather than liquidate open contemplated only a ‘‘case-by-case’’ of documents of title. positions. approach with no corresponding rules The final rule codifies a number of Promoting the Interests of All to spell out what would happen in the approaches and practices that have Americans event of a DCO bankruptcy. While such proven necessary or desirable in a bankruptcy is extremely unlikely, it is Protection of customer funds is the commodity broker bankruptcies in the important to provide ex ante clarity to lynchpin of the commodity broker intervening years since 1983. For DCO members and customers as to how bankruptcy regime of Part 190. The final example, the final rule authorizes a rule includes a number of measures to bankruptcy trustee to treat a broker’s it would be handled. The final rule favors following the DCO’s existing enhance those protections, including by customers in the aggregate for certain buttressing provisions already in place purposes, rather than handling each default management and recovery and wind-down rules and procedures, but under existing law and regulation. In doing so, the final rule seeks to ensure 4 After considering comments that were received gives the trustee discretion to apply them reasonably and practicably. This that the CFTC’s bankruptcy regime on the original proposal, our Commission works for the derivatives market subsequently issued a Supplemental Proposal that allows the bankruptcy trustee to take withdrew § 190.14(b)(2) and (3), and proposed other advantage of and adapt an established participants it was meant to serve— revisions to § 190.14. See Bankruptcy Regulations, ‘‘playbook,’’ rather than being forced particularly public brokerage customers, 85 FR 60110 (Sept. 24, 2020) (‘‘Supplemental with a special emphasis on customers Proposal’’). However, in light of comments raised either to follow a rigid, ‘‘one-size-fits- on the Supplemental Proposal, as well as the all’’ framework or to form a resolution using derivatives to hedge their original proposal, our Commission concluded that, plan in a matter of hours during the commercial risks. at this point, it should engage in further analysis For example, the final rule reinforces onset of a crisis. The final rule also gives and development before proposing this, or any the bankruptcy priority of public broker other, alternative approach. Such further analysis legal certainty to DCO actions taken in customers over ‘‘non-public’’ customers and development will better enable the CFTC to accordance with a recovery and wind- (e.g., the broker’s proprietary and propose, in detail, a solution that is effective, and down plan filed with the CFTC by that mitigates any attendant concerns. affiliate accounts). It also strengthens 5 See Remarks of CFTC Chairman Heath P. the CFTC’s longstanding position that Tarbert to the 35th Annual FIA Expo 2019 (Oct. 30, 6 The final rule also grants the trustee appropriate 2019), available at https://www.cftc.gov/PressRoom/ discretion in other respects—for example, by shortfalls in segregated customer assets SpeechesTestimony/opatarbert2 (outlining the allowing the trustee to modify the customer proof should be made up from the broker’s CFTC’s strategic goals). of claim form as needed for a particular bankruptcy. general estate. As a result, our final rule

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makes clear that the CFTC’s bankruptcy launched the CFTC’s Project KISS support an on-going dialogue between regime is complementary to relatively initiative.2 the DCOs and their members and recently-enacted customer protection I am pleased that today’s final rule customers on resolution and resiliency rules for day-to-day broker operations.7 carefully took into consideration concerns. comments from FCMs, DCOs, asset The final rule also furthers the Appendix 4—Statement of managers and other market participants. preference—consistent with Subchapter Commissioner Rostin Behnam IV of the Bankruptcy Code 8—for I would like to highlight a few aspects I respectfully support the Commodity transferring or ‘‘porting’’ customer of today’s final rule. The rulemaking Futures Trading Commission’s (the positions to a solvent broker, rather than reaffirms the special treatment the U.S. ‘‘Commission’’ or ‘‘CFTC’’) final rule liquidating those positions. Porting of Bankruptcy Code affords to the amending Part 190 of its regulations, positions protects the utility of customer customer account of an insolvent which governs bankruptcy proceedings hedges by avoiding the risk of market commodity broker, so that customers’ 3 of commodity brokers. First and moves between liquidation and re- positions can promptly be transferred. foremost, I want to thank Commission establishment of the customer’s hedging The Commission is, for the first time, issuing rules specific to an insolvent staff for all of their hard work on the position. It also mitigates the risk that final rule. This is the first major update liquidation itself will cause such market DCO, which are similar to the rules applicable to an insolvent FCM. Next, of the CFTC’s existing Part 190 since moves. Among other measures, the grant 1983, when it was originally of trustee discretion as to whether to taking advantage of the Commission’s experience with a few insolvent FCMs implemented by the Commission.1 treat hedging positions as specifically The final rule is the product of years identifiable property will serve these over the past decades, the final rule provides deference to the trustee that a of staff analysis and engagement with objectives by facilitating porting of such market participants, including the Part positions en masse, promptly and U.S. Bankruptcy Court appoints to oversee the proceedings of an insolvent 190 Subcommittee of the Business Law efficiently, along with other customer Section of the American Bar property. commodity broker. This increased deference is intended to expedite the Association, which provided a detailed Conclusion transfer of customer funds. In response submission of suggested model Part 190 to comments from the asset management rules in response to a prior Commission While updates to the CFTC’s 2 community, the final provisions provide request for information. Several agency bankruptcy rules have been years in the Chairs going back many years deserve making, I believe today’s final rule was additional guidance on how a trustee should balance various interests in recognition and thanks for pushing to well worth the wait. The commodity 4 update Part 190 and starting this broker resolution regime of Part 190 is seeking to protect public customers. In light of the Commission’s experience process. Customer protections are at the respected throughout the world for its heart of the Commodity Exchange Act, effectiveness and efficiency. In addition, from the bankruptcy of MF Global in 2011, the new bankruptcy rules and it is imperative that the Part 190 is important to the continued Commission have clear rules that direct global competitiveness of American generally treat letters of credit equivalently to other collateral posted how proceedings occur during a exchanges, clearinghouses, and market commodity broker bankruptcy. intermediaries. The final rule further by customers, so that the pro rata distribution of customer property in the The revision is designed to recognize enhances these features of our regime. the many changes in our industry over Through its focus on promoting event of a shortfall in the customer account will apply equally to all the past 37 years. Most importantly, it customer protection, clarity, and is informed by the Commission’s forward thinking, I believe the final rule collateral. The final rule also reflects experience from MF Global by dividing experience with past bankruptcies. will position us well for this decade and More recently, the MF Global beyond. the delivery account into ‘‘physical delivery’’ and ‘‘cash delivery’’ account bankruptcy in 2011 was the eighth Appendix 3—Statement of Support of classes. Property other than cash is largest corporate bankruptcy in 3 Commissioner Brian D. Quintenz generally easier to trace, so it should American history. It gave the have the benefit of a separate account Commission first hand experience with I am pleased to support today’s final class. Finally, the final rule’s revised what worked, what did not, and what rule amending the Commission’s treatment of the ‘‘delivery account,’’ could be improved. I was a lead advisor during the U.S. regulations governing the bankruptcy applicable in the context of physically- 1 Senate’s investigation of the MF Global proceedings of commodity brokers. settled futures and cleared swaps, will bankruptcy, and during the Senate This rulemaking makes the first apply not only to tangible commodities, investigation, I learned the intricate comprehensive change to these as is currently the case, but also to contours of Part 190, its relationship to regulations since they were first issued digital assets. This amendment will the Bankruptcy Code, and how the in 1983. I commend both Chairman provide important legal certainty to the larger puzzle of creditors, customers, Tarbert for his leadership in continuing growing exchange-traded market for and equity holders, among others, fits the Commission’s rulemaking agenda cleared, physically-settled, digital asset and former Chairman Giancarlo for derivatives. 1 laying the groundwork for this I acknowledge that the asset Bankruptcy, 48 FR 8716 (March 1, 1983). important rulemaking when he 2 82 FR 23765 (May 3, 2017). The ABA management community has raised Submission can be found at: https:// concerns with certain existing DCO comments.cftc.gov/PublicComments/ 7 17 CFR 1.23 (enacted in 2013 and revised in rules that would be recognized in the ViewComment.aspx?id=61331&SearchText; the 2014) (requiring an FCM to contribute its own funds bankruptcy of an FCM or DCO. I would accompanying cover note (‘‘ABA Cover Note’’) can as ‘‘residual interest’’ to top up shortfalls in be found at: https://comments.cftc.gov/ customer segregated accounts in the ordinary PublicComments/ course of business). 2 CFTC Requests Public Input on Simplifying ViewComment.aspx?id=61330&SearchText. 8 Statutory authority for Part 190 includes Rules, https://www.cftc.gov/PressRoom/ 3 John Gapper and Isabella Kaminska, Downfall of Subchapter IV of Chapter 7 of the Bankruptcy Code. PressReleases/pr7555-17. MF Global, Financial Times, Nov. 4, 2011, available 1 Part 190 of the Commission’s regulations (17 3 11 U.S.C. 761 et seq. at https://www.ft.com/content/2882d766-06fb-11e1- CFR part 190). 4 § 190.00(c)(3)(i)(C). 90de-00144feabdc0.

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together. It was during those frenzied lessons learned from MF Global, the That comment period ended October 26. days that I truly appreciated the Commission is enacting changes to the Particularly for a rule of this size and regulatory principle that customer treatment of letters of credit as intricacy, the time that staff had to margin is sacrosanct property. Because collateral, both during business as usual review and analyze the comment letters of my experience during those few and during bankruptcy, in order to and draft the final rule and preamble months, I have made customer ensure that customers who post letters has been incredibly short. Staff has protections an absolute priority in my of credit as collateral have the same worked tirelessly on this rule to get to time as a Commissioner. Having spoken proportional loss as customers who post the finish line. However, I think both with many market participants other types of collateral. the Commission and the public might throughout the MF Global bankruptcy The final rule also addresses a well have benefited from more time for proceedings, including those whose number of changes that have naturally review and reflection before issuing money disappeared in the days occurred in our markets since the such an important rule. immediately following, customer original Part 190 finalization in 1983. On that note, I would like to close by protection is my most pressing The Commission is promulgating a new again thanking staff for all of their hard responsibility. subpart C to part 190, specifically work in producing this refresh of the Just a few months later in early 2012, governing the bankruptcy of a clearing Commission’s part 190 rules to provide the bankruptcy of Peregrine Financial organization. As DCOs have grown in important customer protections. Group (‘‘PFG’’), the catastrophic importance over time, including being Appendix 5—Statement of culmination of a fraudulent scheme by deemed systemically important by the Commissioner Dan M. Berkovitz a futures commission merchant Financial Stability Oversight Council I support the final rule amending the (‘‘FCM’’) involving over $220M in following the financial crisis,5 the customer funds,4 further laid bare the Commission’s part 190 bankruptcy Commission believes that it is regulations. The amendments strengths and weaknesses of the imperative to have a clear plan in place Commission’s bankruptcy regime. comprehensively update these for exactly how a DCO bankruptcy regulations to address the increased size Important lessons have been learned, would be resolved. The final rule also both in terms of what works and what and speed of our markets and addresses changes in technology over incorporate ‘‘lessons learned’’ from does not, and I believe today’s final rule the past 37 years, and the movement implements the lessons learned in both futures commission merchant (FCM) from paper-based to electronic-based bankruptcies that occurred since the of those events, and those that preceded means of communication—a lesson them. regulations were first adopted in 1983. learned from the PFG bankruptcy. Many of the changes to Part 190 in The new derivatives clearing today’s final rule further support In many ways, this final rule is organization (DCO) bankruptcy provisions that have worked in prior exactly how the rulemaking process regulations provide a framework to help bankruptcies. One of the themes of this should work. It looks retrospectively at market participants be prepared for such refresh is clarity. The goal is to be as major relevant events, and applies an event. While FCM bankruptcies are clear as possible about the important lessons learned regarding infrequent, and a registered DCO has Commission’s intentions regarding Part what works in the existing Part 190 never gone bankrupt, any such event 190 in order to enhance the rules, what does not, and what can be could have significant financial impacts understanding of Designated Clearing improved. But it also looks forward in on many market participants, which, in Organizations (‘‘DCOs’’), FCMs, their a sense, recognizing changes in market turn, could have systemic implications. customers, trustees, and the public at structure and thinking ahead to the Improving the overall effectiveness and large. Changes in this final rule will possibility of the bankruptcy of a efficiency of the bankruptcy process foster the longstanding and continuing clearing organization. This is a stark fosters systemic stability and helps to policy preference for transferring (as contrast to the risk principles final rule better protect, preserve, and quickly opposed to liquidating) the positions of that we consider today. While the return customer assets. public customers—an important bankruptcy final rule looks back at the The Bankruptcy Code provides customer protection aimed at preserving Commission’s past experiences with MF express preferences for positions and the status quo/asset value. Other Global and PFG, the risk principles final property of customers of an FCM or changes further support existing rule seems to ignore past events. While DCO debtor so that the customers and requirements including that shortfalls in the bankruptcy final rule looks ahead their counterparties can be assured that segregated property should be shored up and plans for the possibility of those positions and property will not be from the FCM’s general assets, and that addressing a DCO bankruptcy, the risk included in the debtor’s general assets public customers are favored over non- principles final rule ignores future or clawed back post-filing. As a result, public customers. The new provisions events such as climate change. those positions and property (e.g., provide trustees with enhanced My only concern regarding the customer margin) can be transferred to discretion based upon prior positive bankruptcy rule, and it is a relatively another FCM or liquidated for value experience, and codify practice adopted small one, is one of timing. The quickly and returned to customers in past bankruptcies by requiring FCMs proposal for this rule was issued this following the filing of the bankruptcy. to notify the Commission of their intent past April.6 The comment period just In this way, an FCM bankruptcy can be to file for voluntary bankruptcy. closed on July 13. The Commission then resolved expeditiously, greatly reducing Other changes address what has not issued a supplemental notice of any uncertainty as to the treatment of worked or become outdated. In light of proposed rulemaking in September.7 positions and property held in the name of the debtor.1 The protection of 4 See Press Release Number 6300–12, CFTC, 5 https://www.federalreserve.gov/ _ _ CFTC Files Complaint Against Peregrine Financial paymentsystems/designated fmu about.htm. LawRegulation/FederalRegister/proposedrules/ Group, Inc. and Russell R. Wasendorf, Sr., Alleging 6 Bankruptcy Regulations, 85 FR 36000 (June 12, 2020-21005.html. Fraud, Misappropriation of Customer Funds, 2020). https://www.cftc.gov/LawRegulation/ 1 The bankruptcy trustee is directed to ‘‘return Violation of Customer Fund Segregation Laws, and FederalRegister/proposedrules/2020-08482.html. promptly to a customer any specifically identifiable Making False Statements (July 10, 2012), https:// 7 Bankruptcy Regulations, 85 FR 60110 security, property, or commodity contract to which www.cftc.gov/PressRoom/PressReleases/6300-12. (September 24, 2020). https://www.cftc.gov/ such customer is entitled, or shall transfer, on such

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customer assets and positions furthers and processes established in the The Commission also received market stability by reducing the need for Commission’s bankruptcy regulations. numerous comments on the proposed customers to rush to liquidate or This reality is reflected in the DCO bankruptcy regulations. This is not transfer the positions themselves prior thoughtful comments we received in surprising given that these regulations to the bankruptcy to avoid such assets response to the proposed rule. The final create, for the first time, a regulatory being entangled in the debtor’s general rule release addresses these comments scheme for DCO bankruptcies. Many assets. I am voting for the final rule in turn, discussing the pros and cons of commenters expressed concerns because it significantly improves the the changes requested. In a number of regarding the direction in § 190.15 to the likelihood of achieving these objectives. instances, the final rule has been trustee to, within reasonable discretion, As a general matter, commenters modified to address concerns raised follow the debtor DCO’s recovery and agreed that, overall, the final rule is a where such modifications better achieve wind-down plans. The final rule, while significant improvement. As described the stated principles of the regulations. largely leaving the proposed provision in the final rule release and my For other concerns raised, as explained in place, did modify the rule text to in the release, the balancing of the statement on the proposed rule, the emphasize that the trustee must act in equities meant that the overall outcome revised regulations further solidify and a manner ‘‘consistent with the of the bankruptcy proceeding would be implement important principles such as protection of customers.’’ In addition, the preference for public customers, pro better served by maintaining the rule as proposed. Particularly with respect to the preamble notes that some of the rata distributions within account concerns raised in this context are part classes, and prompt return of assets. The the bankruptcy rules, the fact that nobody gets everything they want likely of a broader discussion in the final rule does this not only through derivatives industry regarding the general statements, but also in specific means that the rule, for the most part, involvement of DCO members and procedures established in the rule. is well-balanced. customers in the governance, Commenters raised a number of I would like to take this opportunity rulemaking, and structuring of the specific concerns regarding the final to address two particular areas of rule. As would be expected, these comments. Entities that represent DCOs, and that the Commission concerns were often (though not always) certain ‘‘public customers’’ expressed continues to review these matters. I look grouped by the specific interests of concern regarding the greater forward to engaging in further different types of market participants in ‘‘reasonable’’ discretion provided to discussions on these issues. the event of a bankruptcy of an FCM or bankruptcy trustees, which is intended I commend the Commission staff, DCO. to facilitate a speedier resolution and particularly Bob Wasserman, for the Bankruptcy occurs because there are return of value to customers generally. thoughtful effort that has clearly been not enough assets to cover a debtor’s These commenters are concerned that put into the final rule release. The liabilities. In resolving the claims on the some customers could receive less than Commission staff has done an debtor’s assets during a bankruptcy they could otherwise if the trustee exemplary job of reviewing the proceeding, the allocation of the makes poor choices when exercising its comments received, addressing those shortfall must entail a balancing of discretion or does not implement concerns, and drafting the preamble in equities that, unfortunately, most often specific customer instructions. This very understandable language. I also leaves one or more creditors and other concern is partially addressed with the appreciate Commission staff’s interested parties (e.g., shareholders) addition of § 190.00(c)(3)(i)(C) to clarify engagement with my office on a number with less than they expected to have if how a trustee shall exercise its of areas in the final rule. a bankruptcy had not occurred. As such, discretion to ‘‘best achieve the overarching goal of protecting public The final rule modernizes the different creditor groups may have Commission’s bankruptcy regulations competing interests in the preferences customers as a class by enhancing recoveries for, and mitigating and furthers the general principles these regulations serve. Public customers and customer’s behalf, such security, property, or disruptions to, public customers as a commodity contract to a commodity broker that is class.’’ Otherwise, as explained in the markets will be better protected in the not a debtor’’ subject to CFTC regulations. 11 U.S.C. preamble, the discretion granted to the event of an FCM or DCO bankruptcy. 766(c). Section 764(a) of the Bankruptcy Code trustee is appropriate when weighing For these reasons, I support the final provides that ‘‘any transfer by the debtor of rule. property that, but for such transfer, would have the benefits of prompt resolution of the [FR Doc. 2020–28300 Filed 4–12–21; 8:45 am] been customer property, may be avoided by the bankruptcy with the other goals of the [bankruptcy] trustee . . . .’’ 11 U.S.C. 764(a). regulations. BILLING CODE 6351–01–P

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