I support the final rule amending the Commission’s part 190 bankruptcy regulations.  The amendments comprehensively update these regulations to address the increased size and speed of our markets and incorporate “lessons learned” from futures commission merchant (FCM) bankruptcies that occurred since the regulations were first adopted in 1983.  The new derivatives clearing organization (DCO) bankruptcy regulations provide a framework to help market participants be prepared for such an event.  While FCM bankruptcies are infrequent, and a registered DCO has never gone bankrupt, any such event could have significant financial impacts on many market participants, which, in turn, could have systemic implications.  Improving the overall effectiveness and efficiency of the bankruptcy process fosters systemic stability and helps to better protect, preserve, and quickly return customer assets.

The Bankruptcy Code provides express preferences for positions and property of customers of an FCM or DCO debtor so that the customers and their counterparties can be assured that those positions and property will not be included in the debtor’s general assets or clawed back post-filing.  As a result, those positions and property (e.g., customer margin) can be transferred to another FCM or liquidated for value quickly and returned to customers following the filing of the bankruptcy.  In this way, an FCM bankruptcy can be resolved expeditiously, greatly reducing any uncertainty as to the treatment of positions and property held in the name of the debtor.[1]  The protection of customer assets and positions furthers market stability by reducing the need for customers to rush to liquidate or transfer the positions themselves prior to the bankruptcy to avoid such assets being entangled in the debtor’s general assets.  I am voting for the final rule because it significantly improves the likelihood of achieving these objectives.

As a general matter, commenters agreed that, overall, the final rule is a significant improvement.  As described in the final rule release and my statement on the proposed rule, the revised regulations further solidify and implement important principles such as the preference for public customers, pro rata distributions within account classes, and prompt return of assets.  The final rule does this not only through general statements, but also in specific procedures established in the rule.

Commenters raised a number of specific concerns regarding the final rule.  As would be expected, these concerns were often (though not always) grouped by the specific interests of different types of market participants in the event of a bankruptcy of an FCM or DCO.  

Bankruptcy occurs because there are not enough assets to cover a debtor’s liabilities.  In resolving the claims on the debtor’s assets during a bankruptcy proceeding, the allocation of the shortfall must entail a balancing of equities that, unfortunately, most often leaves one or more creditors and other interested parties (e.g., shareholders) with less than they expected to have if a bankruptcy had not occurred.  As such, different creditor groups may have competing interests in the preferences and processes established in the Commission’s bankruptcy regulations.

This reality is reflected in the thoughtful comments we received in response to the proposed rule.  The final rule release addresses these comments in turn, discussing the pros and cons of the changes requested.  In a number of instances, the final rule has been modified to address concerns raised where such modifications better achieve the stated principles of the regulations.  For other concerns raised, as explained in the release, the balancing of the equities meant that the overall outcome of the bankruptcy proceeding would be better served by maintaining the rule as proposed.  Particularly with respect to the bankruptcy rules, the fact that nobody gets everything they want likely means that the rule, for the most part, is well-balanced.

I would like to take this opportunity to address two particular areas of comments.  Entities that represent certain “public customers” expressed concern regarding the greater “reasonable” discretion provided to bankruptcy trustees, which is intended to facilitate a speedier resolution and return of value to customers generally.  These commenters are concerned that some customers could receive less than they could otherwise if the trustee makes poor choices when exercising its discretion or does not implement specific customer instructions.  This concern is partially addressed with the addition of subsection 190.00(c)(3)(i)(C) to clarify how a trustee shall exercise its discretion to “best achieve the overarching goal of protecting public customers as a class by enhancing recoveries for, and mitigating disruptions to, public customers as a class.”  Otherwise, as explained in the preamble, the discretion granted to the trustee is appropriate when weighing the benefits of prompt resolution of the bankruptcy with the other goals of the regulations.

The Commission also received numerous comments on the proposed DCO bankruptcy regulations.  This is not surprising given that these regulations create, for the first time, a regulatory scheme for DCO bankruptcies.  Many commenters expressed concerns regarding the direction in section 190.15 to the trustee to, within reasonable discretion, follow the debtor DCO’s recovery and wind-down plans.  The final rule, while largely leaving the proposed provision in place, did modify the rule text to emphasize that the trustee must act in a manner “consistent with the protection of customers.”  In addition, the preamble notes that some of the concerns raised in this context are part of a broader discussion in the derivatives industry regarding the involvement of DCO members and customers in the governance, rulemaking, and structuring of the DCOs, and that the Commission continues to review these matters.  I look forward to engaging in further discussions on these issues.

I commend the Commission staff, particularly Bob Wasserman, for the thoughtful effort that has clearly been put into the final rule release.  The Commission staff has done an exemplary job of reviewing the comments received, addressing those concerns, and drafting the preamble in very understandable language.  I also appreciate Commission staff’s engagement with my office on a number of areas in the final rule.

The final rule modernizes the Commission’s bankruptcy regulations and furthers the general principles these regulations serve.  Public customers and markets will be better protected in the event of an FCM or DCO bankruptcy.  For these reasons, I support the final rule.

[1] The bankruptcy trustee is directed to “return promptly to a customer any specifically identifiable security, property, or commodity contract to which such customer is entitled, or shall transfer, on such customer’s behalf, such security, property, or commodity contract to a commodity broker that is not a debtor” subject to CFTC regulations.  11 U.S.C. 766(c).  Section 764(a) of the Bankruptcy Code provides that “any transfer by the debtor of property that, but for such transfer, would have been customer property, may be avoided by the [bankruptcy] trustee . . . .”  11 U.S.C. 764(a).