FR Doc E9-18853[Federal Register: August 13, 2009 (Volume 74, Number 155)]
[Proposed Rules]
[Page 40794-40799]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13au09-20]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 190
RIN 3038-AC82
Account Class
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')
proposes amending its regulations (the ``Regulations'') to create a
sixth and separate ``account class,'' applicable only to the bankruptcy
of a commodity broker that is a futures commission merchant (``FCM''),
for positions in cleared over-the-counter (``OTC'') derivatives (and
money, securities, and/or other property margining, guaranteeing, and
securing such positions). In general, the concept of ``account class''
governs the manner in which the trustee calculates the net equity
(i.e., claims against the estate) and the allowed net equity (i.e., pro
rata share of the estate) for each customer of a commodity broker in
bankruptcy. The Commission further proposes amending the Regulations to
codify the appropriate allocation, in a bankruptcy of any commodity
broker, of positions in commodity contracts of one account class (and
the money, securities, and/or other property margining, guaranteeing,
or securing such positions) that are commingled with positions in
commodity contracts of the futures account class (and the money,
securities, and/or other property margining, guaranteeing, or securing
such positions), pursuant to an order issued by the Commission.
DATES: Submit comments on or before September 14, 2009.
ADDRESSES: You may submit comments, identified by RIN number, by any of
the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web Site: http://www.cftc.gov. Follow the
instructions for submitting comments on the Web site.
E-mail: [email protected]. Include the RIN number in the
subject line of the message.
Fax: 202-418-5521.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, Division of Clearing and Intermediary Oversight, 202-418-
5092, [email protected]; or Nancy Schnabel, Attorney-Advisor,
Division of Clearing and Intermediary Oversight, 202-418-5344,
[email protected]; Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Net Equity
A. Authority of Commission To Define ``Net Equity'' and To Prescribe
Procedures for Its Calculation
The Commission is empowered by Section 20 of the Commodity Exchange
Act (the ``Act''),\1\ (i) to define the ``net equity'' of a customer of
a commodity broker \2\ in bankruptcy, and (ii) to prescribe, by rule or
regulation,\3\ the procedures for calculating such ``net
[[Page 40795]]
equity.'' Moreover, Section 761(17) of the Bankruptcy Code \4\ subjects
the definition of ``net equity'' in the case of a commodity broker to
``such rules and regulations as the Commission promulgates under the
Act.'' \5\ Section 20 of the Act states, in pertinent part, that:
---------------------------------------------------------------------------
\1\ 7 U.S.C. 24.
\2\ Section 101(6) of the Bankruptcy Code (11 U.S.C. 101(6))
defines ``commodity broker'' as a ``futures commission merchant,
foreign futures commission merchant, clearing organization, leverage
transaction merchant, or commodity options dealer, as defined in
section 761 of this title, with respect to which there is a
customer, as defined in section 761 of this title.''
\3\ The regulations of the Commission can be found at 17 CFR
Chapter 1.
\4\ Section 761(17) of the Bankruptcy Code (11 U.S.C. 761(17))
is one provision in Subchapter IV of Chapter 7 of the Bankruptcy
Code (11 U.S.C. 761 et seq.), which governs commodity broker
liquidations (``Subchapter IV'').
\5\ 11 U.S.C. 761(17).
Notwithstanding title 11 of the United States Code, the
Commission may provide, with respect to a commodity broker that is a
debtor under chapter 7 of title 11 of the United States Code, by
rule or regulation--* * * (5) how the net equity of a customer is to
be determined.\6\
---------------------------------------------------------------------------
\6\ 7 U.S.C. 24.
The Commission has exercised its power under Section 20 of the Act
---------------------------------------------------------------------------
in promulgating Regulation 190.07(b), which defines ``net equity'' as:
[T]he total claim of a customer against the estate of the debtor
based on the commodity contracts held by the debtor for or on behalf
of such customer less any indebtedness of the customer to the
debtor.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 190.07(a).
In addition, the Commission has exercised its power under Section
20 of the Act in promulgating the remainder of Regulation 190.07
(Calculation of Allowed Net Equity). According to the proposing release
for Regulation Part 190 (the ``Proposing Release''),\8\ the Commission
intended Regulation 190.07 to constitute a ``step-by-step method for
calculating the estate's liability to a customer (i.e., the customer's
net equity) and of the pro rata share of the assets available to pay
that claim (i.e., the customer's allowed net equity claim).'' \9\ To
further such intent, the Commission set forth the concept of ``account
class'' in Regulation 190.07, and defined the term ``account class'' in
Regulation 190.01(a).
---------------------------------------------------------------------------
\8\ See Proposed Rulemaking: 17 CFR Part 190 (Bankruptcy), 46 FR
57535 (November 24, 1981).
\9\ Id. at 57546.
---------------------------------------------------------------------------
B. Account Class
1. Definition
Regulation 190.01(a) currently defines ``account class'' as
follows:
Each of the following types of customer accounts which must be
recognized as a separate class of account by the trustee: [i]
futures accounts, [ii] foreign futures accounts, [iii] leverage
accounts, [iv] commodity option accounts and [v] delivery accounts
as defined in Sec. 190.05(a)(2): Provided, however, That to the
extent that the equity balance, as defined in Sec. 190.07, of a
customer in a commodity option, as defined in Sec. 1.3(hh) of this
chapter, may be commingled with the equity balance of such customer
in any domestic commodity futures contract pursuant to regulations
under the Act, the aggregate shall be treated for purposes of this
part as being held in a futures account.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 190.01(a).
2. Rationale for the Concept of Account Class
In general, the Regulations apply different requirements to the
treatment of positions in different types of commodity contracts (and
to the money, securities, and/or other property margining,
guaranteeing, or securing such positions) based on the underlying
characteristics of those contracts. For example, the segregation
requirements in Regulations 1.20 through 1.30 \11\ would generally
apply to positions in commodity futures contracts that are traded on a
designated contract market (i.e., futures contracts), and to the money,
securities, and/or other property margining, guaranteeing, or securing
such positions. In contrast, the requirements in Regulation 30.7 \12\
would generally apply to positions in commodity futures contracts that
are traded on foreign boards of trade (i.e., foreign futures or foreign
options contracts), and to the money, securities, and/or other property
margining, guaranteeing, or securing such positions.\13\
---------------------------------------------------------------------------
\11\ 17 CFR 1.20-1.30.
\12\ 17 CFR 30.7.
\13\ As discussed in further detail below, the Commission has
the power under Section 4d of the Act (7 U.S.C. 6d) to issue an
order permitting positions in foreign futures contracts (and the
money, securities, and/or property margining, guaranteeing, or
securing such positions), to be commingled, in either an FCM or DCO
account, with positions in futures contracts (and the money,
securities, and/or other property margining, guaranteeing, or
securing such positions).
---------------------------------------------------------------------------
Under the Regulations, requirements for the treatment of positions
(and the money, securities, and/or other property margining,
guaranteeing, or securing such positions) may differ in stringency, and
therefore in the degree of protection that they afford customers of a
commodity broker in bankruptcy. For example, the segregation
requirements in Regulations 1.20 through 1.30 are more stringent than
the requirements in Regulation 30.7.\14\ Thus, the Commission created
the concept of ``account class,'' in order to ensure that, in a
bankruptcy of a commodity broker, customers that hold positions in
commodity contracts (and deposit money, securities, and/or other
property to margin, guarantee, or secure such positions) subject to one
requirement would benefit from the specific protections afforded by
such requirement. As the Commission stated in the Proposing Release:
---------------------------------------------------------------------------
\14\ When the Commission promulgated Regulation Part 190 in
1983, the Regulations had no requirements for the treatment of
money, securities, and/or other property that were used to margin,
guarantee, or secure commodity futures contracts traded on foreign
boards of trade. In 1987, however, the Commission promulgated
Regulation 30.7, which applies different and less stringent
requirements to such money, securities, and/or other property than
the segregation requirements in Regulations 1.20 through 1.30.
The reason for identifying classes of customer accounts is to
permit the implementation of the principle of pro rata distribution
so that the differing segregation requirements with respect to
different classes of accounts benefit customer claimants based on
the class of account for which they were imposed.\15\
---------------------------------------------------------------------------
\15\ Proposing Release, supra, note 9 at 57536.
---------------------------------------------------------------------------
As the Commission further stated in the Proposing Release:
Obviously, much of the benefit of segregation would be lost if
property segregated on behalf of a particular account class could be
allocated to pay the claims of customers of a different account
class for which less stringent segregation requirements were in
effect.\16\
---------------------------------------------------------------------------
\16\ Id. at 57554.
The Commission codified the aforementioned intent by promulgating
---------------------------------------------------------------------------
Regulation 190.08(c), which states:
[P]roperty held by or for the account of a customer, which is
segregated on behalf of a specific account class * * * must be
allocated to the customer estate of the account class for which it
is segregated. * * * \17\
---------------------------------------------------------------------------
\17\ 17 CFR 190.08(c).
C. The Use of Account Class in the Calculation of Net Equity and
Allowed Net Equity
As mentioned above, the concept of ``account class'' governs the
manner in which the trustee calculates the net equity and the ``allowed
net equity'' for each customer of a commodity broker in bankruptcy.
In general, Regulation 190.07(b) requires a trustee to calculate
net equity separately for each account class.\18\ Specifically,
Regulation 190.07(b)(2) directs the trustee to ``aggregate the credit
and debit equity balances of all accounts of the same class held by a
customer in the same capacity'' while calculating net equity.\19\
---------------------------------------------------------------------------
\18\ 17 CFR 190.07(b).
\19\ 17 CFR 190.07(b)(2).
Regulation 190.07(b)(3) (17 CFR 190.07(b)(3)) provides a limited
exception to Regulation 190.07(b)(2), by permitting the trustee,
while calculating net equity, to offset ``[a] negative equity
balance with respect to one customer account class'' against ``a
positive equity balance in any other account class of such customer
held in the same capacity.''
---------------------------------------------------------------------------
[[Page 40796]]
Regulation 190.07(a) states that ``allowed net equity'' shall ``be
equal to the aggregate of the funded balances of such customer's net
equity claim for each account class plus or minus'' certain
adjustments.\20\ Regulation 190.07(c), in turn, defines ``funded
balance'' as: ``* * * a customer's pro rata share of the customer
estate with respect to each account class available as of the primary
liquidation date for distribution to customers of the same class.''
\21\
---------------------------------------------------------------------------
\20\ 17 CFR 190.07(a).
\21\ 17 CFR 190.07(c).
---------------------------------------------------------------------------
As this definition provides, Regulation 190.07(c) requires a
trustee to calculate funded balance separately for each account class.
Specifically, Regulation 190.07(c)(1) requires the trustee to
calculate, with respect to a particular account class held by a
particular customer of a commodity broker in bankruptcy, the ratio
between (i) the net equity of such customer for such account class, and
(ii) the net equity of all customers for such account class. Regulation
190.07(c)(1) then requires the trustee to multiply such ratio against
the value of any money, securities or other property that the commodity
broker held on behalf of commodity contracts in such account class.
Finally, to calculate allowed net equity, Regulation 190.07(a) requires
the trustee to aggregate the funded balances across account classes,
and to make certain adjustments, thus generating the total amount that
each customer is entitled to recover from all money, securities, and/or
other property held on behalf of such customer.
II. Proposed Amendments To Include Cleared OTC Derivatives as a
Separate Account Class
A. Description
As mentioned above, Regulation 190.01(a) currently sets forth five
separate account classes: (i) Futures accounts; (ii) foreign futures
accounts; (iii) leverage accounts; (iv) commodity option accounts; and
(v) delivery accounts. The Commission is proposing to amend Regulation
190.01(a) to designate ``cleared OTC derivatives'' as a sixth and
separate account class with respect to the bankruptcy of a commodity
broker that is an FCM. The Commission is also proposing to make certain
conforming changes to Regulation 190.07(b)(2)(viii) and Form 4 (Proof
of Claim) in Appendix A to Regulation Part 190 (Bankruptcy Forms).\22\
As described below, the Commission does not intend for ``cleared OTC
derivatives'' to constitute a sixth and separate account class with
respect to a bankruptcy of a commodity broker that is not an FCM.
---------------------------------------------------------------------------
\22\ 17 CFR pt. 190, app. A, form 4.
---------------------------------------------------------------------------
The Commission is also proposing to amend Regulation 190.01 to
define ``cleared OTC derivatives.'' In its Interpretative Statement,
dated September 26, 2008 (the ``Statement on Cleared OTC
Derivatives''), the Commission defined ``cleared-only contracts'' as
those contracts that ``although not executed or traded on a Designated
Contract Market or a Derivatives Transaction Execution Facility, are
subsequently submitted for clearing through a Futures Commission
Merchant * * * to a Derivatives Clearing Organization.'' \23\ In the
definition of ``cleared OTC derivatives'' in the proposed amendment to
Regulation 190.01, the Commission is proposing to incorporate the
definition for ``cleared-only contracts'' from the Statement on Cleared
OTC Derivatives. However, consistent with the intentions specified in
the Proposing Release,\24\ the Commission proposes to limit ``cleared
OTC derivatives'' to only those positions in ``cleared-only contracts''
that (along with the money, securities, and/or other property
margining, guaranteeing, or securing such positions) are required to
have been (i) segregated in accordance with a rule, regulation, or
order issued by the Commission, or (ii) held in a separate account for
``cleared-only contracts'' in accordance with the rules or bylaws of a
DCO. The Commission does not intend to specify substantive requirements
for the treatment of cleared OTC derivatives (and the money,
securities, and/or other property margining, guaranteeing, or securing
such derivatives). Rather, the Commission proposes to define ``cleared
OTC derivatives'' in such a manner as to specify the sources from which
such substantive requirements may originate. Moreover, by including
contracts that ``are required to be segregated * * * or to be held in a
separate account'' for ``cleared-only contracts,'' the Commission seeks
to avoid the need to engage in fact-intensive post-bankruptcy inquiries
regarding compliance with such requirements.
---------------------------------------------------------------------------
\23\ 73 FR 65514 (November 4, 2008).
\24\ See supra notes 16 and 17, and the corresponding quotations
from the Proposing Release in the text of this preamble.
---------------------------------------------------------------------------
B. Rationale
As detailed further below, the Commission is proposing these
amendments (i) to reflect the extension of Subchapter IV (and, in turn,
Regulation Part 190) to cleared OTC derivatives under the Commodity
Futures Modernization Act of 2000 (the ``CFMA''),\25\ and (ii) to
address a scenario that the Statement on Cleared OTC Derivatives did
not reference. The Commission is proposing the amendments at this time
because of increased interest among DCOs in clearing OTC derivatives,
and the need to enhance certainty regarding the treatment of cleared
OTC derivatives in the bankruptcy of a commodity broker that is an FCM.
---------------------------------------------------------------------------
\25\ Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------
1. To Reflect the Extension of Subchapter IV to Cleared OTC Derivatives
The Commission promulgated the current version of Regulation
190.01(a) in 1983. At that time, cleared OTC derivatives, if they
existed, were not ``commodity contracts'' within the meaning of Section
761(4) of the Bankruptcy Code.\26\ Therefore, neither Subchapter IV nor
Regulation Part 190 applied to cleared OTC derivatives.
---------------------------------------------------------------------------
\26\ 11 U.S.C. 761(4).
---------------------------------------------------------------------------
The CFMA, however, created the opportunity for OTC derivatives to
be cleared.\27\ In addition, the CFMA extended Subchapter IV (and, in
turn, Regulation Part 190) to cleared OTC derivatives. As mentioned in
the Statement on Cleared OTC Derivatives, Section 761(4)(A) of the
Bankruptcy Code defines ``commodity contract,'' with respect to an FCM,
as a ``contract for the purchase or sale of a commodity for future
delivery on, or subject to the rules of, a contract market or board of
trade.'' \28\ The CFMA amended the definition of ``contract market'' in
Section 761(7) of the Bankruptcy Code to include reference to a
``registered entity.'' As mentioned in the Statement on Cleared OTC
Derivatives, Section 761(8) of the Bankruptcy Code incorporates by
reference the definition of ``registered entity'' in the Act.\29\
Therefore, the CFMA first permitted cleared OTC derivatives, which are
subject to the rules of a DCO, to become ``commodity contracts'' within
the meaning of Section 761(4) of the Bankruptcy Code, specifically with
respect to a commodity broker that is an FCM.
---------------------------------------------------------------------------
\27\ See Sections 2(d) and 2(e) of the Act (7 U.S.C. Sec. Sec.
2(d), (e)).
\28\ Id.
\29\ 11 U.S.C. 761(8). The term ``registered entity'' is defined
in Section 1a(29) of the Act (7 U.S.C. Sec. 1a(29)) to include
``(iii) a derivatives clearing organization registered under Section
5b * * *.''
---------------------------------------------------------------------------
[[Page 40797]]
As detailed in the Statement on Cleared OTC Derivatives, in a
bankruptcy of a commodity broker that is an FCM, claims arising out of
cleared OTC derivatives should be included in the determination of net
equity (and therefore, by inference, in the determination of allowed
net equity), for purposes of Subchapter IV and Regulation Part 190.\30\
Consequently, the Commission is proposing amendments to provide a
regulatory framework to accomplish this goal.
---------------------------------------------------------------------------
\30\ 73 FR 65514, 65515 (November 4, 2008).
---------------------------------------------------------------------------
2. To Address a Scenario Not Referenced in the Statement on Cleared OTC
Derivatives
In the Statement on Cleared OTC Derivatives, the Commission
explained that, for purposes of Regulation Part 190:
A claim arising out of a cleared-only contract, or the property
margining such a contract, would be includable in the futures
account class, where, pursuant to Commission Order, the contract or
property is included in an account segregated in accordance with
Section 4d of the Act.\31\
---------------------------------------------------------------------------
\31\ 73 FR 65514, 65516 (November 4, 2008).
However, the Commission did not address the treatment, under
Regulation Part 190, of positions in cleared OTC derivatives (and the
money, securities, and/or other property margining, guaranteeing, or
securing such positions), in a scenario where there is no applicable
Section 4d Order (as such term is defined below). Therefore, as
mentioned above, the Commission is proposing amendments to create, only
with respect to the bankruptcy of a commodity broker that is an FCM, a
sixth and separate account class, to which cleared OTC derivatives (as
well as the money, securities, and/or other property margining,
guaranteeing, or securing such derivatives) could be allocated. By
creating such an account class, the Commission is effectively
specifying the manner in which the trustee in the bankruptcy of a
commodity broker that is an FCM must treat, in the absence of an
applicable Section 4d Order, claims arising out of cleared OTC
derivatives when determining net equity and allowed net equity.
III. Proposed Amendment To Clarify Appropriate Allocation of Collateral
to Certain Account Classes
The Commission has the power under Section 4d of the Act \32\ to
issue an order (a ``Section 4d Order'') permitting positions in
commodity contracts of one account class (and the money, securities,
and/or other property margining, guaranteeing or securing such
positions), to be commingled with (and, therefore, to be accorded the
same protections in bankruptcy as) positions in commodity contracts of
the futures account class (and the money, securities, and/or other
property margining, guaranteeing or securing such positions), in either
an FCM or DCO account. Specifically, Section 4d of the Act states that:
---------------------------------------------------------------------------
\32\ 7 U.S.C. 6d.
In accordance with such terms and conditions as the Commission
may prescribe by rule, regulation, or order, * * * money,
securities, and property of the customers of such futures commission
merchant may be commingled and deposited * * * with any other money,
securities, and property received by such futures commission
merchant and required by the Commission to be separately accounted
for and treated and dealt with as belonging to the customers of such
---------------------------------------------------------------------------
futures commission merchant.
The Commission has issued two interpretations stating that, for
purposes of Regulation Part 190, if positions in commodity contracts
(and relevant money, securities, and/or other property) of one account
class, are, pursuant to a Commission order, commingled with positions
in commodity contracts (and relevant money, securities, and/or other
property) of the futures account class, then, the former positions (and
relevant money, securities, and/or other property) shall be treated as
part of the futures account class. First, the Commission issued an
Interpretative Statement on October 21, 2004 (the ``Statement on
Commingling Foreign Futures Positions''), stating that ``collateral
supporting foreign futures placed in domestic segregation pursuant to
Commission Order should be treated as in a futures account, not a
foreign futures account, for purposes of Part 190.'' \33\ In the
Statement on Commingling Foreign Futures Positions, the Commission
indicated that it would accord similar treatment to positions in other
commodity contracts (and the relevant money, securities, and/or other
property) that are placed in domestic segregation. Specifically, the
Commission stated that:
---------------------------------------------------------------------------
\33\ 69 FR 69510, 69511 (November 30, 2004).
In a situation whereby Commission order or direction, customers
are required or allowed to contribute to a Commission Regulation
1.20 segregated account, those customers also should benefit from
the distribution of that account proportionately to their
contributions in the event of insolvency. Such claims should be
treated as encompassed within the futures account class as opposed
to the foreign futures account class or another account class.\34\
---------------------------------------------------------------------------
\34\ Id.
As mentioned above, the Commission subsequently issued the
Statement on Cleared OTC Derivatives, which extends the conclusion in
the Statement on Commingling Foreign Futures Positions to cover cleared
OTC derivatives that have been placed in domestic segregation pursuant
---------------------------------------------------------------------------
to Commission order. Specifically, the Commission stated that:
[I]n October 2004, the Commission issued an interpretation
regarding the appropriate account class for funds attributable to
contracts traded on non-domestic boards of trade, and the assets
margining such contracts, that are included in accounts segregated
in accordance with Section 4d of the Act pursuant to Commission
Order. In that context, the Commission concluded that the claim is
properly against the Section 4d account class because customers
whose assets are deposited in such an account pursuant to Commission
Order should benefit from that pool of assets. The same rationale
supports the Commission's conclusion that a claim arising out of a
cleared-only contract, or the property margining such a contract,
would be includable in the futures account class, where, pursuant to
Commission Order, the contract or property is included in an account
segregated in accordance with Section 4d of the Act.\35\
---------------------------------------------------------------------------
\35\ 73 FR 65514, 65516 (November 4, 2008).
The Commission is proposing to codify explicitly, in Regulation
190.01(a), a generalized version of the Statement on Commingling
Foreign Futures Positions and the Statement on Cleared OTC Derivatives.
This version shall apply to positions in all commodity contracts (and
money, securities, and/or other property margining, guaranteeing, or
securing such positions). The Commission believes that these amendments
would remove any concerns regarding whether the Statement on
Commingling Foreign Futures Positions and the Statement on Cleared OTC
Derivatives would be limited to the specific factual patterns addressed
therein. To be clear, it is the belief of the Commission that the
Statement on Commingling Foreign Futures Positions and the Statement on
Cleared OTC Derivatives are nonetheless effective without such explicit
codification.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \36\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small
[[Page 40798]]
businesses. The amendments proposed herein will affect only FCMs and
DCOs. The Commission has previously established certain definitions of
``small entities'' to be used by the Commission in evaluating the
impact of its regulations on small entities in accordance with the
RFA.\37\ The Commission has previously determined that FCMs \38\ and
DCOs \39\ are not small entities for the purpose of the RFA.
Accordingly, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of
the Commission, certifies that the amendments will not have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\36\ 5 U.S.C. 601 et seq.
\37\ 47 FR 18618 (Apr. 30, 1982).
\38\ Id. at 18619.
\39\ 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \40\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. The
amendments do not require the new collection of information on the part
of any entities subject to such amendments. Accordingly, for purposes
of the PRA, the Commission certifies that the amendments, if
promulgated in final form, would not impose any new reporting or
recordkeeping requirements.
---------------------------------------------------------------------------
\40\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
C. Cost-Benefit Analysis
Section 15(a) of the Act requires that the Commission, before
promulgating a regulation under the Act or issuing an order, consider
the costs and benefits of its action. By its terms, Section 15(a) of
the Act does not require the Commission to quantify the costs and
benefits of a new regulation or determine whether the benefits of the
regulation outweigh its costs. Rather, Section 15(a) of the Act simply
requires the Commission to ``consider the costs and benefits'' of its
action.
Section 15(a) of the Act further specifies that costs and benefits
shall be evaluated in light of the following considerations: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. Accordingly, the Commission could, in its
discretion, give greater weight to any one of the five considerations
and could determine that, notwithstanding its costs, a particular
regulation was necessary or appropriate to protect the public interest
or to effectuate any of the provisions or to accomplish any of the
purposes of the Act.
The Commission has evaluated the costs and benefits of the
amendments, in light of the specific considerations identified in
Section 15(a) of the Act, as follows:
1. Protection of Market Participants and the Public
The amendments would benefit FCMs and DCOs, as well as customers of
the futures and options markets, by providing greater certainty (i) in
a bankruptcy of a commodity broker that is an FCM, regarding the
treatment of cleared OTC derivatives, and (ii) in a bankruptcy of any
commodity broker, regarding the allocation of positions in commodity
contracts (and relevant money, securities, and/or other property) of
one account class that are commingled in an FCM or DCO account,
pursuant to an order from the Commission, with positions in commodity
contracts (and relevant money, securities, and/or other property) of
the futures account class.
2. Efficiency and Competition
The amendments are not expected to have an effect on efficiency or
competition.
3. Financial Integrity of Futures Markets and Price Discovery
The amendments would enhance the protection, in the bankruptcy of a
commodity broker that is an FCM, of customers with positions in cleared
OTC derivatives, by providing an account class in which to hold such
positions (and relevant money, securities, and/or other property). The
amendments would enhance certainty regarding the treatment, in a
bankruptcy of any commodity broker, of customers with positions (and
relevant money, securities, and/or other property) subject to a Section
4d Order, by removing concerns regarding whether the Statement on
Commingling Foreign Futures Positions and the Statement on Cleared OTC
Derivatives would be limited to the specific factual patterns addressed
therein. Thus, the proposed regulations would contribute to the
financial integrity of the futures and options markets as a whole.
4. Sound Risk Management Practices
The amendments would reinforce the sound risk management practices
already required of FCMs and DCOs, by (i) providing an account class in
which to hold positions in cleared OTC derivatives (and relevant money,
securities, and/or other property), and (ii) providing certainty to
FCMs and DCOs regarding the allocation between account classes, in a
commodity broker bankruptcy, of customer positions (and relevant money,
securities, and/or other property) subject to a Section 4d Order.
5. Other Public Considerations
Recent market events, including disruptions in global credit
markets, render it prudent to enhance certainty regarding the treatment
of customer positions (and relevant money, securities, and/or other
property) in a commodity broker bankruptcy.
Accordingly, after considering the five factors enumerated in the
Act, the Commission has determined to propose the regulations set forth
below.
List of Subjects in 17 CFR Part 190
Bankruptcy, Brokers, Commodity Futures.
For the reasons stated in the preamble, the Commission proposes to
amend 17 CFR part 190 as follows:
PART 190--BANKRUPTCY
1. The authority citation for part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise
noted.
2. In Sec. 190.01, revise paragraph (a) and add paragraph (oo) to
read as follows:
Sec. 190.01 Definitions.
* * * * *
(a) Account class means each of the following types of customer
accounts which must be recognized as a separate class of account by the
trustee: futures accounts, foreign futures accounts, leverage accounts,
commodity option accounts, delivery accounts as defined in Sec.
190.05(a)(2), and, only with respect to the bankruptcy of a commodity
broker that is a futures commission merchant, cleared OTC derivatives
accounts; Provided, however, That to the extent that the equity
balance, as defined in Sec. 190.07, of a customer in a commodity
option, as defined in Sec. 1.3(hh) of this chapter, may be commingled
with the equity balance of such customer in any domestic commodity
futures contract pursuant to regulations under the Act, the aggregate
shall be treated for purposes of this part as being held in a futures
account; Provided, further, that, if positions in commodity contracts
of one account class (and the money, securities, and/or other property
margining, guaranteeing, or securing such positions), are, pursuant to
a Commission order,
[[Page 40799]]
commingled with positions in commodity contracts of the futures account
class (and the money, securities, and/or other property margining,
guaranteeing, or securing such positions), then the former positions
(and the relevant money, securities, and/or other property) shall be
treated, for purposes of this part, as being held in an account of the
futures account class.
* * * * *
(oo) Cleared OTC derivatives shall mean positions in commodity
contracts that have not been entered into or traded on a contract
market (as such term is defined in Sec. 1.3(h) of this chapter) or on
a derivatives transaction execution facility (within the meaning of
Section 5a of the Act), but which nevertheless are submitted by a
commodity broker that is a futures commission merchant (as such term is
defined in Sec. 1.3(p) of this chapter) for clearing by a clearing
organization (as such term is defined in this section), along with the
money, securities, and/or other property margining, guaranteeing, or
securing such positions, which are required to be segregated, in
accordance with a rule, regulation, or order issued by the Commission,
or which are required to be held in a separate account for cleared OTC
derivatives only, in accordance with the rules or bylaws of a clearing
organization (as such term is defined in this section).
4. In Sec. 190.07, revise paragraph (b)(2)(viii) to read as
follows:
Sec. 190.07 Calculation of allowed net equity.
(b) * * *
(2) * * *
(viii) Subject to paragraph (b)(2)(ix) of this section, the futures
accounts, leverage accounts, options accounts, foreign futures
accounts, and cleared OTC derivatives accounts of the same person shall
not be deemed to be held in separate capacities: Provided, however,
That such accounts may be aggregated only in accordance with paragraph
(b)(3) of this section.
* * * * *
5. Amend ``bankruptcy appendix form 4--proof of claim'' in Appendix
A to Part 190 by revising paragraph a in section III to read as
follows:
Appendix A to Part 190--Bankruptcy Forms
* * * * *
Bankruptcy Appendix Form 4--Proof of Claim
* * * * *
III. * * *
a. Whether the account is a futures, foreign futures, leverage,
option (if an option account, specify whether exchange-traded or
dealer), ``delivery'' account, or, only with respect to a bankruptcy
of a commodity broker that is a futures commission merchant, a
cleared OTC derivatives account. A ``delivery'' account is one which
contains only documents of title, commodities, cash, or other
property identified to the claimant and deposited for the purposes
of making or taking delivery on a commodity underlying a commodity
contract or for payment of the strike price upon exercise of an
option.
* * * * *
Issued in Washington, DC, on July 31, 2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-18853 Filed 8-12-09; 8:45 am]
Last Updated: August 13, 2009