[Federal Register: April 25, 2001 (Volume 66, Number 80)]
[Rules and Regulations]
[Page 20740-20745]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ap01-5]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 190
RIN 3038--AB67
Opting Out of Segregation
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: Pursuant to section 111 of the Commodity Futures Modernization
Act of 2000, the Commodity Futures Trading Commission (``Commission''
or ``CFTC'') is adopting a new rule allowing futures commission
merchants (``FCM'') to offer certain customers the right to elect not
to have funds, that are being carried by the FCM for purposes of
margining, guaranteeing or securing the customers' trades on or through
a registered derivatives transaction execution facility (``DTF''),
separately accounted for and segregated. This is sometimes referred to
as ``opting out'' of segregation. The CFTC is also adopting amendments
to certain existing rules that would, among other things, govern the
bankruptcy treatment of a customer that opts out of segregation.
EFFECTIVE DATE: June 19, 2001.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Michael A. Piracci, Attorney-Advisor, Division of Trading
and Markets, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW, Washington, DC 20581. Telephone: (202)
418-5430.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
The Commodity Futures Modernization Act of 2000 (``CFMA''),\1\
enacted on December 21, 2000, included a new section 5a of the
Commodity Exchange Act (the ``Act'') \2\ to permit a board of trade,
subject to certain conditions, to elect to operate as a registered DTF
in lieu of seeking designation as a contract market.\3\ In order to
operate as a registered DTF, the board of trade must meet certain
requirements as to the underlying commodities traded and must restrict
access to certain eligible traders. The newly-enacted section 5a(f) of
the Act provides that a registered DTF may authorize an FCM to offer
its customers that are eligible contract participants \4\ the right not
to have their funds that are carried by the FCM for purposes of trading
on the registered DTF, separately accounted for and segregated. Opting
out of segregation is not available to a customer who is not also an
eligible contract participant.
---------------------------------------------------------------------------
\1\ Commodity Futures Modernization Act of 2000, Pub. L. 106-
554, 114 Stat. 2763 (to be codified as amended in scattered sections
of 7 U.S.C.).
\2\ 7 U.S.C. 1 et seq. (1994), as amended by Pub. L. 106-554,
114 Stat. 2763.
\3\ Commission rules concerning DTFs will be included in a new
Part 37. See 66 FR 14262 (March 9, 2001).
\4\ Generally, eligible contract participants are: (1)
Individuals with more than $10 million in total assets, or more than
$5 million in total assets if entering into the transaction to
manage risk; (2) financial institutions, investment companies, and
insurance companies; (3) companies with more than $10 million in
total assets, or a net worth exceeding $1 million if entering into
the transaction in connection with the conduct of their businesses;
and (4) commodity pools that have more than $5 million in total
assets. See 7 U.S.C. 1a(12), as amended.
---------------------------------------------------------------------------
B. Proposed Rules
1. New Rule 1.68
On March 13, 2001, the Commission published a proposed new rule
allowing FCMs to offer certain customers the right to elect not to have
funds, that are being carried by the FCM for purposes of margining,
guaranteeing or securing the customers' trades on or through a
registered DTF, separately accounted for and segregated, sometimes
referred to as ``opting out'' of segregation.\5\ The Commission
proposed to add new Rule 1.68 to implement the newly-enacted section
5a(f) of the Act. The proposed rule provided that an FCM shall not
segregate a customer's funds where: (i) The customer is an eligible
contract participant; (ii) the funds are deposited with the FCM for
purposes of trading on a registered DTF; (iii) the DTF has authorized
the FCM to permit eligible contract participants to elect not to have
such funds segregated; and (iv) there is a written agreement signed by
the customer \6\ in which the customer elects to opt out of segregation
and acknowledges that it is aware of the consequences of not having its
funds segregated.\7\ In particular, the agreement would have been
required to explain that, to the extent a customer has a claim against
the estate of a bankrupt FCM in connection with trades for which it has
opted out of segregation,
[[Page 20741]]
the customer would be treated like a general creditor.\8\
---------------------------------------------------------------------------
\5\ See 66 FR 14507 (March 13, 2001).
\6\ For purposes of satisfying the requirement that the customer
sign the opt-out agreement, an electronic signature will be
acceptable provided it satisfies the provisions of Rule 1.4.
Commission rules referred to herein are found at 17 CFR Ch. 1
(2000).
\7\ An FCM may offer benefits to customers who elect not to have
their funds segregated. In making any such offer, however, an FCM
may not make any misleading claims or disclosures.
\8\ Normally, in the event of an FCM's bankruptcy, customer
claims have priority with respect to customer property over all
other claims, except claims ``attributable to the administration of
customer property.'' See 11 U.S.C. 766(h); see also 17 CFR part 190.
To the extent that the customer has claims against the bankrupt
FCM's estate for trades to which segregation applies, e.g., trades
on or subject to the rules of contract markets, or of DTFs for which
opting out of segregation is not permitted, the customer would be
eligible for the customer priority. Thus, the same customer may have
two different kinds of claims against the estate of a bankrupt FCM.
See 48 FR 8716 (March 1, 1983).
---------------------------------------------------------------------------
Proposed Rule 1.68 also stated that: (1) The FCM could provide the
customer a single monthly account statement with a notation of trades
for which segregation does not apply; (2) the FCM's records must
clearly distinguish those positions subject to the opt-out agreement
and those that remain subject to segregation; (3) the required
agreement with a customer to opt out of segregation may provide that it
covers all DTFs that have authorized FCMs to offer such treatment of
customer funds; and (4) a customer may revoke its election to opt out
of segregation by notifying the FCM in writing, which would only be
effective for trades entered into after the FCM received such notice
from the customer. These provisions were intended to simplify the opt-
out process for both FCMs and customers. Proposed Rule 1.68 further
provided that in no event may customer funds related to DTF ``opt-out''
trades be commingled with customer funds segregated pursuant to section
4d of the Act and the Commission rules thereunder.
The proposed rule would also have provided that a customer who
chose to opt out of segregation would not be permitted to establish a
``third-party custodial account,'' sometimes also referred to as a
``safekeeping account.'' In Financial and Segregation Interpretation
No. 10 (``Interpretation No. 10''), the Commission's Division of
Trading and Markets (the ``Division'') set forth guidelines for these
types of accounts.\9\
---------------------------------------------------------------------------
\9\ Financial and Segregation Interpretation No. 10, 1 Comm.
Fut. L. Rep. (CCH) para. 7120 (May 23, 1984).
---------------------------------------------------------------------------
2. Other Rule Proposals
The Commission proposed to add Rule 1.3(uu) to define the term
``opt-out customer'' as a customer who is an eligible contract
participant and elects not to have funds carried by an FCM for purposes
of trading on a DTF separately accounted for and segregated, in
accordance with Rule 1.68. The Commission also proposed to amend Rule
1.3(gg), which defines the term ``customer funds.'' The Commission
proposed to amend the rule to make clear that the funds of an opt-out
customer would not be deemed ``customer funds.''
Rule 1.17(a)(1)(i) provides the standards for determining the
minimum adjusted net capital that must be maintained by each person
registered as an FCM. The Commission proposed to amend Rule
1.17(a)(1)(i)(B), which contains the volume of business element of
these standards, to make clear that the funds of an opt-out customer
are to be included in the computation of the FCM's minimum adjusted net
capital requirement. The proposed amendment to the rule ensured that
opt-out customers, by opting out of segregation, do not have an impact
on the financial condition of the FCM, thereby increasing the risk to
the other customers of the FCM or to the marketplace. In proposing the
amendment, the Commission noted that by including the funds of the opt-
out customer for purposes of calculating the minimum adjusted net
capital, there is no effect on the current minimum capital requirements
for registered FCMs.\10\
---------------------------------------------------------------------------
\10\ Several other provisions of Rule 1.17 include calculations
for determining the adjusted net capital required of an FCM in order
to undertake various actions, such as prepaying subordinated debt.
The Commission proposed to amend these rules to make clear that the
funds of an opt-out customer are to be included in calculating the
FCM's required adjusted net capital in these situations. See Rules
1.17(e)(1)(ii), 1.17(h)(2)(vi)(C)(2), 1.17(h)(2)(vii)(A)(2),
1.17(h)(2)(vii)(B)(2), 1.17(h)(2)(viii)(A)(2), 1.17(h)(3)(ii)(B),
and 1.17(h)(3)(v)(B); see also Rule 1.12(b)(2) (determining the
``early warning'' level of adjusted net capital).
---------------------------------------------------------------------------
The Commission also proposed amending Rule 1.37. Rule 1.37(a)
requires an FCM, for each account that it carries, to keep a permanent
record that shows the name, address, and occupation of the person for
whom the account is being carried, as well as any person guaranteeing
the account or exercising trading control with respect to the account.
The Commission proposed to maintain this requirement and to redesignate
paragraph ``(a)'' as paragraph ``(a)(1).'' The Commission further
proposed to add paragraph ``(a)(2),'' to require FCMs to keep a
permanent record showing a customer's election pursuant to proposed
Rule 1.68. The FCM would be permitted to indicate such a customer's
election on the record it is required to keep under redesignated
paragraph (a)(1).
Finally, the Commission proposed to amend Rule 190.07(b), which
defines the term ``net equity'' for purposes of calculating the allowed
net equity claim of a customer in the event of an FCM bankruptcy. The
proposed amendment would make clear that the net equity of an opt-out
customer should not include funds the customer has chosen not to have
segregated and separately accounted for pursuant to proposed Rule 1.68.
The Commission's intention was that, to the extent that a customer has
a claim against the estate of a bankrupt FCM in connection with trades
for which it has opted out of segregation, the customer would not be
entitled to the normal customer priority in bankruptcy and would be
treated as a general creditor.
II. Final Rules
The 30-day comment period on the proposal expired on April 12,
2001. The Commission received six comment letters. The commenters were
the Futures Industry Association (``FIA''), the Chicago Mercantile
Exchange, Inc. (``CME''), National Futures Association (``NFA''), the
Chicago Board of Trade (``CBOT''), the Options Clearing Corporation
(``OCC''), and the Securities Industry Association (``SIA''). The
commenters generally supported the proposed rules, although each
suggested some modifications. The Commission notes its appreciation
that most of the comment letters were submitted on time, and in some
cases were received earlier than the deadline date. The early
submission of comment letters was helpful in assisting the Commission
to meet the statutory deadline for adoption of opt-out rules.
Additionally, the Commission notes the usefulness of the comment
letters in that they contained concise and specific suggestions.
A. Bankruptcy Treatment
FIA, CME, NFA, CBOT, OCC, and SIA all expressed concern that
customers who choose to opt out of segregation would, in the event of
an FCM bankruptcy, be treated as general creditors and, therefore,
would have claims inferior to proprietary accounts carried by an
FCM.\11\ For purposes of bankruptcy proceedings, proprietary accounts
are included in the definition of a non-public customer.\12\ Non-public
customers receive a portion of the customer estate only after all
public customer claims have been satisfied in full.\13\ Therefore,
under the proposed rules, a non-public customer would have a priority
superior to an opt-out customer in the unlikely event that there are
customer funds in excess of
[[Page 20742]]
the net equity claims of all public customers in the bankrupt estate.
---------------------------------------------------------------------------
\11\ A proprietary account is defined in Rule 1.3(y).
\12\ See 17 CFR 190.01(bb).
\13\ 17 CFR 190.08(b).
---------------------------------------------------------------------------
Upon reconsideration of this issue, the Commission agrees that opt-
out customers should be entitled to no less protection than non-public
customers. Accordingly, the Commission has amended Rule 190.01(bb), the
definition of a non-public customer for bankruptcy purposes, to include
opt-out customers. Additionally, the Commission will not amend Rule
190.07(b), the definition of net equity, as proposed, but will retain
it as it currently reads. As a result, eligible contract participants
may have two net equity claims against the estate of an FCM for
purposes of bankruptcy proceedings: (i) A net equity claim as a non-
public customer for claims based on agreements, contracts or
transactions traded on or subject to the rules of a DTF for which the
customer has opted out; and (ii) a net equity claim as a public
customer based on all other commodity interest transactions with the
FCM. On the former claims, the customer will have the same priority as
proprietary accounts; on the latter claim, the customer will have the
normal preferred customer priority.
In its comment letter, NFA also recommended that the Commission
consider what bankruptcy issues may arise for security futures products
that may be initiated and offset on different markets. Additionally,
NFA recommended that the Commission consider the need to implement
rules governing the treatment of customer funds in bankruptcy in the
event of the insolvency of an exchange or clearing organization. As NFA
recognizes in its letter, these issues, while certainly important, are
not of immediate concern. Section 125 of the CFMA requires the
Commission to undertake a complete study of the Act and the rules
thereunder and to solicit the views of the public. In light of that
study and the mandate to promptly adopt an opt-out provision, the
Commission is deferring addressing these additional bankruptcy issues
raised by NFA to a later date.
B. Definition of Opt-Out Customer
Pursuant to proposed Rule 1.3(uu), a customer is deemed an opt-out
customer only to the extent that the customer has elected to opt out of
segregation. In its comment letter, FIA indicated its concern that Rule
1.3(uu) as proposed could be read more broadly. The Commission has
revised the text of Rule 1.3(uu) to make clear that a customer is an
opt-out customer only as to those funds for which the customer has
elected to opt out of segregation and is a customer, as defined in Rule
1.3(k), as to funds that are separately accounted for and segregated
pursuant to section 4d of the Act and Rules 1.20-1.30, 1.32 and 1.36.
FIA, in suggesting language to clarify Rule 1.3(uu), appears to
indicate that a customer must individually elect to opt out of
segregation as to each particular DTF. As discussed above, and in the
proposing release, the agreement entered into between an FCM and a
customer may provide that it covers agreements, contracts or
transactions on all DTFs that have authorized opting out. In such a
case, there would be only one agreement that covers all DTFs on which
the customer trades. If, however, an FCM chooses to draft the opt-out
agreement so that it covers only a specific DTF, and, therefore, a
separate agreement would be required for each DTF on which the customer
conducts trades, that would also be permissible. However, the
Commission does not require this latter arrangement in Rule 1.68 as
adopted.\14\
---------------------------------------------------------------------------
\14\ A customer is of course permitted to request that an FCM
permit it to opt out of segregation as to trading only on specific
DTFs. An FCM may grant or deny this request.
---------------------------------------------------------------------------
C. Separate Agreements
Proposed Rule 1.68(e) would have prohibited a customer that elects
to opt out of segregation from establishing a third-party custodial
account as described in Interpretation No. 10. This provision was
intended to prevent an opt-out customer from securing a priority in
customer funds equal to or greater than that of customers whose funds
are separately accounted for and segregated. FIA and NFA both suggested
that the Commission could achieve this purpose in a more
straightforward manner ``by prohibiting certain contractual provisions
generally.'' The Commission agrees. Therefore, Rule 1.68 will require a
customer who elects to opt out of segregation to agree not to enter
into any agreement or understanding with an FCM that would permit the
customer to retain a security interest in any assets deposited with the
FCM that are not subject to segregation. Further, a customer may not
enter into any agreement or understanding with an FCM relating to the
manner in which the customer's assets will be held at the FCM that, in
the event of bankruptcy, would give the customer a priority that is
equal to or greater than the priority afforded customers whose funds
are segregated. This prohibition applies to any agreement or
understanding, whether or not it is the type discussed in
Interpretation No. 10.\15\
---------------------------------------------------------------------------
\15\ OCC stated that ``an opt-out customer should be able to
arrange for its own assets to be held separately and not subjected
to the claims of other customers.'' SIA expressed a similar view.
The Commission does not believe that such a separate holding
arrangement would be consistent with opt-out status.
---------------------------------------------------------------------------
D. Movement of Funds Between Segregated and Opt-Out Accounts
Rule 1.68(b) provides that under no circumstances may funds related
to opt-out accounts be commingled with funds held in segregation. CBOT
expressed its agreement with this rule and suggested that where a
customer has both segregated and non-segregated accounts, the
Commission use the same principles currently applied where a customer
has both a regulated and non-regulated account. The Commission agrees.
Where a customer has both a segregated and an opt-out account, any
positive balance or net liquidating equities in the opt-out account may
not be used to offset any deficit which may be in the segregated
account.\16\
---------------------------------------------------------------------------
\16\ See Division Form 1-FR-FCM Instructions at page 10-5.
---------------------------------------------------------------------------
Proposed Rule 1.68(c) would have authorized an FCM to continue to
hold trades and related funds for which a customer had previously
elected to opt out of segregation in a non-segregated account after the
customer revokes its opt-out election. The Commission had provided for
this approach in proposed Rule 1.68(c) with the intention that the
procedure would be the least burdensome on FCMs. The FIA, in its
comment letter, noted, ``that offsetting positions between a customer's
segregated account and a non-segregated account would be operationally
difficult at best.'' Accordingly, FIA suggested that when an election
to opt out of segregation is revoked, an FCM be required to transfer
trades held in an opt-out account to a customer's segregated account,
so long as the customer's positions in the non-segregated account are
fully margined. NFA expressed a similar desire for such a requirement.
CBOT indicated that this sort of transfer should not be permitted ``if
the FCM has filed, or is in the process of filing, for bankruptcy.''
Because the transfer to a segregated account would result in the
increased protection of customer assets and would be administratively
more convenient for FCMs, the Commission has modified Rule 1.68(c) to
require such a transfer, unless the FCM has filed, or has had filed
against it, a petition for bankruptcy.
FIA also expressed a desire for FCMs to be permitted to establish a
notice period before a customer's decision to revoke its election to
opt out of segregation would become effective. FIA indicated that FCMs
require a
[[Page 20743]]
reasonable time period to make the appropriate changes to books and
records. The Commission recognizes that FCMs need time to make the
required operational changes where a customer revokes its election to
opt out of segregation. To avoid disputes as to what may constitute a
reasonable time period, the Commission is adopting a five-business day
limit to accomplish the necessary changes.
E. Applicability to Contract Markets
In their comment letters, CME, OCC, and SIA suggested that the
choice to opt out of segregation should be extended to eligible
contract participants trading on a designated contract market as well
as on a DTF, because a designated contract market is subject to greater
regulatory scrutiny than a DTF and the focus should be on the type of
customer rather than the type of market involved. The CFMA, however,
only provides for opting out of segregation in connection with trades
executed on registered DTFs. Accordingly, at this time, the Commission
will defer addressing any extension of opting out to trades on
exchanges other than registered DTFs. The Commission may, however,
reconsider this issue in connection with the study of the Act and the
rules thereunder required by section 125 of the CFMA.
F. Disclosure to Pool Participants
NFA, in its comment letter, noted its support for the requirement
that customers electing to opt out of segregation enter into a written
agreement acknowledging the consequences of such an election. NFA
indicated that while this will provide adequate disclosure in the
majority of cases, additional disclosure might be considered in the
case of commodity pools that qualify as eligible contract participants.
Specifically, NFA noted that retail investors might be investing in a
commodity pool that qualifies as an eligible contract participant and
chooses to opt out of segregation. NFA believes that operators of
commodity pools that qualify as eligible contract participants and
intend to opt out of segregation should be required to provide
prospective pool participants with full disclosure regarding the
consequences of investing in a pool that opts out of segregation. The
Commission agrees that such disclosure should be required, but also
believes that the obligation to do so is implicit in existing
Commission Rules 4.24(h)(4)(i) and 4.24(w).
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \17\ requires that
agencies, in promulgating rules, consider the impact of those rules on
small businesses. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on such entities in accordance with
the RFA.\18\ The Commission has previously determined that FCMs are not
small entities for the purpose of the RFA.\19\ Additionally, eligible
contract participants, as defined in the newly-amended Act, by the
nature of the definition, should not be considered small entities.
Further, eligible contract participants have the choice as to whether
or not to exercise the right not to have certain funds segregated from
the FCM's funds. Furthermore, no comments were received from the public
on the RFA and its relation to the proposed rules.
---------------------------------------------------------------------------
\17\ 5 U.S.C. 601 et seq.
\18\ 47 FR 18618 (April 30, 1982).
\19\ 47 FR at 18619.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
New Rule 1.68 contains information collection requirements. As
required by the Paperwork Reduction Act of 1995,\20\ the Commission
submitted a copy of the proposed rules to the Office of Management and
Budget for its review. No comments were received in response to the
Commission's invitation in the proposed rules to comment on any
potential paperwork burden associated with this regulation.
---------------------------------------------------------------------------
\20\ Pub. L. 104-13 (May 13, 1995).
---------------------------------------------------------------------------
C. Cost-Benefit Analysis
Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission, before promulgating a new rule under the Act,
consider the costs and benefits of the Commission's action. The
Commission is applying the cost-benefit provisions of section 15 for
the first time in this rulemaking with respect to a final rule and
understands that, by its terms, section 15 as amended does not require
the Commission to quantify the costs and benefits of a new rule or
determine whether the benefits of the rule outweigh its costs.
The amended section 15 further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations.\21\ Accordingly, the
Commission could in its discretion give greater weight to any one of
the five enumerated areas of concern and could in its discretion
determine that, notwithstanding its costs, a particular rule 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.
---------------------------------------------------------------------------
\21\ As applied to this rulemaking, price discovery is not a
relevant concern.
---------------------------------------------------------------------------
The main area of concern relevant to the opt-out rules is the first
one set forth in the Act, ``protection of market participants and the
public.'' The Commission believes that those market participants
eligible to opt out of segregation, eligible contract participants
trading on a registered DTF, are sophisticated persons that can
properly evaluate for themselves, in light of the required disclosure
by, and agreement with, an FCM, whether to opt out of segregation.
Additionally, FCMs are also able to evaluate whether offering such an
election to their customers who are eligible contract participants is
appropriate and consistent with sound risk management practices. As for
the public interest, the general public and retail customers are
protected because any eligible contract participant who opts out of
segregation has a priority no better than a holder of a proprietary
account in the event of an FCM's bankruptcy. The Commission has
endeavored to impose minimal costs (i.e., only necessary disclosure and
recordkeeping) on any of the parties that would be involved in the opt-
out process so that the perceived benefits can be fully realized. The
Commission further notes that opting out of segregation is not required
of anyone and has to be a voluntary election of the registered DTF,
FCM, and eligible contract participant. The Commission also notes that
the CFMA specifically mandates that the Commission adopt rules to
facilitate this election. Finally, the Commission did not receive any
comments that addressed these issues.
List of Subjects
17 CFR Part 1
Consumer protection, Definitions, Reporting and recordkeeping
requirements.
17 CFR Part 190
Bankruptcy, Definitions.
In consideration of the foregoing and pursuant to the authority
contained in
[[Page 20744]]
the Commodity Exchange Act and, in particular, sections 2(a)(1)(A), 4d,
5a(f), and 8a(5) 7 U.S.C. 2(i), 6d, 7a(f), and 12a(5), and 11 U.S.C.
362, 546, 548, 556 and 761-766, the Commission hereby amends Chapter I
of Title 17 of the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.
2. Section 1.3 is amended by adding paragraphs (gg)(3) and (uu) to
read as follows:
Sec. 1.3 Definitions.
* * * * *
(gg) * * *
* * * * *
(3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the
term customer funds shall exclude money, securities or property
received to margin, guarantee or secure the trades or contracts of opt-
out customers, and all money accruing to opt-out customers as the
result of such trades or contracts, to the extent that such trades or
contracts are made on or subject to the rules of any registered
derivatives transaction execution facility that has authorized opting
out in accordance with Sec. 37.7 of this chapter.
* * * * *
(uu) Opt-out customer. This term means a customer that is an
eligible contract participant, as defined in section 1a(12) of the Act,
and that, in accordance with Sec. 1.68, has elected not to have funds
that are being carried for purposes of trading on or through the
facilities of a registered derivatives transaction execution facility,
separately accounted for and segregated by the futures commission
merchant pursuant to section 4d of the Act and Secs. 1.20-1.30, 1.32
and 1.36. A customer is an opt-out customer solely with respect to
agreements, contracts or transactions, and the money, securities or
property received by a futures commission merchant to margin, guarantee
or secure such agreements, contracts or transactions, made on or
subject to the rules of any derivatives transaction execution facility
that has adopted rules permitting a customer to elect to be an opt-out
customer and with respect to which the customer has made such an
election. For all other purposes under the Act and the rules
thereunder, except where otherwise provided, an opt-out customer shall
be a customer as defined in Sec. 1.3(k).
3. Section 1.12 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(b) * * *
(2) Six percent of the following amount: The customer funds
required to be segregated pursuant to the Act and the regulations in
this part, plus the funds of opt-out customers that, but for the
election to opt out pursuant to Sec. 1.68, would be required to be
segregated, plus the foreign futures or foreign options secured amount,
less the market value of commodity options purchased by such customers
on or subject to the rules of a contract market or a foreign board of
trade for which the full premiums have been paid: Provided, however,
that the deduction for each such customer shall be limited to the
amount of customer funds in such customer's account(s) and foreign
futures and foreign options secured amounts;
* * * * *
4. Section 1.17 is amended as follows:
a. By revising paragraph (a)(1)(i)(B), and
b. By amending paragraphs (e)(1)(ii), (h)(2)(vi)(C)(2),
(h)(2)(vii)(A)(2),(h)(2)(vii)(B)(2), (h)(2)(viii)(A)(2), (h)(3)(ii)(B),
and (h)(3)(v)(B) by removing the second instance of the word ``and''
and adding in its place the words ``, plus the funds of opt-out
customers that, but for the election to opt out pursuant to Sec. 1.68,
would be required to be segregated, plus''; the revision as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
(a) * * *
(1) * * *
(i) * * *
(B) Four percent of the following amount: The customer funds
required to be segregated pursuant to the Act and the regulations in
this part, plus the funds of opt-out customers that, but for the
election to opt out pursuant to Sec. 1.68, would be required to be
segregated, plus the foreign futures or foreign options secured amount,
less the market value of commodity options purchased by customers on or
subject to the rules of a contract market or a foreign board of trade
for which the full premiums have been paid: Provided, however, that the
deduction for each customer shall be limited to the amount of
segregated customer funds in such customer's account(s) and foreign
futures and foreign options secured accounts;
* * * * *
5. Section 1.37 is amended by redesignating paragraph (a) as
paragraph (a)(1) and by adding paragraph (a)(2) to read as follows:
Sec. 1.37 Customer's or option customer's name, address, and
occupation recorded; record of guarantor or controller of account.
(a) * * *
(2) Each futures commission merchant who receives a customer's
election not to have the customer's funds separately accounted for and
segregated, in accordance with Sec. 1.68, shall keep a record in
permanent form that indicates such customer's election. The record of
such a customer election may be indicated on the record required by
paragraph (a)(1) of this section.
* * * * *
6. Section 1.68 is added to read as follows:
Sec. 1.68 Customer election not to have funds, carried by a futures
commission merchant for trading on a registered derivatives transaction
execution facility, separately accounted for and segregated.
(a) A futures commission merchant shall not separately account for
and segregate, in accordance with the provisions of section 4d of the
Act and Secs. 1.20-1.30, 1.32 and 1.36, funds received from a customer
if:
(1) The customer is an eligible contract participant as defined in
section 1a(12) of the Act;
(2) The customer's funds are being carried by the futures
commission merchant for the purpose of trading on or through the
facilities of a derivatives transaction execution facility registered
under section 5a(c) of the Act;
(3) The registered derivatives transaction execution facility has
authorized, in accordance with Sec. 37.7 of this chapter, futures
commission merchants to offer eligible contract participants the right
to elect not to have funds that are being carried for purposes of
trading on or through the facilities of the registered derivatives
transaction execution facility, separately accounted for and segregated
by the futures commission merchant; and
(4) The futures commission merchant and the customer have entered
into a written agreement, signed by a person with the authority to bind
the customer, in which the customer:
(i) Represents and warrants that the customer is an eligible
contract participant as defined in section 1a(12) of the Act;
[[Page 20745]]
(ii) Elects not to have its funds separately accounted for and
segregated in accordance with the provisions of section 4d of the Act
and Secs. 1.20-1.30, 1.32 and 1.36 with respect to agreements,
contracts or transactions traded on or subject to the rules of any
registered derivatives transaction execution facility that has
authorized such treatment in accordance with Sec. 37.7 of this chapter;
(iii) Acknowledges that it has been informed, and by making this
election agrees that:
(A) The customer's funds, related to agreements, contracts or
transactions on any registered derivatives transaction execution
facility that authorizes the opting out of segregation will not be
segregated from the funds of the futures commission merchant in
accordance with the provisions of section 4d of the Act and Secs. 1.20-
1.30, 1.32 and 1.36;
(B) The futures commission merchant may use such funds in the
course of the futures commission merchant's business without the prior
consent of the customer or any third party;
(C) In the event the futures commission merchant files, or has a
petition filed against it, for bankruptcy, the customer, as to those
funds that the customer has elected not to have separately accounted
for and segregated by the futures commission merchant in accordance
with the provisions of section 4d of the Act and Secs. 1.20-1.30, 1.32
and 1.36, will not be entitled to the priority for customer claims
provided for under the Bankruptcy Code and part 190 of this chapter;
(D) The customer may not retain a security interest in assets
excluded from segregation in accordance with this section;
(E) The customer may not enter into any agreement or other
understanding with the futures commission merchant relating to the
manner in which the customer's assets will be held at the futures
commission merchant, that directly or indirectly gives the customer a
priority in bankruptcy that is equal or superior to the priority
afforded public customers under the Bankruptcy Code and part 190 of
this chapter; and
(iv) Acknowledges that the agreement shall remain in effect unless
and until the customer abrogates the agreement in accordance with
paragraph (c) of this section.
(b) In no event may money, securities or property representing
those funds that customers have elected not to have separately
accounted for and segregated by the futures commission merchant, in
accordance with this section, be held or commingled and deposited with
customer funds in the same account or accounts required to be
separately accounted for and segregated pursuant to section 4d of the
Act and Secs. 1.20-1.30, 1.32 and 1.36.
(c)(1) A customer that has entered into an agreement in accordance
with paragraph (a)(4) of this section may abrogate that agreement by so
informing the futures commission merchant in writing, signed by a
person with the authority to bind the customer. The effective date of
the abrogation shall not exceed five business days from the futures
commission merchant's receipt of the customer's abrogation. The
abrogation shall not become effective if the futures commission
merchant files, or has had filed against it, a petition for bankruptcy
prior to the effective date of the abrogation.
(2) Upon the effective date of the abrogation, permitted under
paragraph (c)(1) of this section, provided that the customer's
positions in the non-segregated account are fully margined and the
customer is not in default with respect to any of its obligations to
the futures commission merchant arising out of agreements, contracts or
transactions entered on, or subject to the rules of, a registered
entity, as defined in section 1a(29) of the Act, the futures commission
merchant shall transfer to a customer segregated account:
(i) All trades or positions of the customer with respect to which
the customer had previously elected to opt out of segregation; and
(ii) All money, securities, or property held in such account to
margin, guarantee or secure such trades or positions.
(d) Each futures commission merchant shall maintain any agreements
entered into with customers pursuant to paragraph (a) of this section
and any abrogations of such agreements, made pursuant to paragraph (c)
of this section, in accordance with Sec. 1.31.
PART 190--BANKRUPTCY RULES
7. The authority citation for Part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23,
and 24, and 11 U.S.C. 362, 546, 548, 556 and 761-766, unless
otherwise noted.
8. Section 190.01 is amended by revising paragraph (bb) to read as
follows:
Sec. 190.01 Definitions.
* * * * *
(bb) Non-public customer means any person enumerated in
Sec. 1.3(y), Sec. 1.3(uu) or Sec. 31.4(e) of this chapter, who is
defined as a customer under paragraph (k) of this section.
* * * * *
Issued in Washington, DC on April 19, 2001, by the Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 01-10222 Filed 4-24-01; 8:45 am]
BILLING CODE 6351-01-P
�