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]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 190

RIN 3038-AC82

Account Class

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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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:

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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

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6 7 U.S.C. 24.

The Commission has exercised its power under Section 20 of the Act

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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

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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).

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8 See Proposed Rulemaking: 17 CFR Part 190 (Bankruptcy), 46 FR

57535 (November 24, 1981).

9 Id. at 57546.

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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

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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

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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).

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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:

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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

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15 Proposing Release, supra, note 9 at 57536.

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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

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16 Id. at 57554.

The Commission codified the aforementioned intent by promulgating

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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

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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

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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.”

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[[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

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20 17 CFR 190.07(a).

21 17 CFR 190.07(c).

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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.

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22 17 CFR pt. 190, app. A, form 4.

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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.

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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.

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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.

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25 Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

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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.

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26 11 U.S.C. 761(4).

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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.

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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 * * *.”

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[[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.

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30 73 FR 65514, 65515 (November 4, 2008).

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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

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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:

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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

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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:

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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

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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

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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

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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.

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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).

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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.

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40 44 U.S.C. 3501 et seq.

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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