Bankruptcy Regulations

Federal RegisterJun 12, 2020

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 4, 41, and 190

RIN 3038-AE67

Bankruptcy Regulations

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Commodity Futures Trading Commission (the “Commission”) is proposing amendments to its regulations governing bankruptcy proceedings of commodity brokers. The proposed amendments are meant to comprehensively update those regulations to reflect current market practices and lessons learned from past commodity broker bankruptcies.

DATES:

Comments must be received on or before July 13, 2020.

ADDRESSES:

You may submit comments, identified by “Part 190 Bankruptcy Regulations” and RIN 3038-AE67, by any of the following methods:

•

CFTC Comments Portal: https:// comments.cftc.gov

. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.

•

Mail:

Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

•

Hand Delivery/Courier:

Follow the same instructions as for Mail, above.

Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to

https://comments.cftc.gov

. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission's regulations.

17 CFR 145.9. Commission regulations referred to in this release are found at 17 CFR chapter I (2019), and are accessible on the Commission's website at

https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from

https://comments.cftc.gov

that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT:

Robert B. Wasserman, Chief Counsel and Senior Advisor, 202-418-5092,

rwasserman@cftc.gov

or Kirsten Robbins, Associate Director, 202-418-5313,

krobbins@cftc.gov

, Division of Clearing and Risk; Andree Goldsmith, Special Counsel, 202-418-6624,

agoldsmith@cftc.gov

or Carmen Moncada-Terry, Special Counsel, 202-418-5795,

cmoncadaterry@cftc.gov

, Division of Swap Dealer and Intermediary Oversight, in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. The Part 190 Subcommittee Proposal

B. Background of the NPRM

II. Proposed Regulations

A. Subpart A—General Provisions

1. Regulation § 190.00: Statutory Authority, Organization, Core Concepts, Scope, and Construction

2. Regulation § 190.01: Definitions

3. Regulation § 190.02: General

B. Subpart B—Futures Commission Merchant as Debtor

1. Regulation § 190.03: Notices and Proofs of Claims

2. Regulation § 190.04: Operation of the Debtor's Estate—Customer Property

3. Regulation § 190.05: Operation of the Debtor's Estate—General

4. Regulation § 190.06: Making and Taking Delivery under Commodity Contracts

5. Regulation § 190.07: Transfers

6. Regulation § 190.08: Calculation of Allowed Net Equity

7. Regulation § 190.09: Allocation of Property and Allowance of Claims

8. Regulation § 190.10: Provisions Applicable to Futures Commission Merchants During Business as Usual

C. Subpart C—Clearing Organization as Debtor

1. Regulation § 190.11: Scope and Purpose of Subpart C

2. Regulation § 190.12: Required Reports and Records

3. Regulation § 190.13: Prohibition on Avoidance of Transfers

4. Regulation § 190.14: Operation of the Estate of the Debtor Subsequent to the Filing Date

5. Regulation § 190.15: Recovery and Wind-Down Plans; Default Rules and Procedures

6. Regulation § 190.16: Delivery

7. Regulation § 190.17: Calculation of Net Equity

8. Regulation § 190.18: Treatment of Property

9. Regulation § 190.19: Support of Daily Settlement

D. Appendix A Forms

E. Appendix B Forms

F. Technical Corrections to Other Parts

1. Part 1

2. Part 4

3. Part 41

III. Revisions Proposed by the ABA Committee That Have Not Been Proposed by the Commission

IV. Cost-Benefit Considerations

A. Introduction

B. Baseline

C. Overarching Concepts

1. Changes to Structure of Industry

2. Trustee Discretion

3. Cost Effectiveness and Promptness Versus Precision

4. Unique Nature of Bankruptcy Events

5. Administrative Costs Are Costs to the Estate, and Often to the Customers

6. Request for Comment

D. Subpart A—General Provisions

1. Regulation § 190.00: Statutory Authority, Organization, Core Concepts, Scope, and Construction

2. Regulation § 190.01: Definitions

3. Regulation § 190.02: General

4. Section 15(a) Factors—Subpart A

E. Subpart B—Futures Commission Merchant as Debtor

1. Regulation § 190.03: Notices and Proofs of Claims

2. Regulation § 190.04: Operation of the Debtor's Estate—Customer Property

3. Regulation § 190.05: Operation of the Debtor's Estate—General

4. Regulation § 190.06: Making and Taking Delivery Under Commodity Contracts

5. Regulation § 190.07: Transfers

6. Regulation § 190.08: Calculation of Allowed Net Equity

7. Regulation § 190.09: Allocation of Property and Allowance of Claims

8. Regulation § 190.10: Provisions Applicable to Futures Commission Merchants During Business as Usual

9. Section 15(a) Factors—Subpart B

F. Subpart C—Clearing Organization as Debtor

1. Regulation § 190.11: Scope and Purpose of Subpart C

2. Regulation § 190.12: Required Reports and Records

3. Regulation § 190.13: Prohibitions on Avoidance of Transfers

4. Regulation § 190.14: Operation of the Estate of the Debtor Subsequent to the Filing Date

5. Regulation § 190.15: Recovery and Wind-Down Plans; Default Rules and Procedures

6. Regulation § 190.16: Delivery

7. Regulation § 190.17: Calculation of Net Equity

8. Regulation § 190.18: Treatment of Property

9. Regulation § 190.19: Support of Daily Settlement

10. Section 15(a) Factors—Subpart C

G. Technical Corrections to Parts 1, 4, and 41

H. Antitrust Considerations

V. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

1. Reporting Requirements in an FCM Bankruptcy

2. Recordkeeping Requirements in an FCM Bankruptcy

3. Third-Party Disclosure Requirements Applicable to a Single Respondent in an FCM Bankruptcy

4. Reporting Requirements in a DCO Bankruptcy

5. Recordkeeping Requirements in a DCO Bankruptcy

6. Third-Party Disclosure Requirements Applicable to a Single Respondent in a DCO Bankruptcy

7. Third-Party Disclosure Requirements Applicable to Multiple Respondents During Business as Usual

I. Background

A. Background of the NPRM

The basic structure of the Commission's bankruptcy regulations, part 190 of title 17 of the Code of Federal Regulations, was proposed in 1981 and finalized in 1983. While there have been a number of rulemakings that have amended part 190 in light of specific issues or statutory changes, this is the first comprehensive revision of part 190. The Commission is proposing to revise part 190 comprehensively in light of several major changes to the industry over the past 37 years, including the exponential growth in the speed of transactions and trade processing. In addition, important lessons have been learned over prior bankruptcies, including the need for administrative arrangements that are specific to the circumstances of the individual bankruptcy and the success of an approach, consistent with applicable statutes, that prioritizes cost effectiveness and promptness over precision.

Finally, derivatives clearing organizations (“DCOs”) have become increasingly important to the financial system.

The concept of prioritizing cost effectiveness and promptness over precision is discussed in detail in overarching concept three in the cost-benefit considerations, section IV.C.3 below.

In proposing these rules, the Commission is exercising its broad power under the Commodity Exchange Act (“CEA” or “Act”) to make regulations with respect to commodity broker debtors. Specifically, section 20(a) states that notwithstanding title 11, the Commission may provide, with respect to a commodity broker that is a debtor under chapter 7 of title 11, by rule or regulation (1) that certain cash, securities, other property, or commodity contracts are to be included in or excluded from customer property or member property; (2) that certain cash, securities, other property, or commodity contracts are to be specifically identifiable to a particular customer in a specific capacity; (3) the method by which the business of such commodity broker is to be conducted or liquidated after the date of the filing of the petition under such chapter, including the payment and allocation of margin with respect to commodity contracts not specifically identifiable to a particular customer pending their orderly liquidation; (4) any persons to which customer property and commodity contracts may be transferred under section 766 of title 11; and (5) how the net equity of a customer is to be determined.

See

CEA section 20(a), 7 U.S.C. 24(a).

In developing this rulemaking, the Commission benefited from outside contributions.

On September 29, 2017, the Part 190 Subcommittee of the Business Law Section of the American Bar Association (“ABA Committee”) submitted a model set of part 190 rules (the “ABA Submission”) in response to the Commission's Project KISS (“Request for Information”).

82 FR 23765 (May 3, 2017). The ABA Submission can be found at:

https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61331&SearchText

; the accompanying cover note (“ABA Cover Note”) can be found at:

https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61330&SearchText

. The ABA Cover Note cautions that “[t]he views expressed in this letter, and the proposed Model Part 190 Rules, are presented on behalf of the [ABA] Committee. They have not been approved by the House of Delegates or Board of Governors of the ABA and, accordingly, should not be construed as representing the policy of the ABA. In addition, they do not represent the position of the ABA Business Law Section, nor do they necessarily reflect the views of all members of the Committee.”

As the ABA Committee noted,

The [part 190 regulations] have generally served the industry, bankruptcy professionals and customers well. That said, the [ABA] Committee believes there is a need to update [p]art 190 in a comprehensive manner, as the markets—and how they are regulated—have changed dramatically in the intervening decades. At the same time, it is important to stay true to the sound conceptual elements of the existing rules with respect to account class distinctions, porting of customer positions, and pro rata distribution of customer property by account class, with priority given to public customers. The Committee was also spurred to act by the MF Global and Peregrine Financial Group bankruptcies, and the lessons they revealed on the challenges of liquidating a large [futures commission merchant (“FCM”)] that is severely under-segregated.

ABA Cover Note at 2.

The ABA Committee started its work in 2015, conducting a review of the Commission's part 190 regulations to identify potential areas for improvement, with the plan to draft comprehensive revisions in the form of model rules that the Commission could consider for potential agency rulemaking. The ABA Committee included participants who represented a broad cross-section of interested parties, in particular attorneys who work extensively in the areas of derivatives law, bankruptcy law, or both, including at law firms, futures commission merchants, clearing houses and exchanges, government agencies,

and industry associations. The ABA Committee also included attorneys for the trustees in the commodity broker bankruptcy cases of MF Global and Peregrine Financial Group, as well as attorneys who were formerly staff at the Commission, including one of the drafters of the original rules.

Each of the members devoted significant amounts of time to this project.

The Committee members included staff at government agencies other than the Commission. Current Commission staff participated in a few meetings of the Committee (in the form of “brainstorming exercises”) to discuss their understanding of the current regulations. Commission staff “expressly conveyed that they did not want to direct the Committee's deliberations, and they were careful not to offer comments that could be construed as trying to persuade the Committee to any particular viewpoint on any particular issue. They were also clear that their comments did not represent the views of the Commission, or of anyone other than the person expressing them.” ABA Cover Note at 3 n. 5.

See

generally

id.

at 3.

The resulting ABA Submission represents a consensus across this broad range of interests, thoughtfully and comprehensively addressing the issues presented in part 190, and assisting the Commission in developing a deeper understanding of the practical issues involved in commodity broker bankruptcy proceedings. This notice of proposed rulemaking (“NPRM”) has benefited significantly from the ABA Submission, as well as conversations between Commission staff and members of the ABA Committee, both individually and collectively, to understand their thinking with respect to various aspects of the ABA Submission.

B. Major Themes in the Proposed Revisions to Part 190

While the proposed revised part 190 carries forward significant portions of existing part 190, there are important changes that are proposed. The major

themes in changes to part 190 include the following:

(1) The Commission is proposing to add § 190.00, which is designed to set out the statutory authority, organization, core concepts, scope, and rules of construction for part 190. This section is intended to set out, subject to notice and comment rulemaking, the Commission's thinking and intent regarding part 190 in order to benefit and to enhance the understanding of DCOs, FCMs, their customers, trustees,

and the public at large.

Including bankruptcy and SIPA trustees, as well as the FDIC in its role as a receiver.

(2) Some of the changes would further support the implementation of the requirements, established consistent with section 4d of the CEA, that shortfalls in segregated property should be made up from the FCM's general assets, while others further the preferences, established in title 11 of the United States Code (

i.e.,

the “Bankruptcy Code”), section 766(h), that with respect to customer property, public customers are favored over non-public customers, and that public customers are entitled

inter se

to a pro rata distribution based on their respective claims.

(3) Other changes would foster the longstanding and continuing policy preference for transferring (as opposed to liquidating) positions of public customers and those customers' proportionate share of associated collateral.

Some of the benefits, for both customers and the markets as a whole, arising from this policy are addressed in the discussion of proposed § 190.00(c)(4) in section II.A.1 below.

This policy preference is manifest in section 764(b) of the Bankruptcy Code, 11 U.S.C. 764(b) (protecting from avoidance transfers approved by the Commission up to seven days

after

the order for relief);

see also

current § 190.06(g) (approving a wide variety of pre-relief and post-relief transfers).

(4) The Commission is proposing a new subpart C to part 190, governing the bankruptcy of a clearing organization. As explained in further detail in connection with proposed § 190.11, the Commission is proposing to establish ex ante the approach to be taken in addressing such a bankruptcy, in order to foster prompt action in the event such a bankruptcy occurs, and in order to establish a clear counterfactual (

i.e.,

“what would creditors receive in a liquidation in bankruptcy?”) in the event of a resolution of a clearing organization pursuant to Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act

(hereinafter, “Title II” and “Dodd-Frank”).

The Commission's approach toward a DCO bankruptcy is characterized by three overarching concepts:

Public Law 111-203 (July 21, 2010).

Section 210(d)(2), 12 U.S.C. 5390(d)(2), provides that the maximum liability of the FDIC, acting as a receiver for a covered financial company in a resolution under Title II, is the amount the claimant would have received if the FDIC had not been appointed receiver and the covered financial company had instead been liquidated under chapter 7 of the Bankruptcy Code. Thus, in developing resolution strategies for a DCO while mitigating claims against the FDIC as receiver, it is important to understand what would happen if the DCO was instead liquidated pursuant to chapter 7 of the Bankruptcy Code (and this part 190), and such a liquidation is the counterfactual to resolution of that DCO under Title II.

a. First, the trustee should follow, to the extent practicable and appropriate, the DCO's pre-existing default management rules and procedures and recovery and wind-down plans that have been submitted to the Commission.

These rules, procedures, and plans will, in most cases,

have been developed pursuant to the Commission's regulations in part 39, and subject to staff oversight. This approach relieves the trustee of the burden of developing, in the moment, models to address an extraordinarily complex situation. It would also enhance the clarity of the counterfactual for purposes of resolution under Title II.

See generally

proposed § 190.15.

Only those DCOs that are subject to subpart C of part 39 (

i.e.,

those that have been designated as systemically important by the FSOC or that have elected to be subject to subpart C of part 39) are subject to § 39.35 (Default rules and procedures) and § 39.39 (Recovery and wind-down).

b. Second, resources that are intended to flow through to members as part of daily settlement (including both daily variation payments and default resources) should be devoted to that purpose, rather than to the general estate.

See generally

proposed § 190.19.

c. Third, other provisions would draw, with appropriate adaptations, from provisions applicable to FCMs.

See, e.g.,

proposed §§ 190.16, 190.17(c).

(5) The Commission is proposing to note the applicability of part 190 in the context of proceedings under the Securities Investors Protection Act (“SIPA”) in the case of FCMs subject to a SIPA proceeding,

and Title II of Dodd-Frank in the case of a commodity broker where the Federal Deposit Insurance Corporation (“FDIC”) is acting as a receiver.

Those would be FCMs that are also registered as broker-dealers with the Securities and Exchange Commission.

See generally

SIPA, 15 U.S.C. 78aaa

et seq.

(6) In light of lessons learned from the MF Global bankruptcy, the Commission is proposing changes to the treatment of letters of credit as collateral, both during business as usual and during bankruptcy, in order to ensure that, consistent with the pro rata distribution principle discussed in proposed § 190.00(c)(5) in section II.A.1 below, customers who post letters of credit as collateral suffer the same proportional loss as customers who post other types of collateral.

(7) The Commission is proposing in a number of areas to grant trustees enhanced discretion, based on both practical necessity and positive experience.

a. Recent commodity broker bankruptcies have involved many thousands of customers, with as many as hundreds of thousands of commodity contracts. Trustees must make decisions as to how to handle such customers and contracts in the days—in some cases, the hours—after being appointed. Moreover, each commodity broker bankruptcy has unique characteristics, and bankruptcy trustees need to adapt correspondingly quickly to those unique characteristics.

i. In order to foster the ability of the trustee to operate effectively, some of the changes would permit the trustee enhanced discretion generally.

ii. Others, recognizing the difficulty in treating large numbers of customers on a bespoke basis, would permit the trustee to treat them on an aggregate basis. These changes represent a move from a model where the trustee receives/complies with instructions from individual customers to a model—reflecting actual practice in commodity broker bankruptcies in recent decades—where the trustee transfers as many open commodity contracts as possible.

b. These grants of discretion are also supported by the Commission's positive experience working in cooperation and consultation with bankruptcy and SIPA trustees.

c. On a related note, and as discussed further as the third overarching concept in the section below on cost-benefit considerations,

both the current and proposed versions of part 190 favor cost effectiveness and promptness over precision in certain respects, particularly with respect to the concept of pro rata treatment. Following the policy choice made by Congress in section 766(h) of the Bankruptcy Code, the Commission is proposing that it is more important to be cost effective and prompt in the distribution of customer property (

i.e.,

in terms of being able to treat customers as part of a class) than it is to value each customer's entitlements on an individual basis. Doing so fosters transfer rather than liquidation of customer positions, and

return of most funds to customers in time periods of days or weeks rather than months or years. Similarly, calculations of each customer's funded balance are directed in proposed § 190.05 to be “as accurate as reasonably practicable under the circumstances, including the reliability and availability of information.” The quoted language would allow the trustee to avoid more precise calculations where such precision would not be cost effective or could not reasonably be accomplished on a prompt basis (for example, in a situation where price information for particular assets or contracts at particular times was not readily available). The Commission believes that this approach would lead to (1) in general, a faster administration of the proceeding, (2) customers receiving their share of the debtor's customer property more quickly, and (3) a decrease in administrative costs (and thus, in case of a shortfall in customer property, a greater return to customers).

See

the overarching concept discussed in section IV.C.3 below.

(8) Many of the changes are intended to update part 190 in light of changes to the regulatory framework over the past three decades, including cross-references to other Commission regulations. Some of these codify actual practice in prior bankruptcies, such as a requirement that an FCM notify the Commission of its imminent intention to file for voluntary bankruptcy. In another case, the Commission is addressing for the first time the interaction between part 190 and recent revisions to the Commission's customer protection rules.

78 FR 68506 (Nov. 14, 2013). This refers to proposed new § 190.05(f) in section II.B.3 below.

(9) Other changes follow from changes to the technological ecosystem, in particular changes from paper-based to electronic-based means of communication, (for example, the use of communication to customers' electronic addresses rather than by paper mail, as well as the use of websites as a means for the trustee to communicate with customers on a regular basis). The proposal would also recognize the change from paper-based to electronic recording of “documents of title.” Many of these changes also recognize the actual practice in prior bankruptcies.

(10) As discussed further below, many of the changes are intended to clarify language in existing regulations, without any intent to change substantive results. While some of these changes will, as discussed below, address ambiguities that have complicated past bankruptcies, this comprehensive revision of part 190 has also provided opportunities to clarify language in order to avoid future ambiguities, and to add provisions to address circumstances that have not yet arisen, in order to accomplish better and more reliably the goals of promptly and cost-effectively resolving commodity broker bankruptcies while mitigating systemic risk and protecting the commodity broker's customers.

The Commission seeks comment on these major themes. Do commenters agree or disagree with these themes and the analysis presented? Do commenters view proposed revised part 190 as appropriately implementing these major themes, or are some of the proposed changes inconsistent with (or does the proposal in some areas insufficiently address) these themes? General comments concerning these major themes are welcome, however, adding more specific suggestions for changes to the proposed regulations would be most helpful.

II. Proposed Regulations

A. Subpart A—General Provisions

The Commission is proposing technical corrections and updates to parts 1, 4 and 41, which are discussed in II.F. below.

1. Regulation § 190.00: Statutory Authority, Organization, Core Concepts, Scope, and Construction

The Commission is proposing a new § 190.00, which would contain general provisions applicable to all of part 190. Proposed § 190.00 is intended to assist trustees, bankruptcy courts, customers, clearing members, clearing organizations, and other interested parties in understanding the Commission's rationale for, and intent in promulgating, the specific provisions of this proposed part. Moreover, this regulation may be particularly useful in a time of crisis for those individuals who may not have extensive experience with the CEA or Commission regulations. This provision generally would state facts and concepts that exist in the Commission's bankruptcy regulations.

To the extent there are changes reflected in this proposed § 190.00, these changes will be identified and the reasoning for these changes will be further detailed in the relevant section below.

See

ABA Cover Note at 6:

The Committee recommends adding a rule to Subpart A that provides context and sets forth the general framework for the Part 190 Rules to assist a trustee or bankruptcy court in understanding the reasons for the specific requirements set forth in the other rules. If the individual appointed as the trustee, or the bankruptcy court, does not have extensive experience with the CEA or CFTC rules, in particular with requirements relating to clearing and customer funds segregation, the Part 190 Rules may well prove difficult to comprehend, particularly in the critical early days when the trustee is expected to act in circumstances that are likely chaotic and stressful. This context and description of the general framework will also be important to customers and other stakeholders that may not have experience with a subchapter IV proceeding.

Thus, the Committee has proposed Rule 190.00, which explains:

• The Commission's statutory authority to adopt the Part 190 Rules.

• The organization of the rules into the three subparts described above.

• The core principles reflected in the rules.

• The scope of the rules in terms of proceedings, account classes, customer property and commodity contracts.

Although Rule 190.00 adds to the length of the rules, on balance, we believe it provides useful explanation that will benefit trustees, bankruptcy judges, customers and other stakeholders applying the rules in practice.

Proposed § 190.00(a) would set forth the Commission's statutory authority to adopt the proposed part 190 regulations under section 8a(5) of the CEA, which empowers the Commission to “make and promulgate such rules and regulations as are necessary to effectuate any of the provisions or to accomplish any of the purposes of” the CEA, and section 20 of the CEA, which provides that the Commission may, notwithstanding the Bankruptcy Code, adopt certain rules or regulations governing a proceeding involving a commodity broker that is a debtor under subchapter IV of chapter 7 of the Bankruptcy Code.

Proposed § 190.00(b) would explain that the proposed part 190 regulations are organized into three subparts. Subpart A would contain general provisions applicable in all cases. Subpart B would contain provisions that apply when the debtor is a FCM, the definition of which includes acting as a foreign FCM.

Subpart C would contain provisions that apply when the debtor is a DCO as defined by the CEA. Proposed § 190.00(c) would present the core concepts

of proposed part 190. These core concepts are central to understanding how a commodity broker bankruptcy works. These include those related to commodity brokers and commodity contracts; account classes; public customers and non-public customers, Commission segregation

requirements, and member property

; porting of public customer commodity contract positions; pro rata distribution; and deliveries. More specifically, this paragraph would explain the following concepts:

See

CEA section 1a(28), 7 U.S.C. 1a(28). The definition of foreign FCM involves soliciting or accepting orders for the purchase or sale of a commodity for future delivery executed on a foreign board of trade, or by accepting property or extending credit to margin, guarantee or secure any trade or contract that results from such a solicitation or acceptance.

See

section 761(12) of the Bankruptcy Code, 11 U.S.C. 761(12).

The Commission is proposing to use the term “core concepts” to avoid confusion with the core principles applicable to registered entities.

Cf.

CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2).

“Member property” would be defined in proposed § 190.01 and would be used to identify cash, securities, or property available to pay the net equity claims of clearing members based on their house account at the clearing organization.

Cf.

11 U.S.C. 761(16).

• Proposed § 190.00(c)(1) would explain that subchapter IV of chapter 7 of the Bankruptcy Code applies to a debtor that is a “commodity broker,” the definition of which requires a “customer.”

Proposed § 190.00(c)(1) would further state that the rules in proposed part 190 apply to commodity brokers that are FCMs as defined by the Act, or DCOs as defined by the Act.

See

11 U.S.C. 101(6) (definition of “commodity broker”), 761(9) (definition of “customer” referred to in 101(6)).

• Proposed § 190.00(c)(2) would explain that the CEA and Commission regulations provide separate treatment and protections for different types of cleared commodity contracts or account classes. The four account classes would include the (domestic) futures account class (including options on futures),

the foreign futures account class (including options on foreign futures),

the cleared swaps account class for swaps cleared by a registered DCO (including cleared options other than options on futures or foreign futures),

and the delivery account class for property held in an account designated as a delivery account. Delivery accounts would be used for effecting delivery under commodity contracts that provide for settlement via delivery of the underlying when a commodity contract would be held to expiration or, in the case of an option on a commodity, would be exercised.

This corresponds to segregation pursuant to section 4d(a) of the CEA, 7 U.S.C. 6d(a).

This corresponds to segregation pursuant to section 30.7 (enacted pursuant to section 4(b)(2)(A) of the CEA, 7 U.S.C. 6(b)(2)(A).

This corresponds to segregation pursuant to section 4d(f) of the CEA, 7 U.S.C. 6d(f).

Delivery accounts are discussed further below in,

e.g.,

§§ 190.00(c)(6), 190.01 (definition of delivery account, cash delivery property, physical delivery property) and 190.06.

• Proposed § 190.00(c)(3)(i) would explain that in a bankruptcy, public customers are generally entitled to a priority distribution of cash, securities, or other customer property over “non-public customers,”

and both are given a priority over all other claimants (except for claims relating to the administration of customer property) pursuant to section 766(h) of the Bankruptcy Code.

That provision of the Code states explicitly that the trustee shall distribute customer property ratably to customers in priority to all other claims, except claims that are attributable to the administration of customer property. Notwithstanding any other provision of this subsection, a customer net equity claim based on a proprietary account may not be paid either in whole or in part, directly or indirectly, out of customer property unless all other customer net equity claims have been paid in full.

Non-public customers are customers who bear certain proprietary or other “insider” relationships to an FCM. This term would be more precisely defined in § 190.01.

Thus, as discussed further below, all customer property will be allocated to public customers so long as the funded balance in any account class for public customers is less than one hundred percent of public customer net equity claims. Once all account classes for public customers are fully funded (

i.e.,

at one hundred percent of net equity claims), any excess would be allocated to non-public customers' net equity claims until all of those are fully funded.

As noted in proposed § 190.00(c)(3)(i)(A), the cash, securities, or other property of public customers are subject to special segregation requirements under the CEA

and Commission regulations

for each class of account except delivery accounts. Although the transactions and property of non-public customers are not subject to segregation requirements, such transactions and property are deemed part of customer property. In the distribution of customer property, customer net equity claims of public customers are prioritized over those of non-public customers.

See, e.g.,

section 4d of the CEA, 7 U.S.C. 6d.

See, e.g.,

§§ 1.20-1.29, part 22, § 30.7.

As noted in proposed § 190.00(c)(3)(i)(B), the property in delivery accounts nonetheless constitutes “customer property,” and thus claims of public customers enjoy the same priority over claims of non-public customers in the distribution of delivery account property.

• Proposed § 190.00(c)(3)(ii) would address the division of customer property and member property in proceedings in which the debtor is a clearing organization. The classification of customers as non-public customers in contrast to public customers also would be relevant, in that each member of the clearing organization would have separate claims against the clearing organization with respect to (A) transactions cleared for its own account or for any of its non-public customers and (B) transactions cleared on behalf of the public customers of the member. In such a proceeding, customer property would consist of member property, which could be distributed to pay member claims based on members' house accounts, and customer property other than member property, which would be reserved for payment of claims for the benefit of members' public customers.

• Proposed § 190.00(c)(3)(iii) would address preferential assignment of property among customer classes and account classes in clearing organization bankruptcies: (1) Certain customer property, as specified in § 190.18(c), would be preferentially assigned to “customer property other than member property” instead of “member property” to the extent that there is a shortfall in funded balances for members' public customer claims. Moreover, to the extent that there are excess funded balances for members' claims in any customer class/account class combination, that excess also would be assigned preferentially to “customer property other than member property” for other account classes to the extent of any shortfall in funded balances for members' public customer claims in such account classes; (2) Where property would be assigned to a particular customer class with more than one account class, it would be assigned on a least funded to most funded basis among the account classes.

• Proposed § 190.00(c)(4) would explain that, in a proceeding in which the debtor is an FCM, part 190 details the policy preference for transferring to another FCM, (commonly known as “porting”) open commodity contract positions of the debtor's customers along with all or a portion of such customers' account equity. Porting mitigates risks to both the customers of the debtor FCM and to the markets. Specifically, porting (rather than the alternative, liquidation) of customer positions protects customers' hedges from changes in value between the time they are liquidated and the time, if any, that the customer may be able to re-establish them (and thus mitigates the market risk that some customers use the futures markets to counteract), and similarly protects customers' directional positions . Moreover, not all customers may be able to re-establish positions with the same speed—in particular, smaller customers may be subject to longer delays in re-establishing their positions. In addition, liquidation of an FCM's book of positions can increase volatility in the markets, to the detriment of all market participants (and also contribute to making it more expensive for customers to re-establish their hedges and other positions).

• Proposed § 190.00(c)(5) would address pro rata distribution. It would explain that, if the aggregate value of

customer property in a particular account class is less than the amount needed to satisfy the net equity claims of public customers in that account class (

i.e.,

there is a “shortfall”), customer property in that account class would be distributed pro rata to those public customers. The pro rata distribution principle carries forth the statutory direction in section 766(h) of the Bankruptcy Code. It would ensure that all public customers within an account class will suffer the same proportional loss, including those public customers that post as collateral letters of credit or specifically identifiable property.

In prior bankruptcies, some customers posting letters of credit or specifically identifiable property as collateral sought to escape pro rata treatment for these categories of collateral, contrary to the Commission's intent.

See

discussion of § 190.04(d)(3) in section II.B. below.

Moreover, any customer property that would not be attributable to any particular account class or which is in excess of public customer net equity claims for the account class to which it is attributed, would be distributed to public customers in respect of net equity claims in other account classes where there is a shortfall. Thus, as noted in § 190.00(c)(3), all public customer net equity claims would receive priority over non-public customer claims.

• Proposed § 190.00(c)(6) would address deliveries. It would explain that the delivery provisions of part 190 apply to any commodity that is subject to delivery under a commodity contract, including agricultural commodities, other non-financial commodities (such as metals or energy) and commodities that are financial in nature (including virtual currencies). In the ordinary course of business, commodity contracts with delivery obligations are offset before reaching the delivery stage (

i.e.,

prior to triggering bilateral delivery obligations). Nonetheless, when delivery obligations do arise, a delivery default could have a disruptive effect on the cash market for the commodity and could adversely impact the parties to the transaction.

See

ABA Cover Note at 12 (“It is important to address deliveries to avoid disruption to the cash market for the commodity or adverse consequences to parties that may be relying on delivery taking place in connection with their business operations.”).

In a proceeding in which the debtor is an FCM, the delivery provisions in proposed part 190 would reflect the policy preferences (A) to liquidate commodity contracts that settle via delivery before they move into a delivery position and (B) when contracts do move into a delivery position, to allow the delivery to occur, where practicable, outside the administration of the debtor's estate (

i.e.,

directly between the debtor's customer and the delivery counterparty assigned by the clearing organization).

Proposed § 190.00(d)(1)(i) would acknowledge that section 101(6) of the Bankruptcy Code recognizes “commodity options dealers” and “leverage transaction merchants” as defined in sections 761(6) and (13) of the Bankruptcy Code, as separate categories of commodity brokers. However, since there are no commodity options dealers or leverage transaction merchants currently registered,

in proposed § 190.00(d)(1), the Commission would declare its intent to adopt regulations with respect to commodity options dealers and leverage transaction merchants, respectively, at such time as an entity registers as such.

See

ABA Cover Note at 5 (“To our knowledge, no person is currently registered or operating as a commodity option dealer or leverage transaction merchant. . . . Thus, we recommend uncluttering the rules by limiting their scope to subchapter IV proceedings of commodity brokers that are FCMs or DCOs, with respect to commodity contracts that are cleared.”).

Proposed § 190.00(d)(1)(ii) would provide that, pursuant to the Securities Investor Protection Act (“SIPA”),

the trustee in a SIPA proceeding where the debtor is also a commodity broker has the same duties as a trustee in a proceeding under subchapter IV of chapter 7 of the Bankruptcy Code, to the extent consistent with SIPA or as ordered by the court.

This part would implement subchapter IV of chapter 7 by establishing the trustee's duties thereunder, consistent with the broad authority granted to the Commission pursuant to section 20 of the CEA. Therefore, this part also would apply to a proceeding commenced under SIPA with respect to a debtor that is registered as a broker or dealer under section 15 of the Securities Exchange Act of 1934

when the debtor also is an FCM.

15 U.S.C. 78aaa,

et seq.

See

SIPA section 7(b), 15 U.S.C. 78fff-1(b) (To the extent consistent with the provisions of SIPA or as otherwise ordered by the court, a trustee shall be subject to the same duties as a trustee in a case under chapter 7 of title 11, including, if the debtor is a commodity broker, as defined under section 101 of such title, the duties specified in subchapter IV of such chapter 7).

15 U.S.C. 78

Moreover, in the context of a resolution proceeding under Title II of Dodd-Frank, section 210(m)(1)(B)

provides that the FDIC (in its role as resolution authority) must apply the provisions of subchapter IV of chapter 7 of the Bankruptcy Code in respect of the distribution of customer property and member property of a resolution entity

that is a commodity broker as if the resolution entity were a debtor for purposes of subchapter IV. Proposed § 190.00(d)(1)(iii) would explain that this part shall serve as guidance with respect to distribution of property in a proceeding in which the FDIC acts as a receiver for an FCM or DCO pursuant to Title II of Dodd-Frank.

12 U.S.C. 5390(m)(1)(B).

That is, the entity being resolved under Title II. Section 210(m)(1)(b) refers to “any covered financial company or bridge financial company.”

12 U.S.C. 5390(m)(1)(B) provides that the FDIC must apply the provisions of subchapter IV of chapter 7 of the Code with respect to the distribution of customer property and member property in connection with the liquidation of a commodity broker that is a “covered financial company” or “bridge financial company” (terms defined in 12 U.S.C. 5381(a)).

Proposed § 190.00(d)(2)(i) would clarify that a trustee may not recognize any account classes not explicitly provided for in proposed part 190.

Proposed § 190.00(d)(2)(ii) would provide that no property that would otherwise be included in customer property, as defined in proposed § 190.01 of this part, shall be excluded from customer property because it is considered to be held in a constructive trust, resulting trust, or other trust that is implied in equity.

Generally, in a commodity broker bankruptcy, the basis for distributing segregated customer property is pro rata treatment and transparency. To achieve this goal, the FCM's segregation records (including account statements) and reporting to the Commission and self-regulatory organizations (“SROs”) and DCOs must reflect what is actually available for customers. This allows FCMs, SROs, DCOs, and the Commission to ensure, during business as usual, that (a) customer property is being properly protected pursuant to the segregation requirements of section 4d of the CEA and the regulations thereunder, and (b) customer property is not subject to hidden arrangements that cannot be accounted for transparently and reliably. Through this regulation, the Commission is making clear that customer property cannot be burdened by equitable trusts. Attempting to

account for such equitable trusts in a bankruptcy proceeding under part 190 would undermine the Commission's implementation and enforcement of the statutory scheme under the CEA.

This is in contrast to the (ultimately unsuccessful) claims of certain retail customers in the Peregrine bankruptcy, who claimed that their off-exchange retail foreign currency transactions and associated margin collateral were held in a constructive or resulting trust by Peregrine. An off-exchange retail foreign currency transaction is not defined as “commodity contract” under section 761(4) of the Bankruptcy code. Accordingly, counterparties that engage in off-exchange retail transactions with an FCM are not subject to the protections provided by part 190 with respect to their accounts in the event of the FCM's bankruptcy.

See generally Secure Leverage Group, Inc.

Bodenstein,

558 B.R. 226 (N.D. Ill. 2016)

aff'd

866 F.3d 775 (7th Cir. 2017).

The ABA Submission included a more complex approach to this subsection:

Absent extraordinary circumstances and upon application by the trustee (such as to address transfers of funds initiated prior to, but completed after, the entry of the order for relief), so long as there is any shortfall of customer property needed to satisfy customer net equity claims in the classes enumerated in § 190.01 of this part, no person is entitled to a distribution of any property in which the debtor holds any interest on the basis that the debtor holds such property in a `constructive trust' for such person. The foregoing does not restrict any rights a person may have to distribution of property held by the debtor that is not covered by an account class on a ‘custodial' or express trust basis pursuant to statute, governmental rule, regulation or order, or legally binding written agreement between the debtor and such person.

The Commission concludes that the ABA Submission's approach here is overly complicated (both in the level of detail and, in particular, with relation to evaluating what constitutes “extraordinary circumstances”), and has instead determined to propose the more direct approach discussed above.

Proposed § 190.00(d)(3) would provide that certain transactions, contracts or agreements are excluded from the term “commodity contract.” The contracts that would be excluded include: Options on commodities unless cleared by a DCO (or, in the context of a foreign futures clearing member, a foreign clearing organization); forwards (defined as such pursuant to the exclusions in sections 1a(27) or 1a(47)(B)(ii) of the CEA), unless they are cleared by a DCO (or, in the context of a foreign futures clearing member, a foreign clearing organization); security futures products when they are carried in a securities account; retail foreign currency transactions described in sections 2(c)(2)(B) or (C) of the CEA; security-based swaps or other securities carried in a securities account

(other than security futures products carried in an enumerated account class); and retail commodity transactions described in section (2)(c)(2)(D) of the CEA (other than transactions executed on or subject to the rules of a designated contract market (“DCM”) or foreign board of trade (“FBOT”) as if they were futures). The agreements and transactions that would be so excluded have traditionally not been considered to be commodity contracts for purposes of segregation and customer protection, while those that are excepted from these exclusions are so considered, and thus are covered by part 190.

Security-based swaps and securities that are carried in a securities account are part of this exclusion because they are protected under SIPA.

As the ABA Cover Note explains:

The Committee believes it is important for the rules to cover cleared OTC transactions in contracts that may be outside the swap definition and futures contract classification, such as foreign exchange forwards or foreign exchange swaps excluded by the Treasury Department or spot forex transactions, because such transactions are already being cleared by DCOs as if they are swaps. It is the Committee's understanding that the DCOs are clearing such OTC transactions under the account structure, and subject to the customer funds segregation rules, for cleared swaps prescribed in the CFTC Part 22 Rules. Thus, we have included such commodity contracts in the cleared swaps account class.

ABA Cover Note at 8 (footnote omitted).

Positions or transactions that would be covered by part 190 include:

• As part of the cleared swaps account class (discussed in further detail in the definitions section), “swaps” as defined in section 1a(47) of the CEA and § 1.3 that are cleared by a DCO, including options on commodities cleared by a DCO unless otherwise excluded, and non-swap/non-futures contracts that are traded over-the-counter on a swap execution facility and cleared by a DCO as if they were swaps (cleared swaps account class).

See

the definition of commodity contract in proposed § 190.01in conjunction with the definition of swap in proposed § 190.01.

• As part of the futures or foreign futures account class (discussed in further detail in the definitions section), futures or options on futures executed on or subject to the rules of a DCM or FBOT, including retail commodity contracts if they were traded on such market “as if” they are futures and forward contracts which are cleared by a DCO as if they were futures.

See

the definition of commodity contract in proposed § 190.01 in conjunction with the definition of swap in proposed § 190.01.

Proposed § 190.00(e) would address the context in which proposed part 190 should be interpreted. It states that any references to other Federal rules and regulations refer to the most current versions of these rules and regulations (

i.e.,

“as the same may be amended, superseded or renumbered”). Moreover, where they differ, the definitions set forth in proposed § 190.01 shall be used instead of the defined terms set forth in section 761 of the Bankruptcy Code. It should be noted that the other regulations in proposed part 190 are designed to be consistent with subchapter IV of chapter 7 of the Bankruptcy Code.

Proposed § 190.00(e) also addresses account classes in the context of portfolio margining and cross margining programs. Where commodity contracts (and associated collateral) that would be attributable to one account class are, instead, commingled with the commodity contracts (and associated collateral) in a second account class (the “home field”), then the trustee must treat all such commodity contracts and associated collateral as being held in, and consistent with the regulations applicable to, an account of the second account class. The approach of following the rules of the “home field” also pertains to securities positions held in a commodity account class (and thus treated in accord with the relevant commodity account class) and commodity contract positions (and associated collateral) held in the securities account, in which case the rules applicable to the securities account will apply, consistent with section 16(2)(b)(ii) of SIPA, 15 U.S.C. 78lll(2)(b)(ii).

The Commission requests comment with respect to all aspects of proposed § 190.00. In particular, is a regulation setting forth core concepts useful? Are the core concepts that are addressed under or over inclusive? Are the definitions and discussions for each core concept helpful?

2. Regulation § 190.01: Definitions

The Commission would update the definitions for proposed revised part 190. The current and proposed definitions are in § 190.01. Most of the changes in proposed § 190.01 would be conforming changes, such as correcting cross-references and deleting definitions of certain terms that are not used in proposed part 190. Other changes would tie the definitions in § 190.01 more closely to the definitions in § 1.3 and other Commission regulations, to reflect changes in Commission regulations. In some cases, the Commission is proposing more substantive changes to the definitions, such as amending or adding definitions to further clarify and provide additional details where the current definitions are silent or unclear, or to reflect concepts that are new to proposed part 190. In particular, the Commission is proposing to separate the delivery account class into two sub-classes, a physical delivery account class and a cash delivery account class; the relevant terms are defined below. The proposed definitions of commodity contract and physical delivery property would codify positions that the Commission has taken in recent commodity broker bankruptcies.

Respectively,

In Re Peregrine Financial Group

and

In Re MF Global, Inc.

The Commission is also proposing to amend the current § 190.01 to replace the paragraphs currently identified with an alphabetic designation for each defined term (

e.g.,

“§ 190.01(ll)”) with a simple alphabetized list, as is recommended by the Office of the Federal Register, and as recently

implemented by the Commission with respect to,

e.g.,

§ 1.3.

See generally

83 FR 7979, 7979 & n.6 (Feb. 23, 2018).

The Commission is proposing the following definitions in proposed § 190.01:

“Account Class”: The current definition of the term account class specifies that it includes certain types of customer accounts, each of which is to be recognized as a separate class of account. The types are “futures account,” “foreign futures accounts,” “leverage accounts,” “delivery accounts,” and “cleared swaps accounts.” The proposed definition of the term “account class” would be expanded to include definitions of each of these account classes. However, as discussed above with respect to proposed § 190.00(d)(1)(i), the “commodity options” and “leverage account” account classes are proposed to be removed, at least temporarily.

The definition of “futures account” would cross-reference the definition of the same term in § 1.3, while the definition of “cleared swaps account” cross-references the definition of “cleared swaps customer account” in § 22.1. Each of these definitions applies to both FCMs and DCOs. The definition of “foreign futures account” cross-references the definition of “30.7 account” in § 30.1(g). As that latter definition is limited to FCMs, a corresponding reference to such accounts at a clearing organization would be included, in the event that a clearing organization clears foreign futures transactions for members that are FCMs, where those accounts are maintained on behalf of those FCM members' 30.7 customers (as that latter term is defined in § 30.1(f)). This would not apply to the case where a foreign clearing organization is clearing foreign futures for clearing members that are not subject to the requirements of § 30.7.

Paragraph (1)(iv) of the definition of account class would address the delivery account class. The delivery account class is relevant when an FCM or DCO establishes delivery accounts through which it accounts for the making or taking of physical delivery under commodity contracts whose terms require settlement by delivery of a commodity, in either case in an account designated as a delivery account on the books and records of the entity.

Paragraph (1)(iv)(A)(

) would define delivery accounts for FCMs, and would be based on current § 190.05(a)(2). Paragraph (1)(iv)(A)(

) would incorporate the same concepts for clearing organizations, and also adds in additional concepts. Specifically, a clearing organization may act as a central depository for physical delivery property represented by electronic title documents, or otherwise in electronic (dematerialized) form.

As set forth in paragraph (1)(iv)(B), the delivery account class would be subdivided into separate physical and cash delivery account classes, as provided in proposed § 190.06(b).

Customer property held in a delivery account is not subject to Commission segregation requirements. Thus, it may be more challenging and time-consuming to identify customer property for the delivery account class.

It should be noted that under the proposed regulations, “physical delivery property” refers to a commodity that is held in a form that can be delivered, including,

e.g.,

virtual currencies, and (in contrast to current § 190.01(ll)(3)), is not limited to physical (

i.e.,

tangible) commodities.

As the ABA Committee noted:

Based on lessons learned from the MF Global bankruptcy, those challenges are likely greater for tracing cash. Physical delivery property, in particular when held in the form of electronic documents of title as is prevalent today, is more readily identifiable and less vulnerable to loss, compared to cash delivery property that an FCM may hold in an operating bank account.

ABA Cover Note at 14.

See also In re MF Global Inc.,

2012 WL 1424670 (noting how physical delivery property was traceable).

(and such cash would thus be commingled with the FCM's own cash intended for operations). Thus, separating (1) cash delivery property and customer claims therefor from (2) physical delivery property and customer claims therefor, would promote the more efficient and prompt distribution of the latter to customers.

For these reasons, the Commission is proposing that the delivery account class be further divided into physical delivery and cash delivery account classes, for purposes of pro rata distributions to customers for their delivery claims.

The claims with respect to these subclasses are fixed on the filing date. Thus, the physical delivery account class includes, in addition to certain physical delivery property, cash delivery property received post-filing date in exchange for physical delivery property held on the filing date that has been delivered under a commodity contract. Conversely, the cash delivery account class includes, in addition to certain cash delivery property, physical delivery property that has been received post-filing date in exchange for cash delivery property held on the filing date.

Paragraph (2) of the definition of account class would address commingling orders and rules. Specifically, there are cases where commodity contracts (and associated collateral) that would be attributable to one account class are held separately from contracts and collateral associated with that first account class, and instead are allocated to a different account class and commingled with contracts and collateral in such account class. This would take place because the contracts in question are risk-offsetting to contracts in the latter account class.

This commingling may be authorized pursuant to a Commission regulation or order, or pursuant to a clearing organization rule that is approved in accordance with § 39.15(b)(2). Paragraph (2) would confirm that the trustee must treat the commodity contracts in question (and the associated collateral) as being held in an account of the latter account class.

This could involve portfolio margining within a DCO or cross-margining between a DCO and another central counterparty, which may or may not be a derivatives clearing organization.

Paragraph (3) of the definition of account class would address cases where the commodity broker establishes internal books and records in which it records a customer's commodity contracts and collateral, and related activity. It would confirm that the commodity broker is considered to maintain such an account for the customer regardless of whether it has kept such books and records current or accurate.

“Act” is proposed to be added to the definitions in proposed § 190.01 to refer to the Commodity Exchange Act.

“Allowed net equity” is proposed to be revised to update cross-references and to allow for two definitions of the term (as used in subparts B and C of part 190).

“Bankruptcy code” is proposed to be revised to update cross-references.

“Business day” is proposed to be described further by defining what constitutes a Federal holiday. The definition also would clarify that the end of a business day is one second before the beginning of the next business day.

“Calendar day” is proposed to be amended to include a reference to Washington, DC as the location of the Calendar day.

“Cash delivery account class” is proposed to be cross-referenced to the new definition in “account class.”

“Cash delivery property” and “physical delivery property” are proposed to be added.

The current definition of “delivery account,” § 190.05(a)(2), refers to an account that contains only property described in three of the nine categories of property in the definition of “specifically identifiable property.” Following the suggestion of the ABA Committee,

the Commission is proposing to define directly a delivery account class, taking elements of the definition from the current definition of “specifically identifiable property,” as discussed below with reference to the proposed changes to that definition. The proposed regulation will separate delivery property into subcategories, with separate definitions of “cash delivery property” and “physical delivery property.”

See

ABA Cover Note at 10.

Defining these terms would also be relevant for proposed § 190.06, which would address the process for making or taking physical delivery under commodity contracts, including deliveries that may occur outside a delivery account.

The proposed definition of cash delivery property would carry through the concepts from current § 190.01(ll)(4) and (5) that the cash or cash equivalents, or the commodity, must be identified on the books and the records of the debtor as having been received, from or for the account of a particular customer, on or after three calendar days before the relevant (i) first delivery notice date in the case of a futures contract or (ii) exercise date in the case of an option.

The proposed definition of physical delivery property includes, under the four specified sets of circumstances discussed below, a commodity, whether tangible or intangible, held in a form that can be delivered to meet and fulfill delivery obligations under a commodity contract that settles via delivery if held to a delivery position.

The definition would note that this includes warehouse receipts, shipping certificates or other documents of title (including electronic title documents) for the commodity, or the commodity itself.

The current definition is found in § 190.01(ll)(3), and focuses on documents of title and physical commodities.

Some of the changes in the definition address changes in delivery practices since the 1980s. The reference to electronic title documents explicitly would recognize that “title documents for commodities are now commonly held in dematerialized, electronic form, in lieu of paper.” Moreover, the types of commodities that might be physically delivered would extend beyond tangible commodities to those that are intangible, including Treasury securities, foreign currencies, or virtual currencies.

See

ABA Cover Note at 10, 12-13.

For purposes of analytical clarity, the definition of physical delivery property would be separated into four categories:

First, commodities or documents of title for commodities that the debtor holds for the account of a customer for purposes of making delivery of such property and which, as of the filing date or thereafter, can be identified as held in a delivery account for the benefit of such customer on the books and records of the debtor.

These first two categories together correspond to current § 190.01(ll)(3), with the first category corresponding to physical delivery property held for the purpose of

making

delivery and the second category corresponding to physical delivery property held as a result of

taking

delivery. The property that is (or should be) within these two categories, as of the filing date, comprises the property that will be distributed as part of the physical delivery account class.

Second, commodities or documents of title for commodities that the debtor holds for the account of the customer, where the customer received or acquired such property by taking delivery under an expired or exercised commodity contract, and which, as of the filing date or thereafter, can be identified as held in a delivery account for the benefit of such customer on the books and records of the debtor.

The current definition does not prescribe or imply a limit to how long such received property can be held in a delivery account, because there is no principled basis to draw a bright line delineating how long is too long. The proposed definition explicitly would codify that position.

The third category addresses property that (a) is in fact being used, or has in fact been used, for the purpose of making or taking delivery, but (b) is held in a futures, foreign futures, cleared swaps, or (if the commodity is a security) securities account.

This property would be considered physical delivery property

solely

for the purpose of the obligations, pursuant to proposed § 190.06, to make or take delivery of physical delivery property. Property in this category would be

distributed

as part of the account class in which it is held (futures, foreign futures, or cleared swaps, or, in the case of a securities account, as part of a SIPA proceeding).

See

ABA Cover Note at 13 (“When the FCM has a role in facilitating delivery, deliveries may occur via title transfer in a futures account, foreign futures account, cleared swaps account, delivery account, or, if the commodity is a security . . . in a securities account.”).

Fourth, where such commodities or documents of title are not held by the debtor, but are delivered or received by a customer in accordance with proposed § 190.06(a)(2) (either by itself in the case of an FCM bankruptcy or in conjunction with proposed § 190.16(a) in the case of a clearing organization bankruptcy), they will be considered physical delivery property, but, again,

solely

for purposes of obligations to make or take delivery of physical delivery property pursuant to proposed § 190.06.

As this property is held outside of the debtor's estate (and there was no obligation to transmit it to the debtor's customer accounts), it is not subject to pro rata distribution.

As noted immediately above, the third and fourth categories of physical delivery property are not part of the physical delivery account class. They are included because the Commission is proposing, consistent with the suggestion in the ABA Submission for § 190.06 and the ABA Cover Note “to provide more specificity than is found in current [§ ] 190.05 on how to accomplish delivery” where “[o]pen positions . . . get caught in delivery position where parties incur bilateral contractual obligations.”

Id.

at 13. This more ramified approach to setting out obligations in connection with delivery requires a correspondingly broader definition of physical delivery property.

“Cash equivalents” is proposed to be added to define assets that might be accepted as a substitute for United States dollar cash.

“Cleared swaps account” is proposed to be cross-referenced to the new definition in “account class.”

“Clearing organization” is proposed to be revised to update cross-references.

“Commodity broker” is proposed to be updated to reflect the current definition of commodity broker in the Bankruptcy Code and the relevant cross-references.

“Commodity contract” is proposed to be amended to incorporate and extend in context (through references to current Commission regulations) the definition in section 761(4) of the Bankruptcy Code.

It should be noted that, consistent with proposed § 190.00(d)(3)(iv) and the decision

In re Peregrine Financial Group, Inc.,

866 F.3d 775, 776 (7th Cir. 2017),

adopting by reference Secure Leverage Group, Inc.

Bodenstein,

558 B.R. 226 (N.D. Ill. 2016), retail foreign exchange contracts do not fit within the definition of commodity contracts.

“Commodity contract account” is proposed to be added to refer to accounts of a customer based on commodity contracts in one of the account classes, as well as, for purposes of identifying customer property for the foreign futures account class, accounts maintained by foreign futures intermediaries or foreign clearing organizations reflecting foreign futures.

“Court” is proposed to be clarified to refer to the court having jurisdiction over the debtor's estate, reflecting that such court may not be a bankruptcy court (

e.g.,

in the event of a withdrawal of the reference.)

Cf.

28 U.S.C. 157(d).

“Cover” is proposed to be reworded to improve clarity; no substantive change is intended.

“Customer” is proposed to be revised to reflect the revisions to part 190 through this rulemaking, specifically, noting the different meanings of “customer” with respect to an FCM in contrast to with respect to a DCO.

“Customer claim of record” is proposed to be reworded to improve clarity; no substantive change is intended.

“Customer class” is proposed to be revised to reflect the revisions to part 190 through this rulemaking, specifically emphasizing the difference between public customers and non-public customers.

“Customer property, customer estate” is proposed to be updated to clarify cross-references and to note that customer property distribution is also addressed in section 766(i) of the Bankruptcy Code.

“Dealer option” is proposed to be eliminated as this term is no longer used.

“Debtor” is proposed to be revised to explicitly refer to commodity brokers involved in a bankruptcy proceeding, a proceeding under SIPA, or a proceeding under which the FDIC is appointed as a receiver.

“Delivery account” is proposed to be cross-referenced to the new definition in “account class.”

“Distribution” is proposed to be defined to include transfer of property on a customer's behalf, return of property to a customer, as well as distributions to a customer of valuable property that is different than the property posted by that customer.

“Equity” is proposed to be amended to update a cross-reference.

“Exchange Act” and “FDIC” definitions are proposed to be added as the Commission is taking into account both in these proposed rules.

“Filing Date” is proposed to be revised to include the commencement date for proceedings under SIPA or Title II of the Dodd-Frank Act.

In SIPA, the term “filing date” is defined to occur earlier than the filing of an application for a protective decree if the debtor is the subject of a proceeding in which a receiver, trustee, or liquidator for the debtor has been appointed and such proceeding is commenced before the date on which the application for a protective decree under SIPA is filed. In such case, the term “filing date” is defined to mean the date on which such proceeding is commenced. By contrast, this proposal does not define the term “filing date” to occur earlier in such a case, although it would (in proposed § 190.02(f), discussed below) authorize such a receiver to themselves file a voluntary petition for bankruptcy of the FCM.

This difference is due to the different uses of the “filing date” in these rules and in SIPA. For purposes of part 190, “filing date” refers to the date on and after which a commodity broker is treated as a debtor in bankruptcy.

See, e.g.,

proposed §§ 190.00(c)(4), 190.06(a)(1) and (b)(1), 190.08(b)(4), 190.09(a)(1)(ii)(A). For purposes of SIPA, by contrast, the “filing date” is the date on which securities are valued.

See, e.g.,

SIPA sections 8(b), 8(c)(1), 8(d), 9(a)(3), 15 U.S.C. 78fff-2(b), (c)(1), (d), 78fff-3(a)(3).

“Final net equity determination date” is proposed to be revised stylistically, to provide updated cross-references, and to further clarify who the parties involved are intended to be.

“Foreign board of trade” is proposed to be added, and adopts by reference the definition in § 1.3 (which is consistent with § 48.2(a)).

“Foreign clearing organization” is proposed to be added to refer to a clearing house, clearing association, clearing corporation or similar entity, facility or organization that clears and settles transactions in futures or options on futures executed on or subject to the rules of a foreign board of trade.

“Foreign future” and “Foreign futures commission merchant” are unchanged.

“Foreign futures account” is proposed to be cross-referenced to the new definition in “account class.”

“Foreign futures intermediary” is proposed to refer to a foreign futures or options broker, as defined in § 30.1, acting as an intermediary for foreign futures contracts between a foreign futures commission merchant and a foreign clearing organization.

“Funded balance” is proposed to be revised to refer to the definition in proposed § 190.08(c). That definition is discussed further below.

“Futures, futures contract” is proposed to be added to clarify what these terms mean for purposes of part 190.

“Futures account” is proposed to be cross-referenced to the new definition in “account class.”

“House account” is proposed to be modified to replace the current definition with one that (a) clarifies the connection between the concept of a “house account” in part 190 and the concept of a proprietary account in § 1.3, and (b) separately defines the term in relation to an FCM, in relation to a foreign futures commission merchant, and in relation to a DCO.

“In-the-money amount” is proposed to be deleted as the term will no longer be used. It is proposed to be replaced by “in-the-money,” a term that is Boolean, and is used in proposed § 190.04(c).

“Joint account” is proposed to be edited to reflect the fact that a commodity pool must be a legal entity.

Thus, the reference to a commodity pool that is not a legal entity is removed.

See

§ 4.20(a)(1).

“Leverage contract” and “Leverage transaction merchant” are proposed to be deleted, consistent with the discussion above with respect to proposed § 190.00(d)(1)(i)(B).

“Member property” is proposed to be moved from current § 190.09(a), and clarified to note that member property may be used to pay net equity claims based on claims on behalf of non-public customers of the member.

“Net equity” is proposed to be revised to update cross-references, including the difference between bankruptcy of an FCM and of a clearing organization.

“Non-public customer” and “public customer”: These definitions are complements (

i.e.,

every customer is either a public customer or a non-public customer, but not both). The Commission is proposing to define who is considered a public versus a non-public customer separately for FCMs and for clearing organizations.

In the case of a customer of an FCM, the proposed regulation would explicitly define “public customer.”

The definition of public customer would be analyzed separately for each of the relevant account classes (futures, foreign futures, cleared swaps, and delivery) with the relevant cross-references to other Commission regulations. For the futures account class, this would be a futures customer as defined in § 1.3 whose futures account is subject to the segregation requirements of section 4d(a) of the Act and the Commission regulations thereunder; for the foreign futures account class, a § 30.7 customer as defined in § 30.1 whose foreign futures account is subject to the segregation requirements of § 30.7; for the cleared swaps account class, a cleared swaps customer as defined in § 22.1 whose cleared swaps account is subject to the segregation requirements of part 22; and for the delivery account class, a customer that would be classified as a public customer if the property held in the customer's delivery account had been held in an account described in one of the prior three categories. This would tie the definition of public customer for bankruptcy purposes to the definitions of “customer” (and segregation requirements) that apply during business as usual. An FCM's

non-public customers would be defined as customers that are not public customers.

This is in contrast to the current definitions in § 190.01(cc) and (ii), which explicitly define non-public customer, and define public customer as a customer that is not a non-public customer. This proposed change would not be intended to be substantive, but rather would be intended to foster closely tying the account classes to business-as-usual segregation requirements.

As part of the process for introducing a bespoke regime for the bankruptcy of a clearing organization, the proposed definitions also would differentiate between public and non-public customers for those purposes. Specifically, customers of clearing members (whether such clearing members are FCMs or foreign brokers) acting on behalf of their proprietary (

i.e.,

house) accounts, would be non-public customers, while all other customers of clearing members would be public customers.

In the case of members of a DCO that are foreign brokers, the determination as to whether a customer of such a member is a proprietary member would be based on either the rules of the clearing organization or the jurisdiction of incorporation of such member: If either designates the customer as proprietary member, then the customer would be treated as a proprietary member.

“Open commodity contract” is proposed to be reworded to improve clarity; no substantive change is intended.

“Order for relief” is proposed to be revised to update cross-references and to be reworded for stylistic purposes.

“Person” is proposed to be added as a definition to clarify what this term means.

“Physical delivery account class” is proposed to be cross-referenced to the new definition in “account class.”

“Physical delivery property” See discussion above under “cash delivery property.”

“Premium” is proposed to be deleted as that term is no longer used.

“Primary liquidation date” is proposed to be revised to reflect the removal of the concept of accounts being held open for later transfer. As a result of such removal, the Commission would also delete current § 190.03(a), which sets forth provisions regarding the operation of accounts held open for later transfer, since there will no longer be any such accounts.

“Principal contract” is proposed to be deleted as that term is no longer used. This term was previously used to refer to contracts that are not traded on designated contract markets, but the definition excluded cleared swaps.

“Public customer” is discussed under non-public customer.

“Securities Account” and “SIPA” are proposed to be added to address the bankruptcy of an FCM that is also subject to the Securities Investor Protection Act. These are based on appropriate cross-references to the Exchange Act and SIPA.

“Security” is proposed to be changed to update the cross-reference to the Bankruptcy Code.

“Short term obligation” is proposed to be removed as the term is no longer used. It would be removed from the definition of specifically identifiable property, and the concept of a duration or maturity date of 180 days or less would be stated explicitly in the text of that latter definition.

“Specifically identifiable property”: The Commission is proposing a new definition that updates and streamlines the definition in current § 190.01(ll).

The proposal in paragraph (1)(i) would focus on “futures accounts,” “foreign futures accounts,” and “cleared swaps accounts.” Paragraph (1)(i)(A) of the proposed definition corresponds in major part to paragraphs (ll)(1) and (6) of the current definition. For securities, paragraph (1)(i)(A)(

) of the proposal substantially copies current paragraph (ll)(1)(i), but would clarify that a security is not a short term obligation when it has “a duration or maturity date of more than 180 days.” Paragraph (1)(i)(A)(

) of the proposal simply would reformat current paragraph (ll)(6). For warehouse receipts, bills of lading, or other documents of title (paragraph (i)(B), corresponding to current paragraph (ll)(1)(ii)), the proposal would restate the corresponding portion of the current definition.

Paragraph (1)(ii) of the definition in the proposal would further the approach of providing discretion to the trustee. It would include as specifically identifiable property commodity contracts that are treated as such in accordance with proposed § 190.03(c)(2). As discussed further below,

the latter provision would permit (but does not require) the trustee, following consultation with the Commission, to treat open commodity contracts of public customers as specifically identifiable property if they are held in a futures account, foreign futures account, or cleared swaps account that is designated as a hedging account in the debtor's books and records, and if the trustee determines that treating the commodity contracts as specifically identifiable property is reasonably practicable under the circumstances of the case. In contrast, paragraph (ll)(2) of the current definition is more prescriptive. It refers to open commodity contracts that meet the following criteria: They (A) have not been transferred, (B) are identified on the books and records of the debtor FCM as held for the account of a particular customer, and (C) are either bona fide hedging positions or transactions as defined in § 1.3 or are commodity option transactions that have been determined by the registered entity to be appropriate to the reduction of risks in the conduct and management of a commercial enterprise pursuant to rules that have been approved by the Commission pursuant to section 5c(c) of the CEA.

See

section II.B.1.

Paragraph (ll)(3) of the current definition refers to documents of title, including warehouse receipts or bills of lading, or physical commodities that, as of the filing date, can be identified on the books and records of the debtor as received from or for the account of a particular customer as held specifically for the purpose of delivery or exercise. These types of property, to the extent included in the debtors estate, would be transposed in the proposed regulations to paragraphs (1) through (3) of the definition of physical delivery property, in this proposed § 190.01, above, and discussed in that context.

Paragraph (ll)(4) of the current definition refers to cash or other property deposited prior to the entry of the order for relief to pay for the taking of physical delivery on a long commodity contract, or the payment of the strike price upon exercise of a short put or a long call option contract on a physical commodity. Correspondingly, paragraph (ll)(5) of the current definition refers to the cash price tendered, for property deposited prior to the entry of the order for relief, where such property (i) has been deposited to make physical delivery on a short commodity contract, or for exercise of a long put or a short call option contract on a physical commodity, and (ii) is identified on the books and records of the debtor as received from or for the account of a particular customer on or after three calendar days before the first notice date (for delivery) or exercise date (for exercise). In either case, current paragraph (ll)(5) requires the customer to make delivery or exercise the option in accordance with the applicable contract market rules. These items both refer to cash, which is fungible, and thus are excluded from the definition of specifically identifiable property, but are instead proposed to be addressed in the definition of cash delivery property, the proper treatment of which is addressed in proposed § 190.06(a)(3)(i)(B), discussed below.

Current paragraph (ll)(7), which refers to open commodity contracts that have been transferred, would be deleted, in that open commodity contracts that

have been transferred are no longer part of the debtor's estate, and thus no longer subject to liquidation as part of a bankruptcy. While the customer may well have to provide margin to the transferee in order to collateralize the contract, that requirement does not deny the customer the protection applicable to specifically identifiable property.

Current paragraph (ll)(8), limiting treatment as specifically identifiable property to the items specified in the definition thereof would be transposed to proposed paragraph (3), while current paragraph (ll)(9), which excludes security futures products and related collateral from specifically identifiable property, if they are held in a securities account, would be transposed to proposed paragraph (2).

“Strike price” is proposed to be reworded for brevity. No substantive change is intended.

“Substitute customer property”: The Commission is proposing to add this definition to refer to the property (in the form of cash or cash equivalents) delivered to the trustee by or on behalf of a customer in order to redeem either specifically identifiable property or a letter of credit.

“Swap” is proposed as the term used to refer to what is in the current regulation referred to as a “Cleared swap.”

The definition is proposed to be updated to reflect the current definition and meaning of the term “swap” under the Commission's rules and regulations outside of part 190. The definition also would add as a swap, for purposes of this part, “any other contract, agreement or transaction that is carried in a cleared swaps account pursuant to a rule, regulation or order of the Commission, provided, in each case, that it is cleared by a clearing organization [

i.e.,

a DCO] as, or the same as if it were, a swap.”

See

Current § 190.01(pp).

Cf.

11 U.S.C. 761(4)(F)(ii) (including as a commodity contract “with respect to a futures commission merchant or clearing organization, any other contract, option, agreement, or transaction, in each case, that is cleared by a clearing organization”).

“Truste

e”

is proposed to be amended to include the trustee in a SIPA proceeding.

“Undermargined”: The Commission proposes to define “undermargined” for purposes of part 190 as a futures account, foreign futures account, or cleared swaps account carried by the debtor is considered undermargined if the funded balance for such account is below the minimum amount that the debtor is required to collect and maintain for the open commodity contracts in such account under the rules of the relevant clearing organization, foreign clearing organization, DCM, Swap Execution Facility (“SEF”), or FBOT. If any such rules establish both an initial margin requirement and a lower maintenance margin

requirement applicable to any commodity contracts (or to the entire portfolio of commodity contracts or any subset thereof) in a particular commodity contract account of the customer, the trustee will use the lower maintenance margin level to determine the customer's minimum margin requirement for such account. An undermargined account may or may not be in deficit.

For further discussion of maintenance margin and its relationship to initial margin,

see, e.g.,

https://www.cmegroup.com/education/courses/introduction-to-futures/margin-know-what-is-needed.html

An account is in deficit if the balance is negative (

i.e.,

the customer owes the debtor instead of the reverse). An account can be undermargined but not in deficit (if the balance is positive, but less than the required margin).

See

discussion of proposed § 190.04(b)(4). For example, if the margin requirement is $100 and the account balance is $20, the account is undermargined by 80, but is not in deficit. If the account loses a further $35, the balance would be ($15). The account would be in deficit by $15, and would be undermargined by $115.

“Variation Settlement” is proposed to be added to define the payments a trustee may make with respect to open commodity contracts. It would include “variation margin” as defined in § 1.3, and, in order to cover all of the potential obligations associated with an open commodity contract, also includes all other daily settlement amounts (such as price alignment payments) that may be owed or owing on the commodity contract.

The Commission requests comment with respect to all aspects of proposed § 190.01. In particular, are the revised definitions useful? Do any appear likely to lead to unintended consequences, and, if so, how may these best be mitigated?

3. Regulation 190.02: General

Proposed § 190.02(a)(1) is derived from current § 190.10(b)(1). There is one substantive change: the proposed section would permit a request to the Commission for exemption from any procedural provision (rather than limiting such requests to exemptions from, or extension of, a time limit). Such an exemption may be subject to conditions, and must be consistent with the purposes of this part and of subchapter IV of the Bankruptcy Code. This change would further major theme 7, discussed in section I.B above, of enhancing trustee discretion. It would allow,

e.g.,

the trustee to request to be permitted to extend a deadline or to amend a form.

Proposed § 190.02(a)(2)(i) and (ii), (a)(3), and (b), are derived from current §§ 190.10(b)(2), (3), and (4) and 190.10(d), respectively, with minor editorial and conforming changes.

Proposed §§ 190.02(c) (forward contracts), (d) (other), and (e) (rule of construction) would be transposed from current § 190.10(e), (g), and (h), respectively.

Proposed § 190.02(f) would be added to enhance customer protection in cases where a receiver has been appointed (pursuant to

e.g.,

section 6c of the CEA) for an FCM due to a violation or imminent violation

of the customer property protection requirements of section 4d of the CEA or of the regulations thereunder, or of the Commission's capital rule (§ 1.17 of this chapter). It would explicitly permit such a receiver to file a voluntary petition for bankruptcy of such FCM in appropriate cases. For example, the receiver may determine that, due to a deficiency in property in segregation, bankruptcy is necessary in order to protect customers' interests in customer property.

Section 6c of the CEA provides in relevant part that whenever it shall appear to the Commission that any person has engaged, is engaging, or

is about to engage

in any act or practice constituting a violation of any provision of this Act or any rule, regulation, or order thereunder the Commission may bring an action in the proper district court to enjoin such act or practice, or to enforce compliance with this Act. Section 6c also refers to an order appointing a temporary receiver to administer such restraining order and to perform such other duties as the court may consider appropriate. 7 U.S.C. 13a-1.

The Commission requests comment with respect to all aspects of proposed § 190.02. In particular, is it appropriate to permit trustees to request relief from procedural provisions such as requirements as to forms, in addition to requesting relief from deadlines? Is it appropriate to permit receivers for FCMs to file voluntary petitions in bankruptcy? Does any portion of proposed § 190.02 appear likely to lead to unintended consequences, and, if so, how may these be mitigated?

B. Subpart B—Futures Commission Merchant as Debtor

The provisions of subpart B (proposed §§ 190.03-190.10) address debtors that are FCMs.

1. Regulation § 190.03: Notices and Proofs of Claims

In proposed § 190.03, the Commission is proposing to reorganize and revise much of current § 190.02. Moreover, some portions of current § 190.10 have been reorganized into proposed § 190.03, and have been revised.

a. Regulation § 190.03(a): Notices—Means of Providing

Proposed § 190.03(a)(1) is substantially similar to current § 190.10(a). In an effort to modernize part 190, the Commission proposes to delete the current requirement that all mandatory or discretionary notices to be given to the Commission under part 190 be sent to the Commission via overnight mail (

i.e.,

hard copy). Proposed § 190.03(a)(1) would retain the requirement that all such notices be sent to the Commission via electronic mail. Overnight hard copy delivery is unnecessary, and removing the requirement to send notices to the Commission via overnight mail will result in cost savings.

Proposed § 190.03(a)(2) is a new paragraph proposed by the Commission to provide a general means of providing notice to customers under part 190. Proposed § 190.03(a)(2) would replace the specific procedures for providing notice to customers that currently appear in § 190.02(b) and, in light of evolving technology since the original issuance of part 190, implement a more generalized approach for giving notice to customers, whereby the trustee must establish and follow procedures “reasonably designed” for giving notice to customers under part 190. In addition, in an effort to modernize part 190, the Commission proposes to state that such notice procedures should generally include the use of a website and customers' electronic addresses. In the Commission's view, this new approach provides trustees with the necessary flexibility to determine the best way to provide notice to customers under part 190 and is consistent with the manner in which bankruptcy trustees in recent FCM bankruptcy cases have provided notice to customers. The Commission anticipates that adopting the more generalized approach to notifying customers set forth in proposed § 190.03(a)(2), rather than retaining the specific notice requirements in the existing regulations, including newspaper publication, will result in both cost savings for the debtor's estate, and more efficient and effective notification of customers.

The Commission requests comment as to the proposed approach to notice requirements set forth in proposed § 190.03(a). Are the proposed changes helpful? Do the proposed revisions appear likely to lead to unintended consequences, and, if so, how may such consequences be mitigated?

b. Regulation § 190.03(b): Notices to the Commission and Designated Self-Regulatory Organizations

Proposed § 190.03(b)(1) is derived from current § 190.02(a)(1). The time requirements set forth in proposed § 190.03(b)(1) are meant to ensure that the Commission and the relevant designated SRO (“DSRO”)

will be aware of a bankruptcy filing or SIPA application as soon as is practicable. These changes to the regulation are designed to codify the practices observed in recent bankruptcy and SIPA cases.

For further detail regarding SROs and DSROs

see generally

§ 1.52.

The Commission proposes to revise the time within which a commodity broker must notify the Commission in the event of a voluntary or involuntary bankruptcy filing.

First, proposed § 190.03(b)(1) would provide that, in the event of a voluntary bankruptcy filing, the commodity broker must notify the Commission and the appropriate designated SRO (“DSRO”) as soon as practicable before, and in any event no later than, the time of filing.

A voluntary case under a chapter of the Bankruptcy Code is commenced by the debtor by filing a petition under that chapter. Section 301(a) of the Bankruptcy Code, 11 U.S.C. 301(a). (A commodity broker may only be a debtor under chapter 7.

See generally

section 109 of the Bankruptcy Code, 11 U.S.C. 109.) Under certain circumstances, creditors of a person may file an involuntary case against that person pursuant to section 303 of the Bankruptcy Code, 11 U.S.C. 303. In such cases, the order for relief will be granted only if the petition is not timely controverted or if the court makes specific findings.

Id.

There is no historical precedent for an involuntary petition in bankruptcy being filed against a commodity broker.

The historical background of such notice is discussed below in section II.C.1.

Second, proposed § 190.03(b)(1) would provide that, in the event of an involuntary bankruptcy filing or an application for a protective decree under SIPA,

the commodity broker must notify the Commission and the appropriate DSRO immediately upon the filing of such petition or application.

A SIPA proceeding is commenced when SIPC files a petition for a protective order.

See generally

SIPA section 5, 15 U.S.C. 78eee.

Moreover, as a practical matter, a decision to file for bankruptcy takes measurable time, as does the preparation of the necessary papers. The Commission notes that, in previous FCM voluntary bankruptcy filings, the commodity broker has provided the Commission and its DSRO with notice ahead of the bankruptcy filing. Proposed § 190.03(b)(1) merely would codify the expectation that such advance notice should, in fact, occur to the extent practicable.

Proposed § 190.03(b)(1) further would amend current § 190.02(a)(1) by allowing the commodity broker to provide the relevant docket number of the bankruptcy or SIPA proceeding to the Commission and the DSRO “as soon as known,” in order to account for the fact that there may be a time lag between the filing of a proceeding and the assignment of a docket number. It is better that the Commission promptly be notified of the filing, rather than waiting for assignment and communication of the docket number.

Proposed § 190.03(b)(2), concerning intent to transfer customer accounts, is derived from current § 190.02(a)(2). Current § 190.02(a)(2) provides that the trustee, the applicable DSRO, or the commodity broker must notify the Commission of an intent to transfer or to apply to transfer open commodity contracts in accordance with section 764(b) of the Bankruptcy Code and relevant provisions of current part 190 no later than three days after the order for relief. Proposed § 190.03(b)(2) would remove the deadline for such notification because three days is likely in many cases to be too long, but may in some cases be too short.

The Commission expects that the bankruptcy trustee would begin working on transferring any open commodity contracts as soon as the trustee is appointed and that, by the end of three days following entry of the order for relief, any such transfers likely will be either completed, actively in process or determined not to be possible. Indeed, the Commission expects that a DCO would, in most cases, be reluctant to hold a position open for more than three days following entry of the order for relief unless a transfer is actively in process and imminent. Thus, while the Commission recognizes that the “[a]s soon as possible” language is somewhat vague, given past experience, the Commission views the current timeframe of three days after entry of the order for relief as generally too long, and it is not clear what precise shorter period of time would be generally appropriate, given the uniqueness of each case. Under different circumstances, that is, where transfer arrangements cannot be made within three days after the order for relief, a specified deadline for notification may in fact be harmful, in that it could be interpreted to prohibit notification after the expiration of such deadline (and thus, impliedly prohibit the trustee from forming the intent to transfer after that time).

In the event of an FCM bankruptcy, the Commission anticipates that there will be frequent contact between the trustee, the relevant DSRO, any relevant clearing organization(s), and the

Commission; thus, a specified deadline for such notification to occur would not appear to be helpful under such circumstances. The proposal also clarifies that notification should be made with respect to a transfer of customer property.

The Commission requests comment on proposed § 190.03(b). As proposed, would § 190.03 meet the objective of ensuring that the Commission and the relevant DSRO will be aware of a bankruptcy filing or SIPA proceeding as soon as is practicable? Why or why not?

c. Regulation § 190.03(c): Notices to Customers; Treatment of Hedging Accounts and Specifically Identifiable Property

Proposed § 190.03(c) introductory text would address notices to customers and treatment of hedging accounts and specifically identifiable property.

Proposed § 190.03(c)(1) would deal with notices to customers concerning specifically identifiable property other than open commodity contracts, and is derived from current § 190.02(b)(1). Proposed § 190.03(c)(1) would require the trustee to use all reasonable efforts to notify promptly any customer whose futures account, foreign futures account, or cleared swaps account includes specifically identifiable property, that such specifically identifiable property may be liquidated on and after the seventh day after the order for relief if the customer has not instructed the trustee in writing before the deadline specified in the notice to return such property pursuant to the terms for distribution of customer property contained in proposed part 190.

The Commission would remove the requirement that the trustee publish notice to customers regarding specifically identifiable property in a newspaper for two consecutive days prior to liquidating such property. Instead, the new notice requirement to customers under part 190 are contained in proposed § 190.03(a)(2), which would provide that a trustee must establish and follow procedures “reasonably designed for giving adequate notice to customers.” As noted above, this change is meant to provide the trustee with flexibility in notifying customers regarding specifically identifiable property, and to modernize part 190 to allow the trustee to provide notice to customers in a way that will maximize the number of customers reached.

Pursuant to current § 190.02(b)(1), the trustee may commence liquidation of specifically identifiable property on the sixth calendar day following the second publication date of the notice to customers. Because proposed § 190.03(c)(1) would not require newspaper publication of customer notice, the Commission would allow the trustee to commence liquidation of specifically identifiable property on the seventh day after the order for relief (or such other date as specified by the trustee with the approval of the Commission or the court), so long as the trustee has used all reasonable efforts promptly to notify the customer under § 190.03(a)(2) and the customer has not instructed the trustee in writing to return such specifically identifiable property.

With respect to the return of specifically identifiable property, proposed § 190.03(c)(1) would add that the trustee's notice to customers whose futures accounts, foreign futures accounts, or cleared swaps accounts include specifically identifiable property must specify the terms upon which such property may be returned, “including, if applicable and to the extent practicable, any substitute customer property that must be provided by the customer.” This addition is meant to make clear that the trustee's notice to customers with specifically identifiable property should include, where applicable, a reference to substitute customer property.

For an explanation of why proposed § 190.03(c)(1) would refer to “substitute customer property” rather than “cash,” please see discussion below, section II.B.7, in connection with proposed § 190.09(d)(1).

Proposed § 190.03(c)(2) would change how a bankruptcy trustee may treat open commodity contracts carried in hedging accounts to a categorical approach; it would replace the bespoke approach of current § 190.02(b)(2). Part 190 currently treats hedging positions as a type of specifically identifiable property, where the customer is given special rights, namely, to have the trustee endeavor to avoid liquidating its hedging positions.

Under current § 190.02(b)(2), the trustee treats customers with specifically identifiable open commodity contracts on a bespoke basis; specifically, to the extent the trustee does not receive transfer instructions regarding a customer's specifically identifiable open commodity contracts, the trustee is required to liquidate such contracts within a certain time period.

See

current §§ 190.01(ll), 190.02(f)(1)(ii), and 190.04(e)(1).

Proposed § 190.03(c)(2) would take a more categorical approach with respect to open commodity contracts. As discussed in major theme 7 in section I.B above, recent commodity broker bankruptcies have involved many thousands of customers, with as many as hundreds of thousands of commodity contracts. Trustees must make decisions as to how to handle such customers and contracts within days—in some cases, hours—after being appointed.

In light of the practical difficulties of treating such large numbers of customers with similar open commodity contracts on a bespoke basis, under proposed § 190.03(c)(2), the Commission is proposing instead to give the trustee authority (

i.e.,

an option, but not an obligation), to treat open commodity contracts of public customers held in hedging accounts designated as such in the debtor's records as specifically identifiable property, after consulting with the Commission and when practical under the circumstances.

To the extent the trustee exercises such authority, proposed § 190.03(c)(2) would provide that the trustee must notify each relevant public customer in accordance with proposed § 190.03(a)(2) and request that the customer provide instructions whether to transfer or liquidate the relevant open commodity contracts.