Bankruptcy Regulations

Federal RegisterApr 13, 2021

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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:

Final rule.

SUMMARY:

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

DATES:

Effective date:

The effective date for this final rule is May 13, 2021.

Compliance date:

The compliance date for § 1.43 is April 13, 2022, for all letters of credit accepted, and customer agreements entered into, by a futures commission merchant prior to May 13, 2021.

FOR FURTHER INFORMATION CONTACT:

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

rwasserman@cftc.gov,

Ward P. Griffin, Senior Special Counsel, 202-418-5425,

wgriffin@cftc.gov,

Jocelyn Partridge, 202-418-5926,

jpartridge@cftc.gov,

Abigail S. Knauff, 202-418-5123,

aknauff@cftc.gov,

Division of Clearing and Risk; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Background of the Notice of Proposed Rulemaking

B. Major Themes in the Revisions to Part 190

II. Finalized 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 (FCM) 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 Funded 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

G. Additional Comments

H. Supplemental Proposal

III. Cost-Benefit Considerations

A. Introduction

1. Baseline

2. Overarching Concepts

a. Changes to Structure of Industry

b. Trustee Discretion

c. Cost Effectiveness and Promptness Versus Precision

d. Unique Nature of Bankruptcy Events

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

f. Preference for Public Customers Over Non-Public Customers and for Both Over General Creditors

B. Subpart A—General Provisions

1. Regulation § 190.00: Statutory Authority, Organization, Core Concepts, Scope, and Construction: Consideration of Costs and Benefits

2. Regulation § 190.01: Definitions: Consideration of Costs and Benefits

3. Regulation § 190.02: General: Consideration of Costs and Benefits

4. Section 15(a) Factors—Subpart A

C. Subpart B—Futures Commission Merchant as Debtor

1. Regulation § 190.03: Notices and Proofs of Claims: Consideration of Costs and Benefits

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

3. Regulation § 190.05: Operation of the Debtor's Estate—General: Consideration of Costs and Benefits

4. Regulation § 190.06: Making and Taking Delivery Under Commodity Contracts: Consideration of Costs and Benefits

5. Regulation § 190.07: Transfers: Consideration of Costs and Benefits

6. Regulation § 190.08: Calculation of Funded Net Equity: Consideration of Costs and Benefits

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

8. Regulation § 190.10: Provisions Applicable to Futures Commission Merchants During Business as Usual: Consideration of Costs and Benefits

9. Section 15(a) Factors—Subpart B

D. Subpart C—Clearing Organization as Debtor

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

2. Regulation § 190.12: Required Reports and Records: Consideration of Costs and Benefits

3. Regulation § 190.13: Prohibitions on Avoidance of Transfers: Consideration of Costs and Benefits

4. Regulation § 190.14: Operation of the Estate of the Debtor Subsequent to the Filing Date: Consideration of Costs and Benefits

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

6. Regulation § 190.16: Delivery: Consideration of Costs and Benefits

7. Regulation § 190.17: Calculation of Net Equity: Consideration of Costs and Benefits

8. Regulation § 190.18: Treatment of Property: Consideration of Costs and Benefits

9. Regulation § 190.19: Support of Daily Settlement: Consideration of Costs and Benefits

10. Section 15(a) Factors—Subpart C

E. Changes to Appendices A and B

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

IV. Related Matters

A. Antitrust Considerations

B. Regulatory Flexibility Act

C. 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 Derivatives Clearing Organization (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 Notice of Proposed Rulemaking

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. In April of

this year, the Commission proposed a comprehensive revision of part 190 (the “Proposal”),

and in September of this year, the Commission issued a supplemental proposal (the “Supplemental Proposal”)

addressing a particular issue involving the interaction between bankruptcy and 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”).

85 FR 36000 (June 12, 2020).

85 FR 60110 (Sept. 24, 2020).

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

The Commission is revising part 190 comprehensively in light of several major changes to the industry over the 37 years since part 190 was first finalized. These changes include exponential growth in the speed of transactions and trade processing, important lessons learned over prior bankruptcies, and the increased importance of derivatives clearing organizations (“DCOs”) to the financial system.

In promulgating 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. In particular, the Proposal benefited from a thoughtful and detailed model set of part 190 rules submitted by the Part 190 Subcommittee of the Business Law Section of the American Bar Association (“ABA Subcommittee”).

In addition, and as discussed further below, the Commission benefited from thoughtful, analytical, and detailed public comments submitted in response to the Proposal and Supplemental Proposal.

The submission by the ABA Subcommittee cautioned that “[t]he views expressed in this letter, and the proposed Model Part 190 Rules, are presented on behalf of the [ABA Subcommittee]. 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.”

B. Major Themes in the Revisions to Part 190

The major themes in the revisions to part 190 include the following:

(1) The Commission is adding § 190.00, which sets out the statutory authority, organization, core concepts, scope, and rules of construction for part 190. More generally, this section sets out, after 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 provisions 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, arising from both title 11 of the United States Code (

i.e.,

the “Bankruptcy Code”), section 766(h), and Commission policy, 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 provisions 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.

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), and in current § 190.02(e).

(4) The Commission is promulgating a new subpart C to part 190, governing the bankruptcy of a clearing organization. In doing so, the Commission is establishing

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 more 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 Dodd-Frank.

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

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. However, as discussed further below, such plans are not rigid formulae. Moreover, the Commission's approach gives the trustee discretion in following those plans. Accordingly, the approach seeks to balance advance planning with flexibility to tailor the implementation to the specific circumstances.

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

i.e.,

those that have been designated as systemically important by the Financial Stability Oversight Council (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 plans).

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

See generally

§ 190.19.

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

See, e.g.,

§§ 190.16, 190.17(c).

(5) The Commission is noting 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) The Commission is enacting 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, 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 granting 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 public customers on a bespoke basis, would permit the trustee to treat public customers on an aggregate basis. These changes represent a move from a model where the trustee receives and complies with instructions from individual public 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 on an omnibus basis.

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,

part 190 favors 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's policy is 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. 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 III.A.2.c 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 § 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 and recording, (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) Finally, 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 invited comments on all aspects of the proposed rulemaking and received a total of 16 substantive comment letters in response.

The comments generally supported the adoption of revisions to part 190, though several provided suggestions as to particular elements of the proposal that should be modified, clarified, deleted, or otherwise improved. The Commission has adopted many, though not all, of these suggestions, and in some cases has sought to address the concerns raised through alternative drafting.

The Commission received comment letters submitted by the following: American Council of Life Insurers (ACLI); Better Markets, Inc. (Better Markets); Cboe Global Markets, Inc. (CBOE); CME Group Inc. (CME); Commodity Markets Council (CMC); Futures Industry Association (FIA); Investment Company Institute (ICI); Intercontinental Exchange Inc. (ICE); International Swaps and Derivatives, Inc. (ISDA); LCH Group (LCH); National Grain and Feed Association (NGFA); Options Clearing Corporation (OCC); Part 190 Subcommittee of the Business Law Section of the American Bar Association (ABA Subcommittee); Securities Industry and Financial Markets Asset Management Group and Managed Funds Association (SIFMA AMG/MFA);); Kathryn Trkla; Geoffrey Goodman; and Vincent Lazar, as individuals (Subcommittee Members), and Vanguard Group, Inc. (Vanguard).

The Commission also issued the Supplemental Proposal, which withdrew proposed § 190.14(b)(2) and (3), and proposed an alternative. The Commission received 5 substantive comment letters in response, each of which was from an entity that had also submitted a comment letter on the Proposal. For the reasons discussed in section II.H below, the Commission is not adopting the Supplemental Proposal.

II. Finalized Regulations

In the discussion below, the Commission highlights topics of interest to commenters and discusses comment letters that are representative of the views expressed on those topics. The discussion does not explicitly respond to every comment submitted; rather, it addresses important issues raised by the proposed rulemaking and analyzes those issues in the context of specific comments.

A. Subpart A—General Provisions

The Commission is adopting the proposed technical corrections and updates to parts 1, 4, and 41, which are discussed in section II.F. below. Moreover, as discussed in section II.B.8, parts of proposed § 190.10 are being adopted, but codified in part 1.

The Commission is adopting as subpart A (§§ 190.00-190.02) general provisions to address both debtors that are both FCMs and debtors that are DCOs.

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

The Commission is adopting § 190.00 as proposed with the addition of § 190.00(c)(3)(i)(C) and the modification to § 190.00(d)(3)(v), as set forth below. The Commission is adopting § 190.00 to set forth general provisions that state facts and concepts that exist in the Commission's bankruptcy regulations. It is applicable to all of part 190. The Commission's intent is 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 part 190. The Commission also believes that the 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.

The Commission requested comment with respect to all aspects of proposed § 190.00. The Commission also raised specific questions as to whether a regulation setting forth core concepts would be useful; whether the core concepts were under or over inclusive; and whether the definitions and discussions for each core concept would be helpful. The Commission received several comments expressing support for various aspects of proposed § 190.00, including comments from SIFMA AMG/MFA, CME, and the ABA Subcommittee. CME noted in particular that it believed that the regulation “may prove particularly useful to a trustee who has little experience with the CEA or the Commission's customer funds segregation rules, as they try to get `up to speed' in the critical early hours and days following the trustee's appointment when the trustee is expected to act quickly on various matters.”

The Commission is adopting § 190.00(a) to 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. The Commission received comments from CME and the ABA Subcommittee specifically supporting the inclusion of an explanation of the Commission's authority to adopt the part 190 regulations in § 190.00.

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

Subpart C contains provisions that apply when the debtor is a DCO, as defined by the CEA. The Commission received comments from the ABA Subcommittee, CME, and ICI in support of the reorganization of part 190.

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 adopting § 190.00(c) to set forth the core concepts

of part 190 that are central to understanding how a commodity broker bankruptcy works. These include concepts related to commodity brokers and commodity contracts, account classes, public customers and non-public customers, Commission segregation requirements, member property,

porting of public customer commodity contract positions,

pro rata

distribution, and deliveries.

The Commission is using 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” is defined in § 190.01 and will 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).

The Commission is adopting § 190.00(c)(1) to 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.”

Section 190.00(c)(1) states that the regulations in 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)).

The Commission is adopting § 190.00(c)(2) to 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 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 are used for effecting delivery under commodity contracts that provide for settlement via delivery of the underlying when a commodity contract is held to expiration or, in the case of an option on a commodity, is 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 § 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.

The Commission is adopting § 190.00(c)(3)(i) to prescribe the separate treatment of “public customers” and “non-public customers,” as defined in § 190.01, within each account class in the event of a proceeding in which the debtor is an FCM. It explains 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.

The Commission is adopting § 190.00(c)(3)(ii) to address the division of customer property and member property in proceedings in which the debtor is a clearing organization. In such a proceeding, customer property consists of member property, which is distributed to pay member claims based on members' house accounts, and

customer property other than member property, which is reserved for payment of claims for the benefit of members' public customers. The Commission is adopting § 190.00(c)(3)(iii) to address the preferential assignment of property among customer classes and account classes in clearing organization bankruptcies. Certain customer property, as specified in § 190.18(c), will be preferentially assigned to “customer property other than member property” (

i.e.,

property for the public customers of members) instead of “member property” to the extent that there is a shortfall in funded balances for members' public customer claims. To the extent that there are excess funded balances for members' claims in any customer class/account class combination, that excess will also 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. Where property will be assigned to a particular customer class with more than one account class, it will be assigned on a least funded to most funded basis among the account classes.

Section 766(h) of the Bankruptcy Code explicitly states that the trustee shall distribute 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. Thus, 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 will be allocated to non-public customers' net equity claims until all of those are fully funded.

The Commission is adopting § 190.00(c)(4) to 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”), the open commodity contract positions of the debtor's customers along with all or a portion of such customers' account equity.

Transfer or porting of customer positions 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).

The Commission is adopting § 190.00(c)(5) to address

pro rata

distribution. It explains 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 will 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 ensures 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.

Any customer property that is not 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, will 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.

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.2 below.

The Commission is adopting § 190.00(c)(6) to address deliveries. It explains 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. In a proceeding in which the debtor is an FCM, the delivery provisions in part 190 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).

The Commission received several comments expressing support for certain provisions in § 190.00(c) and two comments expressing concerns. CME expressed support for “limiting the scope of part 190 to the bankruptcy of a commodity broker that is an FCM or a DCO and to commodity contracts that are cleared” as set forth § 190.00(c)(1). CME, OCC, Vanguard, and NGFA supported the concept of preferring the claims of public customers over non-public customers in a bankruptcy proceeding. CME agreed with the inclusion of the core concept set forth § 190.00(c)(3)(ii), noting that “it aids understanding to explain how the distinction between the public customer class and the non-public customer class is reflected at the DCO-level in the distinctions made between customer accounts and house accounts and between the two categories of customer property—customer property and member property—that are available to satisfy the net equity claims of each.” Better Markets supported the clarification in § 190.00(c)(5)(ii) that customers relying on letters of credit must carry the same proportional losses as customers posting other forms of acceptable collateral.

NGFA supported the core concept of prioritizing the prompt transfer of customer accounts and positions to another FCM as opposed to liquidating customer accounts. OCC, however, disagreed with this policy preference. OCC supported “the Commission's objective to mitigate risk to an FCM's customers and limit market volatility,” noting that “[p]orting positions and associated collateral in an FCM bankruptcy proceeding can be an effective way to achieve these objectives in some instances.” OCC believed, however, that the trustee should retain broad discretion to decide, on a case-by-case basis and in consideration of certain factors (

e.g.,

the defaulting FCM's total book of positions and market conditions) whether porting or liquidating positions will achieve the best result for customers involved in an FCM's bankruptcy. OCC further commented that the market risk associated with closing out and reopening positions for certain customers that may be introduced with liquidation should be weighed against potential drawbacks of porting, including that “(i) a trustee (or DCO) must first identify a transferee to accept the open position[s] and collateral, which depending on market conditions could be a difficult and time consuming process; (ii) until the transfer is complete, the customer may face uncertainty as to how its position and associated collateral will be resolved and may not be able to exit the position in a timely and efficient manner; and (iii) a customer may be required to post additional collateral at a new FCM prior to or immediately after a transfer.”

In response to the concerns raised by OCC, the Commission notes first that, as OCC forthrightly acknowledges,

liquidating customer positions may introduce market risk associated with closing out and reopening positions for certain customers. Additionally, liquidating a mass of customer positions may roil the markets, if any, where those positions are concentrated. For these reasons, the policy preference in favor of transfer is both supported by statute and quite longstanding. It is supported by § 764(b) of the Bankruptcy Code, which explicitly permits transfers of commodity contracts that are authorized by the Commission up to seven calendar days

after

the order for relief. It is also embodied in current § 190.02(e), which requires the trustee to immediately use its best efforts to effect a transfer, and is continued in proposed (and adopted) § 190.04(a)(1).

Furthermore, § 190.00(c)(4) establishes, consistent with § 764(b), a policy

preference

for porting, rather than a

mandate

for porting. This recognizes that finding willing and able transferees for all customer positions may or may not be practicable. Moreover, § 190.04(a)(1) requires the trustee to use its best efforts to effect a transfer no later than the seventh calendar day after the order for relief,

and § 190.04(d) requires the trustee promptly to liquidate most remaining contracts after than time. Indeed, as a practical matter, there is cause for doubt that a DCO will permit the trustee of a debtor that is a clearing member to hold open contracts quite that long.

Thus, despite the preference for porting, there are practical limits to how long contracts will be held open before being liquidated. This also imposes temporal limits on the uncertainty customers will face as to how their positions will be resolved.

Indeed, the preference contained § 190.00(c)(4) does not represent a departure from the existing standards under current part 190. It merely highlights the requirement in § 190.04(a)(1) that the trustee use its best efforts to effect a transfer no later than the seventh calendar day after the order for relief; that requirement is substantially identical to the requirement in current § 190.02(e).

For example, OCC Rule 1102(a) provides that OCC may summarily suspend any Clearing Member which is in such financial or operating difficulty that OCC determines and so notifies the Securities and Exchange Commission or the Commodity Futures Trading Commission that suspension is necessary for the protection of the Corporation, other Clearing Members, or the general public. OCC Rule 1106 permits OCC to close out the positions of a suspended clearing member.

Finally, while a customer may indeed be called for additional collateral at a transferee FCM (particularly if less than 100% of the collateral is transferred along with the positions), a customer that is unwilling to meet such a call will at the least be permitted to have their positions liquidated. That would entitle the customer to prompt return by the transferee FCM of the remaining collateral that was transferred—which may well be more prompt than a distribution in the bankruptcy proceeding of the debtor.

ICI expressed concerns with respect to the discretion granted to the trustee under the part 190 regulations. ICI agreed with the Commission “that trustees need flexibility given the myriad of decisions they must make in a short period of time and the unique circumstances that each commodity broker insolvency may present,” and that “trustees to date have exercised their discretion in a manner that has generally promoted customer protection.” ICI cautioned, however, that the Commission should take steps to help ensure that the trustee prioritizes the protection of public customers. ICI urged the Commission to make clear in § 190.00 “that the trustee must exercise [its] discretion in a manner that it determines will result in the greatest recovery for, and the least disruption to, public customers.” With respect to part 190 regulations that are “specifically aimed at protecting customers,” ICI asserted the trustee's discretion should be more limited. While ICI acknowledged that, at times, compliance with such provisions “may be impractical or impossible or may cause harm to customers,” ICI was concerned that a “reasonable efforts” standard “could signal that the trustee has wider latitude to depart from the requirement at issue.” ICI asked the Commission to impose a “best efforts” standard in certain cases.

The Commission agrees with ICI that the trustee should exercise its discretion in a manner that best achieves the overarching goal of protecting the interests of public customers as a class, and specifically should act in the manner that it determines will result in the greatest recovery for, and the least disruption to, public customers. The Commission notes that, at times, those two sub-goals may be in tension. Because the Commission does not believe that there is a universally optimal means to reconcile the two sub-goals in aid of best achieving the overarching goal of protecting the interests of public customers, the Commission concludes that it is best to leave the balancing of the two sub-goals to the discretion of the trustee. It is in that context that the Commission has decided to direct the trustee to exercise “reasonable efforts” rather than “best efforts” to achieve certain standards. In determining what efforts are “reasonable,” the trustee should act to achieve the overarching goal.

In light of the foregoing and to provide clarity with respect to the scope of the trustee's discretion, the Commission is adopting new § 190.00(c)(3)(i)(C) which provides that where a provision in part 190 affords the trustee discretion, that discretion should be exercised in a manner that the trustee determines will best achieve the overarching goal of protecting public customers as a class by enhancing recoveries for, and mitigating disruptions to, public customers as a class. In seeking to achieve that overarching goal, the trustee has discretion to balance those two subgoals when they are in tension. Where the trustee is directed to exercise “reasonable efforts” to meet a standard, those efforts should only be less than “best efforts” to the extent that the trustee determines that such an approach would support the foregoing goals.

While “ `[b]est efforts' is a term which necessarily takes its meaning from the circumstances,” the trustee in exerting best efforts to meet a standard must diligently exert efforts to meet that standard “to the extent of its own total capabilities.”

See generally Bloor

Falstaff Brewing Corp,

454 F.Supp. 258, 266-67

aff'd

601 F.2d 609 (2nd. Cir. 1979). By contrast, in exerting “reasonable efforts” to meet a standard, the Commission expects that the trustee will work in good faith to meet the standard, but will also take into account other considerations, including the impact of the effort necessary to meet the standard on the overarching goal of protecting public customers as a class.

The Commission is adopting § 190.00(d)(1) to describe the scope of commodity broker proceedings under subchapter IV of chapter 7 of the Bankruptcy Code,

and the relationship between part 190 to SIPA proceedings (where the debtor is a commodity broker) and to resolution of commodity brokers under Title II of the Dodd-Frank Act.”

12 U.S.C. 5381

et seq.

Section 190.00(d)(1)(i) acknowledges that, while 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, there are no commodity options dealers or leverage transaction merchants currently registered as such. As set forth in the Note to paragraph (d)(1)(i)(B), the Commission is declaring 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.

Section 190.00(d)(1)(ii) explains that, pursuant to section 7(b) of 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 implements 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 applies 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. Accordingly, § 190.00(d)(1)(iii) explains that this part shall serve as guidance with respect to the 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)).

The Commission is adopting § 190.00(d)(2)(i) to clarify that a trustee may not recognize any account classes not explicitly provided for in part 190. Section 190.00(d)(2)(ii) provides that no property that would otherwise be included in customer property, as defined in § 190.01, 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. 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 is necessary to enable 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 § 190.00(d)(2)(ii), 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.

Section 190.00(d)(3) provides that certain transactions, contracts, or agreements are excluded from the term “commodity contract.”

The excluded agreements and transactions traditionally have 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.

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 Commission received four comments supportive of specific provisions of proposed § 190.00(d) and one comment requesting a modification of the regulation. CME agreed that removing provisions relating to commodity option dealers and leverage transaction merchants would “improve the rules' clarity.” CME and Cboe expressed support for the clarification in § 190.00(d)(1)(ii) of the applicability of SIPA in the bankruptcy proceeding of a firm that is dually registered as an FCM and a broker-dealer where the bankruptcy must be handled pursuant to SIPA rather than by the FCM rules. Cboe noted that such clarity will be “beneficial to the entire ecosystem, including customers of FCMs and broker-dealers” and will “further the ability of market participants to utilize portfolio margining and the associated efficiencies.” CME expressed support for § 190.00(d)(1)(iii). CME specifically supported “setting out that Part 190 `shall serve as guidance' to the FDIC as receiver for an FCM or DCO in a proceeding under Title II of Dodd Frank, with respect to the distribution of customer property and member property.” Noting that “Title II [of the Dodd-Frank Act] directs the FDIC to apply the provisions of subchapter IV of chapter 7 of the [Bankruptcy] Code with respect to such distributions,” CME stated its belief that “it is reasonable to read Title II's cross-reference to subchapter IV of chapter 7 “as indirectly bringing [p]art 190 into the scope of that provision given the need for Commission regulations to give specificity and meaning to the general principles set out in subchapter IV.” SIFMA AMG/MFA supported the principle of excluding property held in a constructive trust from customer property as set forth in § 190.00(d)(2)(ii), noting that this principle “serves to preserve the integrity of customer property.” ICI strongly supported setting forth the prohibition on excluding property from “customer property” because it is considered to be held in a trust implied in equity in § 190.00(d)(2)(ii), and the exclusion from the term “commodity contract” of off-exchange retail foreign currency transactions in § 190.00(d)(3)(iv).

The ABA Subcommittee recommended one modification to this regulation. It asked the Commission to amend proposed § 190.00(d)(3)(v) to clarify that mixed swaps could be commodity contracts subject to part 190. In support of its position, the ABA Subcommittee asserted that a DCO could theoretically provide clearing services to FCMs and their customers with respect to mixed swaps, where the mixed swap positions are carried in accounts subject to part 22 and customers are part of the cleared swap account class under part 190. The ABA Subcommittee analogized the inclusion of mixed swaps within the “commodity contract” definition to the Commission's proposal to not exclude security futures products from the commodity contract definition when the security futures product is carried in an account for which there is a corresponding account class under part 190. The Commission agrees with the

ABA Subcommittee's reasoning with respect to proposed § 190.00(d)(3)(v) and is amending § 190.00(d)(3)(v) to read in pertinent part, that “. . . a security futures product or mixed swap (as defined in 1a(47)(D) of the Act) that is, in either case, carried in an account for which there is a corresponding account class under part 190 is not excluded.”

The Commission is adopting § 190.00(e) to explain the context in which 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”) and that, where they differ, the definitions set forth in § 190.01 shall be used instead of the defined terms set forth in section 761 of the Bankruptcy Code. The Commission notes that other regulations in part 190 are designed to be consistent with subchapter IV of chapter 7 of the Bankruptcy Code.

Section 190.00(e) 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 received two comments on proposed § 190.00(e). ICI and Cboe expressed support for the clarity provided by § 190.00(e) with respect to portfolio margining and cross margining programs. ICI strongly supported the “home field” rule in proposed § 190.00(e), noting that providing “clarity regarding how transactions and margin that are portfolio margined in the same account will be treated in the event that an FCM or broker-dealer becomes insolvent is a “prerequisite for an effective portfolio margining regime.”

Accordingly, after consideration of the comments and for the reasons stated above, the Commission is adopting § 190.00 as proposed with the addition of § 190.00(c)(3)(i)(C) and the modification to § 190.00(d)(3)(v), as set forth above.

2. Regulation § 190.01: Definitions

The Commission is adopting § 190.01 as proposed with modifications set forth below, to update the definitions for revised part 190. Most of the changes in § 190.01 are conforming changes, such as correcting cross-references and deleting definitions of certain terms that are not used in part 190, as amended. Other changes 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 adopting 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 part 190. In particular, the Commission is separating the delivery account class into two subclasses, a physical delivery account class and a cash delivery account class; the relevant terms are defined below. The definitions of commodity contract and physical delivery property codify positions that the Commission has taken in recent commodity broker bankruptcies.

Respectively,

In Re Peregrine Financial Group, Inc.,

No. 12-B27488 (Bankr. N.D. Ill.), and

MF Global, Inc.

The Commission is also amending § 190.01 to replace the paragraphs 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 requested comment with respect to all aspects of proposed § 190.01, including the usefulness and any unintended consequences of the revised definitions. The Commission received a number of comments on the proposed definitions in § 190.01. As further detailed below, the Commission is modifying some of the definitions in response to comments. Unless stated otherwise below, the Commission did not receive any comments on a proposed definition in § 190.01 and is adopting each definition as proposed.

The Commission did not receive comments with respect to the following part 190 definitions as proposed in § 190.00: Act, Bankruptcy code, Business day, Calendar day, Cash delivery account class, Cash equivalents, Clearing organization, Commodity broker, Commodity contract account, Court, Cover, Customer, Customer claim of record, Customer class, Dealer option, Debtor, Distribution, Equity, Exchange Act, FDIC, Filing Date, Final net equity determination date, Foreign board of trade, Foreign clearing organization, Foreign future, Foreign futures commission merchant, Foreign futures intermediary, Funded balance, Futures and futures contract, In-the-money amount, Joint account, Leverage contract, Leverage transaction merchant, Member property, Net equity, Open commodity contract, Order for relief, Person, Premium, Primary liquidation date, Principal contract, Securities Account, SIPA, Security, Short term obligation, Specifically identifiable property, Strike price, Substitute customer property, Swap, Trustee, and Undermargined. Accordingly, the Commission is adopting those definitions as proposed, as discussed later in section II.A.2.

The Commission is adopting the definition of “account class” as proposed with the modifications described below. 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 swap accounts.” The Commission is adding detail to the definition of “account class” by including therein definitions of “futures account,” “foreign futures accounts,” “cleared swaps accounts,” and “delivery accounts.” However, as discussed above with respect to § 190.00(d)(1)(i), the Commission is removing, at least temporarily, the “commodity options” and “leverage account” account classes.

The Commission is adopting paragraph (2) of the definition of account class to 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 that latter account class. This would take place because the contracts in question are risk-offsetting to contracts in the latter account class. For example, 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 DCO. 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). The Commission is adopting paragraph (2) to 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. The Commission is also adopting paragraph (3) of the definition of account class to 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 confirms 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.

The Commission is adopting the definition of “futures account” to cross-reference the definition of the same term in § 1.3 of the Act, while the definition of “cleared swaps account” cross-references the definition of “cleared swaps customer account” in § 22.1. These definitions apply 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, the Commission is adopting a corresponding reference to such accounts at a clearing organization, 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)). The Commission clarifies that this would not apply if a foreign clearing organization is clearing foreign futures for clearing members that are not subject to the requirements of § 30.7.

The ABA Subcommittee and CME recommended that the Commission expand the definitions of “futures account,” “foreign futures account,” and “cleared swaps account” within the § 190.01 definition of “account class” to cover the accounts of non-public customers. The ABA Subcommittee and CME stated that as proposed, the cross-references to § 1.3, the “30.7 account” in 30.1, and the “cleared swaps customer account” in § 22.1 within the account class definitions, limited the scope of those definitions to only segregated accounts of public customers despite the Commission's intention to use those same account class distinctions for non-public customers elsewhere in the part 190 rules. The ABA Subcommittee and CME suggested that those account class distinctions are also relevant for the non-public customer class (

i.e.,

the holders of proprietary accounts carried by FCMs and for clearing members' house accounts carried by DCOs).

The Commission is persuaded by the comments that there are, in at least some cases, account class distinctions within the customer class for non-public customers,

and thus agrees that the revised definitions of “futures account,” “foreign futures account,” and “cleared swaps account” within the § 190.01 definition of “account class” should address separately non-public customers, and has amended the definitions to do so.

See, e.g.,

§ 190.09(c)(2)(iv) (allocating residual property to the non-public customer estate for each account class in the same order as is prescribed in paragraphs (c)(2)(i) through (iii) of this section for the allocation of the customer estate among account classes.)

Accordingly, after consideration of the comments and for the reasons stated above, the Commission is adopting the “account class,” “futures account,” foreign futures account,” and “cleared swaps account” definitions in § 190.01 as proposed with the modifications referred to above.

The “delivery account” class is the fourth type of account class. It is the relevant account through which an FCM or DCO accounts for the making or taking of physical delivery under commodity contracts whose terms require settlement by delivery of a commodity. The FCM or DCO designates such account as a delivery account on its books and records. The Commission is adopting the definition of “delivery account” as proposed within paragraph (1)(iv) of the definition of account class, with a modification to conform to the issue addressed in the preceding paragraph: The delivery account applies to “both public and non-public customers, considered separately.”

This separate consideration is a consequence of the fact that, pursuant to Bankruptcy Code section 766(h), public customer claims must be paid in full before non-public customer claims.

The current definition of “delivery account” in § 190.05(a)(2) refers to an account that contains only property described in three of the nine categories of property in the current definition of “specifically identifiable property.” The Commission has determined to adopt a more functional definition of “delivery account” in § 190.01. This revised definition will focus on an account maintained on the books and records of an FCM or DCO for the purpose of accounting for the making or taking of delivery under commodity contracts whose terms require settlement by delivery of a commodity.

See

§ 190.01.

The Commission is thus adopting paragraph (1)(iv)(A)(

) to define delivery accounts for FCMs. The Commission is adopting paragraph (1)(iv)(A)(

) to incorporate the same concepts for clearing organizations, and also permit a clearing organization to 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 is being subdivided into separate physical and cash delivery account classes, as provided in § 190.06(b), for purposes of

pro rata

distributions to customers for their delivery claims. The definitions of the terms “physical delivery property” and “cash delivery property” are addressed in detail later in this section.

As customer property held in a delivery account is not subject to the Commission's segregation requirements, the Commission believes it may be more challenging and time-consuming to identify customer property for the cash delivery account class,

(and such cash would thus be commingled with the FCM's own cash intended for operations). Consequently, the Commission believes separating (1) most cash delivery property and customer claims from (2) most physical delivery property and customer claims should promote more efficient and prompter distribution of the latter to customers. For these reasons, the Commission is adopting the delivery account definition to be further divided into physical delivery and cash delivery account classes, for purposes of

pro rata

distributions to customers for their delivery claims.

The Commission agrees with a point previously made by the ABA Committee: “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.”

See

Transmittal Letter from The Part 190 Subcommittee of the Business Law Section of the American Bar Association accompanying Model Part 190 Rules (“ABA Cover Note”),

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

at 14.

similar documents (including electronic

versions thereof

).” The Commission is not amending the examples to explicitly address additional “electronic representations of commodities” within the definition of physical delivery property because the definition already broadly covers “a commodity, whether tangible or intangible, held in a form that can be delivered to meet and fulfill delivery obligations under a commodity contract. . . .”

The Commission is amending the definition of physical delivery property to address the technical correction recommended by CME by acknowledging that shipping certificates are not documents of title while avoiding the phrase “similar documents” by instead amending the last phrase to read “including warehouse receipts, other documents of title, or shipping certificates (including electronic versions of any of the foregoing) for the commodity, or the commodity itself.”

The Commission is also adding a special case, corresponding to the special case for cash delivery property, stating that where one fiat currency is exchanged for another, neither such currency would be considered physical delivery property.

The Commission is further amending the physical delivery property definition with a second special case in response to CME's suggestion to address the possibility of a negative delivery price. While negative prices for deliverable commodities are rare, they are not unprecedented (

e.g.,

the price of crude oil briefly went negative in April 2020). While a negative price for actual delivery may be even rarer, it is theoretically possible. Thus, the Commission is amending the definition of “physical delivery property” to address this special case by adding the following: In a case where the final settlement price is negative,

i.e.,

where the party obliged to deliver physical delivery property under an expiring futures contract or an expired options contract is also obliged to make a cash payment to the buyer, such cash or cash equivalents constitute physical delivery property.

Accordingly, after consideration of the comments and for the reasons stated above, the Commission is adopting the definition of “physical delivery property” as proposed with the appropriate modifications to the structure, as set forth above, to correspond to “(1)

In general.

” and to address two special cases in “(2)

Special cases.

” The Commission is adopting the definition of “allowed net equity” as proposed in § 190.01 and as modified to become “funded net equity” as described below. The Commission proposed “allowed net equity” to update cross-references and allow for two definitions of the term (as used in subparts B and C of part 190).

The ABA Subcommittee expressed concern in their comment letter that the definition and the use of the term “allowed net equity” as proposed in §§ 190.01 and 190.08(a) could create inconsistencies and confusion between part 190 and the settled bankruptcy law terminology in which “allowed” typically refers to the fixed amount of a creditor's claim rather than the amount distributable on such claim. The ABA Subcommittee recommended three modifications to address this potential confusion, including the deletion of the definition of “allowed net equity” in proposed §§ 190.01 and 190.08(a), as the ABA Subcommittee believes the remainder of proposed § 190.08 would address how to calculate a customer's net equity claims and the funded balances for each such claims.

The ABA Subcommittee also recommended that the Commission further amend § 190.02 by adding new paragraph (g) to proposed § 190.02 to state that the term `allowed' in this part shall have the meaning ascribed to it in the Bankruptcy Code. The ABA Subcommittee believed that this would confirm that “allowed” under part 190 equates with the use of “allowed” under the Bankruptcy Code. The ABA Subcommittee also recommended that the Commission add “funded balance of” before “such customer's allowed net equity claim” in proposed § 190.09(d)(3). The Commission agrees that these recommended amendments would avoid confusion with the meaning of “allowed” in § 190.02(g) and is therefore making these suggested changes.

The Commission agrees with the ABA Subcommittee that the inclusion of “allowed” in the defined term “allowed net equity” could cause confusion in the broader context of established bankruptcy law, where “allowed” refers to the trustee's measure of the proper amount of a claim, rather than to the

portion of a claim that is funded (in

pro rata

distribution).

Accordingly, after consideration of the comments, including the ABA Subcommittee's suggestion regarding the funded portion of a customer's allowed claim throughout part 190, and for the reasons stated above, the Commission is changing the defined term “allowed net equity” to “funded net equity,” and adopting the definition as so modified. The Commission is also adding § 190.02(g) (as discussed below) and adding “funded balance of” before “such customer's allowed net equity claim” in § 190.09(d)(3) as suggested.

The Commission is adopting the definition of “commodity contract” in § 190.01 as proposed, in order to amend the definition 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 § 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.

ICI strongly supported the proposed amendments to the definition of “commodity contract” to include any “futures contract” and any “swap” thereby permitting transactions carried in a futures or cleared swaps account in accordance with the Commission's regulations to be eligible for the protections that part 190 affords.

Accordingly, after consideration of the comment and for the reasons stated above, the Commission is adopting the definition of “commodity contract” as proposed.

The Commission is adopting the definition of “customer property and customer estate” as proposed to update the definition to clarify cross-references within part 190 and to note that customer property distribution is addressed in section 766(i) of the Bankruptcy Code in addition to section 766(h).

ICE supported the Commission's decision to include forward contracts that are traded on a DCM and cleared by a DCO as customer property.

Accordingly, after consideration of the comment, and for the reasons stated above, the Commission is adopting the definition of “Customer property, customer estate” in § 190.01 as proposed.

The Commission is adopting the definition of “house account” with modifications, as set forth below to modify the existing definition to (a) clarify 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 define the term in relation to an FCM, a foreign futures commission merchant, and a DCO.

The ABA Subcommittee and CME agreed with expanding the current definition to cover the house accounts that DCOs maintain for clearing members. However, the commenters noted that “house account” is used in only three places for an FCM proceeding: (i) Proposed § 190.06(a)(5), which addresses deliveries made or taken with respect to the debtor FCM's house account under open commodity contracts; (ii) proposed § 190.07(c), which prohibits transfer of the debtor FCM's house account after the filing date; and (iii) proposed § 190.08(b)(2)(ix), which provides that when a non-debtor FCM maintains an omnibus account and a house account with a debtor FCM, it holds the accounts in a separate capacity for purposes of calculating its net equity claims against the debtor FCM. Assuming the Commission intended to expand the scope of these provisions in each case, the ABA Subcommittee and CME suggested that the Commission modify the three provisions to clarify that they apply to proprietary accounts of FCMs, and to limit the defined term to house accounts maintained by a DCO for clearing members. The ABA Subcommittee believed it was unnecessary, potentially confusing, and could preclude porting of proprietary accounts.

The Commission agrees with the commenters' recommendation to streamline the “house account” definition and amend the respective subpart B provisions to limit the use of “house account” to the context of clearing organization bankruptcies to avoid any potential confusion regarding the ability to port proprietary accounts. Accordingly, after considering the comments, and for the reasons stated above, the Commission is adopting the definition of “house account” in § 190.01, as modified.

The Commission is adopting the definitions of “non-public customer” and “public customer” as proposed to define who is considered a public versus a non-public customer separately for FCMs and for clearing organizations. These definitions are complements (

i.e.,

every customer is either a “public customer” or a “non-public customer,” but never both).

In the case of a customer of an FCM, the Commission is adopting the definition of “public customer,”

which 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. The Commission is tying 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 are customers that are not public customers.

This is in contrast to the current definition 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 change is not substantive, but rather fosters 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 Commission is differentiating between public and non-public customers such that 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 a proprietary member, then the customer would be treated as a non-public customer.

Vanguard agreed that the proposed definition of public customer in § 190.01 included any customer of an FCM whose commodity contract is subject to the Commission's segregation

requirements, and for a DCO, a person whose account with the FCM is not classified as a proprietary account. CME also supported the proposed definitions of public customer and non-public customer as it believed they are more understandable than the prior part 190 definitions.

CME, however, asked the Commission to reconsider the recommendation of the ABA Subcommittee to include non-U.S. customers of foreign broker clearing members of a DCO within the public customer definition. CME noted that it previously considered admitting foreign brokers as clearing members to clear trades of their non-U.S. customers in futures or options on futures listed on the CME or the other designated contract markets (“DCMs”) owned by CME Group, which would be analogous to a foreign clearing organization admitting FCMs as members to clear trades of their public customers in futures or options on futures listed by a foreign board of trade. While that model does not currently exist for U.S. DCOs and the DCMs for which they provide clearing services, CME believed it is appropriate to include that flexibility in part 190 to accommodate that possibility. OCC also requested clarification as to whether customers of foreign brokers that access a DCO through an FCM clearing member affiliated with the foreign broker would be treated as public customers.

The Commission is of the view that including non-U.S. customers of foreign-broker clearing members as public customers should be considered as part of a comprehensive review of the issues at such time as the model of admitting foreign brokers as clearing members for U.S. DCOs becomes empirical. Such a review of the issues, including issues related to both bankruptcy and risk management, can be more reliably, and more efficiently, be conducted in the context of empirical rather than hypothetical circumstances.

In response to OCC's request for clarification, the Commission notes that where a foreign broker clears the trades of its (foreign) customers through an affiliated FCM that is a clearing member, those trades would be cleared on an omnibus basis through the FCM's customer account, and would be required to be kept separate from the proprietary trades of the affiliated foreign broker. Thus, those customers would be treated as public customers. If a foreign broker clears its own proprietary trades through an unaffiliated FCM (

i.e.,

there is no proprietary relationship between the foreign broker and the FCM as set forth in § 1.3), those trades would be considered as public customer trades at the FCM, but would not be part of the customer omnibus account of the foreign broker at the FCM.

Accordingly, after consideration of the comments and for the reasons stated above, the Commission is adopting the definitions of “non-public customer” and “public customer” as proposed in § 190.01.

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

CME supported defining variation settlement and generally agreed with the substance of the definition, but recommended that the Commission adopt one self-contained definition that does not rely on cross-reference to another Commission definition. CME suggested that the Commission adopt the ABA Subcommittee's variation settlement definition which would cover “any amount paid or collected (or to be paid or collected) on an open commodity contract relating to changes in the market value of the commodity contract since the trade was executed or the previous time the commodity contract was marked to market along with all other daily settlement amounts (such as price alignment payments) that may be owed or owing on the commodity contract.”

The ABA Subcommittee believed that the definition of variation settlement was not used consistently in the Proposal and identified two places in proposed § 190.14(b) where the term “variation” is used instead of “variation settlement.” The ABA Committee recommended using “variation settlement” in both places, to avoid any confusion as to whether “variation” refers to the Commission's variation margin definition or variation settlement definition.

The Commission notes that the cross-references in § 190.01 to definitions in other parts of the Commission's rules is intentional to clarify the relationships with those other definitions, and thus the Commission declines to make the change proposed by the commenters.

Accordingly, after consideration of the comments and for the reasons stated above, the Commission is adopting the definition of “variation settlement” in § 190.01 as proposed.

The technical correction suggested by the ABA subcommittee to § 190.14(b) (change “variation” to “variation settlement”) will be adopted in one case; the subsection where the second case was found has been removed entirely by the supplemental notice of proposed rulemaking.

The Commission did not receive comments on the remaining definitions in § 190.01 and is therefore adopting them as proposed.

The Commission is adopting the definition of “Act” in § 190.01 to refer to the Commodity Exchange Act.

The Commission is amending the definition of “Bankruptcy Code” in § 190.01 to update cross-references.

The Commission is amending the definition of “Business day” to define what constitutes a Federal holiday and clarify that the end of a business day is one second before the beginning of the next business day.

The Commission is amending the definition of “Calendar day” to include a reference to Washington, DC as the reference location for the Calendar day.

The Commission is adopting the definition of “Cash delivery account class” to cross-reference it to the new definition in “Account class.”

The Commission is adopting the definition of “Cash equivalents” to define assets that might be accepted as a substitute for United States dollar cash.

The Commission is amending the definition of “Cleared swaps account” in § 190.01 to cross-reference it to the new definition in “Account class.”

The Commission is adopting the amended definition of “Clearing organization” to update cross-references.

The Commission is amending the definition of “Commodity broker” to reflect the current definition of commodity broker in the Bankruptcy Code and the relevant cross-references.

The Commission is adding the definition of “Commodity contract account” to refer to accounts of a customer based on commodity contracts in one of the four account classes, as well as, for purposes of identifying customer property for the foreign futures account class (subject to § 190.09(a)(1)), accounts maintained by foreign clearing organizations or foreign futures intermediaries reflecting foreign futures or options on futures executed on or subject to the rules of a foreign board of trade, including any account maintained on behalf of the debtor's public customers.

The Commission is amending the definition of “Court” to clarify that the court having jurisdiction over the

debtor's estate may not be a bankruptcy court (

e.g.,

in the event of a withdrawal of the reference).

Cf.

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

The Commission is amending the definition of “Cover” to improve clarity without any substantive change to the current definition.

The Commission is amending the definition of “Customer” 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.

The Commission is amending the definition of “Customer claim of record” to improve clarity without any substantive changes to the current definition.

The Commission is amending the definition of “Customer class” to reflect the revisions to part 190 through this rulemaking, specifically emphasizing the difference between public customers and non-public customers.

The Commission is deleting the definition of “Dealer option” as this term is no longer used.

The Commission is amending the definition of “Debtor” 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.

The Commission is newly adopting a definition of “Distribution” to include the 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.

The Commission is amending the definition of “Equity” to update a cross-reference.

The Commission is adding definitions for “Exchange Act” and “FDIC” to incorporate the statute and regulator, respectively, in part 190.

The Commission is revising the definition of “Filing date” 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 rulemaking does not define the term “filing date” to occur earlier in such a case, although it would (in § 190.02(f) as discussed below) authorize such a to receiver 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.,

§§ 190.00(c)(4), 190.06(a)(1) and (b)(1), 190.08(b)(4), and 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 ff-2(b), (c)(1), (d), and 78fff-3(a)(3).

The Commission is revising the definition of “Final net equity determination date” stylistically, to provide updated cross-references, and to further clarify who the parties involved are intended to be.

The Commission is adding the definition of “Foreign board of trade” and adopting by reference the definition in § 1.3 (which is consistent with § 48.2(a)).

The Commission is adding the definition of “Foreign clearing organization” 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.

The Commission is retaining the definitions of “Foreign future” and “Foreign futures commission merchant” as proposed to be unchanged.

The Commission is adopting the definition of “Foreign futures intermediary” 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.

The Commission is revising the definition of “Funded balance” to the definition in § 190.08(c). That definition is discussed further below in section II.B.6.

The Commission is adding a definition for “Futures” and “Futures contract,” used interchangeably

to clarify what these terms mean for purposes of part 190.

The Commission is deleting the definition of “In-the-money amount” as the term will no longer be used and replacing it with “in-the-money,” a term that is Boolean, and is used in § 190.04(c).

The Commission is amending the definition of “Joint account” to reflect that a commodity pool must be a legal entity.

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

See

§ 4.20(a)(1).

The Commission is deleting the definitions of “Leverage contract” and “Leverage transaction merchant” consistent with the discussion above with respect to § 190.00(d)(1)(i)(B).

The Commission is removing the definition of “Member property” from current § 190.09(a) and addressing it in § 190.01, and clarifying that member property is the property that may be used to pay net equity claims based on both the members' house account as well as claims on behalf of non-public customers of the member.

The Commission is revising the definition of “Net equity” to update cross-references, including the difference between bankruptcy of an FCM and of a clearing organization.

The Commission is revising the definition of “Open commodity contract” to improve clarity without any substantive changes to the definition.

The Commission is revising the definition of “Order for relief” to update cross-references and incorporate stylistic, non-substantive changes.

The Commission is adding the definition of “Person” to clarify what this term means in the context of part 190.

The Commission is adding the definition of “Physical delivery account class” to be cross-referenced to the new definition in “Account class.”

The Commission is deleting the definition of “Premium” as that term is no longer used.

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

The Commission is deleting the definition of “Principal contract” 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.

The Commission is adding the definition of the “Securities account” and “SIPA” 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.

The Commission is amending the definition of “Security” to update the cross-reference to the Bankruptcy Code without any substantive changes to the definition.

The Commission is removing the definition of “Short term obligation” from § 190.01 as the term is no longer used within the definition of “specifically identifiable property.” The Commission is instead amending the “specifically identifiable property”

definition with respect to securities, as discussed immediately below.

The Commission is amending the definition of “Specifically identifiable property” to update and streamline the definition in current § 190.01(ll). Paragraph (1)(i) focuses on “futures accounts,” “foreign futures accounts,” and “cleared swaps accounts.” Paragraph (1)(i)(A) corresponds in major part to paragraphs (ll)(1) and (6) of the current definition. For securities, paragraph (1)(i)(A)(

) substantially copies current paragraph (ll)(1)(i), but clarifies that a security, to be included as specifically identifiable property, must have “a duration or maturity date of more than 180 days.” Paragraph (1)(i)(A)(

) reformats 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 definition restates the corresponding portion of the current definition.

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

the latter provision permits (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.

See

section II.B.1.c.

The Commission is amending the definition of “Strike price” for brevity without any substantive change.

The Commission is adding the definition of “Substitute customer property” 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.

The Commission is adopting the definition of “Swap” to replace the current definition of “Cleared swap”

in part 190. The definition of reflects the current definition and meaning of the term “swap” in section 1a(47) of the CEA and Commission regulation § 1.3. The Commission is also adopting the definition to 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”).

The Commission is amending the definition of “Trustee” to include the trustee in a SIPA proceeding.

The Commission is adopting a definition of “Undermargined” for purposes of part 190 to mean when the funded balance of a debtor's futures account, foreign futures account, or cleared swaps 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-isneeded.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 § 190.04(b)(f). 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.

Accordingly, after consideration of the comments, and for the reasons discussed above, the Commission will adopt § 190.01 as proposed, with the amendments discussed above.

3. Regulation § 190.02: General

Regulation § 190.02 is being adopted as proposed, with the addition of paragraph (g) as described below. The Commission is adopting § 190.02(a)(1) based on current § 190.10(b)(1) with one substantive change to permit a trustee to request an exemption from the Commission 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. The Commission is adopting § 190.02(a)(1) consistent with major theme 7, discussed in section I.B. above regarding enhanced trustee discretion. Section 190.02(a)(1) allows the trustee to request to be permitted to extend a deadline or to amend a form.

The Commission is also adopting § 190.02(a)(2)(i) and (ii), (a)(3), and (b), as derived from current §§ 190.10(b)(2), (3), and (4) and 190.10(d), respectively, with minor editorial and conforming changes.

The Commission is adopting § 190.02(b) to delegate the functions of the Commission set forth in part 190, other than the authority to disapprove pre-relief transfers pursuant to § 190.07(e)(1), to the Director of the Division of Clearing and Risk, after consultation with the Director of the Market Participants Division

(with the possibility of further delegations to members of the respective Directors' staffs).

The Market Participants Division is the successor to the Division of Swap Dealer and Intermediary Oversight, the title of that division at the time of the Proposal.

The Commission is adopting § 190.02(c) to exclude from the definition of “customer” entities who hold claims against a debtor solely on account of uncleared forward contracts. The Commission is adopting § 190.02(d) to provide that the Bankruptcy Code will not be construed to prohibit a commodity broker from doing certain combinations of business, or to permit any otherwise prohibited operation, trade or business. The Commission is adopting § 190.02(e) to provide that security futures products held in a securities account shall not be considered to be part of commodity futures or options accounts as those terms are used in section 761(9) of the Bankruptcy Code. The Commission is adopting § 190.02(c) (forward contracts), (d) (other), and (e) (rule of construction) as transposed from current § 190.10(e), (g), and (h), respectively.

The Commission continues to believe, as stated in the proposal, that § 190.02(f) should 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). Section 190.02(f) explicitly permits 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 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 (emphasis supplied). 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 requested comment with respect to all aspects of proposed § 190.02. In particular, the Commission requested comment as to whether it would be appropriate to permit trustees to request relief from procedural provisions such as requirements as to forms, in addition to requesting relief from deadlines; whether it would be appropriate to permit receivers for FCMs to file voluntary petitions in bankruptcy; and whether any portion of proposed § 190.02 would likely to lead to unintended consequences, and, if so, how may these be mitigated.

The Commission received two comments on proposed § 190.02. CME generally supported proposed § 190.02, including adding a provision that would allow the trustee to request an exemption from the procedural requirements of the rules. CME also favored adding the proposed provision to clarify that a receiver appointed for an FCM due to segregation or net capital violations may, in an appropriate case, file a petition for bankruptcy of the FCM pursuant to section 301 of the Bankruptcy Code. In contrast, FIA recommended that the Commission require a receiver to obtain the Commission's consent before the receiver may file a voluntary petition in bankruptcy on behalf of an FCM. FIA believed that any receiver that may be appointed by a court would be in response to a proceeding initiated by the Commission pursuant to section 6c of the Act, which authorizes the Commission to file an action in the appropriate U.S. District Court when it appears that a 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. FIA noted that there may be circumstances in which a receiver may determine that a voluntary petition under the Bankruptcy Code is warranted. However, in light of the fact that such a petition would effectively close the FCM, FIA believed that § 190.02(f) should provide that the receiver may file a voluntary petition only with the prior consent of the Commission.

The Commission notes that § 190.02(f) is limited to cases where the receiver was appointed due to concerns about either protection of customer property, or of capital inadequacy, and the appointment would be in response to a proceeding initiated by the Commission. In such a case, the Commission believes that it would be appropriate and most effective to defer to the judgment of the appointed receiver as to the necessity of the filing of a petition in bankruptcy.

As a technical point, the ABA Subcommittee recommended (consistent with their recommendation in the definitions section, § 190.01, to more precisely use the term “allowed net equity”)

that the Commission further amend § 190.02 by adding new paragraph (g) to proposed § 190.02 to state that the term “allowed” in this part shall have the meaning ascribed to it in the Bankruptcy Code. The ABA Subcommittee believed that this would confirm that “allowed” under part 190 equates with the use of “allowed” under the Bankruptcy Code. The Commission agrees, and is making the change.

See

section II.A.2. (recommending that the Commission instead use “funded net equity” as the defined term in the § 190.01 definitions.)

Accordingly, after consideration of the comments, and for the reasons stated above, the Commission is adopting § 190.02 as proposed, with the addition of paragraph (g).

B. Subpart B—Futures Commission Merchant (FCM) as Debtor

The Commission is adopting subpart B (§§ 190.03-190.10) to address debtors that are FCMs.

1. Regulation § 190.03: Notices and Proofs of Claims

The Commission is adopting § 190.03 as proposed with modifications to § 190.03(c)(2), as set forth below.

The Commission is adopting § 190.03 to set forth requirements for the notices and proofs of claim that are applicable to subpart B of part 190. It reorganizes and revises much of current § 190.02, and incorporates some portions of current § 190.10.

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

The Commission is adopting § 190.03(a) to set forth the means by which notices required under subpart B of part 190 are to be provided. Section 190.03(a)(1) is substantially similar to current § 190.10(a), but, in an effort to modernize part 190, the Commission is deleting the requirement that notices be given to it via overnight mail (

i.e.,

in hard copy). The Commission is retaining the requirement that all such notices be sent via electronic mail. The Commission believes that overnight hard copy delivery is unnecessary and that removing the requirement to send notices to the Commission via overnight mail will result in cost savings.

The Commission is adopting § 190.03(a)(2) to provide a generalized approach for giving notice to customers under part 190. In light of evolving technology, § 190.03(a)(2) replaces the specific procedures for providing notice to customers that appear in current § 190.02(b) with the requirement that the trustee must establish and follow procedures “reasonably designed” for giving notice to customers under subpart B of part 190. 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 and is consistent with the manner in which bankruptcy trustees in recent FCM bankruptcy cases have provided notice to customers. The Commission also believes that adopting a generalized notice requirement in lieu of retaining more specific notice obligations (

e.g.,

newspaper publication) will result in both cost savings for the debtor's estate, and more efficient and effective notification of customers.

The Commission requested comment on the approach to the notice requirements set forth in proposed § 190.03(a). The Commission specifically asked whether the proposed changes would be helpful; would be likely to lead to unintended consequences; and how any unintended consequences could be mitigated. CME supported providing trustees with the flexibility, in consultation with the Commission, to establish appropriate procedures for giving notice to customers and moving away from outdated and impractical notice requirements. CME also agreed that the changes align with how trustees in recent FCM cases have communicated with the FCM's customers and are more customer-friendly.

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

Section 190.03(b)(1) is derived from current § 190.02(a)(1), but includes revised notice requirements that are designed to ensure that the Commission and the relevant designated self-regulatory organization (“DSRO”)

will be aware of a voluntary or involuntary bankruptcy filing or SIPA application as soon as is practicable and to codify the practices observed in recent bankruptcy and SIPA cases.

First, § 190.03(b)(1) provides that, in the event of a voluntary bankruptcy filing, the commodity broker must notify the Commission and the appropriate DSRO as soon as practicable before, and in any event no later than, the time of filing. Second, § 190.03(b)(1) provides 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. The Commission notes that, as a practical matter, a decision to file for bankruptcy takes measurable time, as does the preparation of the necessary papers. In previous FCM voluntary bankruptcy filings, the commodity broker has provided the Commission and its DSRO with notice ahead of the bankruptcy filing. Section 190.03(b)(1) merely codifies the expectation that such advance notice should, in fact, occur to the extent practicable. Section 190.03(b)(1) allows 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.

For further detail regarding SROs and DSROs

see generally

§ 1.52.

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). 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.

A SIPA proceeding is commenced when the Securities Investors Protection Corporation (“SIPC”) files a petition for a protective order.

See generally

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

Section 190.03(b)(2) sets forth the requirements for the provision of notice to 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 part 190. It is derived from current § 190.02(a)(2). While § 190.03(b)(2) retains the requirement that such notice be provided “[a]s soon as possible,” it removes the requirement that such notice be provided no later than three days after the order for relief. The Commission believes that the three-day deadline set forth in current § 190.02(a)(2) 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 the 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 the 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 Commission staff. Thus, a specified deadline for such notification would not appear to be helpful. Section 190.03(b)(2) also clarifies that notification should be made with respect to a transfer of customer property.

The Commission requested comment on proposed § 190.03(b). Specifically, the Commission asked whether proposed § 190.03 would 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. LCH expressed support for the requirement that FCMs notify DSROs, in addition to the CFTC, of involuntary bankruptcy filings. LCH also requested that the Commission consider ways in which this information could be quickly transmitted to the DCOs that may be impacted, given the interconnectedness of the derivatives market. While, as noted above, staff would be in contact with DCOs that might be impacted by a bankruptcy proceeding involving an FCM as a matter of supervisory practice, this practice does not need to be incorporated into regulation. Moreover, the Commission notes that many DCOs, including LCH, require as part of their own rules and procedures that their clearing members provide prompt notice of a bankruptcy filing affecting the clearing member.

See, e.g.,

LCH Ltd.: FCM Procedures of the Clearing House 1.6(b)(G) (“All FCM Clearing Members must provide the Clearing House in a prompt and timely manner with: . . . notice if the FCM Clearing Member becomes the subject of a bankruptcy petition.”).

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

The Commission is adopting § 190.03(c) to address notices to customers and the treatment of hedging accounts and specifically identifiable property.

Section 190.03(c)(1) requires 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, other than open commodity contracts, which has not been liquidated, that such 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 part 190. It also requires that the trustee's notice to customers with specifically identifiable property include, where applicable, a reference to substitute property.

Section 190.03(c)(1) is derived from current § 190.02(b)(1), but replaces the requirement that the trustee publish such notice to customers in a newspaper for two consecutive days prior to liquidating the specifically identifiable property with the requirement that the trustee notify customers in accordance with § 190.03(a)(2). This change is intended 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. The timeframe in which the Commission would allow the trustee to commence liquidation of specifically identifiable property has been modified to reflect the revised notice requirements. Because § 190.03(c)(1) does not require newspaper publication of customer notice, the Commission is allowing 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.

The Commission is adopting § 190.03(c)(2) to address how a bankruptcy trustee may treat open commodity contracts carried in hedging accounts. This regulation moves from the bespoke approach of current § 190.02(b)(2) to a categorical approach, in light of the practical difficulties of treating large numbers of customers with similar open contracts on a bespoke basis.

The Commission notes that recent commodity broker bankruptcies have involved 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. Therefore, the Commission is giving the trustee the 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, the trustee is required to notify each relevant public customer in accordance with § 190.03(a)(2). As proposed, § 190.03(c)(2) would have required the trustee, in all cases, to request that the customer provide instructions as to whether to transfer or liquidate the relevant open commodity contracts.

As discussed further below, in response to a comment, the Commission is modifying this proposal to address cases where, in the judgment of the trustee, the books and records of the debtor reveal a clear preference by the public customer with respect to transfer or liquidation of open commodity contracts.

See

major theme 7 in section I.B. above.

The Commission is also making other changes that are intended to make it simpler for the trustee to identify hedging positions and allow an FCM to designate an account as a hedging account by relying on explicit customer representations that the account contains a hedging position.

See

§ 1.41. This would simplify the existing requirement that FCMs provide a hedging instructions form when a customer first opens up a hedging account. For commodity contract accounts opened prior to the effective date of the part 190 revisions, the Commission is proposing that FCMs may rely on written hedging instructions received from the customer in accordance with current § 190.06(d).

See

§ 1.41(c).

Section 190.03(c)(2) also delineates certain information that the trustee must include in the notice. As proposed, the notice must inform the customer that (1) if the customer does not provide instructions in the prescribed manner and by the prescribed deadline, the customer's open commodity contracts will not be treated as specifically identifiable property; (2) any transfer of the open commodity contracts is subject to the terms for distribution contained in § 190.09(d)(2); (3) absent compliance with any terms imposed by the trustee or the court, the trustee may liquidate the open commodity contracts; and (4) providing instructions may not prevent the open commodity contracts from being liquidated. The Commission is making conforming changes to this portion of proposed § 190.03(c)(2) to reflect the modification referenced above. To the extent the trustee does not exercise its authority to treat public customer positions carried in a hedging account as specifically identifiable property, the trustee must endeavor to, as the baseline expectation, treat open commodity contracts of public customers carried in hedging accounts the same as other customer property and effect a transfer of such contracts to the extent possible.

The Commission is making these changes to reflect the policy preference to port

all

positions of public customers. Requiring a trustee to identify hedging accounts and provide hedging account holders the opportunity to keep their positions open may be a resource and time intensive process, which the Commission believes could interfere with the trustee's ability to take prudent and timely action to manage the debtor FCM's estate to protect all of the FCM's customers. The Commission believes that allowing the FCM to rely on representations made by customers during business-as-usual will alleviate this concern. In cases where it may be practical, the trustee may elect to provide special hedging account treatment.

See

§ 190.00(c)(4).

The Commission is adopting § 190.03(c)(3) to make minor modifications to the notice of the commencement of an involuntary proceeding that the trustee may provide to customers prior to entry of an order for relief, and upon leave of the court. Such modifications include clarifying that such notice must be in accordance with the notice provisions set forth § 190.03(a)(2), amending certain terminology, and removing unnecessary references.

Section 190.03(c)(4) requires the bankruptcy trustee to notify customers that an order for relief has been entered and instruct customers to file a proof of customer claim. The regulation is derived from current § 190.02(b)(4), but adds that the notice must be provided in accordance with § 190.03(a)(2). Section 190.03(c)(4) replaces the term “customer of record” with the term “customer,” as “customer of record” is not a defined term in part 190 and all customers should receive notice that an order of relief has been entered. Section 190.03(c)(4) also provides that the trustee shall cause the proof of customer claim form to set forth the bar date for its filing consistent with the current § 190.03(a)(2).

The Commission requested comment on proposed § 190.03(c). It specifically asked whether the proposed changes to the notice requirements would be helpful; whether the discretion granted to the trustee concerning the treatment of hedging accounts as specifically identifiable property is appropriately tailored; whether the proposed revisions appeared likely to lead to unintended consequences; and how such consequences; if any, could be mitigated.

The Commission received three comments on proposed § 190.03. CME fully endorsed the policy preference that the trustee should use their best efforts to transfer all public customer positions and related customer property from the debtor FCM to one or more other FCMs. Accordingly, CME supported the provisions in § 190.03(c) that grant the trustee the discretion to not treat customer positions carried in hedge accounts as specifically identifiable property, unless the trustee determines that doing so would be practicable under the circumstances, following consultation with the Commission. CME asserted that this discretion will allow the trustee to devote their attention to transferring open positions of all public customers, along with their proportionate share of the customer property, in the aggregate.

SIFMA AMG/MFA also generally agreed with § 190.03(c)(2) in that it grants to the trustee the authority (that is, the option but not the obligation) to treat open commodity contracts of public customers held in hedging accounts designated as such in the debtor's record as specifically identifiable property. SIFMA AMG/MFA stated that permitting the trustee this flexibility would serve the interest of customers as a whole by facilitating a more rapid transfer of customer positions and property. SIFMA AMG/MFA recommended, however, that the Commission explicitly clarify that § 190.03(c)(2) is not intended to affect the treatment of hedging accounts under part 39 of the Commission's regulations and that, to the extent reasonably practicable, the trustee's goal will be to maximize value to the public customer.

Additionally, in the context of the treatment of hedging accounts, SIFMA AMG/MFA recommended that, if the trustee exercises the authority as granted in this provision, the trustee should be first required to consult the instructions (regarding preferences with respect to transfer or liquidation of open commodity contracts) provided by a public customer to the debtor at the time of opening the relevant hedging account, and only if such instructions are missing or unclear should the trustee require such customer to provide it with written instructions as contemplated by proposed § 190.03(c)(2). SIFMA AMG/MFA noted that the notice sent by the trustee to the customer can still provide that existing or previously provided instructions may not prevent the open commodity contracts from being liquidated. SIFMA AMG/MFA asserted that adding this first step would further the goal of expediency.

This last point is addressed with the addition of § 190.00(c)(3)(i)(C).

The Commission agrees with the suggestion by SIFMA AMG/MFA that it is more efficient to endeavor to follow clear instructions previously provided rather than to request new instructions. Moreover, this approach mitigates the risk that a customer who has already made their preference patent will fail to reply to the request and thus be treated in a manner contrary to that previously expressed preference.

Accordingly, the Commission is amending and reorganizing § 190.03(c)(2) to implement that suggestion. Specifically, § 190.03(c)(2)(ii)(B) is being amended to provide, in pertinent part that: (1) Where, in the judgment of the trustee, the books and records of the debtor reveal a clear preference by a relevant public customer with respect to transfer or liquidation of open commodity contracts, the trustee shall endeavor, to the extent reasonably practicable, to comply with that preference; and (2) Where, in the judgment of the trustee, the books and records of the debtor do not reveal a clear preference by a relevant public customer with respect to transfer or liquidation of open commodity contracts, the trustee will request the customer to provide written instructions whether to transfer or liquidate such open commod

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