Bankruptcy Regulations

CourtCommodity Futures Trading Commission
Citation86 FR 19324
Published date13 April 2021
Record Number2020-28300
Federal Register, Volume 86 Issue 69 (Tuesday, April 13, 2021)
[Federal Register Volume 86, Number 69 (Tuesday, April 13, 2021)]
                [Rules and Regulations]
                [Pages 19324-19477]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-28300]
                [[Page 19323]]
                Vol. 86
                Tuesday,
                No. 69
                April 13, 2021
                Part IICommodity Futures Trading Commission-----------------------------------------------------------------------17 CFR Parts 1, 4, 41, and 190Bankruptcy Regulations; Final Rule
                Federal Register / Vol. 86 , No. 69 / Tuesday, April 13, 2021 / Rules
                and Regulations
                [[Page 19324]]
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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.
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                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 Sec. 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, [email protected], Ward P. Griffin,
                Senior Special Counsel, 202-418-5425, [email protected], Jocelyn
                Partridge, 202-418-5926, [email protected], Abigail S. Knauff, 202-
                418-5123, [email protected], 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 Sec. 190.00: Statutory Authority, Organization,
                Core Concepts, Scope, and Construction
                 2. Regulation Sec. 190.01: Definitions
                 3. Regulation Sec. 190.02: General
                 B. Subpart B--Futures Commission Merchant (FCM) as Debtor
                 1. Regulation Sec. 190.03: Notices and Proofs of Claims
                 2. Regulation Sec. 190.04: Operation of the Debtor's Estate--
                Customer Property
                 3. Regulation Sec. 190.05: Operation of the Debtor's Estate--
                General
                 4. Regulation Sec. 190.06: Making and Taking Delivery Under
                Commodity Contracts
                 5. Regulation Sec. 190.07: Transfers
                 6. Regulation Sec. 190.08: Calculation of Funded Net Equity
                 7. Regulation Sec. 190.09: Allocation of Property and Allowance
                of Claims
                 8. Regulation Sec. 190.10: Provisions Applicable to Futures
                Commission Merchants During Business as Usual
                 C. Subpart C--Clearing Organization as Debtor
                 1. Regulation Sec. 190.11: Scope and Purpose of Subpart C
                 2. Regulation Sec. 190.12: Required Reports and Records
                 3. Regulation Sec. 190.13: Prohibition on Avoidance of
                Transfers
                 4. Regulation Sec. 190.14: Operation of the Estate of the
                Debtor Subsequent to the Filing Date
                 5. Regulation Sec. 190.15: Recovery and Wind-Down Plans;
                Default Rules and Procedures
                 6. Regulation Sec. 190.16: Delivery
                 7. Regulation Sec. 190.17: Calculation of Net Equity
                 8. Regulation Sec. 190.18: Treatment of Property
                 9. Regulation Sec. 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 Sec. 190.00: Statutory Authority, Organization,
                Core Concepts, Scope, and Construction: Consideration of Costs and
                Benefits
                 2. Regulation Sec. 190.01: Definitions: Consideration of Costs
                and Benefits
                 3. Regulation Sec. 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 Sec. 190.03: Notices and Proofs of Claims:
                Consideration of Costs and Benefits
                 2. Regulation Sec. 190.04: Operation of the Debtor's Estate--
                Customer Property: Consideration of Costs and Benefits
                 3. Regulation Sec. 190.05: Operation of the Debtor's Estate--
                General: Consideration of Costs and Benefits
                 4. Regulation Sec. 190.06: Making and Taking Delivery Under
                Commodity Contracts: Consideration of Costs and Benefits
                 5. Regulation Sec. 190.07: Transfers: Consideration of Costs
                and Benefits
                 6. Regulation Sec. 190.08: Calculation of Funded Net Equity:
                Consideration of Costs and Benefits
                 7. Regulation Sec. 190.09: Allocation of Property and Allowance
                of Claims: Consideration of Costs and Benefits
                 8. Regulation Sec. 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 Sec. 190.11: Scope and Purpose of Subpart C:
                Consideration of Costs and Benefits
                 2. Regulation Sec. 190.12: Required Reports and Records:
                Consideration of Costs and Benefits
                 3. Regulation Sec. 190.13: Prohibitions on Avoidance of
                Transfers: Consideration of Costs and Benefits
                 4. Regulation Sec. 190.14: Operation of the Estate of the
                Debtor Subsequent to the Filing Date: Consideration of Costs and
                Benefits
                 5. Regulation Sec. 190.15: Recovery and Wind-Down Plans;
                Default Rules and Procedures: Consideration of Costs and Benefits
                 6. Regulation Sec. 190.16: Delivery: Consideration of Costs and
                Benefits
                 7. Regulation Sec. 190.17: Calculation of Net Equity:
                Consideration of Costs and Benefits
                 8. Regulation Sec. 190.18: Treatment of Property: Consideration
                of Costs and Benefits
                 9. Regulation Sec. 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
                [[Page 19325]]
                this year, the Commission proposed a comprehensive revision of part 190
                (the ``Proposal''),\1\ and in September of this year, the Commission
                issued a supplemental proposal (the ``Supplemental Proposal'') \2\
                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 \3\
                (hereinafter, ``Title II'' and ``Dodd-Frank'').
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                 \1\ 85 FR 36000 (June 12, 2020).
                 \2\ 85 FR 60110 (Sept. 24, 2020).
                 \3\ Public Law 111-203 (July 21, 2010).
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                 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.\4\
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                 \4\ See CEA section 20(a), 7 U.S.C. 24(a).
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                 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'').\5\ 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.
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                 \5\ 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.''
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                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 Sec. 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,\6\ and the public at large.
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                 \6\ Including bankruptcy and SIPA trustees, as well as the FDIC
                in its role as a receiver.
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                 (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.\7\
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                 \7\ 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 Sec. 190.02(e).
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                 (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.\8\ The Commission's
                approach toward a DCO bankruptcy is characterized by three overarching
                concepts:
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                 \8\ 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.
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                 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,\9\ 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.
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                 \9\ 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 Sec.
                39.35 (default rules and procedures) and Sec. 39.39 (recovery and
                wind-down plans).
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                 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.\10\
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                 \10\ See generally Sec. 190.19.
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                 c. Third, other provisions draw, with appropriate adaptations, from
                provisions applicable to FCMs.\11\
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                 \11\ See, e.g., Sec. Sec. 190.16, 190.17(c).
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                 (5) The Commission is noting the applicability of part 190 in the
                context
                [[Page 19326]]
                of proceedings under the Securities Investors Protection Act (``SIPA'')
                in the case of FCMs subject to a SIPA proceeding,\12\ 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.
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                 \12\ 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.
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                 (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,\13\ 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).
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                 \13\ See the overarching concept discussed in section III.A.2.c
                below.
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                 (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.\14\
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                 \14\ 78 FR 68506 (Nov. 14, 2013). This refers to Sec. 190.05(f)
                in section II.B.3 below.
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                 (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.\15\ 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.\16\
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                 \15\ 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).
                 \16\ The Commission also issued the Supplemental Proposal, which
                withdrew proposed Sec. 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.
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                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 \17\
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                 \17\ 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 Sec. 190.10 are being adopted, but codified in
                part 1.
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                 The Commission is adopting as subpart A (Sec. Sec. 190.00-190.02)
                general provisions to address both debtors that are both FCMs and
                debtors that are DCOs.
                [[Page 19327]]
                1. Regulation Sec. 190.00: Statutory Authority, Organization, Core
                Concepts, Scope, and Construction
                 The Commission is adopting Sec. 190.00 as proposed with the
                addition of Sec. 190.00(c)(3)(i)(C) and the modification to Sec.
                190.00(d)(3)(v), as set forth below. The Commission is adopting Sec.
                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 Sec. 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 Sec. 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 Sec. 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 Sec.
                190.00.
                 The Commission is adopting Sec. 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.\18\ 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.
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                 \18\ 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).
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                 The Commission is adopting Sec. 190.00(c) to set forth the core
                concepts \19\ 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,\20\ porting of public customer commodity
                contract positions, pro rata distribution, and deliveries.
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                 \19\ 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).
                 \20\ ``Member property'' is defined in Sec. 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).
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                 The Commission is adopting Sec. 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.'' \21\ 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.
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                 \21\ See 11 U.S.C. 101(6) (definition of ``commodity broker''),
                761(9) (definition of ``customer'' referred to in 101(6)).
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                 The Commission is adopting Sec. 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),\22\ the foreign
                futures account class (including options on foreign futures),\23\ the
                cleared swaps account class for swaps cleared by a registered DCO
                (including cleared options other than options on futures or foreign
                futures),\24\ 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.\25\
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                 \22\ This corresponds to segregation pursuant to section 4d(a)
                of the CEA, 7 U.S.C. 6d(a).
                 \23\ This corresponds to segregation pursuant to Sec. 30.7
                (enacted pursuant to section 4(b)(2)(A) of the CEA, 7 U.S.C.
                6(b)(2)(A).
                 \24\ This corresponds to segregation pursuant to section 4d(f)
                of the CEA, 7 U.S.C. 6d(f).
                 \25\ Delivery accounts are discussed further below in, e.g.,
                Sec. Sec. 190.00(c)(6), 190.01 (definition of delivery account,
                cash delivery property, physical delivery property) and 190.06.
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 190.00(c)(3)(i) to prescribe the
                separate treatment of ``public customers'' and ``non-public
                customers,'' as defined in Sec. 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.\26\ The Commission is adopting Sec. 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
                [[Page 19328]]
                customer property other than member property, which is reserved for
                payment of claims for the benefit of members' public customers. The
                Commission is adopting Sec. 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 Sec. 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.
                ---------------------------------------------------------------------------
                 \26\ 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 Sec. 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.\27\
                ---------------------------------------------------------------------------
                 \27\ 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 Sec. 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.\28\
                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
                Sec. 190.00(c)(3), all public customer net equity claims would receive
                priority over non-public customer claims.
                ---------------------------------------------------------------------------
                 \28\ 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 Sec.
                190.04(d)(3) in section II.B.2 below.
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 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 Sec. 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 Sec. 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
                Sec. 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 Sec.
                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,
                [[Page 19329]]
                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 Sec. 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 Sec.
                190.02(e), which requires the trustee to immediately use its best
                efforts to effect a transfer, and is continued in proposed (and
                adopted) Sec. 190.04(a)(1).
                 Furthermore, Sec. 190.00(c)(4) establishes, consistent with Sec.
                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, Sec.
                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,\29\ and Sec. 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.\30\ 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.
                ---------------------------------------------------------------------------
                 \29\ Indeed, the preference contained Sec. 190.00(c)(4) does
                not represent a departure from the existing standards under current
                part 190. It merely highlights the requirement in Sec. 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
                Sec. 190.02(e).
                 \30\ 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 Sec. 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
                Sec. 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.\31\
                ---------------------------------------------------------------------------
                 \31\ 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 v. 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 Sec. 190.00(d)(1) to describe the scope
                of commodity broker proceedings under subchapter IV of chapter 7 of the
                Bankruptcy Code,\32\ 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.''
                ---------------------------------------------------------------------------
                 \32\ 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,\33\ the
                [[Page 19330]]
                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.\34\ 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 \35\ when the debtor also is an FCM.
                ---------------------------------------------------------------------------
                 \33\ 15 U.S.C. 78aaa et seq.
                 \34\ 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).
                 \35\ 15 U.S.C. 78o.
                ---------------------------------------------------------------------------
                 Moreover, in the context of a resolution proceeding under Title II
                of Dodd-Frank, section 210(m)(1)(B) \36\ 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 \37\
                that is a commodity broker as if the resolution entity were a debtor
                for purposes of subchapter IV. Accordingly, Sec. 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.\38\
                ---------------------------------------------------------------------------
                 \36\ 12 U.S.C. 5390(m)(1)(B).
                 \37\ That is, the entity being resolved under Title II. Section
                210(m)(1)(b) refers to ``any covered financial company or bridge
                financial company.''
                 \38\ 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 Sec. 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
                Sec. 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 Sec. 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.'' \39\
                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.
                ---------------------------------------------------------------------------
                 \39\ 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 Sec. 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 Sec. 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 Sec.
                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 Sec.
                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
                Sec. 190.00(d)(2)(ii), and the exclusion from the term ``commodity
                contract'' of off-exchange retail foreign currency transactions in
                Sec. 190.00(d)(3)(iv).
                 The ABA Subcommittee recommended one modification to this
                regulation. It asked the Commission to amend proposed Sec.
                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
                [[Page 19331]]
                ABA Subcommittee's reasoning with respect to proposed Sec.
                190.00(d)(3)(v) and is amending Sec. 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 Sec. 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 Sec. 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 Sec. 190.00(e).
                ICI and Cboe expressed support for the clarity provided by Sec.
                190.00(e) with respect to portfolio margining and cross margining
                programs. ICI strongly supported the ``home field'' rule in proposed
                Sec. 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 Sec. 190.00 as
                proposed with the addition of Sec. 190.00(c)(3)(i)(C) and the
                modification to Sec. 190.00(d)(3)(v), as set forth above.
                2. Regulation Sec. 190.01: Definitions
                 The Commission is adopting Sec. 190.01 as proposed with
                modifications set forth below, to update the definitions for revised
                part 190. Most of the changes in Sec. 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 Sec. 190.01 more closely to the definitions in Sec.
                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.\40\
                ---------------------------------------------------------------------------
                 \40\ Respectively, In Re Peregrine Financial Group, Inc., No.
                12-B27488 (Bankr. N.D. Ill.), and MF Global, Inc.
                ---------------------------------------------------------------------------
                 The Commission is also amending Sec. 190.01 to replace the
                paragraphs identified with an alphabetic designation for each defined
                term (e.g., ``Sec. 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., Sec. 1.3.\41\
                ---------------------------------------------------------------------------
                 \41\ See generally 83 FR 7979, 7979 & n.6 (Feb. 23, 2018).
                ---------------------------------------------------------------------------
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 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 Sec. 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
                Sec. 190.01 and is adopting each definition as proposed.\42\
                ---------------------------------------------------------------------------
                 \42\ The Commission did not receive comments with respect to the
                following part 190 definitions as proposed in Sec. 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
                Sec. 190.00(d)(1)(i), the Commission is removing, at least
                temporarily, the ``commodity options'' and ``leverage account'' account
                classes.\43\
                ---------------------------------------------------------------------------
                 \43\ 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
                Sec. 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.
                ---------------------------------------------------------------------------
                [[Page 19332]]
                 The Commission is adopting the definition of ``futures account'' to
                cross-reference the definition of the same term in Sec. 1.3 of the
                Act, while the definition of ``cleared swaps account'' cross-references
                the definition of ``cleared swaps customer account'' in Sec. 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 Sec. 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 Sec.
                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 Sec. 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 Sec. 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 Sec. 1.3, the ``30.7 account'' in 30.1, and the ``cleared swaps
                customer account'' in Sec. 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,\44\ and thus agrees that the revised
                definitions of ``futures account,'' ``foreign futures account,'' and
                ``cleared swaps account'' within the Sec. 190.01 definition of
                ``account class'' should address separately non-public customers, and
                has amended the definitions to do so.
                ---------------------------------------------------------------------------
                 \44\ See, e.g., Sec. 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 Sec. 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.'' \45\
                ---------------------------------------------------------------------------
                 \45\ 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 Sec.
                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 Sec. 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.\46\
                ---------------------------------------------------------------------------
                 \46\ See Sec. 190.01.
                ---------------------------------------------------------------------------
                 The Commission is thus adopting paragraph (1)(iv)(A)(1) to define
                delivery accounts for FCMs. The Commission is adopting paragraph
                (1)(iv)(A)(2) 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 Sec. 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,\47\ (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.
                ---------------------------------------------------------------------------
                 \47\ 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. See also In re MF Global
                Inc., 2012 WL 1424670 (noting how physical delivery property was
                traceable).
                ---------------------------------------------------------------------------
                 The claims with respect to the physical delivery and cash delivery
                subclasses are fixed on the ``filing date.'' \48\ Thus, the physical
                delivery account class includes, in addition to certain physical
                delivery property, cash delivery property received post-filing date in
                exchange for physical delivery property held on the filing date that
                has been delivered under a commodity contract. Conversely, the cash
                delivery account class includes, in addition to certain cash delivery
                property, physical delivery property that has been received post-filing
                date in exchange for cash delivery property held on the filing date.
                ---------------------------------------------------------------------------
                 \48\ ``Filing date'' means the date that a petition under the
                Bankruptcy Code or application under SIPA commencing a proceeding is
                filed or on which the FDIC is appointed as a receiver pursuant to 12
                U.S.C. 5382(a).
                ---------------------------------------------------------------------------
                 CME and ICE supported separate subaccounts of the delivery account
                for physical property (the property being delivered) and cash property
                (cash used
                [[Page 19333]]
                to pay for delivery). CME agreed with the proposed definition of the
                delivery account class and supported the proposed separation of the
                delivery account class into the cash delivery account and physical
                delivery account classes, as they delineate the customer property that
                is available to distribute to customers in each account class on a pro
                rata basis. CME agreed that cash delivery property should include cash
                or cash equivalents recorded in a customer's delivery account as of the
                filing date, along with any physical delivery property subsequently
                received in accepting a delivery, and likewise that physical delivery
                property should include any cash delivery property received subsequent
                to the filing date in exchange for making a delivery. CME also had
                specific comments on each of the two subaccount definitions as
                discussed below.
                 CME noted that the Commission does not impose segregation
                requirements on FCMs with respect to the cash or physical delivery
                property that an FCM holds on behalf of its customers and records in a
                delivery account. As learned from the In re MF Global, Inc. bankruptcy
                (hereinafter ``MF Global''),\49\ CME agreed that it can be more
                challenging for a trustee to trace the cash recorded in delivery
                accounts than to trace physical delivery property. For example, the MF
                Global trustee could more readily identify physical delivery property
                in the form of electronic title documents, compared to identifying non-
                segregated cash belonging to the delivery account class given the
                fungible nature of cash.
                ---------------------------------------------------------------------------
                 \49\ In re MF Global, No. 11-2790 (MG) (SIPA) (Bankr. S.D.N.Y.).
                ---------------------------------------------------------------------------
                 CME recommended that the Commission address through a separate
                rulemaking the broader issues around whether customer property carried
                in delivery accounts should be subject to any special customer
                protections, such as requirements that FCMs should hold such property
                in custody accounts or limitations on how long cash or cash equivalents
                should be held in delivery accounts that are not subject to custody
                requirements.\50\
                ---------------------------------------------------------------------------
                 \50\ This recommendation is addressed in section II.G below.
                ---------------------------------------------------------------------------
                 At this time, after consideration of the comments and for the
                reasons stated above the Commission is adopting the definition of
                ``delivery account'' as proposed, with the modification to note that it
                applies to each of public and non-public customers, considered
                separately.
                 The Commission is adopting the definition of ``cash delivery
                property'' as proposed with the modifications described below. The
                Commission proposed to define cash delivery property to carry through
                the concepts from current Sec. 190.01(ll)(4) and (5) that the cash or
                cash equivalents, or the commodity must be identified on the books and
                records of the debtor as having been received, from or for the account
                of a particular customer, on or after three calendar days before the
                relevant (i) first delivery notice date in the case of a futures
                contract or (ii) exercise date in the case of an option.
                 The Commission is adopting the cash delivery property definition to
                mean any cash or cash equivalents recorded in a delivery account that
                is, as of the filing date: (1) Credited to such account to pay for
                receipt of delivery of a commodity under a commodity contract; (2)
                credited to such account to collateralize or guarantee an obligation to
                make or take delivery of a commodity under a commodity contract, or (3)
                has been credited to such account as payment received in exchange for
                making delivery of a commodity under a commodity contract. It includes
                property in the form of commodities that have been delivered after the
                filing date in exchange for cash or cash equivalents held in a delivery
                account as of the filing date. The definition also requires that the
                cash or cash equivalents, or the commodity, must be identified on the
                books and the records of the debtor as having been received, from or
                for the account of a particular customer, on or after seven calendar
                days before the relevant (i) first delivery notice date in the case of
                a futures contract or (ii) exercise date in the case of a cleared
                option.\51\ In response to comments discussed below, the Commission is
                adopting the definition of cash delivery property to also include any
                cash transferred by a customer to the trustee on or after the filing
                date for the purpose of paying for delivery, consistent with Sec.
                190.06(a)(3)(ii)(B)(1). The Commission is also adopting the definition
                in response to comments that requested that the Commission provide that
                in the case of a contract where one fiat currency is to be exchanged
                for another fiat currency, each currency will be considered cash
                delivery property to the extent that it is recorded in a delivery
                account.
                ---------------------------------------------------------------------------
                 \51\ As discussed below, the proposal had specified a period of
                three calendar days; after consideration of the comments, that
                period has been changed to seven calendar days.
                ---------------------------------------------------------------------------
                 Commenters generally supported separate subaccounts of the delivery
                account, and that cash delivery property should include cash or cash
                equivalents recorded in a customer's delivery accounts as of the filing
                date, along with any delivery property subsequently received in
                accepting a delivery. However, the Commission also received several
                comments on three aspects of the proposed definition of cash delivery
                property.
                 First, the ABA Subcommittee, CME, ICE, FIA, and CMC recommended
                that the Commission remove the three-calendar day restriction proposed
                in the definition of cash delivery property in Sec. 190.01. While
                several of these commenters recognized the Commission's intention to
                encourage customers and their FCMs to hold cash in a segregated account
                where it is better protected until needed to pay for a delivery that is
                effected in the delivery account, the commenters were concerned that
                cash or cash equivalents might be posted to delivery accounts sooner
                than three days before the first notice date or exercise date, and
                therefore this property might be denied the cash delivery property
                protection.
                 FIA stated that the Federal Register release did not explain why
                the Commission proposed to restrict cash delivery property to cash and
                cash equivalents received no earlier than three calendar days before
                the relevant first notice day or exercise date. FIA and ICE could not
                identify any justification as to why cash or cash equivalents that may
                be received by a debtor FCM and properly deposited in a cash delivery
                account prior to this period should receive different protections under
                part 190 than cash and cash equivalents received within the three-
                calendar day time frame. The ABA Subcommittee noted that their
                Committee eliminated this provision in the Model Part 190 Rules to
                avoid unintended consequences.
                 CME recognized that the three-day limitation is based on the
                limitation in current part 190, but stated that it does not make sense
                and if not eliminated from the definition, it could be detrimental to
                customers, which is contrary to the goal of enhancing customer
                protections. CME further explained that if a customer posts cash or
                cash equivalents to its delivery account in anticipation of paying for
                an upcoming delivery or to guarantee its obligation to take delivery,
                the timing of the payment should not matter. If the parties intend to
                make and take delivery, CME believed the trustee should be able to
                follow the customers' intention. CME explained that a customer is
                unlikely to leave cash in an unsegregated delivery account with an FCM
                for any extended time, without reason, when it would be better
                [[Page 19334]]
                protected by holding the cash in a segregated account or withdrawing
                the cash if not needed to meet upcoming delivery obligations. CME noted
                that there can be times, though, when a customer will legitimately post
                cash to its delivery account sooner than the definition would allow,
                for example, out of caution to assure that the necessary funds are
                available to pay for a delivery when the first notice date or exercise
                date immediately follows a weekend or holiday, or to meet payment
                deadlines imposed by the FCM, or based on market convention. CME noted
                that some FCMs may require customers to post cash sooner than three
                days prior to the relevant notice or exercise date, as applicable, to
                satisfy a delivery-related obligation. CME believed it could be
                potentially disruptive to the delivery process to deny the customer the
                protection of having its funds classified as cash delivery property
                because it posted the cash or cash equivalents needed to complete an
                upcoming delivery too soon.
                 CME also believed the three-day timing element does not make sense
                with respect to cash recorded in a customer's delivery account as of
                the filing date, which the customer had previously received as payment
                for delivering a commodity under an expired or exercised contract. CME
                believed the Commission intended for the timing limitation to apply to
                this situation, but the proposed definition does not exclude such cash
                from the requirement.
                 CME understood that the Commission proposed to keep the timing
                limitation to encourage FCMs and their delivery customers to hold cash
                intended to pay for a delivery in a segregated account until bilateral
                delivery obligations are near at hand. However, CME questioned whether
                the limitation was effective in encouraging the desired behavior, in
                particular when it is contained in bankruptcy regulations and parties
                with delivery obligations may not necessarily be aware of it. As a
                result, CME recommended that the Commission address the protection of
                customer property held in delivery accounts in a more direct and
                transparent matter, through a separate rulemaking. Specifically, CME
                recommended that the Commission revise the ``cash delivery property''
                definition to remove the limitation that cash delivery property must be
                recorded in the delivery account no sooner than three calendar days
                before the first notice date or exercise date.
                 The Commission notes that part 190 currently contains the three-day
                limitation, which serves to limit delivery property to property that is
                transferred into a delivery account shortly before the notice or
                exercise date.\52\ Thus, the Commission considered whether a change in
                the current standard is warranted. As discussed further below, the
                Commission concludes that while the case has been made to extend the
                limitation from three calendar days to seven calendar days, the case
                has not been made to remove the limitation in its entirety at this
                time.
                ---------------------------------------------------------------------------
                 \52\ See current Sec. 190.05(a)(2) (tying delivery account to
                portions of the definition of specifically identifiable property in
                Sec. 190.01); Sec. 190.01(ll)(4) and (5) (limiting recognition of
                cash as specifically identifiable property to cases where it is
                identified on the books and records of the FCM as being received
                from or for the account of a particular customer on or after three
                calendar days before the first notice date or exercise date
                specifically for the purpose of a delivery or exercise).
                ---------------------------------------------------------------------------
                 While delivery accounts provide some customer protection, in that
                they benefit from favorable treatment in bankruptcy, they lack the
                protection of segregation requirements, in contrast to futures account,
                foreign futures account, and cleared swaps accounts. In the case of the
                latter types of accounts, the FCM must maintain in accounts, protected
                from the claims of creditors of the FCM other than the customers for
                whom they are segregated, sufficient funds to repay the claims of such
                customers in full, at all times. Such segregation protections are a
                very important means of ensuring that sufficient funds are in fact
                available to pay customers in full in the (highly unlikely) event of
                the insolvency of an FCM.
                 Accordingly, the Commission is of the view that changing current
                part 190 to completely remove any time limitation for protecting
                property transferred into a delivery account would, in light of this
                lack of segregation protection, carry the risk of significant
                unintended consequences, e.g., customers being encouraged to transfer
                funds prematurely into an account without such protection, and thus a
                bankruptcy where a greater number of customers receive less than the
                full amount of their claims, and greater total shortfalls in repayment
                of such claims.
                 CME, while noting their preference for simply deleting the three-
                day limitation, observed that protection of customer property held in
                delivery accounts should be addressed in a direct and transparent
                manner through a separate rulemaking. The Commission concludes that
                deleting entirely the time limitation on posting cash delivery property
                should only be undertaken, if at all, in the context of a separate,
                dedicated, and explicit rulemaking, in which moving property more
                quickly to a delivery account is considered in conjunction with
                segregation protection for property in such an account.
                 However, the Commission believes CME's concerns about long weekends
                raise important issues. For example, in the context of an FCM's global
                business, there could be a bank holiday on a Friday in the jurisdiction
                where a customer is based, a Federal holiday on the following Monday in
                the U.S., and the exercise or notice date might be on a Tuesday; in
                which event three calendar days may be too short. Similarly, in the
                vein of CME's comment, there may be legitimate reasons to transfer the
                funds a day or two in advance of when they are needed, to account for
                the possibility of a failure in the transfer process.
                 Weighing the concerns of having funds for an extended time in an
                account that is not protected by segregation against the need to
                provide a modest amount of flexibility in the process, the Commission
                has determined that a reasonable balance can be achieved by changing
                the three-day (before notice or exercise date) period to a seven-day
                period. The Commission believes this extended time period will address
                completely the concern that a delivery date may come after a holiday
                weekend, and should mitigate concerns about FCM funding requirements
                that extend beyond three days. If and when a separate rulemaking
                results in additional protection for delivery accounts, it will be
                appropriate to revisit this aspect of part 190 as part of such a
                rulemaking.
                 Second, the ABA Subcommittee, CME, and CMC recommended that the
                Committee revise the definition of cash delivery property to allow for
                the possibility that cash or cash equivalents could be posted after the
                filing date for the purpose of paying for a delivery, and to provide
                protection for such deposits. The commenters requested that the
                Commission expand the definition to allow for the rare possibility that
                a customer may be unable to post funds needed to pay for a delivery in
                advance of the filing date so that the definition should also cover
                cash delivery property received after the filing date in anticipation
                of taking delivery of a commodity. CME noted that as has been seen with
                other FCM bankruptcies, the days prior to actual filing can be chaotic
                and customers may not have had the opportunity to meet such a deadline.
                To allow the delivery to be completed reduces a potential disruptive
                situation to commodities markets during an otherwise tumultuous time.
                 This issue is illuminated by considering the interplay of other
                [[Page 19335]]
                regulations that affect delivery. The Commission notes that while Sec.
                190.04(c) continues the preference for the trustee to liquidate
                contracts moving into delivery position before they do so, and Sec.
                190.06(a)(2) continues the preference, in cases where the trustee is
                unable to do so, for the trustee to arrange for delivery to occur
                outside the estate, Sec. 190.06(a)(3) acknowledges that there may be
                cases where the trustee will need to facilitate the making or taking of
                delivery. Regulation Sec. 190.06(a)(3)(ii)(B)(1) refers to cases where
                the trustee pays for delivery (in whole or in part) with cash
                transferred by the customer to the trustee on or after the filing date
                for the purpose of paying for delivery.
                 Thus, the Commission agrees with the arguments made by the
                commenters who suggested that the Commission expand the definition of
                ``cash delivery property'' in this context, and consequently is adding
                an explicit reference to the cash transferred from a customer to the
                trustee after the filing date, consistent with Sec.
                190.06(a)(3)(ii)(B)(1). Moreover, for consistency, the Commission will
                amend Sec. 190.08(c)(1)(ii) as proposed to explicitly give such post-
                petition transfers treatment as 100% funded.
                 Finally, the ABA Subcommittee suggested that the Commission clarify
                that the delivery of two different fiat currencies for foreign currency
                commodity contract constitutes cash delivery property. CME suggested a
                similar technical change to clarify in the definition that for a
                commodity contract that settles by delivery of a foreign currency as
                the underlying commodity or by an exchange of a pair of currencies, the
                USD or foreign currency recorded to a delivery account in connection
                with either side of the delivery constitutes cash delivery property.
                 In response to the ABA Subcommittee comment regarding the delivery
                of two fiat currencies, ``[g]iven the fungible nature of cash,
                regardless of currency denomination,'' the Commission has determined to
                amend further the definition of ``cash delivery property'' to clarify
                that for foreign exchange contracts, i.e., contracts where one fiat
                currency is exchanged for another fiat currency, both fiat currencies
                will be treated as cash delivery property, and neither currency will be
                considered physical delivery property.
                 Accordingly, in consideration of the comments and the reasons
                discussed above, the Commission will adopt the definition of ``cash
                delivery property'' in Sec. 190.01 as modified, with the additions
                referred to above.
                 The Commission is adopting the definition of ``physical delivery
                property'' in Sec. 190.01 as proposed with modifications, as described
                below. The Commission is adopting the definition of ``physical delivery
                property'' to include, under the four specified sets of circumstances
                discussed below, a commodity, whether tangible or intangible, held in a
                form that can be delivered to meet and fulfill delivery obligations
                under a commodity contract that settles via delivery if held to a
                delivery position.\53\ The Commission is adopting the definition to
                include warehouse receipts, other documents of title, or shipping
                certificates (including electronic versions of the forgoing), for the
                commodity, or the commodity itself.
                ---------------------------------------------------------------------------
                 \53\ The current definition is found in Sec. 190.01(ll)(3), and
                focuses on documents of title and physical commodities.
                ---------------------------------------------------------------------------
                 The Commission is amending the physical deliver property definition
                to address changes in delivery practices since the 1980s. The reference
                to electronic versions of warehouse receipts, other documents of title,
                or shipping certificates explicitly recognizes that title documents for
                commodities are now commonly held in dematerialized, electronic form,
                in lieu of paper. Moreover, the types of commodities that might be
                physically delivered would extend beyond tangible commodities to those
                that are intangible, including Treasury securities, foreign currencies,
                or virtual currencies.\54\
                ---------------------------------------------------------------------------
                 \54\ See ABA Cover Note at 10, 12-13.
                ---------------------------------------------------------------------------
                 For purposes of analytical clarity, the Commission is adopting the
                definition of physical delivery property as subdivided into four
                categories:
                 First, the commodities or warehouse receipts, other documents of
                title, or shipping certificates (including electronic versions of any
                of the foregoing) for the commodity that the debtor holds for the
                account of a customer for purposes of making delivery of such property
                and which, as of the filing date or thereafter, can be identified as
                held in a delivery account for the benefit of such customer on the
                books and records of the debtor.\55\
                ---------------------------------------------------------------------------
                 \55\ These first two categories together correspond to current
                Sec. 190.01(ll)(3), with the first category corresponding to
                physical delivery property held for the purpose of making delivery
                and the second category corresponding to physical delivery property
                held as a result of taking delivery. The property that is (or should
                be) within these two categories, as of the filing date, comprises
                the property that will be distributed as part of the physical
                delivery class.
                ---------------------------------------------------------------------------
                 Second, the commodities or warehouse receipts, other documents of
                title, or shipping certificates (including electronic versions of any
                of the foregoing) for the commodity that the debtor holds for the
                account of the customer, where the customer received or acquired such
                property by taking delivery under an expired or exercised commodity
                contract, and which, as of the filing date or thereafter, can be
                identified as held in a delivery account for the benefit of such
                customer on the books and records of the debtor.\56\
                ---------------------------------------------------------------------------
                 \56\ The current definition does not prescribe or imply a limit
                to how long such received property can be held in a delivery
                account, because there is no principled basis to draw a bright line
                delineating how long is too long. The definition the Commission is
                adopting explicitly codifies that position.
                ---------------------------------------------------------------------------
                 The third category addresses property that (a) is in fact being
                used, or has in fact been used, for the purpose of making or taking
                delivery, but (b) is held in a futures, foreign futures, cleared swaps,
                or (if the commodity is a security) securities account.\57\ This
                property would be considered physical delivery property solely for the
                purpose of the obligations, pursuant to Sec. 190.06, to make or take
                delivery of physical delivery property. The property in this category
                would be distributed as part of the account class in which it is held
                (futures, foreign futures, or cleared swaps, or, in the case of a
                securities account, as part of a SIPA proceeding).
                ---------------------------------------------------------------------------
                 \57\ As the ABA Cover Note explained at 13, ``[w]hen the FCM has
                a role in facilitating delivery, deliveries may occur via title
                transfer in a futures account, foreign futures account, cleared
                swaps account, delivery account, or, if the commodity is a security
                . . . in a securities account.''
                ---------------------------------------------------------------------------
                 Fourth, where such commodities or documents of title are not held
                by the debtor, but are delivered or received by a customer in
                accordance with Sec. 190.06(a)(2) (either by itself in the case of an
                FCM bankruptcy or in conjunction with Sec. 190.16(a) in the case of a
                clearing organization bankruptcy), they will be considered physical
                delivery property, but, again, solely for purposes of obligations to
                make or take delivery of physical delivery property pursuant to Sec.
                190.06. As this property is held outside of the debtor's estate (and
                there was no obligation to transmit it to the debtor's customer
                accounts), it is not subject to pro rata distribution.
                 The Commission is also adding a special case to correspond with the
                special case for cash delivery property, which states that where one
                fiat currency is exchanged for another, neither such currency, to the
                extent that it is recorded in the delivery account, will be considered
                physical delivery property. The Commission is also, as discussed
                further below, additionally amending the physical delivery property
                definition to address the possibility of a negative delivery price
                [[Page 19336]]
                where the party obliged to delivery physical delivery property under an
                expiring contract or an expired options contract is also obliged to
                make a cash payment to the buyer, as such cash or cash equivalents
                constitute physical delivery property.
                 CME and CMC agreed that physical delivery property should include
                any cash delivery property received subsequent to the filing date in
                exchange for making a delivery.
                 In light of the evolving nature of intangible assets, and of the
                manner in which they may be held, custodied or transferred, ICE
                suggested that the definition of physical delivery property include, as
                examples (and not by way of limitation), other electronic
                representations of commodities (whether or not technically ``an
                electronic title document'') or any property entitlement to a commodity
                (such as for a commodity held as a financial asset in a securities
                account under Article 8 of the Uniform Commercial Code (whether or not
                a security) or similar structure).
                 ICE strongly agreed with the Commission's proposal to clarify that
                intangible property received or held for purposes of delivery is
                appropriately regarded as subject to the delivery account, without
                regard to whether it is ``physical'' as under the current rule. ICE
                argued that any asset, tangible or intangible, that can be delivered in
                settlement of a contract should be eligible to be treated as delivery
                property, as set out in the proposed definition of ``physical delivery
                property.'' ICE believed this proposed definition would avoid questions
                that may otherwise arise in connection with the delivery of digital
                currencies or other novel digital assets. CME also supported the
                decision to expand the delivery account class to cover intangible
                commodities.
                 Additionally, CME supported modernizing the definition of physical
                delivery property to recognize the use of electronic delivery documents
                in effecting deliveries under physical delivery commodity contracts.
                CME recommended that the Commission further expand the physical
                delivery property definition to cover within its scope any cash or cash
                equivalents that a seller may deposit in its delivery account when its
                obligation to deliver physical delivery property under an expiring
                futures or exercised options contract also includes an obligation to
                make a cash payment to the buyer, as could arise if the contract's
                final settlement price is negative. CME acknowledged that this scenario
                would be unprecedented and may never occur, but believed it prudent to
                contemplate the possibility in light of events in April 2020 where
                certain physical-delivery oil futures contracts traded below zero in
                the days prior to establishment of the final settlement prices.
                 CME also recommended a technical correction to the definition
                relating to the fact that shipping certificates are not electronic
                title documents, and instead represent the contractual obligation of a
                facility to deliver the underlying commodity to the buyer. Thus, for
                clarity CME recommended that the Commission revise the phrase
                ``including warehouse receipts, shipping certificates or other
                documents of title (including electronic title documents) for the
                commodity'' to read ``including warehouse receipts, shipping
                certificates or other 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 Sec. 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 Sec. Sec. 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 Sec. Sec. 190.01 and
                190.08(a), as the ABA Subcommittee believes the remainder of proposed
                Sec. 190.08 would address how to calculate a customer's net equity
                claims and the funded balances for each such claims.\58\
                ---------------------------------------------------------------------------
                 \58\ The ABA Subcommittee also recommended that the Commission
                further amend Sec. 190.02 by adding new paragraph (g) to proposed
                Sec. 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 Sec. 190.09(d)(3). The Commission agrees that
                these recommended amendments would avoid confusion with the meaning
                of ``allowed'' in Sec. 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
                [[Page 19337]]
                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 Sec. 190.02(g) (as discussed below) and
                adding ``funded balance of'' before ``such customer's allowed net
                equity claim'' in Sec. 190.09(d)(3) as suggested.
                 The Commission is adopting the definition of ``commodity contract''
                in Sec. 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.\59\
                ---------------------------------------------------------------------------
                 \59\ It should be noted that, consistent with Sec.
                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. v. 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 Sec. 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 Sec. 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 Sec.
                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 Sec. 190.07(c), which prohibits transfer of the debtor FCM's
                house account after the filing date; and (iii) proposed Sec.
                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 Sec. 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,'' \60\ 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 Sec. 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 Sec.
                30.1, whose foreign futures account is subject to the segregation
                requirements of Sec. 30.7; for the cleared swaps account class, a
                cleared swaps customer as defined in Sec. 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.
                ---------------------------------------------------------------------------
                 \60\ This is in contrast to the current definition in Sec.
                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
                Sec. 190.01 included any customer of an FCM whose commodity contract
                is subject to the Commission's segregation
                [[Page 19338]]
                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 Sec. 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 Sec.
                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 Sec. 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 Sec. 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 Sec. 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.\61\
                Accordingly, after consideration of the comments and for the reasons
                stated above, the Commission is adopting the definition of ``variation
                settlement'' in Sec. 190.01 as proposed.
                ---------------------------------------------------------------------------
                 \61\ The technical correction suggested by the ABA subcommittee
                to Sec. 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 Sec. 190.01 and is therefore adopting them as proposed.
                 The Commission is adopting the definition of ``Act'' in Sec.
                190.01 to refer to the Commodity Exchange Act.
                 The Commission is amending the definition of ``Bankruptcy Code'' in
                Sec. 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 Sec. 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 Sec. 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
                [[Page 19339]]
                debtor's estate may not be a bankruptcy court (e.g., in the event of a
                withdrawal of the reference).\62\
                ---------------------------------------------------------------------------
                 \62\ 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.\63\
                ---------------------------------------------------------------------------
                 \63\ 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 Sec. 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., Sec. Sec.
                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 Sec. 1.3 (which is
                consistent with Sec. 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 Sec. 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 Sec. 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 Sec. 190.04(c).
                 The Commission is amending the definition of ``Joint account'' to
                reflect that a commodity pool must be a legal entity.\64\ Thus, the
                Commission is removing the reference to a commodity pool that is not a
                legal entity.
                ---------------------------------------------------------------------------
                 \64\ See Sec. 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 Sec. 190.00(d)(1)(i)(B).
                 The Commission is removing the definition of ``Member property''
                from current Sec. 190.09(a) and addressing it in Sec. 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 Sec. 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 Sec. 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''
                [[Page 19340]]
                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 Sec. 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)(1) 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)(2) 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 Sec. 190.03(c)(2). As discussed further below,\65\ 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.
                ---------------------------------------------------------------------------
                 \65\ 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'' \66\ 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 Sec.
                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.'' \67\
                ---------------------------------------------------------------------------
                 \66\ See current Sec. 190.01(pp).
                 \67\ 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 \68\ 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.\69\
                ---------------------------------------------------------------------------
                 \68\ 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.
                 \69\ 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 Sec.
                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 Sec. 190.01 as
                proposed, with the amendments discussed above.
                3. Regulation Sec. 190.02: General
                 Regulation Sec. 190.02 is being adopted as proposed, with the
                addition of paragraph (g) as described below. The Commission is
                adopting Sec. 190.02(a)(1) based on current Sec. 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 Sec. 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 Sec. 190.02(a)(2)(i) and (ii),
                (a)(3), and (b), as derived from current Sec. Sec. 190.10(b)(2), (3),
                and (4) and 190.10(d), respectively, with minor editorial and
                conforming changes.
                 The Commission is adopting Sec. 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 Sec.
                190.07(e)(1), to the Director of the Division of Clearing and Risk,
                after consultation with the Director of the Market Participants
                Division \70\ (with the possibility of further delegations to members
                of the respective Directors' staffs).
                ---------------------------------------------------------------------------
                 \70\ 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 Sec. 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 Sec. 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 Sec.
                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 Sec. 190.02(c)
                (forward contracts), (d) (other), and (e) (rule of construction) as
                transposed from current Sec. 190.10(e), (g), and (h), respectively.
                 The Commission continues to believe, as stated in the proposal,
                that Sec. 190.02(f) should enhance customer protection in cases where
                a receiver has been
                [[Page 19341]]
                appointed (pursuant to e.g., section 6c of the CEA) for an FCM due to a
                violation or imminent violation \71\ of the customer property
                protection requirements of section 4d of the CEA or of the regulations
                thereunder, or of the Commission's capital rule (Sec. 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.
                ---------------------------------------------------------------------------
                 \71\ 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 Sec. 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 Sec. 190.02 would
                likely to lead to unintended consequences, and, if so, how may these be
                mitigated.
                 The Commission received two comments on proposed Sec. 190.02. CME
                generally supported proposed Sec. 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 Sec. 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 Sec. 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, Sec. 190.01, to
                more precisely use the term ``allowed net equity'') \72\ that the
                Commission further amend Sec. 190.02 by adding new paragraph (g) to
                proposed Sec. 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.
                ---------------------------------------------------------------------------
                 \72\ See section II.A.2. (recommending that the Commission
                instead use ``funded net equity'' as the defined term in the Sec.
                190.01 definitions.)
                ---------------------------------------------------------------------------
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is adopting Sec. 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 (Sec. Sec. 190.03-190.10) to
                address debtors that are FCMs.
                1. Regulation Sec. 190.03: Notices and Proofs of Claims
                 The Commission is adopting Sec. 190.03 as proposed with
                modifications to Sec. 190.03(c)(2), as set forth below.
                 The Commission is adopting Sec. 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 Sec. 190.02, and
                incorporates some portions of current Sec. 190.10.
                a. Regulation Sec. 190.03(a): Notices--Means of Providing
                 The Commission is adopting Sec. 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
                Sec. 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 Sec. 190.03(a)(2) to provide a
                generalized approach for giving notice to customers under part 190. In
                light of evolving technology, Sec. 190.03(a)(2) replaces the specific
                procedures for providing notice to customers that appear in current
                Sec. 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 Sec. 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.
                [[Page 19342]]
                b. Regulation Sec. 190.03(b): Notices to the Commission and Designated
                Self-Regulatory Organizations
                 Section 190.03(b)(1) is derived from current Sec. 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'') \73\ 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.\74\ First, Sec. 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,
                Sec. 190.03(b)(1) provides that, in the event of an involuntary
                bankruptcy filing or an application for a protective decree under
                SIPA,\75\ 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.
                ---------------------------------------------------------------------------
                 \73\ For further detail regarding SROs and DSROs see generally
                Sec. 1.52.
                 \74\ 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.
                 \75\ 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 Sec. 190.02(a)(2). While Sec. 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 Sec. 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 Sec. 190.03(b).
                Specifically, the Commission asked whether proposed Sec. 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.\76\
                ---------------------------------------------------------------------------
                 \76\ 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 Sec. 190.03(c): Notices to Customers; Treatment of
                Hedging Accounts and Treatment of Specifically Identifiable Property
                 The Commission is adopting Sec. 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 Sec. 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 Sec. 190.03(a)(2). This
                change is intended to provide the trustee with flexibility in notifying
                customers regarding specifically identifiable
                [[Page 19343]]
                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 Sec.
                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 Sec.
                190.03(a)(2) and the customer has not instructed the trustee in writing
                to return such specifically identifiable property.
                 The Commission is adopting Sec. 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 Sec. 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.\77\ 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 Sec. 190.03(a)(2). As proposed, Sec. 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.\78\ 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.
                ---------------------------------------------------------------------------
                 \77\ See major theme 7 in section I.B. above.
                 \78\ 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 Sec. 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 Sec. 190.06(d). See Sec. 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 Sec.
                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 Sec. 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.\79\ 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.
                ---------------------------------------------------------------------------
                 \79\ See Sec. 190.00(c)(4).
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 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 Sec. 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 Sec. 190.02(b)(4), but adds that the notice must be
                provided in accordance with Sec. 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 Sec. 190.03(a)(2).
                 The Commission requested comment on proposed Sec. 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 Sec. 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 Sec. 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.
                [[Page 19344]]
                SIFMA AMG/MFA also generally agreed with Sec. 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 Sec. 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.\80\ 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 Sec. 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.
                ---------------------------------------------------------------------------
                 \80\ This last point is addressed with the addition of Sec.
                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 Sec.
                190.03(c)(2) to implement that suggestion. Specifically, Sec.
                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 commodity contracts. Such notice must specify the
                manner for providing such instructions and the deadline by which the
                customer must provide instructions.
                 Other conforming changes are being made to Sec. 190.03(c)(2). With
                respect to SIFMA AMG/MFA's request that the Commission explicitly
                clarify that proposed Sec. 190.03(c)(2) is not intended to affect the
                treatment of hedging accounts under part 39, the Commission notes that
                Sec. 190.03(c)(2) governs the trustee's actions, and does not govern
                the actions a DCO may take under its default rules or otherwise.
                 ACLI recommended that the Commission amend proposed Sec.
                190.03(c)(2) to require a trustee to transfer a public customer's hedge
                positions where the customer has requested the transfer and met the
                required terms unless, in consultation with the Commission, it is
                determined that it would be unreasonable to transfer such positions.
                ACLI further recommended that the Commission add a threshold such as
                ``impossibility'' or ``exigent circumstances'' to limit a trustee's
                ability to liquidate a customer's hedge position in lieu of a requested
                transfer. ACLI asserted that the Commission's oversight should be
                specifically mandated. In response to ACLI's comment, the Commission
                notes that Sec. 190.00(c)(4) sets forth a preference for the porting
                of all open commodity contract positions of public customers, along
                with all or a portion of such customers' account equity, and Sec.
                190.04(a)(1) instructs the trustee promptly to use its best efforts to
                effect a transfer of such positions and property in accordance with
                Sec. 190.07(c) and (d) not later than seven calendar days after the
                order for relief. The discretion granted to the trustee in Sec.
                190.03(c)(2) is based on the reality that, in light of limited time and
                administrative resources, achieving porting to the maximum extent is
                fostered by treating customers on an omnibus, rather than an
                individualized, basis. For these reasons, the Commission declines to
                adopt ACLI's specific suggestions.
                d. Regulation Sec. 190.03(d): Notice of Court Filings
                 Section 190.03(d) addresses notices of court filings. It is derived
                from current Sec. 190.10(f), but makes modernizing changes to the
                terminology and method of providing notice to the Commission. The
                Commission requested comment on proposed Sec. 190.03(d). The
                Commission specifically asked whether the proposed revisions appeared
                likely to lead to unintended consequences, and, if so, how such
                consequences could be mitigated. The Commission did not receive any
                comments on proposed Sec. 190.03(d).
                e. Regulation Sec. 190.03(e): Proof of Customer Claim
                 The Commission is adopting Sec. 190.03(e) to require a trustee to
                request that customers provide information sufficient to determine a
                customer's claim in accordance with the regulations contained in part
                190. Section 190.03(e) lists certain information that customers shall
                be requested to provide, to the extent reasonably practicable, but
                grants the trustee discretion to adapt the request to the facts of the
                particular case. Such discretion is being granted to the trustee in
                order to enable the trustee to tailor the proof of claim form to the
                information that is most appropriate in light of the specifics of the
                types of business that the debtor did (and did not do), the way in
                which such types of business were organized, and the available records
                of the debtor (as well as the reliability of those records). Section
                190.03(e) is generally derived from current Sec. 190.02(d), although
                certain items on the list of information to be requested of customers
                have been revised and reorganized to: Inter alia, improve clarity; tie
                the questions to definitions of terms in part 190; give the claimant an
                opportunity to provide a more complete picture of its claims; and
                provide its own view as to the value of such open positions,
                unliquidated securities or other unliquidated property in order to
                support its claim against the debtor.
                 The Commission requested comment on proposed Sec. 190.03(e).
                Specifically, the Commission asked whether the proposed changes would
                be helpful; whether the discretion granted to the trustee was
                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 one comment on proposed
                Sec. 190.03(e). CME noted that the proposed regulation
                [[Page 19345]]
                is a major improvement over the current regulation.
                f. Regulation Sec. 190.03(f): Proof of Claim Form
                 Regulation Sec. 190.03(f) provides that a template proof of claim
                form is included as appendix A to part 190.\81\ The Commission
                substantially revised the customer proof of claim form in order to
                streamline it and better map it to the information listed in Sec.
                190.03(e). The revised customer proof of claim form now includes, in
                each section, citations to the location in the text of Sec. 190.03(e)
                where such information is listed.
                ---------------------------------------------------------------------------
                 \81\ Appendix A is discussed in section II.D below.
                ---------------------------------------------------------------------------
                 Section 190.03(f)(1) provides that, to the extent there are no open
                commodity contracts that are being treated as specifically identifiable
                property, the bankruptcy trustee should modify the proof of claim form
                to delete any references to open commodity contracts as specifically
                identifiable property. For example, this would be the case if all open
                commodity contracts had been transferred or liquidated before the proof
                of claim form is sent. Section 190.03(f)(2) makes clear that the
                trustee has discretion as to whether to use the template proof of claim
                form, and that the proof of claim form should be modified to reflect
                the specific facts and circumstances of the case. The provisions of
                Sec. 190.03(f), taken together, are meant to provide bankruptcy
                trustees with appropriate flexibility to determine the best and most
                efficient way to compose the customer proof of claim.
                 The Commission requested comment on proposed Sec. 190.03(f).
                Specifically, the Commission asked whether the proposed changes to the
                treatment of the proof of customer claim form would be helpful; whether
                they would lead to unintended consequences; and how such consequences,
                if any, could be mitigated. The Commission also asked whether the
                discretion granted to the trustee was appropriately tailored and, if
                not, what changes should be made. CME commented that the proof of claim
                form had been improved and supported the flexibility provided to the
                trustee.
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.03 as
                proposed, with modifications to Sec. 190.03(c)(2), as set forth above.
                2. Regulation Sec. 190.04: Operation of the Debtor's Estate--Customer
                Property
                 The Commission is adopting Sec. 190.04 as proposed with
                modifications, as set forth below to address the collection of margin
                and variation settlement, as well as the liquidation and valuation of
                positions. The Commission is adopting Sec. 190.04 to clarify and
                update portions of Sec. Sec. 190.02, 190.03, and 190.04.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.04 including: Whether the revisions create any
                unintended conflicts with customer protection regulations set forth in
                parts 1, 22, and 30; how any such conflicts may be resolved; whether
                there are any proposed clarification changes that are likely to create
                unintended consequences; and, if so, how might those be avoided or
                mitigated.
                a. Regulation Sec. 190.04(a): Transfers
                 The Commission is adopting Sec. 190.04(a) as proposed. Section
                190.04(a) largely retains the current provisions in current Sec.
                190.02(e) regarding transfers for customers in a bankruptcy proceeding.
                It also retains the policy preference \82\ that the trustee should use
                its best efforts to transfer open commodity contracts and property held
                by the failed FCM for or on behalf of its public customers to one or
                more solvent FCMs.\83\ Regulation Sec. 190.04(a)(1) provides that the
                trustee ``shall promptly'' use its best efforts to effect such
                transfers, while current Sec. 190.02(e)(1) states that the trustee
                must ``must immediately'' do so. This revision signals that the trustee
                must take action to transfer open commodity contracts as soon as
                practicable, while avoiding potential pressure of the term
                ``immediately'' in light of the challenges presented in an FCM
                bankruptcy. Regulation Sec. 190.04(a)(2) replaces the term ``equity''
                with ``property'' to clarify that the trustee should endeavor to
                transfer all types of property that the commodity broker is holding on
                behalf of customers; the transfer is not limited to equity. The
                Commission is also adding the word ``public'' before ``customers'' to
                clarify that the transfers discussed in Sec. 190.04(a)(1) relate to
                the open commodity contracts and property of the debtor's public
                customers.\84\
                ---------------------------------------------------------------------------
                 \82\ The Commission discussed the rationale for this policy
                preference in the discussion of Sec. 190.00(c)(4). See section
                II.A.1. See also ABA Cover Note at 14 (recommending explicitly
                identifying in Sec. 190.04(a) a clear policy that the trustee
                should use best efforts to transfer open commodity contracts and
                property held by the failed FCM for or on behalf of its public
                customers to one or more solvent FCMs).
                 \83\ The Commission is also adopting cross-references in Sec.
                190.04(a) to other provisions within proposed part 190 that discuss
                transfers of customer property.
                 \84\ The Commission is adopting the same change--addition of the
                word ``public'' before ``customers''--to Sec. 190.04(a)(2), as
                discussed below.
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 190.04(a)(2), as derived from
                Sec. 190.02(e)(2), to remove the liquidation-only trading limitations
                on an FCM that is subject to an involuntary bankruptcy petition unless
                otherwise directed by the Commission, by any applicable self-regulatory
                organization, or by court. The Commission is instead adopting
                limitations on the business of an FCM in bankruptcy in Sec. 190.04(g)
                to more generally address involuntary proceedings.\85\
                ---------------------------------------------------------------------------
                 \85\ The Commission is deleting the reference to ``liquidation''
                in Sec. 190.02(e)(4) accordingly since the limitation to trading
                for liquidation only is being deleted from Sec. 190.04(a)(2).
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 190.04(a)(2), as derived from
                current Sec. 190.02(e)(2), to provide that if such commodity broker
                demonstrates to the Commission within a specified period of time that
                it is in compliance with the Commission's segregation and financial
                requirements on the filing date, the Commission may determine to allow
                the commodity broker to continue in business. The Commission is
                retaining this provision because any requirement to transfer customers
                is properly addressed pursuant to Sec. 1.17(a)(4), which deals with
                FCMs that do not meet minimum financial requirements. The Commission is
                of the view that an FCM that does meet such requirements should not be
                compelled to cease business and transfer its customers absent an
                appropriate finding by a court or the Commission.
                 In addition, similar to Sec. 190.04(a)(1), as discussed above, the
                Commission is replacing the term ``equity'' with ``property'' to
                clarify that the transfers discussed in Sec. 190.04(a)(2) are for all
                types of property that the commodity broker is holding on behalf of
                customers, rather than limited to only equity. Also, the Commission is
                adding the word ``public'' before ``customers'' to clarify in Sec.
                190.04(a)(2) that the transfers discussed in Sec. 190.04(a)(1) relate
                to the open commodity contracts and property of the debtor's public
                customers.
                 The Commission did not receive any comments on this aspect of the
                Proposal. Accordingly, for the reasons stated above, the Commission is
                adopting Sec. 190.04(a) as proposed.
                b. Regulation Sec. 190.04(b): Treatment of Open Commodity Contracts
                 The Commission is adopting Sec. 190.04(b) as proposed to clarify
                and update the provisions in current Sec. 190.02(g)(1), which allow a
                trustee to make ``variation and maintenance margin payments'' on behalf
                of the
                [[Page 19346]]
                debtor FCM's customers. The Commission is adopting Sec. 190.04(b) to
                be generally consistent with the current regulation but with a number
                of substantive changes.
                 First, the Commission is adopting Sec. 190.04(b) to permit the
                trustee to make margin payments pending transfer or liquidation; not
                just pending liquidation as required by current Sec. 190.02(g)(1). The
                amendment is consistent with the Commission's longstanding policy for
                the trustee to endeavor to transfer open commodity contracts. The
                trustee has two paths for the treatment of such contracts: Transfer
                and, if transfer is not possible, liquidation.
                 Second, the Commission is adopting Sec. 190.04(b)(1) to delete the
                phrase ``required to be liquidated under paragraph (f)(1) of this
                section'' in current Sec. 190.02(g)(1) to eliminate a complete
                prohibition against paying margin on open contracts. While holding
                contracts open may or may not be practicable given the particular
                circumstances of the bankruptcy, a complete prohibition against paying
                margin on such open contracts would undermine the point of having the
                possibility to hold those contracts open. Accordingly, the Commission
                is deleting the phrase ``required to be liquidated under paragraph
                (f)(1) of this section'' and thus will instead apply more broadly to
                any open commodity contracts.
                 The Commission is also adopting several technical amendments.
                Third, the Commission is replacing the phrase ``variation and
                maintenance margin payments'' with ``payments of initial margin and
                variation settlement'' which, in the Commission's view, more accurately
                describes the types of payments being reflected in this provision.
                Fourth, the Commission is replacing the phrase ``to a commodity
                broker'' with ``to a clearing organization, commodity broker, foreign
                clearing organization or foreign futures intermediary'' to account for
                the various types of entities to which a margin payment described in
                this provision may be made. Lastly, the Commission is replacing the
                phrase ``specifically identifiable to a particular customer'' with
                ``specifically identifiable property of a particular customer'' in
                order to be consistent with the definitions in part 190, which includes
                as a defined term ``specifically identifiable property.''
                 The Commission is adopting Sec. 190.04(b)(1)(i), as derived from
                current Sec. 190.02(g)(1)(i), to prevent the trustee from making any
                payments on behalf of any commodity contract account that is in
                deficit, to the extent within the trustee's control. The Commission is
                including the phrase ``to the extent within the trustee's control'' to
                recognize that certain commodity contract accounts may be held on an
                omnibus basis (i.e., on behalf of several customers), so to the extent
                the trustee is making a margin payment on behalf of the omnibus
                account, it may be out of the trustee's control to identify and only
                pay on behalf of those underlying customer accounts (within the omnibus
                account) that are not in deficit. The Commission is including a proviso
                to note that Sec. 190.04(b)(1)(i) shall not be construed to prevent a
                clearing organization, foreign clearing organization, FCM, or foreign
                futures intermediary from exercising its rights to the extent permitted
                under applicable law. This proviso is intended to remove any doubt that
                the right of these ``upstream'' entities to use collateral posted by
                the FCM on an omnibus basis is not affected by the prohibition on
                making margin payments on behalf of accounts that are in deficit.
                 The Commission is adopting Sec. 190.04(b)(1)(ii) as a new
                provision to prohibit the trustee from making an upstream margin
                payment with respect to a specific customer account that would exceed
                the funded balance of that account. This restriction is consistent with
                the pro rata distribution principle discussed in Sec. 190.00(c)(5), in
                that any payment in excess of a customer's funded balance would be to
                the detriment of other customers.
                 The Commission is adopting some non-substantive clarifications in
                Sec. 190.04(b)(1)(iii), as derived from current Sec.
                190.02(g)(1)(ii), to retain the limitation that the trustee may not
                make payments on behalf of non-public customers of the debtor from
                funds that are segregated for the benefit of public customers.
                 The Commission is adopting Sec. 190.04(b)(1)(iv)-(v) to clarify
                and expand upon current Sec. 190.02(g)(1)(iii),\86\ to require that
                margin is used consistent with the requirements of section 4d of the
                CEA.\87\ First, the Commission is adopting Sec. 190.04(b)(1)(iv) to
                provide that, if the trustee receives payments from a customer in
                response to a margin call, then to the extent within the trustee's
                control,\88\ the trustee must use such payments to make margin payments
                for the open commodity contract positions of such customer. Second, the
                Commission is adopting Sec. 190.04(b)(1)(v) to provide that the
                trustee may not use payments received from one public customer to meet
                the margin (or any other) obligations of any other customer. Given the
                restriction in paragraph (b)(1)(v), the Commission believes it may in
                some cases be impracticable for a trustee to follow paragraph
                (b)(1)(iv). In such a situation, therefore the trustee would hold onto
                the funds received in response to a margin payment and such funds would
                be credited to the account of the customer that made the payment.\89\
                ---------------------------------------------------------------------------
                 \86\ Current Sec. 190.02(g)(1)(iii) provides that the trustee
                must make margin payments if payments of margin are received from
                customers after bankruptcy in response to margin calls.
                 \87\ See 7 U.S.C. 6d.
                 \88\ The phrase ``to the extent within the trustee's control''
                recognizes the reality that certain accounts are held on an omnibus
                basis. See discussion of Sec. 190.04(b)(1)(i) above.
                 \89\ See Sec. 190.08(c)(1)(ii).
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.04(b)(1)(vi) builds upon current Sec.
                190.02(g)(1)(iv), which provides that no payments need to be made to
                restore initial margin, thus noting that such payments are not required
                but implicitly allowed to be made. Revised Sec. 190.04(b)(1)(vi)
                explains in this in more detail and provides more comprehensive
                guidance to the trustee about when such payments may be made.
                Specifically, Sec. 190.04(b)(1)(vi) provides that, in the event that
                the funds segregated for the benefit of public customers in a
                particular account class exceed the aggregate net equity claims for all
                customers in that account class, the trustee is permitted to use such
                funds to meet the margin obligations for any public customer in such
                account class whose account is undermargined, but not in deficit, and
                sets conditions around such use.
                 Regulation Sec. 190.04(b)(2) updates current Sec. 190.02(g)(2),
                which concerns margin calls made by trustee with respect to
                undermargined accounts of public customers. The Commission is removing
                the current requirement in Sec. 190.02(g)(2) that the trustee issue
                margin calls, by replacing the term ``must issue margin calls'' with
                ``may issue a margin call,'' in light of the possibility that the
                trustee will determine it impracticable or inefficient to do so.
                Current Sec. 190.02(g)(2), which sets up a retail-level analysis on
                issuing mandatory margin calls based on the funded balance of the
                account, is based on a model of the FCM continuing in business. Revised
                Sec. 190.04(b)(d) recognizes that an FCM in bankruptcy will be
                operated in crisis mode, and may be pending wholesale transfer or
                liquidation of open positions.\90\ Therefore, the Commission is
                allowing for the possibility that the trustee may issue margin calls.
                The specification of
                [[Page 19347]]
                highly prescriptive conditions for issuing such calls is no longer
                appropriate, given the Commission whether or not to make a margin call
                is now based on the trustee's discretion.
                ---------------------------------------------------------------------------
                 \90\ See generally major theme 7 discussed in section I.B.
                above.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.04(b)(3), as derived from current Sec.
                190.02(g)(3) with updated cross-references, retains the important
                concept that margin payments made by a customer in response to a
                trustee's margin call are fully credited to the customer's funded
                balance. As these post-petition payments made by the customer are fully
                counted toward the customer's funded net equity claims under Sec.
                190.04(b)(3), they are not subject to pro rata distribution (in
                contrast to the treatment of the debtor commodity broker's pre-petition
                obligations to customers).
                 Regulation Sec. 190.04(b)(4) is derived from a combination of
                current Sec. Sec. 190.03(b)(1) and (2) and 190.04(e)(4), and addresses
                the trustee's obligation to liquidate certain open commodity contracts;
                in particular, those in deficit and those where the customer has failed
                to promptly meet a margin call. During business-as-usual, an FCM is
                required to cover, at all times, any customer accounts in deficit
                (i.e., those with debit balances) with its own capital.\91\ The FCM is
                also required to cover with its own capital any undermargined amounts
                in customer accounts each day by no later than the Residual Interest
                Deadline.\92\ These ongoing requirements are intended to protect other
                customers with positive account balances.
                ---------------------------------------------------------------------------
                 \91\ See, e.g., Sec. Sec. 1.22(i)(4), 1.23(a)(2).
                 \92\ See, e.g., Sec. 1.22(c)(3).
                ---------------------------------------------------------------------------
                 An FCM in bankruptcy will generally not have capital available to
                protect other customers by covering these obligations; rather, any loss
                suffered by customers whose accounts are in deficit will be at the risk
                of those other customers.\93\ The Commission intends for Sec.
                190.04(b)(4) to mitigate the risk to those other customers by directing
                the trustee to liquidate such accounts.
                ---------------------------------------------------------------------------
                 \93\ While the trustee may seek to recover any debit balance
                from a customer, see Sec. 190.09(a)(1)(ii)(E), Sec. 190.04(b)(4)
                proceeds from the conservative assumption that such efforts will be
                unsuccessful.
                ---------------------------------------------------------------------------
                 In light of the importance of mitigating this fellow-customer risk,
                Sec. 190.04(b)(4), in contrast to many of the other proposed changes
                to part 190, curtails the trustee's discretion. Specifically, Sec.
                190.04(b)(4), as derived from current Sec. 190.03(b)(1) and (2),
                provides that the trustee shall, as soon as practicable, liquidate all
                open commodity contract accounts in any commodity contract account (i)
                that is in deficit; (ii) for which any mark-to-market calculation would
                result in a deficit; or (iii) for which the customer fails to meet a
                margin call made by the trustee within a reasonable time. Pursuant to
                current Sec. 190.03(b)(1), a trustee must liquidate open commodity
                contracts if any payment of margin would result in a deficit in the
                account in which they are held.\94\ Revised Sec. 190.04(b)(4) adds a
                requirement to liquidate all open commodity contracts in any commodity
                contract account that is in deficit. The existing language applies to
                an account that is on the threshold of deficit; the Commission is
                revising the language to clarify that the provision also applies to an
                account that is already in deficit. Moreover, the change from ``payment
                of margin'' to ``mark-to-market'' calculations addresses the case where
                the trustee is aware, based on mark-to-market calculations, that the
                account is in deficit. In order to protect other customers more
                effectively, the trustee should begin the liquidation process
                immediately upon gaining that awareness, rather than delaying until the
                time when a margin payment is due.
                ---------------------------------------------------------------------------
                 \94\ 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 amount of required margin). For example, a customer
                may have a margin requirement of $100 and an equity balance of $80.
                Such customer is undermargined by $20, but is not in deficit,
                because the liquidation value of the commodity contracts is
                positive.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.04(b)(4) also provides that, absent exigent
                circumstances or unless otherwise provided, a reasonable time for
                meeting margin calls made by a trustee shall be one hour or such
                greater period not to exceed one business day, as determined by the
                trustee.\95\ This language is largely reflective of current Sec.
                190.04(e)(4), but adds the concept of ``exigent circumstances'' as a
                new exception to the general and long-established rule that a minimum
                of one hour is sufficient notice for a trustee to liquidate an
                undermargined account. The Commission intends this revision to provide
                the trustee with the discretion to deem a period of less than one hour
                as sufficient notice to liquidate an undermargined account if the
                ``exigent circumstances'' so require.
                ---------------------------------------------------------------------------
                 \95\ See Morgan Stanley & Co. Inc. v. Peak Ridge Master SPC
                Ltd., 930 F.Supp.2d 532, 539-540 (S.D.N.Y. 2013)(Morgan Stanley, in
                its business discretion, determined Peak Ridge's account had assumed
                overly risky positions, necessitating an increase in the margin
                requirement and giving Peak Ridge a limited amount of time to bring
                the account into compliance. ``Courts have held that as little as
                one hour is sufficient notice under similar circumstances.''). See
                also Capital Options Invs., Inc. v. Goldberg Bros. Commodities,
                Inc., 958 F.2d 186, 190 (7th Cir. 1992) (``One-hour notice to post
                additional margin . . . is reasonable where a contract specifically
                provides for margin calls on options at any time and without
                notice.''); Prudential-Bache Sec., Inc. v. Stricklin, 890 F.2d 704,
                706-07 (4th Cir. 1989) (rejecting a claim that 24-hour notice, which
                the broker normally gave to customers, was necessary before broker
                could liquidate an under-margined account and upholding notice of
                one hour as in accordance with the customer agreement); Modern
                Settings, Inc. v. Prudential-Bache Sec. Inc., 936 F.2d 640, 645 (2d
                Cir. 1991) (upholding a provision of a customer agreement allowing
                Defendant-broker to liquidate an under-margined account without
                notice).
                ---------------------------------------------------------------------------
                 The Commission is deleting current Sec. 190.03(b)(3) to permit the
                trustee to liquidate open commodity contracts where the trustee has
                received no customer instructions with respect to such contracts by the
                sixth calendar day following the entry of the order for relief. The
                Commission is adopting this change as part of a model where the trustee
                receives and complies with instructions from individual customers to a
                model--that reflects actual practice in commodity broker bankruptcies
                in recent decades--where the trustee transfers as many open commodity
                contracts as possible.\96\
                ---------------------------------------------------------------------------
                 \96\ Cf. major theme 7 in section I.B above.
                ---------------------------------------------------------------------------
                 The Commission is adopting new Sec. 190.04(b)(5) to provide
                guidance to the trustee in assigning liquidating positions \97\ to the
                debtor FCM's customers when only a portion of the open commodity
                contracts in an omnibus account are liquidated. The new guidance is
                designed to protect the customer account as a whole, in light of the
                fact that any losses which cause a customer account to go into deficit
                are, as discussed in connection with Sec. 190.04(b)(4), at the risk of
                other customers. To mitigate the risk of such losses, Sec.
                190.04(b)(5) establishes a preference, subject to the trustee's
                exercise of reasonable business judgment, for assigning liquidating
                transactions to individual customer accounts in a risk-reducing manner.
                Specifically, the trustee should endeavor to assign such liquidating
                transactions first, in a risk-reducing manner, to commodity contract
                accounts that are in deficit; second, in a risk-reducing manner, to
                commodity contract accounts that are undermargined; \98\ and finally to
                liquidate any remaining open commodity contracts. Where there are
                multiple accounts in any of these groups, the trustee is instructed to,
                as practicable, to allocate such liquidating transactions pro rata. The
                term ``risk-reducing manner'' is measured by the margin methodology and
                parameters
                [[Page 19348]]
                followed by the DCO at which such contracts are cleared. Specifically,
                where allocating a transaction to a particular customer account reduces
                the margin requirement for that account, such an allocation is ``risk-
                reducing.''
                ---------------------------------------------------------------------------
                 \97\ A liquidating position or transaction is one that offsets a
                position held by the debtor, in whole or in part. Thus, if the
                debtor has three long March '21 corn contracts, then three (or two,
                or one) short March '21 corn contracts would be a liquidating
                transaction.
                 \98\ And thus are next at risk of going into deficit.
                ---------------------------------------------------------------------------
                 The Commission requested comment on whether the revised approach in
                proposed Sec. 190.04(b)(4) regarding the required liquidation of
                certain open commodity contract accounts would provide the trustee with
                an appropriate amount of discretion and is practicable; whether
                customers, who believe they did not benefit from those decisions, would
                likely challenge the trustee's choices given the level of discretion
                provided; whether such challenges could materially slow down the
                distribution of customer property relative to a context where the
                trustee was granted less discretion; and whether the proposed approach
                in Sec. 190.04(b)(5) for the assignment of liquidating positions to
                debtor FCM customers in a ``risk-reducing manner'' is practicable when
                only a portion of the open commodity contracts in an omnibus account
                are liquidated.
                 SIFMA AMG/MFA supported most of the substantive amendments in
                subpart B of part 190 and believed such changes are generally helpful
                for purposes of reducing risk for market participants and allowing the
                trustee to act as efficiently as possible. SIFMA AMG/MFA approved of
                the inclusion of transfers in addition to liquidation, and the
                clarification to apply the proposed regulation to any open commodity
                contracts in proposed Sec. 190.04(b).
                 CME agreed with the general concept of providing the trustee for a
                debtor FCM with significant flexibility to operate the FCM and favored
                any provision that encourages the transfer of customer positions and
                property and continuation of margin payments on behalf of the debtor
                FCM pending transfer or liquidation of positions. ICE suggested that
                the Commission should clarify that any trustee discretion proposed in
                Sec. 190.04 for managing a failed FCM should be subject to the
                obligations of the defaulting clearing member and the rights of the DCO
                as provided by the DCO's rules.
                 ICE supported the Commission's proposal in Sec. 190.04(b)(1) to
                clarify that a trustee may make variation margin payments on open
                contracts, pending their liquidation or transfer. ICI agreed with
                proposed Sec. 190.04(b)(1)(ii), which prohibits a trustee from making
                any margin payments with respect to a customer account that would
                exceed the funded balance for that account.
                 ICI and Vanguard agreed with the preservation of the existing
                requirement within proposed Sec. 190.04(b)(3) that the trustee fully
                credit the customer's funded balance for any margin payment made by a
                customer in response to trustee's margin call. Vanguard noted that any
                customer concerns as to the ability to fully recover margin would
                surely de-incentivize customers to post additional margin in critical
                times.
                 SIFMA AMG/MFA generally supported proposed Sec. 190.04(b), but had
                concerns regarding the calculation of whether a customer is
                undermargined, and the timing of margin calls. SIFMA AMG/MFA questioned
                whether the trustee would be able to calculate accurately whether a
                customer is undermargined, particularly if the FCM's books and records
                do not accurately reflect margin amounts transferred by such customer
                to the FCM. SIFMA AMG/MFA requested that the Commission clarify how the
                trustee will try to protect customers from being called upon to provide
                duplicate margin amounts. SIFMA AMG/MFA recommended that the Commission
                amend proposed Sec. 190.04(b) to provide customers with the
                opportunity to demonstrate that a margin payment was made even if the
                FCM's books and records do not yet reflect its receipt.
                 SIFMA AMG/MFA disagreed that absent exigent circumstances, a
                reasonable time for meeting margin calls made by the trustee shall be
                deemed to be one hour, or such greater period not to exceed one
                business day, as the trustee may determine in its sole discretion.
                SIFMA AMG/MFA stated that the necessary assets may not be readily
                available to customers and urged the Commission to require the trustee
                to defer to the margin call timings present in the applicable
                underlying agreements entered into by the customer pursuant to Sec.
                39.13 when determining a reasonable time for meeting margin calls.
                SIFMA AMG/MFA opined that this is a reasonable level of deference,
                since the trustee will have access to these agreements, which are
                already in place with the Commission regulations, and will allow for
                customers to satisfy margin calls without causing needless market
                panic.
                 ICI and Vanguard agreed with proposed Sec. 190.04(b)(4), which
                would require the trustee to liquidate any customer account in deficit.
                ICI supported maintaining the existing requirement that the trustee
                promptly liquidate any customer account when a customer fails to meet a
                margin call in a reasonable time or where any payment of margin from
                the account would result in an account deficit. ICI agreed with the
                proposal that a debtor FCM will generally not have capital available to
                protect other customers by covering account deficits, so any loss
                suffered by customers whose accounts are in deficit will be at risk of
                those other non-defaulting customers. As a result, ICI noted that it is
                vital that the trustee be required to swiftly crystallize, and
                therefore cap the losses resulting from, such deficits by promptly
                liquidating accounts in deficit or for which a customer has failed to
                meet a margin call. ICI cautioned that if the accounts were allowed to
                remain open, additional losses on the delinquent customers'
                transactions would be borne by the FCM's non-defaulting customers,
                which could dissuade non-defaulting customers from continuing to meet
                their margin obligations post-petition.
                 OCC was concerned that the proposed definition of ``undermargined''
                in Sec. Sec. 190.01 and 190.04(b)(2) and (4) could create a situation
                in which a trustee offers one public customer an opportunity to deposit
                additional margin that ultimately prevents an account deficit and
                resulting liquidation of the public customer's account, but exercises
                discretion not to offer another public customer the same opportunity to
                deposit margin and subsequently must liquidate the account because it
                is in deficit, notwithstanding the customer's willingness to post
                additional margin to keep its positions open. OCC was concerned that
                the use of such trustee discretion would expose a trustee to challenge
                by a public customer that asserts, though it was similarly situated to
                a public customer that was given this opportunity, it was not given
                this opportunity and received inequitable treatment.
                 In response to SIFMA AMG/MFA's comment, the Commission notes that,
                in the case of an FCM in bankruptcy, any deficit in the account of one
                customer may come at the expense of distributions to other customers.
                As ICI noted, the normal buffer of the capital of an FCM in continuing
                operation cannot be relied upon. Accordingly, where a trustee believes,
                based on the records and limited time available to them, that a
                customer is undermargined, it is important that they act on that belief
                in order to protect other customers. Similarly, in a case where a
                customer fails to meet a margin call within what the trustee
                determines, in their sole discretion, is a reasonable time, the trustee
                should liquidate the contracts of that customer to protect other
                customers. Forcing the trustee to defer to margin call timings in pre-
                bankruptcy agreements, or to give the customer an opportunity to
                demonstrate that a margin payment was made, as requested by the
                comment, may
                [[Page 19349]]
                increase: (1) The risk that such customer would default; (2) the risk
                that delaying liquidation of such a customer's positions increases the
                potential for and likelihood that they would do so with a debit
                balance; and (3) the risk that the size of that debit balance would
                increase as a result of that delay, thereby reducing the funded
                balances of other customers. The Commission is of the view that
                timeframes that may have been acceptable during business-as-usual
                cannot bind the trustee in addressing the context of an FCM in
                bankruptcy, because any post-petition losses incurred by a customer
                will be at the cost of other customers (without the normal buffer of
                the capital of a going-concern FCM). Moreover, the Commission agrees
                with the view championed by ICI and Vanguard that the trustee should be
                required to swiftly crystallize and therefore cap the losses resulting
                from deficit balances by promptly liquidating accounts in deficit and
                those for which a customer has failed to meet a margin call. OCC's
                concerns about treating customers equitably inter se are
                understandable, but, in the Commission's view, ensuring complete equity
                may not be practicable. A trustee must make decisions within a severely
                limited timeframe in a situation that is likely to be chaotic and with
                information that is limited and may be imperfect. In these
                circumstances, the Commission is of the view that it is appropriate to
                defer to the trustee's discretion to make the best decisions they can
                under the circumstances. Accordingly, the Commission believes that,
                where a trustee makes in good faith decisions with regard to margin and
                liquidation of accounts, that are, in retrospect, inequitable, the
                Commission's regulations should discourage challenges to such a
                decision (and, if such a challenge is made, should reduce the
                likelihood that it is successful).
                 While the trustee retains discretion, as specified in, inter alia,
                proposed Sec. 190.04, to manage the affairs of the debtor FCM, the
                Commission can confirm, as requested by ICE, that a DCO of which that
                FCM is a member retains its rights to act under its rules.\99\
                ---------------------------------------------------------------------------
                 \99\ See, e.g., Sec. 190.04(b)(1) (while trustee shall, to the
                extent within its control, not make payments on behalf of an account
                in deficit, this shall not be construed to prevent a clearing
                organization from exercising its rights to the extent permitted
                under applicable law).
                ---------------------------------------------------------------------------
                 SIFMA AMG/MFA recommended that the Commission amend proposed Sec.
                190.04(b) to clearly state that, to the extent gains-based haircutting
                has been utilized by a DCO in respect of customer positions, the
                trustee should give customers of an FCM credit for any gains that were
                haircut during such gains-based haircutting. With respect to this
                suggestion, the Commission notes that, where a DCO at which a debtor
                FCM is a member applies gains-based haircutting under that DCO's rules,
                the measure of the claim of a customer whose account at the debtor FCM
                contains contracts cleared on that DCO will be based on the customer
                agreement between that customer and the debtor FCM. If, outside of the
                FCM's bankruptcy and pursuant to that customer agreement, the
                customer's gains would have been reduced by X% or $Y, then the amount
                of the customer's claim in bankruptcy would be adjusted
                accordingly.\100\ Accordingly, the Commission does not accept that
                suggestion.
                ---------------------------------------------------------------------------
                 \100\ Moreover, there are other reasons to forego an approach
                that would reverse the effects of gains-based haircutting. As
                discussed in more detail in section II.C.7 below, there is a limited
                amount of customer property available. Any increase in some
                customers claims (and thus their distributions) due to the reversal
                of gains-based haircutting would thus come at the expense of a
                reduced share of that limited customer property, and thus reduced
                distributions, to other customers.
                ---------------------------------------------------------------------------
                 ICI and Vanguard agreed with proposed Sec. 190.04(b)(5) which
                prohibits a trustee from making margin payments that would exceed the
                customer's funded account balance or transfer a customer's transactions
                or property and thereby increase the exposure of other customers.
                Vanguard supported addressing situations where the trustee could allow
                certain customers to avoid the core customer protection of pro rata
                treatment at the expense of other customers.
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, Sec. 190.04(b) will be adopted as proposed.
                c. Regulation Sec. 190.04(c): Contracts Moving Into Delivery
                 The Commission is adopting Sec. 190.04(c), as proposed, to direct
                the trustee to use its best efforts to avoid delivery obligations
                concerning contracts held through the debtor FCM by transferring or
                liquidating such contracts before they move into delivery position. The
                Commission is adopting Sec. 190.04(c) based on its analog in current
                Sec. 190.03(b)(5) and is incorporating a portion of current Sec.
                190.02(f)(1)(ii). Current Sec. 190.03(b)(5) instructs the trustee to
                liquidate promptly, and in an orderly manner, commodity contracts that
                are not settled in cash (implicitly, those that settle via physical
                delivery of a commodity) where the contract would remain open beyond
                the earlier of (i) the last day of trading or (ii) the first day on
                which notice of delivery may be tendered--that is, where the contract
                would move into delivery position. The Commission intends Sec.
                190.04(c) to have the same purpose as its predecessors, but uses more
                explicit language regarding physical delivery to refer to ``any open
                commodity contract that settles upon expiration or exercise via the
                making or taking of delivery of a commodity,'' and that is moving into
                the delivery position. The Commission also intends Sec. 190.04(c) to
                expand current Sec. 190.03(b)(5), with the incorporation of some
                aspects of current Sec. 190.02(f)(1)(ii), to include an explicit
                reference to how options on commodities move into delivery position.
                 CME supported proposed Sec. 190.04(c), which directs the trustee
                to use their best efforts to liquidate open physical delivery commodity
                contracts that have not been transferred before the contracts move into
                a delivery position as CME believed this would avoid unnecessary
                disruptions to the delivery process by customers that did not intend to
                participate in making or taking delivery. ICI supported adding
                provisions that clarify the standards applicable to an FCM's
                liquidation of a debtor FCM's transactions and the way a trustee must
                assign liquidating transactions in the context of a partial
                liquidation.
                 According, after consideration of the comments, and for the reasons
                stated above, the Commission is adopting Sec. 190.04(c) as proposed.
                d. Regulation Sec. 190.04(d): Liquidation or Offset
                 The Commission is adopting Sec. 190.04(d) as proposed with
                modifications, as set forth below. Regulation Sec. 190.04(d), as
                derived from current Sec. Sec. 190.02(f) and 190.04(d), sets forth the
                categories of commodity contracts and other property held by or for the
                account of a debtor that must be liquidated by the trustee in the
                market or by book entry offset, promptly, and in an orderly
                manner.\101\
                ---------------------------------------------------------------------------
                 \101\ The Commission is also adopting three non-substantive
                changes in the header language to proposed Sec. 190.04(d) from that
                in current Sec. 190.02(f): (1) The addition of the phrase ``except
                as otherwise set forth in this paragraph (d)'' to account for any
                exceptions that are included in the paragraphs under the header
                language; (2) the addition of cross-references to proposed Sec.
                190.04(e) when discussing liquidation, as that provision contains
                instructions on how to effect liquidation; and (3) the deletion of
                the phrase ``subject to limit moves and to applicable procedures
                under the Bankruptcy Code.''
                ---------------------------------------------------------------------------
                 Importantly, the Commission is retaining the requirement, present
                in the header language to current Sec. 190.02(f), that the trustee
                must effect such
                [[Page 19350]]
                liquidation ``in an orderly manner.'' Regulation Sec. 190.04(d)
                recognizes that any factor which, in the trustee's discretion, makes it
                imprudent to liquidate a position at a particular point in time would
                contribute to the trustee's judgment as to what constitutes liquidation
                ``in an orderly manner.''
                 Section 190.04(d)(1), as derived from Sec. 190.02(f)(1), requires
                that all open commodity contracts must be liquidated, subject to two
                exceptions: (1) Commodity contracts that are specifically identifiable
                property and are subject to customer instructions to transfer as
                provided in proposed Sec. 190.03(c)(2); and (2) open commodity
                contract positions that are in a delivery position.\102\ In the former
                case (specifically identifiable property), the Commission is adopting
                Sec. 190.04(d)(1) to revise the language of current Sec.
                190.02(f)(1)(ii) to add references to the provisions of Sec.
                190.03(c)(2) (concerning the trustee's option to treat hedging accounts
                as specifically identifiable property) and Sec. 190.09(d)(2)
                (concerning the payments that customers on whose behalf specifically
                identifiable commodity contracts will be transferred must make to
                ensure that they do not receive property in excess of their pro rata
                share).\103\ The latter exception, for open commodity contract
                positions that are in a delivery position is new, and provides that
                such positions should be treated in accordance with Sec. 190.06, which
                concerns delivery.\104\
                ---------------------------------------------------------------------------
                 \102\ Regulation Sec. 190.04(d)(1) deletes the reference in
                current Sec. 190.02(f)(1)(i) to dealer option contracts since such
                term is no longer used.
                 \103\ The Commission is incorporating part of current Sec.
                190.02(f)(1)(ii) into Sec. 190.04(c), and therefore that will not
                appear in Sec. 190.04(d)(1).
                 \104\ As noted in section II.A.1 above in the discussion of
                Sec. 190.00(c)(6), a delivery default could have a disruptive
                effect on the cash market for the commodity and could adversely
                impact the parties to the transaction.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.04(d)(2) describes when specifically
                identifiable property, other than open commodity contracts or physical
                delivery property, must be liquidated. The Commission derived Sec.
                190.04(d)(2) from current Sec. 190.02(f)(2), with a number of
                revisions.
                 First, the provision applies to specifically identifiable property,
                other than open commodity contracts or physical delivery property,
                while the current regulation applies only to specifically identifiable
                property other than open commodity contracts. The Commission intends
                for this change to provide the trustee with discretion to avoid
                interfering with the physical delivery process.
                 Second, while the current regulation would require liquidation of
                such property if the fair market value of the property drops below 90%
                of its value on the date of the entry of the order for relief,\105\
                Sec. 190.04(d)(2)(i) changes that standard to 75% of the fair market
                value, in order to provide greater discretion to the trustee to forego
                or postpone liquidation in appropriate cases.
                ---------------------------------------------------------------------------
                 \105\ See current Sec. 190.02(f)(2)(i).
                ---------------------------------------------------------------------------
                 Third, revised Sec. 190.04(d)(2)(ii) adds an additional condition
                that will require liquidation where failure to liquidate the
                specifically identifiable property may result in a deficit balance in
                the applicable customer account, which corresponds to the general
                policy of liquidating any accounts that are in deficit.
                 Lastly, Sec. 190.04(d)(2)(iii), which is similar to current Sec.
                190.02(f)(2)(ii), includes updated cross-references to the provisions
                in proposed part 190 that discuss the return of specifically
                identifiable property.
                 Regulation Sec. 190.04(d)(3) is a new provision that codifies the
                Commission's longstanding policies of pro rata distribution and
                equitable treatment of customers in bankruptcy, as described in Sec.
                190.00(c)(5) above, as applied to letters of credit posted as
                margin.\106\ Accordingly, customers who post letters of credit as
                margin will be treated no differently than other customers and thus
                would suffer the same pro rata loss.
                ---------------------------------------------------------------------------
                 \106\ See, e.g., 48 FR 8716, 8718-19 (March 1, 1983) (Commission
                intends to assure that customers using a letter of credit to meet
                original margin obligations would be treated no differently than
                customers depositing other forms of non-cash margin or customers
                with excess cash margin deposits. If letters of credit are treated
                differently than Treasury bills or other non-cash deposits, there
                would be a substantial incentive to use and accept such letters of
                credit as margin as they would be a means of avoiding the pro rata
                distribution of margin funds, contrary to the intent of the
                Bankruptcy Code (11 U.S.C. 766).)
                ---------------------------------------------------------------------------
                 The implementation of this policy in current Sec.
                190.08(a)(1)(i)(E) was challenged in an adversary proceeding in the MF
                Global bankruptcy; \107\ the codification of this policy in Sec. Sec.
                190.00(c)(5) (clarifying policy), 190.04(d)(3) (treatment in
                bankruptcy), and 1.43 (treatment during business-as-usual) are intended
                to implement the policy effectively and to forestall any future
                challenge.
                ---------------------------------------------------------------------------
                 \107\ See ConocoPhillips v. Giddens, No. 12 Civ. 6014, 2012 WL
                4757866 (S.D.N.Y. 2012).
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.04(d)(3) provides that the trustee may request
                that such a customer deliver substitute customer property with respect
                to any letter of credit received, acquired or held to margin,
                guarantee, secure, purchase, or sell a commodity contract. This applies
                whether the letter of credit is held by the trustee on behalf of the
                debtor's estate, a DCO, a foreign broker, or foreign clearing
                organization, and whether it is held on a pass-through or other basis.
                The amount of the substitute customer property to be posted may be less
                than the full-face amount of the letter of credit, in the trustee's
                discretion, if such lesser amount is sufficient to ensure pro rata
                treatment consistent with proposed Sec. Sec. 190.08 and 190.09. If
                required, the trustee may require the customer to post property equal
                to the full-face amount of the letter of credit to ensure pro rata
                treatment. Regulation Sec. 190.04(d)(3)(i) provides that, if such a
                customer fails to provide substitute customer property within a
                reasonable time specified by the trustee, the trustee may draw upon the
                full amount of the letter of credit or any portion thereof.
                 Regulation Sec. 190.04(d)(3)(ii) addresses cases where a letter of
                credit received, acquired or held to margin, guarantee, secure,
                purchase, or sell a commodity contract is not fully drawn upon. The
                trustee is instructed to treat any portion of the letter of credit that
                is not fully drawn upon as having been distributed to the customer.
                However, the amount treated as having been distributed will be reduced
                by the value of any substitute customer property delivered by the
                customer to the trustee. For example, if the face amount of the letter
                of credit is $1,000,000, the customer delivers $250,000 in substitute
                customer property, and no portion of the letter of credit is drawn
                upon, then the trustee will treat the customer as having received a
                distribution of $750,000. In order to avoid an effective transfer of
                value, due to an expiration of the letter of credit on or after the
                date of the order for relief, to the customer who posted the letter of
                credit, this calculation will not be changed due to such an expiration.
                 Regulation Sec. 190.04(d)(3)(iii) confirms that any proceeds of a
                letter of credit drawn by the trustee, or substitute customer property
                posted by a customer, shall be considered customer property in the
                account class applicable to the original letter of credit.
                 Regulation Sec. 190.04(d)(4), as derived from current Sec.
                190.02(f)(3), provides for the liquidation of all other property not
                required to be transferred or returned pursuant to customer
                instructions and which has not been liquidated. Regulation Sec.
                190.04(d)(4) excepts from the liquidation requirement any ``physical
                delivery property held for delivery in accordance with the provision
                of'' Sec. 190.06, in order to avoid interfering with the physical
                delivery process.
                [[Page 19351]]
                 Several commenters supported proposed Sec. 190.04(d)(3). SIFMA
                AMG/MFA, ICI, and Vanguard strongly supported proposed Sec.
                190.04(d)(3) because it permits a trustee to demand substitute margin
                so that other customers' margin need not be accessed to meet any
                shortfall occasioned by the inability to draw on the letters of credit.
                SIFMA AMG/MFA noted that the addition of proposed Sec. 190.04(d)(3)
                would ensure that customers using letters of credit to meet original
                margin obligations will be treated no differently from customers
                depositing other forms of non-cash margin or excess cash margin
                deposits. SIFMA AMG/MFA ``agree[d] that most letters of credit
                currently in use by the industry follow the Joint Audit Committee forms
                [and believed] that the impact of these additional requirements
                concerning letters of credit will result in clearer guidance for more
                equitable treatment of customers within each account class.'' However,
                SIFMA AMG/MFA ``questione[d] the one-year transition period and urge[d]
                the Commission to shorten it in the interest of investor protection.
                For example, if an FCM were to enter bankruptcy proceedings during the
                one-year transition period,'' SIFMA AMG/MFA inquired as to how the
                letters of credit would be treated in such proceeding.
                 OCC also supported proposed Sec. 190.04(d)(3) and the pro rata
                loss policy objective. OCC stated that it ``expects that it would
                generally, to the extent permitted by OCC's rules and default
                management arrangements, draw on a defaulted member's letter of credit
                collateral as soon as practicable after a declaration of default. OCC
                would attempt to do so, whether or not it has immediately identified a
                need to draw on a letter of credit to meet the defaulted member's
                settlement obligations, as a protective action in anticipation of any
                potential increase in the credit risk associated with the letter of
                credit. In such cases, a trustee would obtain any remaining proceeds
                from the drawn-down letter to distribute pro rata among the FCM's
                customers as appropriate.''
                 However, several commenters including CME, FIA, and CMC believed
                the policy reasons for the trustee's general right to demand substitute
                collateral do not exist with respect in the narrow context of a
                delivery letter of credit.
                 CME agreed ``that a letter of credit posted to secure obligations
                under open commodity contracts (whether drawn upon or not) must be
                deemed as part of the customer's property, in addition to any
                additional collateral posted by the customer, for purposes of
                distribution calculations. [CME agreed] that it is prudent to make
                clear that the trustee in either an FCM or DCO bankruptcy can draw upon
                posted letters of credit.'' CME supported ``granting the trustee the
                power to require a customer to deliver substitute customer property to
                the estate and allowing the trustee to draw on the letter of credit if
                the customer does not post additional collateral, provided that those
                conditions apply only to letters of credit letter that are received,
                acquired, or held to guarantee or secure a customer's obligations under
                open commodity contracts, and do not apply to delivery letters of
                credit.''
                 With respect to a delivery letter of credit posted as collateral to
                secure the customer's obligation to pay for delivery of a commodity it
                will receive, CME and CMC believed it was ``critically important that
                the letter of credit be available to draw upon if the customer defaults
                or is expected to default on its obligation to pay the seller.''
                However, CME, CMC, and FIA recommended that the Commission revise
                proposed Sec. 190.04(d)(3) to confirm that the authority of the
                trustee to require a customer that posts a letter of credit to deliver
                substitute customer property does not extend to letters of credit
                posted to a delivery account.
                 CME argued that ``[c]ustomers routinely post letters of credit in
                connection with delivery obligations under certain physical delivery
                futures contracts held to maturity.'' CME noted that this is the case
                for deliveries under certain oil futures listed on the New York
                Mercantile Exchange. ``The buyers are required to post collateral for
                the full payment amount owed because actual delivery is effected via
                physical transfer of oil and thus is typically completed 30 days or so
                after buyers and sellers are matched for bilateral delivery
                obligations. Given the substantial dollar amounts involved, often
                hundreds of millions, letters of credit are often posted as
                collateral.'' CMC emphasized that ``unlike other situations, a delivery
                [letter of credit] simply serves as collateral for delivery of a
                futures contract after expiry but before delivery is taken and while
                the seller still has possession of the commodity for delivery.'' CME
                stated that ``[t]he value available to CME under such a letter of
                credit is wholly independent from the solvency of an FCM, unlike a
                letter of credit posted as performance bond, which decays when utilized
                to meet margin or variation calls post-FCM bankruptcy.'' CME posited
                that the delivery letter of credit does not pose the same issues that
                the Commission encountered in the MF Global bankruptcy. FIA argued that
                ``[a] purchaser that takes delivery under a commodity contract
                frequently is not required to take delivery for a significant period of
                time after the purchaser and seller have been matched. In these
                circumstances, the purchaser may be required to post a letter of credit
                as security for full payment when delivery is made.''
                 CME, CMC, and FIA warned that a trustee's decision to request
                substitute collateral of cash or cash equivalents for a delivery letter
                of credit or risk having the letter of credit drawn down prior to the
                time that delivery is made would create a sudden and unexpected
                liquidity need for the delivery participant and introduce unnecessary
                strain into physical and derivatives markets. The commenters were
                concerned that because the parties' obligations under the delivery
                account arise from a commodity account, a trustee's authority under
                proposed Sec. 190.04(d)(3) could be interpreted to apply to letters of
                credit held in a delivery account. Accordingly, CME and CMC recommended
                ``that the Commission limit or eliminate the trustee's powers to
                request that a market participant substitute other forms of collateral
                for a delivery letter of credit upon which the DCO is a beneficiary.''
                Specifically, CME and FIA recommended that the Commission revise
                proposed Sec. 190.04(d)(3) to exclude delivery letters of credit,
                i.e., letters of credit posted by buyers to guarantee their payment for
                commodities that they are contractually obligated to purchase under an
                expired futures or exercised commodity option contract.
                 CME also requested clarity in the context of Sec. 190.06 ``that
                when a customer posts a delivery letter of credit directly with the DCO
                or with its delivery counterparty, and not with or through the FCM, the
                letter of credit is outside the delivery account class, i.e., it does
                not constitute cash delivery property (or property of the debtor's
                estate), and the provisions in other parts of the proposed revisions
                regarding treatment of letters of credit posted with or through the
                debtor FCM do not apply.''
                 The Commission notes that, despite the comments of CME, CMC, and
                FIA, there are reasons to forego excluding delivery letters of credit
                as a class from the application of Sec. 190.04(d)(3), and to adopt
                Sec. 190.04(d)(3) as proposed, as supported by ICI, SIFMA AMG/MFA, and
                Vanguard: If, at the end of the bankruptcy proceeding, there are
                shortfalls in customer property in the cash delivery account class,
                those
                [[Page 19352]]
                shortfalls will necessarily be borne by public customers. If public
                customers posting letters of credit (including in the delivery account)
                are shielded from such losses, they will be borne in greater proportion
                by other public customers. That result would be inconsistent with the
                Commission's longstanding policy, embodied in section 766(h) of the
                Bankruptcy Code, to treat all customers on a pro rata basis.\108\
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                 \108\ Pursuant to Sec. 190.08(c)(1)(ii), the customer's funded
                balance includes 100% of margin posted after the order for relief.
                Accordingly, this principle would not apply to a delivery letter of
                credit posted after the order for relief (unless the letter of
                credit was delivered in substitution for a pre-bankruptcy letter of
                credit).
                ---------------------------------------------------------------------------
                 However, the concerns raised by commenters regarding sudden and
                unexpected liquidity needs are important ones. They are important both
                in the context of delivery letters of credit, as discussed by some
                commenters, and more broadly as well.\109\ The Commission agrees that
                these concerns can and should be mitigated. Specifically, the trustee
                has discretion in managing this process with respect to letters of
                credit, and should exercise that discretion with the goal of achieving
                pro rata treatment among customers in a manner that mitigates, to the
                extent practicable, the adverse effects upon customers that have posted
                letters of credit.
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                 \109\ Moreover, and for the avoidance of doubt, as delivery is
                simply a stage in the life of a commodity contract, Sec.
                190.04(d)(3) applies to letters of credit in connection with
                delivery obligations under a commodity contract.
                ---------------------------------------------------------------------------
                 First, with regard to timing, the commenters expressed concern that
                requests for substitute property would cause ``sudden'' liquidity
                needs. Regulation Sec. 190.04(d)(3)(i) states that the trustee may
                draw upon the letter of credit if the customer fails to provide
                substitute customer property within a reasonable time specified by the
                trustee. If the expiry date of the letter of credit is not imminent,
                the Commission expects that a ``reasonable time'' would be sufficiently
                long to enable the customer to mitigate liquidity concerns (consistent
                with the trustee's plans to make distributions). If the expiry date of
                the letter of credit is imminent, and the customer can and does arrange
                to have that expiry date extended, the parties could work in the
                context of that extended expiry date. However, if the expiry date is
                imminent, and cannot be extended, then the trustee will need to take
                promptly whatever steps are, in their discretion, necessary to ensure
                pro rata treatment among customers.
                 Second, with regard to the amount requested, Sec. 190.04(d)(3)
                provides that the trustee may request that a customer deliver
                substitute customer property with respect to a letter of credit, and
                that the amount of the request may equal the full face amount of the
                letter of credit or any portion thereof, to the extent required or may
                be required, in the trustee's discretion to ensure pro rata treatment
                among customer claims within each account class, consistent with
                Sec. Sec. 190.08 and 190.09. Thus, the amount of the substitute
                customer property requested (or, if substitute customer property is not
                provided, the amount of the letter of credit drawn upon (if partial
                draws are permitted)) should be proportionate to the amount required or
                may be required, in the trustee's discretion, to ensure pro rata
                treatment among customer claims. If the amount of the shortfall in the
                relevant account class (whether cash delivery property or otherwise) is
                estimated to be a small percentage, the amount of substitute customer
                property requested would also be a small percentage (subject to the
                trustee adding an appropriate buffer for later corrections in
                estimates, and taking into account any need to use the letter of credit
                as ongoing performance bond for the customer's obligations).
                 To re-enforce these concepts, the Commission is adding a new Sec.
                190.04(d)(3)(iv), which provides that the trustee shall, in exercising
                their discretion with regard to addressing letters of credit, including
                as to the timing and amount of a request for substitute customer
                property, endeavor to mitigate, to the extent practicable, the adverse
                effects upon customers that have posted letters of credit in a manner
                that achieves pro rata treatment among customer claims. The Commission
                intends that this new paragraph will confirm to trustees that they
                should steer their discretion in the specified manner, and will provide
                assurance to customers that have posted letters of credit that the
                trustees will exercise their discretion in that manner. The Commission
                believes that this provision will appropriately address concerns
                regarding the manner in which the trustee ensures that customers that
                have posted letters of credit are treated economically in the same
                manner as customers who have posted other forms of collateral
                 Moreover, in the context of Sec. 190.06, CME requested that the
                Commission confirm that ``when a customer posts a delivery letter of
                credit directly with the DCO or with its delivery counterparty, and not
                with or through the FCM, the letter of credit is outside the delivery
                account class, i.e., it does not constitute cash delivery property (or
                property of the debtor's estate), and the provisions in other parts of
                the proposed revisions regarding treatment of letters of credit posted
                with or through the debtor FCM do not apply.''
                 For example, the Commission understands that upon expiry of certain
                deliverable contracts and assignment of delivery obligation, the long/
                buyer of the contract must post collateral to the DCO against its final
                payment obligation on the delivery. In certain cases, collateral in the
                form of a delivery letter of credit collateral is posted by the
                customer directly to the DCO. The delivery letters of credit in these
                cases are subject to uniform terms that name the DCO as the sole
                beneficiary on the instrument. These delivery letters of credit do not
                create an obligation of or to a customer's FCM as they are posted
                directly to the DCO and the FCM is not a named beneficiary on the
                instrument.\110\
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                 \110\ Similarly, CMC's concerns focus on ``a delivery LOC upon
                which the DCO is beneficiary.''
                ---------------------------------------------------------------------------
                 In the context of a delivery letter of credit that is posted
                directly with the DCO or with the delivery counterparty, rather than
                with or through the FCM, and for which the FCM is not a named
                beneficiary, the Commission confirms that the letter of credit is
                outside the delivery account class, i.e., it does not constitute cash
                delivery property (or property of the debtor's estate), and the
                provisions in other parts of the proposed revisions regarding treatment
                of letters of credit posted with or through the debtor FCM do not
                apply.\111\
                ---------------------------------------------------------------------------
                 \111\ The Commission was not requested to opine on whether this
                approach vis-[agrave]-vis letters of credit is permissible outside
                of the context of the delivery account class, and expresses no view
                on that question.
                ---------------------------------------------------------------------------
                 The Commission believes that this clarification, in combination
                with the new provision directing the trustee's discretion in the
                context of letters of credit, will ameliorate the commenters concerns
                regarding delivery letters of credit.
                 The foregoing applies to the trustee. DCOs remain free to exercise
                any of the rights and powers in their rules vis-[agrave]-vis their
                clearing members, in particular with respect to risk management,
                limited only by requirements within the Commission's regulations.\112\
                However, in this context, the Commission would encourage DCOs holding
                letters of credit posted by customers of FCMs in bankruptcy to exercise
                their rights under such letters of credit in a
                [[Page 19353]]
                measured fashion, in order to achieve risk management goals fully but
                in a manner that mitigates, to the extent practicable, adverse effects
                upon customers that have posted letters of credit.\113\
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                 \112\ See, e.g., Sec. 190.04(e) (Rules providing for
                liquidation other than on the open market shall be designed to
                achieve, to the extent feasible under market conditions at the time
                of liquidation, a process for liquidating open commodity contracts
                that results in competitive pricing.)
                 \113\ In this connection, the Commission notes that OCC Rule
                1104(a)(ii) permits OCC, if the issuer of a letter of credit agrees
                to extend the irrevocability of its commitment thereunder in a
                manner satisfactory to OCC, to ``demand only such amounts as it may
                from time to time deem necessary to meet anticipated
                disbursements.''
                ---------------------------------------------------------------------------
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.04(d) as
                proposed, with the addition of new Sec. 190.04(d)(3)(iv) as set forth
                above.
                e. Regulation Sec. 190.04(e): Liquidation of Open Commodity Contracts
                 The Commission is adopting Sec. 190.04(e) as proposed to provide
                details regarding the liquidation and valuation of open positions.\114\
                Paragraph (e) is derived from current Sec. 190.04(d), subject to a
                number of changes.
                ---------------------------------------------------------------------------
                 \114\ The Commission is amending Sec. 190.08(d) to also clarify
                the process by which customer positions and other customer property
                are valued for purposes of determining the amount of a customer's
                claim.
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 190.04(e)(1)(i), as derived from
                current Sec. 190.04(d)(1)(ii), to describe the process of liquidating
                open commodity contracts when the debtor is a member of a clearing
                organization. Regulation Sec. 190.04(e)(1)(i), like its predecessor,
                emphasizes the goal of competitive pricing to the extent feasible under
                market conditions at the time of liquidation. Treatment under the CEA
                of clearing organization rules has evolved from a pre-approval regime
                to a primarily self-certification regime. The Commission is of the view
                that the various processes set forth in part 40 of the Commission's
                regulations (including self-certifications under Sec. 40.6, voluntary
                submission for rule approval under Sec. 40.5, and Commission review of
                certain rules of systemically important DCOs under Sec. 40.10) are
                sufficient, and that a separate rule approval process for rules
                regarding settlement price in the context of a bankruptcy is no longer
                necessary. The Commission is accordingly adopting Sec. 190.04(e)(1)(i)
                to delete the requirement contained in current Sec. 190.04(d)(1)(i)
                that a clearing organization must obtain approval pursuant to section
                5c(c) of the CEA for its rules regarding liquidation of open commodity
                contracts.
                 Section 190.04(e)(1)(i) also adds a provision regarding open
                commodity contracts that are futures or options on futures that were
                established on or subject to the rules of a foreign board of trade and
                cleared by the debtor as a member of a foreign clearing organization,
                providing that such contracts shall by liquidated pursuant to the rules
                of the foreign clearing organization or foreign board of trade or, in
                the absence of such rules, in the manner the trustee deems appropriate.
                This the new provision is analogous to the existing provision but would
                extend to cases where the debtor FCM is a member of a foreign clearing
                organization.
                 Section 190.04(e)(1)(ii) provides instructions to the trustee
                regarding the liquidation of open commodity contracts where the debtor
                is not a member of a DCO or foreign clearing organization, but instead
                clears through one or more accounts established with an FCM or a
                foreign futures intermediary. In such a case, Sec. 190.04(e)(1)(ii)
                provides that the trustee shall use commercially reasonable efforts to
                liquidate the open commodity contracts to achieve competitive pricing,
                to the extent feasible under market conditions at the time of
                liquidation. The Commission is adding this provision to account for
                those circumstances where the trustee must liquidate open commodity
                contracts for a debtor that is not a clearing member.
                 As with Sec. 190.04(e)(1)(i), the Commission is adopting Sec.
                190.04(e)(2) to delete the rule approval requirement, for the same
                reasons stated above. Regulation Sec. 190.04(e)(2) is derived from
                current Sec. 190.04(d)(1)(ii) which requires a trustee or clearing
                organization to apply to the Commission for permission to liquidate
                open commodity contracts by book entry. In such a case, the settlement
                price for such commodity contracts shall be determined by the clearing
                organization in accordance with its rules, which shall be designed to
                establish, to the extent feasible under market conditions at the time
                of liquidation, such settlement prices in a competitive manner.
                 The Commission is adopting Sec. 190.04(e)(3) to recognize that an
                FCM or foreign futures intermediary through which a debtor FCM carries
                open commodity contracts will generally have enforceable contractual
                rights to liquidate such commodity contracts. New Sec. 190.04(e)(3)
                confirms that the upstream intermediary may exercise such rights.
                However, the liquidating FCM or foreign futures intermediary shall use
                commercially reasonable efforts to liquidate the open commodity
                contracts to achieve competitive pricing, to the extent feasible under
                market conditions at the time of liquidation and subject to any rules
                or orders of the relevant clearing organization, foreign clearing
                organization, DCM, SEF or foreign board of trade governing its
                liquidation of such open commodity contracts.
                 If the liquidating FCM or foreign futures intermediary fails to do
                so, the trustee may seek damages reflecting the difference in price(s)
                resulting from such failure. However, such damages would be the
                trustee's sole available remedy as the regulation makes clear that
                ``[i]n no event shall any such liquidation be voided.''
                 The Commission is adopting Sec. 190.04(e)(4)(i) and (ii) based on
                current Sec. 190.04(d)(2) and (3), respectively, with some minor non-
                substantive language changes and updated cross-references.
                 The Commission requested comment in particular on the treatment of
                letters of credit in bankruptcy, as set forth in proposed Sec.
                190.04(e). The Commission did not receive any comments on this aspect
                of the Proposal. Accordingly, for the reasons stated above, the
                Commission is adopting Sec. 190.04(e) as proposed.
                f. Regulation Sec. 190.04(f): Long Option Contracts
                 The Commission is adopting Sec. 190.04(f) as proposed to contain
                only minor non-substantive changes from the current Sec. 190.04(e)(5),
                including (1) a cross-reference to the liquidation provisions in
                proposed Sec. 190.04(d) and (e), and (2) a clarification that the
                provision is referring to commodity contracts that are long option
                contracts, rather than to long option contracts more generally.
                 The Commission did not receive any comments on this aspect of the
                Proposal. Accordingly, for the reasons stated above, the Commission is
                adopting Sec. 190.04(f) as proposed.
                3. Regulation Sec. 190.05: Operation of the Debtor's Estate--General
                 The Commission is adopting Sec. 190.05 to revise parts of current
                Sec. 190.04 and add new provisions to (1) require a trustee to use all
                reasonable efforts to continue to issue account statements for customer
                accounts holding open commodity contracts or other property and (2)
                clarify the trustee's obligation with respect to residual interest. The
                Commission requested comment with respect to all aspects of proposed
                Sec. 190.05.
                 The Commission is adopting Sec. 190.05(a) to amend the requirement
                in current Sec. 190.04(a) that the trustee ``shall'' comply with all
                provisions of
                [[Page 19354]]
                the CEA and of the regulations thereunder as if it were the debtor, to
                state that the trustee ``shall use reasonable efforts to comply'' with
                all provisions of the CEA and of the regulations thereunder as if it
                were the debtor. This change is intended to provide the trustee with
                some flexibility in making decisions in an emergency bankruptcy
                situation, subject to the requirements of the Bankruptcy Code. Given
                that an FCM bankruptcy will likely be a fast-paced situation requiring
                the trustee to make decisions with little time for consideration, the
                Commission recognizes that there may be circumstances under which
                strict compliance with the CEA and the regulations thereunder may not
                be practicable. The Commission did not receive any comments on proposed
                Sec. 190.05(a).\115\
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                 \115\ To the extent that ICI's comment raising concerns about
                trustee discretion applies here, the Commission notes that the
                addition of Sec. 190.00(c)(3)(i)(C), which directs the trustee to
                use their discretion with the overarching goal of protecting public
                customers, should mitigate that concern.
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 190.05(b) to address the
                computation of funded balances. It is derived from, and makes several
                revisions to, Sec. 190.04(b). The Commission's objective in making
                such revisions is to provide the bankruptcy trustee with the latitude
                to act reasonably given the circumstances with which the trustee is
                confronted, recognizing that information may be more reliable and/or
                accurate in some insolvency situations than in others and permitting an
                approach that, to an appropriate extent, favors cost effectiveness and
                promptness over precision.\116\ First, whereas current Sec. 190.04(b)
                provides that a trustee ``must'' compute a daily funded balance for the
                relevant customer accounts, Sec. 190.05(b) requires the trustee to use
                ``reasonable efforts'' to make such computations. Such computations are
                required to be ``as accurate as reasonably practicable under the
                circumstances, including the reliability and availability of
                information.'' Second, Sec. 190.05(b) increases the scope of customer
                accounts for which the bankruptcy trustee is obligated to compute a
                funded balance from accounts that contain open commodity contracts to
                accounts that contain open commodity contracts or other property. In
                the Commission's view, there is no reason to exclude customer accounts
                that contain only property (the value of which may change) from the
                scope of those for which bankruptcy trustees must compute a daily
                funded balance. Third, Sec. 190.05(b) revises the length of time that
                the trustee is obligated to compute the funded balance of customer
                accounts from ``until the final liquidation date'' to until the open
                commodity contracts and other property in the account have been
                transferred or liquidated. This change ties the computation requirement
                to each specific account, such that a bankruptcy trustee is not
                required to continue to compute the funded balance of customer accounts
                that do not contain any open commodity contracts or other property.
                Lastly, the specific deadline by which the computation must be
                completed is being removed. The Commission does not believe that the
                deadline in current Sec. 190.04(b) (by noon the next business day) is
                crucial in a bankruptcy context (as it is with respect to an FCM
                conducting ongoing daily business).\117\ Such computation would,
                however, inherently need to be accomplished prior to performing any
                action where knowledge of funded balances is essential, such as
                transfers of accounts or property.
                ---------------------------------------------------------------------------
                 \116\ See major theme 7 discussed in section I.B above.
                 \117\ See, e.g., Sec. 1.32(d).
                ---------------------------------------------------------------------------
                 The Commission received one comment regarding proposed Sec.
                190.05(b). CME agreed that allowing the trustee to compute the funded
                balance for customers' accounts before transferring or liquidating
                customer positions or property using ``reasonable efforts'' to be ``as
                accurate as reasonably practicable under the circumstances, including
                the reliability and availability of information'' ``should allow the
                trustee to act more promptly to transfer the positions of public
                customers and their pro rata share of the customer property than if the
                trustee were held to a strict standard of precision in calculating
                funded balances before it could undertake such transfers.'' This is
                consistent with the Commission's view. The Commission is adopting Sec.
                190.05(c)(1) to amend the record retention requirements in current
                Sec. 190.04(c) to be more comprehensive. Section 190.05(c)(1) expands
                the referenced records from ``computations required by this [p]art'' to
                ``records required under this chapter to be maintained by the debtor,
                including records of the computations required by this part.'' To
                enable the trustee to mitigate the expenses of record retention,
                however, it reduces the time that records are required to be retained
                from ``the greater of the period required by Sec. 1.31 of this chapter
                or for a period of one year after the close of the bankruptcy
                proceeding for which they were compiled'' to ``until such time as the
                debtor's case is closed.'' Section 190.05(c)(2) simplifies the
                corresponding portion of current Sec. 190.04(c)(2) by omitting the
                requirement that the records required in Sec. 190.05(c)(1) be
                available to the Court and parties in interest. The requirement that
                such records be available to the Commission and the United States
                Department of Justice is being retained. A court generally will not
                itself look at records, and any parties in interest should have access
                to records under the discovery provisions of the Federal Rules of
                Bankruptcy Procedure and the Federal Rules of Civil Procedure, as
                applicable. The Commission did not receive any comments on proposed
                Sec. 190.05(c).
                 The Commission is adopting new Sec. 190.05(d) to facilitate the
                ability of customers of the bankrupt FCM with open commodity contracts
                or property to keep track of such open commodity contracts or property
                even during insolvency, and promptly to make them aware of the
                specifics of the liquidation or transfer of such contracts or property.
                Section 190.05(d) requires the trustee to use all reasonable efforts to
                continue to issue account statements with respect to any customer for
                whose account open commodity contracts or other property is held that
                has not been liquidated or transferred. Section 190.05(d) also requires
                the trustee to issue an account statement reflecting any liquidation or
                transfer that has taken place with respect to a customer account
                promptly after such liquidation or transfer has occurred.
                 The Commission sought comment on the practicability of the proposed
                requirements regarding the issuance of account statements. ICI
                commented in support of the account statement requirements.
                 The Commission is adopting Sec. 190.05(e)(1) to amend the
                requirement in current Sec. 190.04(e)(2) that a trustee must obtain
                court approval to make disbursements to customers, to specifically
                carve out transfers of customer property made in accordance with Sec.
                190.07. The Commission is making this change to reflect the policy
                preference to transfer as many public customer positions as practicable
                in the event of an FCM insolvency.\118\ The Commission notes, however,
                that this
                [[Page 19355]]
                carve out does not detract from the trustee's ability to, in their
                discretion, nonetheless seek and obtain court approval for certain
                transfers of property. The Commission recognizes that there is an
                inherent tension between distributing to public customers as much
                customer property as possible from the debtor's estate, as quickly as
                possible, and ensuring accuracy in distribution, and believes that
                Sec. 190.05(e)(1) strikes the right balance between these competing
                objectives.\119\
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                 \118\ The Commission notes that current Sec. 190.08(d) provides
                for the return of specifically identifiable property other than
                commodity contracts under certain circumstances (namely, where the
                customer makes good any pro rata loss related to that property)
                without court approval; however, the Commission is deleting this
                provision in favor of allowing transfers without court approval for
                the reasons stated above.
                 \119\ The concept of prioritizing cost effectiveness and
                promptness over precision is discussed in detail in major theme 7 in
                section I.B above and in overarching concept three in the cost-
                benefit considerations, section III.A.2.iii below.
                ---------------------------------------------------------------------------
                 Section 190.05(e)(2) addresses how a bankruptcy trustee may invest
                the proceeds \120\ from the liquidation of open commodity contracts and
                specifically identifiable property, and other customer property. It is
                derived from, and retains much of, current Sec. 190.04(e)(3), but it
                expands the provision permitting the bankruptcy trustee to ``invest any
                customer equity in accounts which remain open in accordance with Sec.
                190.03'' to permit the investment of ``any other customer property.''
                It continues to limit the permissible investments to obligations of, or
                fully guaranteed by, the United States, and to limit the location of
                permissible depositories to those located in the United States or its
                territories or possessions. The Commission did not receive any comments
                on proposed Sec. 190.05(e).
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                 \120\ Section 190.05(e)(2) uses the term ``proceeds'' rather
                than the term ``equity,'' which is used in current Sec.
                190.04(e)(3). This change in wording is not meant to be a
                substantive.
                ---------------------------------------------------------------------------
                 The Commission is adopting new Sec. 190.05(f) to require a
                bankruptcy trustee to apply the residual interest provisions contained
                in Sec. 1.11 ``in a manner appropriate to the context of their
                responsibilities as a bankruptcy trustee'' and ``in light of the
                existence of a surplus or deficit in customer property available to pay
                customer claims.'' The purpose of the residual interest provisions is
                to have the FCM maintain a sufficient buffer in segregated funds ``to
                reasonably ensure that the [FCM] . . . remains in compliance with the
                segregated funds requirements at all times.'' \121\ The Commission
                requested comment with respect to all aspects of proposed Sec. 190.05.
                Specifically, the Commission sought comment on the practicability and
                appropriateness of proposed Sec. 190.05(f).
                ---------------------------------------------------------------------------
                 \121\ Section 1.11(e)(3)(i)(D).
                ---------------------------------------------------------------------------
                 The Commission received supportive comments from CME, SIFMA AMG/
                MFA, ICI, and Vanguard. CME supported adding clarity that the trustee
                should use reasonable efforts to operate the debtor FCM's estate in
                compliance with the CEA and CFTC regulations governing FCMs, including
                to apply the residual interest provisions in Sec. 1.11, in a manner
                appropriate to the context of their responsibilities and in light of
                the existence of a surplus or deficit in customer property available to
                pay customer claims. ICI and Vanguard supported the clarification in
                proposed Sec. 190.05(f) that an FCM's residual interest is to be
                applied to public customer claims. Vanguard noted its belief that ``FCM
                residual interest is a valuable buffer to insulate FCM customers from
                the risk of delayed or failed margin transfers from other customers.''
                Vanguard was ``pleased that the Commission has confirmed that, while
                residual interest is fronted by FCMs, it must be used to support
                customers through an FCM insolvency,'' noting that its ``purpose is to
                enhance core customer protections.'' SIFMA AMG/MFA also believed that
                ``the proposed use of residual interest as contemplated by proposed
                Sec. Sec. 190.05(f) and 190.09 is appropriate,'' and agreed with the
                Commission that ``the residual interest provisions contained in Sec.
                1.11 remain important.''
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.05 as
                proposed.
                4. Regulation Sec. 190.06: Making and Taking Delivery Under Commodity
                Contracts
                 The Commission is adopting Sec. 190.06 as proposed. The Commission
                is adopting Sec. 190.06 to provide more specificity regarding making
                and taking deliveries on commodity contracts in the context of an FCM
                bankruptcy and to reflect current delivery practices. Section 190.06 is
                derived from current Sec. 190.05, but implements new concepts (with
                respect to delivery practices, intangible commodities, and separation
                of physical and cash delivery property), as discussed further below.
                 Generally, open positions may enter a delivery position where the
                parties incur bilateral contractual delivery obligations.\122\ It is
                important to address deliveries to avoid disruption to the cash market
                for the commodity and to avoid adverse consequences to parties that may
                be relying on delivery taking place in connection with their business
                operations.
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                 \122\ The timing of the entry of the order for relief in a
                subchapter IV proceeding relative to when physical delivery
                contracts move into a delivery positions will generally influence
                whether a delivery issue may arise. Additionally, during business as
                usual, market participants typically offset contracts before
                incurring delivery obligations.
                ---------------------------------------------------------------------------
                 The delivery provisions in the current regulations largely reflect
                the delivery practices at the time current part 190 was adopted in
                1983. At that time, delivery was effected largely by tendering paper
                warehouse receipts or certificates. In contrast, most deliverable title
                documents today are held and transferred in electronic form, typically
                with the clearing organization serving as the central depository for
                such instruments. Under the terms of some contracts (such as oil or gas
                futures) the party with the contractual obligation to make delivery
                will physically transfer a tangible commodity to meet its obligations.
                In other cases, intangible commodities may be delivered, including
                virtual currencies. As noted previously, in the definitions section
                (Sec. 190.01), the Commission is dividing the delivery account class
                into physical delivery and cash delivery account subclasses to
                recognize the differing issues that apply to physical delivery property
                versus cash delivery property. The Commission is also recognizing that,
                consistent with current practice, physical deliveries \123\ may be
                effected in different types of accounts.\124\ For example, when an FCM
                has a role in facilitating delivery, deliveries may occur via title
                transfer in a futures account, foreign futures account, cleared swaps
                account, delivery account, or, if the commodity is a security, in a
                securities account. \125\
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                 \123\ Current Sec. 190.05 applies to the delivery of a physical
                commodity, or of documents of title to physical commodities. Section
                190.06 applies to any type of commodity that is subject to delivery,
                whether tangible or intangible. This is captured in the definition
                of physical property. Given the different ways in which delivery may
                take place, physical delivery property is not limited to property
                that an FCM holds for or on behalf of a customer in a delivery
                account. For a discussion of those different ways, see the third and
                fourth categories under the definition of physical delivery property
                in Sec. 190.01 in section II.A.2 above.
                 \124\ See also Sec. 1.42.
                 \125\ See also Sec. 1.42.
                ---------------------------------------------------------------------------
                 Section 190.06(a) applies to commodity contracts that settle upon
                expiration or exercise by making or taking delivery of physical
                delivery property, if such commodity contracts are in a delivery
                position on the filing date or the trustee is unable to liquidate such
                commodity contracts in accordance with Sec. 190.04(c) to prevent them
                from moving into a delivery position.\126\ The Commission is
                [[Page 19356]]
                adopting Sec. 190.06(a)(2) to address delivery made or taken on behalf
                of a customer outside of the administration of the debtor's estate,
                (i.e., directly between the debtor's customer and the delivery
                counterparty assigned by the clearing organization). It replaces
                current Sec. 190.05(b). Current Sec. 190.05(b) requires a DCO, DCM,
                or SEF to enact rules that permit parties to make or take delivery
                under a commodity contract outside the debtor's estate, through
                substitution of the customer for the commodity broker. The Commission
                believes that deliveries should occur in this manner only where
                feasible. Deliveries may not always happen in this manner, as customers
                largely rely on their FCMs to hold physical delivery property on their
                behalf in electronic form.\127\
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                 \126\ As discussed above, Sec. 190.04(c) directs the trustee to
                use its best efforts to avoid delivery obligations concerning
                contracts held through the debtor FCM by transferring or liquidating
                such contracts before they move into delivery position.
                 \127\ The requirement for registered entity rules to be
                submitted for approval in accordance with section 5c(c) of the Act
                has been deleted for reasons discussed in section II.B.2 above with
                respect to Sec. 190.04(e)(1) and (2).
                ---------------------------------------------------------------------------
                 Section 190.06(a)(2)(i) \128\ directs the trustee to use
                ``reasonable efforts'' to allow a customer to deliver physical delivery
                property that is held directly by the customer in settlement of a
                commodity contract, and to allow payment in exchange for such delivery,
                to occur outside the debtor's estate, where the rules of the exchange
                or clearing organization prescribe a process for delivery that allows
                delivery to be fulfilled either (A) in the ordinary course by the
                customer, (B) by substitution of the customer for the commodity broker,
                or (C) through agreement of the buyer and seller to alternative
                delivery procedures. In adopting a ``reasonable efforts'' standard
                rather than (as in current Sec. 190.05(a)(1)) ``best efforts,'' the
                Commission is recognizing that, in the event that the trustee is unable
                to transfer or earlier liquidate the positions, delivery involves a
                significant degree of bespoke administration. Moreover, requiring the
                trustee's ``best efforts'' for delivery might require the trustee to
                spend an inordinate amount of time focusing on the needs of a few
                customers and detract from the trustee's ability to manage the short
                term challenges of the administration of the estate in the days
                immediately following the filing date.
                ---------------------------------------------------------------------------
                 \128\ The Commission notes that Sec. 190.04(c) directs the
                trustee to use its best efforts to avoid delivery obligations
                concerning contracts held through the debtor FCM by transferring or
                liquidating such contracts before they move into delivery position.
                Section 190.06(a)(2) applies where the trustee is unable to do so.
                ---------------------------------------------------------------------------
                 Section 190.06(a)(2)(ii) addresses the circumstance where, while
                the customer makes physical delivery in satisfaction of a commodity
                contract using property that is outside the administration of the
                estate of the debtor, the customer nonetheless has property held in
                connection with that contract at the debtor (i.e., collateral posted in
                connection with that contract pre-petition). Consistent with current
                Sec. 190.05(b)(2), Sec. 190.06(a)(2)(ii) provides that the property
                held at the debtor becomes part of the customer's claim and can only be
                distributed pro rata, despite the customer fulfilling the delivery
                obligation outside the administration of the debtor's estate.
                 Section 190.06(a)(3) applies when it is not practicable to effect
                delivery outside the estate. Section 190.06(a)(3) clarifies that which
                was implied, but was not addressed, in current Sec. 190.05(c)(1)-(2),
                by providing additional details for when delivery is made or taken
                within the debtor's estate. It contains provisions for the trustee to
                deliver physical or cash delivery property on a customer's behalf, or
                return such property to the customer so that the customer may fulfill
                its delivery obligation. The regulation also includes restrictions
                designed to assure that a customer does not receive (or otherwise
                benefit from) a distribution of customer property (or other use of such
                property that benefits the customer) that exceeds the customer's pro
                rata share of the relevant customer property pool.
                 The Commission is adopting new Sec. 190.06(a)(4) to recognize that
                delivery may need to be made in a securities account if an open
                commodity contract held in a futures account, foreign futures account,
                or cleared swaps account requires the delivery of securities, and
                property from any of these accounts is transferred to the securities
                account for the purpose of effecting delivery. The value of the
                property transferred to the securities account must be limited to the
                customer's funded balance for a commodity contract account, and only to
                the extent that funded balance exceeds (i.e., the surplus over) the
                customer's minimum margin requirements for that account. Such a
                transfer may not be made if the customer is undermargined or has a
                deficit balance in any other commodity contract accounts.
                 Section 190.06(a)(5), as proposed, addressed deliveries made or
                taken on behalf of ``a house account of the debtor.'' It was derived
                from current Sec. 190.05(c)(3), with some clarifying wording.
                Consistent with the suggestion from the ABA Subcommittee, as discussed
                in section II.A.2 above, the Commission is deleting in this final rule
                the definition of house account as it applies to FCMs. The reference in
                the provision as proposed to ``a house account of the debtor'' is being
                replaced in the final rule with a reference to ``the debtor's own
                account or the account of any non-public customer of the debtor.'' No
                substantive change vis-[agrave]-vis either the current regulation or
                the regulation as proposed is intended.
                 The Commission is adopting new Sec. 190.06(b) to divide the
                delivery account class into separate physical delivery and cash
                delivery account subclasses, for purposes of pro rata distributions to
                customers in the delivery account class on their net equity claims.
                Because claims in each subclass are fixed as of the filing date, Sec.
                190.06(b)(1)(i) provides that the physical delivery account class
                includes physical delivery property held in delivery accounts as of the
                filing date, and the proceeds of any such physical delivery property
                received subsequently (i.e., cash received after the filing date, in
                exchange for physical delivery property on which delivery was made),
                and Sec. 190.06(b)(ii) provides the cash delivery account class
                includes cash delivery property in delivery accounts as of the filing
                date, along with physical delivery property for which delivery is
                subsequently taken (i.e., in exchange for cash delivery property paid
                after the filing date) on behalf of a customer in accordance with Sec.
                190.06(a)(3).
                 Section 190.06(b)(2) describes the customer property included in
                the cash delivery account class and in the physical delivery account
                class. Section 190.06(b)(2) provides that customer property in the cash
                delivery account class includes cash or cash equivalents that are held
                in an account under a name, or in a manner, that clearly indicates that
                the account holds property for the purpose of making payment for taking
                delivery of a commodity under commodity contracts. Customer property in
                the cash delivery account class also includes any other property that
                is (A) not segregated for the benefit of customers in the futures,
                foreign futures, or cleared swaps account classes) and (B) traceable
                (through, e.g., account statements) as having been received after the
                filing date as part of taking delivery.
                 Section 190.06(b)(2) also provides, conversely, that customer
                property in the physical delivery account class includes cash or cash
                equivalents that are held in an account under a name, or in a manner,
                that clearly indicates that the account holds property received in
                payment for making delivery of a commodity under a commodity contract.
                Customer property in the
                [[Page 19357]]
                physical delivery account class also includes any other property that
                is (A) not segregated for the benefit of customers in the futures,
                foreign futures, or cleared swaps account classes) and (B) traceable
                (through, e.g., account statements) as having been held for the purpose
                of making delivery of a commodity under a commodity contract, or held
                as of the filing date as a result of taking delivery.
                 The Commission requested comment on all aspects of proposed Sec.
                190.06. In particular, the Commission sought comment on the
                implications of subdividing the delivery account class into separate
                physical delivery and cash delivery account subclasses, including any
                additional challenges or benefits that the Commission did not consider.
                CME expressed support for specific aspects of proposed Sec. 190.06,
                such as: (1) The proposed enhancements to the delivery account class,
                including separating the account class into physical and cash delivery
                account classes; (2) the additional detail provided to the trustee on
                how to facilitate the completion of deliveries including, in
                particular, the requirement for the trustee to use reasonable efforts
                to allow delivery to occur outside administration of the debtor FCM's
                estate when the rules of the relevant exchange or DCO prescribe a
                process for allowing deliveries to be accomplished as set forth in the
                proposal; and (3) the clarification that cash or cash equivalents held
                by the debtor FCM in an account maintained at a bank, DCO, foreign
                clearing organization or elsewhere constitutes customer property when
                it is held under a name or in a manner clearly indicating the property
                in the account relates to deliveries. As to the latter, CME believes
                that this will facilitate identifying cash delivery property available
                to distribute to customers in the cash delivery account class.\129\
                ---------------------------------------------------------------------------
                 \129\ CME noted that its support was ``subject to CME's comments
                which request changes to the cash delivery property and physical
                delivery property definitions.'' Specifically, CME requested that
                the Commission adopt more formal requirements with respect to
                delivery accounts through a separate rulemaking. That request is
                addressed in section II.G below.
                ---------------------------------------------------------------------------
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.06 as
                proposed, with modifications to Sec. 190.06(a)(5) as set forth above.
                5. Regulation Sec. 190.07: Transfers
                 Regulation Sec. 190.07 was proposed to set forth detailed
                provisions governing transfers, consistent with the policy preference,
                explained in Sec. 190.00(c)(4), for transferring (or ``porting'')
                public customer commodity contract positions, as well as all or a
                portion of such customers' account equity. It is being adopted as
                proposed with modifications to Sec. 190.07(b), (d), and (e), as set
                forth below.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.07, and raised particular questions with respect to
                the proposed six-month post-transfer period to complete customer
                diligence, partial transfers, and estimates of customer claims.
                 Section 190.07(a) addresses rules that clearing organizations and
                SROs may ``adopt, maintain in effect, or enforce'' that may affect
                transfers.
                 In Sec. 190.07, paragraphs (a)(1) and (2) states that these
                organizations may not have such rules that, respectively, ``are
                inconsistent with the provisions of'' part 190 or that interfere with
                the acceptance by their members of commodity contracts and collateral
                from FCMs that are required to transfer accounts pursuant to Sec.
                1.17(a)(4). These provisions are derived from current Sec.
                190.06(a)(1) and (2), with technical changes. No comments were received
                with respect to these provisions.
                 Section 190.07(a)(3) is intended to promote transfers, to the
                extent consistent with good risk management. It provides that no
                clearing organization or other SRO may adopt, maintain in effect, or
                enforce rules that ``interfere with the acceptance by its members of
                transfers of commodity contracts, and the property margining or
                securing such contracts, from [an FCM that is a debtor] if such
                transfers have been approved by the Commission . . .'' Paragraph (a)(3)
                includes a proviso, however, that it shall not (i) ``[l]imit the
                exercise of any contractual right of a clearing organization or other
                registered entity to liquidate or transfer open commodity contracts'';
                or (ii) ``[b]e interpreted to limit a clearing organization's ability
                adequately to manage risk.''
                 FIA supported the proviso, and CME ``agree[ed] that transfers
                should be made consistent with sound risk management principles, and in
                that regard welcome[d] the proposed clarification that the requirements
                under the proposed rule do not limit the rights of a DCO (or a DCM or
                swap execution facility as ``registered entities'' as defined in the
                CEA) to liquidate or transfer open commodity contracts.'' ICE, by
                contrast, was concerned that the term ``interfere with'' is overly
                broad, and requested that the Commission ``clarify that a clearing
                organization is not precluded from managing the risks presented by any
                such transfer, including through bona fide changes in margin
                requirements and guarantee fund contributions for transferee clearing
                members.''
                 As discussed immediately above, the provision already states that
                ``this paragraph (a)(3) shall not . . . be interpreted to limit a
                clearing organization's ability adequately to manage risk.'' Moreover,
                recognizing the different or additional margin requirements or
                guarantee fund contribution requirements resulting from the additional
                positions carried by a transferee clearing member is not a rule that
                interferes with the acceptance of a transfer of commodity
                contracts.\130\ Accordingly, the Commission concludes that Sec.
                190.07(a)(3) appropriately meets the goal of promoting transfers to the
                extent consistent with good risk management.
                ---------------------------------------------------------------------------
                 \130\ The Commission understands ICE's reference to ``bona fide
                changes in margin requirements and guarantee fund contributions'' to
                mean changes that are not based on the fact that positions were
                acquired by transfer.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.07(b) concerns requirements for transferees.
                Paragraph (b)(1) clarifies that it is the duty of the transferee--not
                of anyone else--to assure that the transfer will not cause the
                transferee to be in violation of the minimum financial requirements.
                Paragraph (b)(2) notes that the transferee accepts the transfer subject
                to any loss arising from deficit balances that cannot be recovered from
                the customer, and, in the case of customer accounts, must keep such
                counts open for at least one business day (unless the customer fails to
                respond to a margin call within a reasonable time) and may not collect
                commissions with respect to the transfer.
                 As stated in the proposal, the Commission understands that customer
                diligence processes would have already been required to have been
                completed by the debtor FCM with respect to each of its customers as
                part of opening their accounts. Regulation Sec. 190.07(b)(3) thus
                provides that a transferee may accept open commodity contracts and
                property, and may open accounts on its records prior to completing
                customer diligence, provided that account opening diligence as required
                is performed as soon as practicable but no later than six months after
                transfer, unless the time is extended, by the Commission, for a
                particular account, transfer, or debtor. This provision is consistent
                with past practice in FCM bankruptcies.
                 CME supported this provision as a ``practical change'' that should
                assist in finding willing transferees, while ICI believed that it will
                help mitigate or
                [[Page 19358]]
                eliminate ``speed bumps'' to porting. Vanguard supported the
                flexibility advanced by the Commission here, but urged the Commission
                to work to harmonize that flexibility across other regulatory regimes
                applicable at FCMs, particularly for those dually registered as broker-
                dealers.
                 FIA supported the policy underlying paragraph (b)(3), and noted
                that it is essential to realize the policy of favoring porting over
                liquidation of customer accounts. FIA also agreed that six months is a
                reasonable period of time for this process, subject to the Commission's
                authority to grant additional time in particular circumstances. FIA
                was, however, of the view that this regulation should ``provide
                transferee FCMs more specific relief from applicable law relating to
                `customer diligence.' ''
                 FIA encouraged the Commission to specify the customer diligence
                rules from which transferee FCMs will have temporary relief. FIA stated
                that
                ``such rules may include, but not be limited to: (i) rules relating
                to anti-money laundering requirements (including rules requiring
                FCMs to implement customer identification programs and know your
                customer requirements and all corresponding self-regulatory
                organization (``SRO'') requirements); (ii) rules relating to risk
                and other disclosures (Sec. Sec. 1.55, 30.6, 33.7 and similar SRO
                disclosure requirements); (iii) rules relating to capital and
                residual interest requirements (Sec. Sec. 1.11, 1.17, 1.22, 1.23,
                22.2, 22.17, 30.7 and 41.48 and related SRO requirements); (iv)
                rules relating to account statements required under Sec. 1.33 in
                the event positions transfer with inadequate contact information
                (Sec. 1.33 and related SRO requirements); and [(v)] rules relating
                to margin in the event accounts transfer without adequate margin
                (Sec. Sec. 1.17, 39.13, 41.42-41.49 and related SRO
                requirements).''
                 The Commission has considered each of the five types of
                requirements discussed by FIA:
                 With respect to anti-money laundering requirements, the Commission
                notes that, for purposes of the Customer Identification Program
                (``CIP'') requirements applicable to futures commission merchants
                pursuant to 31 CFR 1026.220, the term ``account'' is defined to exclude
                ``[a]n account that the futures commission merchant acquires through
                any acquisition, merger, purchase of assets, or assumption of
                liabilities.'' 31 CFR 1026.100(a)(2)(i). Thus, transferred accounts are
                not subject to the CIP requirements.
                 However, the Customer Due Diligence (``CDD'') requirements of 31
                CFR 1026.210(b)(5) do appear to apply. These include a requirement for
                ``[a]ppropriate risk-based procedures for conducting ongoing customer
                due diligence, to include . . . [u]nderstanding the nature and purpose
                of customer relationships for the purpose of developing a customer risk
                profile . . . .'' 31 CFR 1026.210(b)(5)(i). The Commission is of the
                view that Sec. 190.07(b)(3) would inform the determination of what
                constitutes appropriate risk-based procedures in the exigent context of
                an FCM accepting a transfer of accounts from an FCM that is a debtor in
                bankruptcy.
                 While FIA appears to request a reference to the account opening
                disclosure requirements in Sec. Sec. 1.55, 30.6, and 33.7, these would
                appear to be addressed by the bulk transfer provisions of Sec. 1.65.
                The Commission is amending Sec. 190.07(b)(3) to include a
                parenthetical statement that explicitly refers to ``the risk
                disclosures referred to in Sec. 1.65(a)(3).'' This will modify the
                sixty-day requirement of that paragraph.
                 The Commission declines to amend the regulation to extend the time
                to comply with capital and residual interest requirements. To do so
                would risk permitting a transfer of accounts to result in contagion of
                financial weakness. The Commission reiterates the importance of Sec.
                190.07(b)(1), which provides that ``it is the duty of each transferee
                to assure that it will not accept a transfer that would cause the
                transferee to be in violation of the minimum financial requirements set
                forth in this chapter.''
                 However, to the extent that shortfalls in compliance with these
                requirements are due to errors or shortfalls in the data received by
                the transferee from the transferor FCM, and the transferee acts with
                reasonable and appropriate diligence in seeking to detect such errors
                or shortfalls in data, and, where detected, in investigating and
                correcting them, such shortfalls in compliance would not be considered
                violations of such requirements.
                 Similarly, where account statements required by Sec. 1.33 do not
                reach the customer due to errors or shortfalls in the contact
                information provided to the transferee, there would be no violation so
                long as the transferee takes reasonable steps to detect such errors or
                shortfalls (e.g., by reacting promptly to rejected email or returned
                postal mail, or to complaints by a transferred customer that they are
                not receiving such statements) and to correct the situation once
                detected. The proposed regulation does not need to be amended to
                achieve this result.
                 Finally, with respect to FIA's request for relief with respect to
                regulations ``relating to margin in the event accounts transfer without
                adequate margin,'' the Commission believes that the determination of
                whether a transferee FCM is promptly collecting such margin should be
                informed by the exigencies of the situation. There is, however, no
                basis for a general exemption for transferee accounts from the
                requirements of Sec. 39.13(g)(8)(iii), providing that a DCO shall
                require that its members do not permit customers to withdraw funds from
                their accounts unless the accounts would be fully margined after such
                withdrawal. If the transferee FCM is not confident of the information
                it has regarding the transferred account, it would seem appropriate to
                risk manage with caution. Once the transferee FCM is confident that it
                fully understands the situation, the transferee can act in accordance
                with its normal procedures.\131\ Similarly, there is no basis to
                provide a general exemption from undermargined account capital charges
                in accordance with Sec. 1.17.
                ---------------------------------------------------------------------------
                 \131\ Such normal procedures would include the ``ordinary course
                of business'' referred to in Letter 19-17, or any successor letter
                or regulation. See CFTC Letter 19-17, https://www.cftc.gov/node/217076.
                ---------------------------------------------------------------------------
                 In all of these cases, the Commission encourages DCOs and SROs to
                take similar approaches.
                 While the Commission has declined, in many of the above cases, to
                provide general relief by regulation, this is without prejudice to the
                possibility that more targeted relief may be appropriate in particular
                cases. Specifically, any further relief that might be appropriate in a
                particular situation could be requested by, e.g., the transferee, in
                light of the relevant facts and circumstances.
                 The Commission observes that its staff have traditionally responded
                to requests for relief in emergency situations with great dispatch, and
                expects, and thus instructs staff, to continue to do so in this context
                in the future.\132\
                ---------------------------------------------------------------------------
                 \132\ For the avoidance of doubt, the nature of the expectation
                and the instruction is that staff will provide a response to such
                requests with great dispatch. The nature of the response, whether
                affirmative, affirmative in part, or negative, will depend on the
                relevant facts and circumstances.
                ---------------------------------------------------------------------------
                 OCC recommended that ``the Commission adopt a parallel regulation
                permitting a DCO to postpone any due diligence the DCO would typically
                have to perform on an FCM member accepting transferred positions from a
                bankrupt FCM.'' This would include the requirements of, e.g., Sec.
                39.12, requiring a DCO to have ``continuing participation requirements
                for clearing members of the [DCO] that are objective, publicly
                available, and risk-based.''
                 The Commission does not agree that the situations are parallel: An
                FCM is required to perform individualized due
                [[Page 19359]]
                diligence on each of its customers, which in the case of a transfer
                such as was seen in historical situations such as MF Global, would
                amount to hundreds or even thousands of customers. By contrast, the
                focus of a DCO is on the financial and operational capability of each
                of its clearing members that is a transferee to manage, in the
                aggregate, the customer portfolios of which it accepts transfer. The
                number of transferee FCM clearing members is likely to be no more than
                a dozen.
                 In any event, the Commission expects that a DCO would, and would be
                permitted to, conduct its due diligence procedures in a manner
                consistent with balancing risk management requirements (see, e.g.,
                Sec. 190.07(a)(3)(ii) (restrictions on a DCO interfering with the
                acceptance of transfers from a debtor FCM ``shall not be interpreted to
                limit a clearing organization's ability adequately to manage risk'')
                with the exigencies of the situation.
                 Section 190.07(b)(4) is designed to clarify what the account
                agreement between the transferred customer and the transferee is at and
                after the time the transfer becomes effective. This includes situations
                where an account is partially transferred. As proposed, it provides
                that any account agreements governing a transferred account shall be
                deemed assigned to the transferee and shall govern the customer's
                relationship unless and until a new agreement is reached. It also
                provides that a breach of the agreement prior to a transfer does not
                constitute a breach on the part of the transferee. CME, ICI, and
                Vanguard supported this provision.
                 FIA appreciated the need for legal certainty as to the terms of the
                relationship between a transferee FCM and each transferred customer,
                but was concerned that the transferee FCM might be disadvantaged by
                being subject to an account agreement between the transferred customer
                and the transferor (debtor) FCM. There are two possible situations with
                respect to each customer: Either the customer does, or does not, have a
                pre-existing account agreement with the transferee FCM.
                 FIA noted that many large customers, in particular, may maintain
                accounts at more than one FCM, and thus it may be the case that the
                customer already has an account agreement in place with the transferee
                FCM. FIA asked the Commission to confirm their view that, in this
                context, the transferee would not be required to manage the ported
                account(s) in accordance with the agreement with the transferor FCM.
                The Commission agrees with this view, and is modifying proposed Sec.
                190.07(b)(4) to state this explicitly: The proposed text will be
                renumbered as Sec. 190.07(b)(4)(i), and paragraph (b)(4)(ii) will be
                added to provide that paragraph (b)(4)(i) shall not apply where the
                customer has a pre-existing account agreement with the transferee
                futures commission merchant. In such a case, the transferred account
                will be governed by that pre-existing account agreement.
                 However, where the transferred customer does not have a pre-
                existing account agreement with the transferee FCM, FIA conceded that
                ``the account agreement [between the transferor and the customer]
                should stay in place for a short defined interim period during which
                the parties may renegotiate. . . .'' FIA did not specify how long that
                ``short defined interim period'' should last, nor what should happen at
                the end of that period if the parties fail to reach agreement. The
                Commission notes that nothing prevents either the transferee FCM or
                customer from negotiating at any time to change the (in this case,
                assigned) account agreement between them, and that, aside from Sec.
                190.07(b)(2)(ii)(A) (requiring the transferee to keep the customer's
                commodity contracts open at least one business day after their receipt
                unless the customer fails to meet promptly a margin call), nothing in
                the Commission's regulations prevents either the transferee or customer
                from terminating their relationship if they cannot reach agreement as
                to the terms under which that relationship should continue, on what
                either party believes is a timely basis. Accordingly, the Commission
                declines to modify Sec. 190.07(b)(4) in this context.
                 Lastly, FIA observed that a customer's account may not always be
                able to be physically transferred from the debtor FCM to the transferee
                FCM. The Commission notes that the reference in Sec. 190.07(b)(4) to
                assignment of account agreements does not refer to the movement of
                physical documents.\133\ As requested by FIA, the Commission can thus
                confirm that assignment of the agreement does not depend upon such
                movement.
                ---------------------------------------------------------------------------
                 \133\ To be sure, a transfer agreement would likely include
                transfers of records or at least copies of records as a matter of
                good practice.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.07(b)(5) provides that customer instructions
                received by the debtor with respect to open commodity contracts or
                specifically identifiable property that has been, or will be,
                transferred in accordance with section 764(b) of the Bankruptcy Code,
                should be transmitted to any transferee, which shall comply therewith
                to the extent practicable (if the transferee subsequently enters
                insolvency).
                 Regulation Sec. 190.07(c) addresses eligibility of accounts for
                transfer under section 764(b) of the Bankruptcy Code. This provision
                states that ``[a]ll commodity contract accounts (including accounts
                with no open commodity contract positions) are eligible for transfer. .
                . .'' This language recognizes that accounts can be transferred even if
                they are intended for trading commodities but do not include any open
                commodity contracts at the time of the order for relief.\134\
                ---------------------------------------------------------------------------
                 \134\ Cf. 11 U.S.C. 761(9)(A)(ii)(II) (customer means, with
                respect to an FCM, an entity that holds a claim against the FCM
                arising out of ``a deposit or payment of cash, security, or other
                property with such [FCM] for the purpose of making or margining [a]
                commodity contract'') (emphasis added).
                 Thus, where a person opens a customer account and deposits
                collateral on day 1, intending to trade on day 3 (or some subsequent
                day when the customer determines that it is propitious to trade) and
                the FCM becomes a debtor on day 2 (or some other day when the
                customer has no positions open) such person nonetheless qualifies as
                a customer, and their claim would be a customer claim.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.07(d) addresses special rules for transfers
                under section 764(b) of the Bankruptcy Code. Paragraph (d)(1) instructs
                the trustee to ``use its best efforts to effect a transfer to one or
                more other commodity brokers of all eligible commodity contract
                accounts, open commodity contracts and property held by the debtor for
                or on behalf of its customers, based on customer claims of record, no
                later than the seventh calendar day after the order for relief.'' The
                Commission will correct a typographical error in the proposal, and
                refer to ``customer claims of record'' rather than ``customer claims or
                record.''
                 Regulation Sec. 190.07(d)(2) addresses cases of partial transfers
                and multiple transferees. It includes a requirement that ``a partial
                transfer of contracts and property may be made so long as such transfer
                would not result in an increase in the amount of any customer's net
                equity claim.'' The added language is intended to caution against
                partial transfers that would break netting sets and make the customer
                worse off. The Commission has also decided to state that one way to
                accomplish a partial transfer is ``by liquidating a portion of the open
                commodity contracts held by a customer such that sufficient value is
                realized, or margin requirements are reduced to an extent sufficient,
                to permit the transfer of some or all of the remaining open commodity
                contracts and property.'' This language is intended to clarify that the
                liquidation may either crystalize gains or have the effect of reducing
                the required margin. Finally, with regards to the transfer of part of a
                spread or a straddle,
                [[Page 19360]]
                Sec. 190.07(d)(2)(ii) states that ``to the extent practicable under
                the circumstances,'' each side of the spread or straddle must be
                transferred or none of the open commodity contracts comprising the
                spread or straddle may be transferred. This language is intended to
                clarify that the trustee is required to protect customers holding
                spread or straddle positions from the breaking of netting sets, but
                only to the extent practicable given the circumstances.
                 Regulation Sec. 190.07(d)(3) provides details regarding the
                treatment and transfer of letters of credit used as margin, consistent
                with other proposed provisions related to letters of credit. In
                particular, this provision states that a transfer of a letter of credit
                cannot be made if it would result in a recovery that exceeds the amount
                to which the customer is entitled in Sec. Sec. 190.08 and 190.09. If
                the letter of credit cannot be transferred and the customer does not
                deliver substitute property, the trustee may draw upon a portion or
                upon all of the letter of credit, the proceeds of which will be treated
                as customer property in the applicable account class. The Commission
                believes a regulation detailing how letters of credit are to be treated
                in a transfer will provide more certainty, as there is currently no
                such regulation, and that the proposed treatment is both practical and
                consistent with the policy of pro rata distribution.\135\
                ---------------------------------------------------------------------------
                 \135\ See also discussion of treatment of letters of credit in
                bankruptcy under Sec. 190.04(d)(3) in section II.B.2.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.07(d)(4) requires a trustee to use reasonable
                efforts to prevent physical delivery property from being separated from
                commodity contract positions under which the property is deliverable.
                The Commission is proposing this regulation to clarify its expectations
                in such situations, specifically, to promote the delivery process.
                 Regulation Sec. 190.07(d)(5) is intended to prevent prejudice to
                customers generally by prohibiting the trustee from making a transfer
                that would result in insufficient customer property being available to
                make equivalent percentage distributions to all equity claim holders in
                the applicable account class. It clarifies that the trustee should make
                determinations in this context based on customer claims reflected in
                the FCM's records, and, for customer claims that are not consistent
                with those records, should make estimates using reasonable discretion
                based in each case on available information as of the calendar day
                immediately preceding transfer.
                 Regulation Sec. 190.07(e) addresses the prohibition on avoidance
                of transfers under section 764(b) of the Bankruptcy Code. It explicitly
                approves specific types of transfers, unless such transfers are
                disapproved by the Commission.
                 Section 190.07(e)(1) approves (i) transfers that were made before
                the order for relief in compliance with Sec. 1.17(a)(4) (FCM fails to
                meet capital requirements); (ii) pre-relief transfers, withdrawals or
                settlements at the request of public customers, unless the customer
                acted in collusion with the debtor to obtain a greater share than it
                would otherwise be entitled to; and (iii) pre-relief transfers of
                customer accounts or commodity contracts and other related property,
                either by a clearing organization or a receiver that has been appointed
                for the FCM that is now a debtor. In this context, ``public customers''
                would include a lower-level (i.e., downstream) FCM acting on behalf of
                its own public customers (e.g., cleared at the debtor on an omnibus
                basis).
                 Regulation Sec. 190.07(e)(2) pertains to post-relief transfers.
                Section 764(b) of the bankruptcy code permits the Commission to
                approve, and thus protect from avoidance, transfers that occur up to
                seven days after the order for relief. Section 190.07(e)(2)(i) approves
                transfers of eligible commodity contract accounts or customer property
                made by the trustee or any clearing organization. Section
                190.07(e)(2)(ii) approves transfers made at the direction of the
                Commission upon such terms and conditions as the Commission may deem
                appropriate and in the public interest.
                 Regulation Sec. 190.07(e)(3) was referred to in preamble to the
                proposal as derived from current Sec. 190.06(g)(3). It was
                inadvertently omitted from the rule text in the proposal.
                 Section 190.07(e)(3) pertains to pre-relief withdrawals by
                customers (in contrast to the transfers dealt with previously in Sec.
                190.07(e)(1)(ii)). It states (in terms analogous to Sec.
                190.07(e)(1)(ii)) that notwithstanding the provisions of paragraphs (c)
                and (d) of this section, the following transfers are approved and may
                not be avoided under sections 544, 546, 547, 548, 549 or 724(a) of the
                Bankruptcy Code: The withdrawal or settlement of a commodity contract
                account by a public customer, including a public customer which is a
                commodity broker, prior to the filing date unless: (i) The customer
                making the withdrawal or settlement acted in collusion with the debtor
                or its principals to obtain a greater share of the bankruptcy estate
                than that to which such customer would be entitled in a bankruptcy
                distribution; or (ii) The withdrawal or settlement is disapproved by
                the Commission.
                 Regulation Sec. 190.07(f) provides that, notwithstanding the other
                provisions of this section (with exceptions discussed below), the
                Commission may prohibit the transfer of a particular set or sets of the
                commodity contract accounts and customer property, or permit the
                transfer of a particular set or sets of commodity contract accounts and
                customer property that do not comply with the requirements of the
                section. The exceptions are the policy in favor of avoiding the
                breaking of netting sets in Sec. 190.07(d)(2)(ii), and the avoidance
                of prejudice to other customers in Sec. 190.07(d)(5).
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.07 as
                proposed with modifications to Sec. 190.07(b), (d), and (e), as set
                forth above.
                6. Regulation Sec. 190.08: Calculation of Funded Net Equity
                 Section 190.08 is being adopted as proposed with a number of
                technical modifications, as set forth below.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.08, and raised particular questions with respect to
                the revisions to the calculation of the equity balance of a commodity
                contract set forth in proposed Sec. 190.08(b)(1), and the
                appropriateness of the proposal to determine the value of an open
                commodity contract at the end of the last settlement cycle on the day
                preceding the transfer rather than at the end of the day of the
                transfer, as set forth in Sec. 190.08(d)(1)-(2).
                 As proposed, Sec. 190.08(a) stated that the ``allowed net equity
                claim of a customer shall be equal to the aggregate of the funded
                balances of such customer's net equity claim for each account class.''
                As discussed above, the ABA Subcommittee urged that there should be
                more precise use of the term ``allowed claim.'' \136\ The Commission
                agrees with this recommendation. Accordingly, the Commission is
                amending the language in the proposal to replace the term ``allowed net
                equity'' with the term ``funded net equity'' in the final rule in both
                Sec. 190.08(a) and in the title of Sec. 190.08.\137\
                ---------------------------------------------------------------------------
                 \136\ See discussion of ``funded claim'' in section II.A.2
                above.
                 \137\ Proposed Sec. 190.08(a) is derived from current Sec.
                190.07(a), but reflects the fact that, under the revised definition
                of the term ``primary liquidation date,'' all commodity contracts
                will be liquidated or transferred prior to the primary liquidation
                date. Since no (relevant) operations will occur subsequent to the
                liquidation date, provisions that address how to deal with commodity
                contracts after that time are moot.
                ---------------------------------------------------------------------------
                [[Page 19361]]
                 Section 190.08(b) sets forth the steps for a trustee to follow when
                calculating each customer's net equity.\138\ Section 190.08(b)(1),
                equity determination, sets forth the steps for a trustee to follow when
                calculating the equity balance of each commodity contract account of a
                customer. When calculating the customer's claim against the debtor, the
                basis for calculating such claim is the data that appears in the
                debtor's records. Once the customer's claim based on the debtor's
                records is calculated, the customer will have the opportunity to
                dispute such claim based on their own records, and the trustee may
                adjust the debtor's records if it is persuaded by the customer. There
                were no comments directed specifically to this provision.
                ---------------------------------------------------------------------------
                 \138\ Pursuant to section 20(a)(5) of the CEA, 7 U.S.C.
                24(a)(5), the Commission has the power to provide how the net equity
                of a customer is to be determined.
                ---------------------------------------------------------------------------
                 Section 190.08(b)(2), customer determination (aggregation),
                provides instructions to the trustee regarding how to aggregate the
                credit and debit equity balances of all accounts of the same class held
                by a customer. Specifically, the regulation sets forth how to determine
                whether accounts are held in the same capacity or in separate
                capacities. There were two comments applicable to this provision.
                 As proposed, Sec. 190.08(b)(2)(ix) referred to the fact that an
                omnibus customer accounts is held in a separate capacity from the
                ``house account.'' As noted above,\139\ the ABA Subcommittee has
                suggested the deletion of the term ``house account'' in the context of
                FCM bankruptcies, and the Commission has accepted this suggestion.
                Consistent with that approach, the Commission is accepting the ABA
                Subcommittee's revised drafting for this provision: An omnibus customer
                account for public customers of a futures commission merchant
                maintained with a debtor shall be deemed to be held in a separate
                capacity from any omnibus customer account for non-public customers of
                such futures commission merchant and from any account maintained with
                the debtor on its own behalf or on behalf of any non-public customer
                (emphasis added only for illustration).
                ---------------------------------------------------------------------------
                 \139\ See section II.A.2 above.
                ---------------------------------------------------------------------------
                 As proposed, Sec. 190.08(b)(2)(xii) provided that except as
                otherwise provided in this section, an account maintained with a debtor
                by an agent or nominee for a principal or a beneficial owner shall be
                deemed to be an account held in the individual capacity of such
                principal or beneficial owner.
                 SIFMA AMG/MFA urged the Commission to amend this provision to
                ``treat accounts of the same principal or beneficial owner maintained
                by different agents or nominees as separate accounts,'' noting that
                this approach would ``reduce the administrative difficulties the
                trustee would face in consolidating all accounts of the same principal
                or beneficial owner'' and would ``avoid[] any confusion as to the
                treatment of separate accounts that could arise with the overlay of the
                time-limited relief provided by Letter 19-17.'' \140\ SIFMA AMG/MFA
                asserted that this change would be similar to the approach taken by the
                Commission in proposed Sec. 190.08(b)(2)(xiv), which provides that
                accounts held by a customer in separate capacities shall be deemed to
                be accounts of different customers.
                ---------------------------------------------------------------------------
                 \140\ See CFTC Letter 19-17, https://www.cftc.gov/node/217076.
                ---------------------------------------------------------------------------
                 The Commission notes that CFTC Letter 19-17 conditioned such relief
                on the FCM performing ``stress testing and credit limits . . . on a
                combined account basis'' and ``provid[ing] each beneficial owner using
                separate accounts with a disclosure that under CFTC [p]art 190 rules
                all separate accounts of the beneficial owner will be combined in the
                event of an FCM bankruptcy.'' \141\ Thus, treating separate accounts of
                the same beneficial owner on a combined basis is entirely consistent
                with the approach taken in Letter 19-17. Nor is the situation of
                separate accounts for the same beneficial owner analogous to a customer
                holding accounts in separate capacities, as referred to in Sec.
                190.08(b)(2)(xiv) (e.g., in their personal capacity versus in their
                capacity as trustee for X, or in their capacity as trustee for Y versus
                their capacity as trustee for Z.). In those latter cases, the same
                legal owner is acting for separate beneficial owners. Accordingly, the
                Commission is declining to amend Sec. 190.08(b)(2)(xii).
                ---------------------------------------------------------------------------
                 \141\ Id. at 5 (emphasis supplied).
                ---------------------------------------------------------------------------
                 Section 190.08(b)(3), setoffs, sets forth instructions regarding
                how and when to set off positive and negative equity balances.
                 Section 190.08(b)(4), correction for distributions, provides that
                the value of property that has been transferred or distributed must be
                added to the net equity amount calculated for that customer after
                performing the steps contained in Sec. 190.08(b)(1) through (3).
                Section 190.08(b)(4) also includes a proviso that clarifies that the
                calculation of net equity for any late-filed claims (in cases where all
                accounts for which there are customer claims of record as of the filing
                date are transferred with all of the equity pertaining thereto) will be
                based on the allowed amount of such claims.
                 Section 190.08(b)(5), correction for ongoing events, provides that
                the calculation of net equity will be adjusted to correct for
                misestimates or errors, including corrections for the liquidation of
                claims or specifically identifiable property at a value different from
                the estimate value previously used in computing net equity.
                 As proposed, Sec. 190.08(c) set forth the method for calculation
                of a customer's funded balance, i.e., ``a customer's pro rata share of
                the customer estate with respect to each account class available for
                distribution to customers of the same customer class.'' Section
                190.08(c)(1) sets forth instructions for calculating the funded balance
                of any customer claim, while Sec. 190.08(c)(2) requires the funded
                balance to be adjusted to correct for ongoing events.
                 One change is being made to paragraph (c)(1), as a result of
                addressing a comment that affected a prior section. As proposed, Sec.
                190.08(c)(1)(ii) addressed giving customers credit for 100% of margin
                payments made after the order for relief.
                 As discussed above,\142\ a number of commenters (ABA Subcommittee,
                CME, CMC), suggested that the definition of cash delivery property be
                expanded to address the possibility of post-filing-date payments made
                by customers to the FCM to pay for delivery. Such payments should be
                credited in full to the customer's funded balance. Indeed, Sec.
                190.06(a)(3)(ii)(B)(2) provides that the trustee could issue payment
                calls in this context and that ``the full amount of any payment made by
                the customer in response to a payment call must be credited to the
                funded balance of the particular account for which such payment is
                made.''
                ---------------------------------------------------------------------------
                 \142\ See discussion of cash delivery property in section
                II.A.2, above.
                ---------------------------------------------------------------------------
                 In order to be consistent with the principle that 100% of post-
                filing-date payments are credited to a customer's funded balance,
                proposed Sec. 190.08(c)(1)(ii) is being amended, with the proposed
                language addressing post-filing-date margin payments to be codified as
                Sec. 190.08(c)(1)(ii)(A), and the addition of Sec.
                190.08(c)(1)(ii)(B) to address post-filing-date payments for
                deliveries, to read as follows: ``[then adding 100% of] . . . [f]or
                cash delivery property, any cash transferred to the trustee on or after
                the filing date for the purpose of paying for delivery.''
                 Section 190.08(d), valuation, sets forth instructions about how to
                value
                [[Page 19362]]
                commodity contracts and other property for purposes of calculating net
                equity as set forth in the rest of Sec. 190.08.
                 Section 190.08(d)(1) sets forth instructions regarding how to value
                commodity contracts, separately addressing: (i) Open commodity
                contracts, and (ii) liquidated commodity contracts.
                 As proposed, Sec. 190.08(d)(1)(i), regarding the valuation of open
                commodity contracts, states that ``if an open commodity contract is
                transferred to another commodity broker, its value on the debtor's
                books and records shall be determined as of the end of the last
                settlement cycle on the day preceding such transfer.'' The Commission
                noted in the proposal that ``[t]his would allow the value of the open
                commodity contract to be known prior to the transfer,'' \143\ and, as
                discussed above, specifically sought comments on this issue.
                ---------------------------------------------------------------------------
                 \143\ 85 FR 36028.
                ---------------------------------------------------------------------------
                 The Commission received contrasting comments on this provision. ICE
                ``d[id] not believe that valuation is the right one, particularly
                because the market may move significantly on the date of transfer.'' By
                contrast, CME ``agree[d]'' with valuation as of the end the last
                settlement cycle on the day preceding transfer, because it aligns with
                calculations of funded balances under proposed Sec. 190.08(c), and
                noted that ``any mark-to-market gains or losses on the date of the
                transfer should be reflected by the receiving FCM(s) in the customer
                account statements as a result of that day's settlement cycle.'' The
                Commission is persuaded by the latter comment, and will adopt the
                provision as proposed, both for the reasons stated by the latter
                commenter, and because of concerns regarding practicability. Markets
                move on a continuous basis so long as they are open and, considering
                markets around the world, some markets on which futures, foreign
                futures, or cleared swaps are traded are moving at all times other than
                over a weekend.
                 Section 190.08(d)(1)(ii)(A) allows the trustee to use the weighted
                average of liquidation prices for identical commodity contracts that
                are liquidated within a 24-hour period or business day, but not at the
                same price.
                 Section 190.08(d)(1)(ii)(B) provides instructions on how to value
                commodity contracts that are liquidated as part of a bulk auction by a
                clearing organization or similarly outside of the open market. As
                proposed, this provision would value a commodity contract that is
                liquidated as part of a bulk auction at the settlement price calculated
                by the clearing organization as of the end of the settlement cycle
                during which the commodity contract was liquidated. ICE disagreed with
                this approach, stating that ``the price achieved in the auction should
                be used.'' However, as the Commission noted in the proposing release,
                the units being auctioned will often be a heterogenous (though risk-
                related) set of products, tenors (e.g., contract months), and
                directions (e.g., long or short). Different auctioned portfolios may
                contain the same or similar contracts. In this context, setting the
                price of a particular contract based on the auction price for a
                portfolio would require considerable interpretation. Accordingly, the
                Commission will implement the approach from the proposal.
                 Section 190.08(d)(2) sets forth the approach for valuing listed
                securities, and incorporates the same weighted average concept
                discussed above with respect to Sec. 190.08(d)(1)(ii)(A).
                 Section 190.08(d)(3) sets forth the approach for valuing
                commodities held in inventory, directing the trustee to use fair market
                value. If such fair market value is not readily ascertainable from
                public sources of prices, the trustee is directed to use the approach
                in Sec. 190.08(d)(5), discussed below.
                 Section 190.08(d)(4) addresses the valuation of letters of credit.
                The trustee is directed to use the face amount (less amounts, if any,
                drawn and outstanding). However, if the trustee makes a determination
                in good faith that a draw is unlikely to be honored on either a
                temporary or permanent basis, they are directed to use the approach in
                paragraph (d)(5).
                 Section 190.08(d)(5) provides the trustee with pragmatic
                flexibility in determining the value of customer property by allowing
                the trustee, in their sole discretion, to enlist the use of
                professional assistance to value all other customer property.\144\ This
                provision further notes that, if such property is sold, its value for
                purposes of the calculations required by this part is equal to the
                actual value realized on sale of such property (the trustee, of course,
                retains discretion to engage professional assistance to allocate such
                value among a heterogenous set of items sold as a unit). Finally, the
                provision notes that any such sale shall be made in compliance with all
                applicable statutes, rules, and orders of any court or governmental
                entity with jurisdiction thereover.
                ---------------------------------------------------------------------------
                 \144\ The trustee's employment of professionals remains subject
                to the requirements of section 327 of the Bankruptcy Code.
                ---------------------------------------------------------------------------
                 Accordingly, after consideration of the comments and for the
                reasons stated above, Sec. 190.08 is being adopted as proposed, with
                modifications to the title and to Sec. 190.08(a), (b), and (c), as set
                forth above.
                7. Regulation Sec. 190.09: Allocation of Property and Allowance of
                Claims
                 Section 190.09 is being adopted to set forth rules governing the
                scope of customer property, the allocation of customer property between
                customer and account classes, and distribution of customer property. It
                was derived from current Sec. 190.08. It is being adopted as proposed
                with modifications to Sec. 190.09(d)(3), as set forth below.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.09. The Commission also raised particular questions
                with respect to: Whether the proposed revisions to Sec. 190.09(a)(1)
                would appropriately preserve customer property for the benefit of
                customers; whether proposed Sec. 190.09(a)(1)(ii)(G), concerning
                property that other regulations require to be placed into segregation,
                and Sec. 190.09(a)(1)(ii)(L), concerning remaining shortfalls, are
                appropriately crafted; whether it is advisable to permit customers to
                post ``substitute customer property'' rather than ``cash'' in proposed
                Sec. 190.09(d); and whether it is appropriate to clarify the term
                ``like-kind securities'' by reference to the concept, derived from
                SIPA, of ``securities of the same class and series of an issuer?''
                 There are three substantive changes in new Sec. 190.09, as
                compared to current regulations:
                 Section 190.09(a)(1)(ii)(G) and (L) are two categories of property
                that are defined to be included in customer property in order better to
                protect customers from shortfalls in customer property (i.e., cases
                where customer property is insufficient to cover claims for customer
                property).
                 Section 190.09(a)(1)(ii)(G) is a new category of property that
                constitutes customer property. It includes any cash, securities, or
                other property which constitutes current assets of the debtor,
                including the debtor's trading or operating accounts and commodities of
                the debtor held in inventory, in the greater of (i) the amount of the
                debtor's targeted residual interest amount pursuant to Sec. 1.11 with
                respect to each account class, or (ii) the debtor's obligations to
                cover debit balances or undermargined amounts as provided in Sec. Sec.
                1.20, 1.22, 22.2 and, 30.7. Each of the sets of regulations referred to
                in proposed Sec. 190.09(a)(1)(ii)(G) requires an FCM to put certain
                funds into
                [[Page 19363]]
                segregation on behalf of customers. To the extent the FCM has failed to
                comply with those regulatory requirements prior to the filing of the
                bankruptcy, this provision requires the bankruptcy trustee to fulfill
                that requirement, and allows the trustee to use the current assets of
                the debtor to do that.
                 CME stated that this new provision is a ``substantial improvement
                over the current rule,'' and it was also supported by ICI and Vanguard.
                 Section 190.09(a)(1)(ii)(L) is the analog to current Sec.
                190.08(a)(1)(ii)(J) but with updated cross-references (and a new second
                sentence, discussed in the next paragraph). It states that customer
                property includes any cash, securities, or other property in the
                debtor's estate, but only to the extent that the customer property
                under the other definitional elements is insufficient to satisfy in
                full all claims of the FCM's public customers.\145\
                ---------------------------------------------------------------------------
                 \145\ ICE notes that the issues with respect to this provision
                may be complicated, and that it may warrant further consideration,
                but ultimately expresses no view on it.
                ---------------------------------------------------------------------------
                 A new second sentence of Sec. 190.09(a)(1)(ii)(L) notes explicitly
                that customer property for purposes of these regulations includes any
                ``customer property,'' as that term is defined in SIPA, that remains
                after satisfaction of the provisions in SIPA regarding allocation of
                (securities) customer property. SIPA provides that such remaining
                customer property would be allocated to the general estate of the
                debtor.\146\ Any securities customer property that remains after
                satisfaction in full of securities claims provided for in that section
                of SIPA proceeding and would accordingly become property of the general
                estate should, to the extent otherwise provided in proposed Sec.
                190.09(a)(1)(ii)(L), and for the same reasons, become customer property
                in the FCM bankruptcy proceeding.
                ---------------------------------------------------------------------------
                 \146\ See generally SIPA section 8(c)(1), 15 U.S.C. 78fff-
                2(c)(1).
                ---------------------------------------------------------------------------
                 Section 190.09(d) governs the distribution of customer property,
                and has its analog in current Sec. 190.08(d). Section 190.09(d)(1)(i)
                and (ii) and (d)(2) require customers to deposit ``substitute customer
                property,'' to obtain the return or transfer of specifically
                identifiable property. ``Substitute customer property'' is defined in
                Sec. 190.01 to mean (in relevant part) ``cash or cash equivalents.''
                ``Cash equivalents,'' in turn, are defined as ``assets, other than
                United States dollar cash, that are highly liquid such that they may be
                converted into United States dollar cash within one business day
                without material discount in value.''
                 The purpose of requiring customers to, in essence, ``buy back''
                specifically identifiable property is to implement the pro rata
                distribution principle set forth in section 766(h) of the Bankruptcy
                Code, and discussed in Sec. 190.00(d)(5). Permitting customers to
                redeem specifically identifiable property with either cash or cash
                equivalents, rather than requiring cash, may mitigate the difficulty
                (and costs) such customers face in obtaining redemption, but will in
                any event fully implement the pro rata distribution principle.
                 As a technical point, the ABA Subcommittee recommended (consistent
                with their recommendation in the definitions section, Sec. 190.01, to
                more precisely use the term ``allowed net equity'') that the reference
                in proposed Sec. 190.09(d)(3) to the amount distributable on a
                customer's claim be amended to add ``[the] funded balance of'' before
                the phrase ``such customers allowed net equity claim.'' The Commission
                agrees, and is making the change.
                 The remaining provisions of revised Sec. 190.09 include only
                technical changes to the current regulations.
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, Sec. 190.09 will be adopted as proposed, with
                the modification to Sec. 190.09(d)(3) referred to above.
                8. Regulation Sec. 190.10: Provisions Applicable to Futures Commission
                Merchants During Business as Usual
                 The Commission proposed Sec. 190.10 to contain new and relocated
                provisions that set forth an FCM's obligations during business as
                usual. The Commission requested comment with respect to all aspects of
                proposed Sec. 190.10, and specifically with respect to (1) the impact
                of proposed Sec. 190.10(b) regarding the designation of hedging
                accounts, (2) the impact of proposed Sec. 190.10(c) regarding the
                establishment of delivery accounts during business as usual, (3) the
                changes in proposed Sec. 190.10(d) to the business as usual
                requirements for acceptance of letters of credit, and in particular (a)
                whether its understanding is correct that most letters of credit
                currently in use by the industry follow the JAC forms, (b) the impact
                of additional requirements concerning letters of credit (as well as any
                alternative methods of achieving the goal of treating customers posting
                letters of credit consistent with the treatment of other customers),
                and (c) whether the proposed one year transition period is reasonable,
                and (4) the disclosure statement for non-cash margin set out in
                proposed Sec. 190.10(e) (whether the statement is helpful, legally or
                practically, whether it should be changed, or whether it should be
                deleted).
                 Section 190.10 will be adopted as proposed with modifications. In
                particular, the ABA Subcommittee and CME suggested that the provisions
                in proposed Sec. 190.10 be codified in part 1, along with other
                regulations that pertain to an FCM's business as usual. The ABA
                Subcommittee stated that, while they had originally suggested that
                these provisions belong in Sec. 190.10, ``[u]pon further reflection,
                the Committee believes that such a rule more logically belongs in the
                Commission's Part 1 Regulations, along with other rules that apply to
                FCMs during business as usual. Compliance and legal personnel could
                inadvertently overlook obligations that are not located in the
                Commission rule set where they would expect to find them.''
                 The Commission agrees with the commenters that transparency would
                be fostered by putting the ``business as usual'' requirements proposed
                for Sec. 190.10 into part 1 of the Commission's regulations.
                Accordingly, as discussed further below, most of the paragraphs of the
                regulation that was proposed as Sec. 190.10 are being renumbered and
                will be codified in specified places in part 1. The provisions of
                proposed Sec. 190.10 will otherwise be adopted as proposed.
                 The provision proposed as Sec. 190.10(a) notes that an FCM is
                required to maintain current records relating to its customer accounts,
                pursuant to Sec. Sec. 1.31, 1.35, 1.36, and 1.37, and in a manner that
                would permit them to be provided to another FCM in connection with the
                transfer of open customer contracts of other customer property. This
                provision recognizes that current and accurate records are imperative
                in arranging for the transfer of customer contracts and other property,
                both for the trustee of the estate of the defaulter and for an FCM that
                is accepting the transfer. Nonetheless, it does not add to an FCM's
                obligations under the specified regulations, but rather is useful as a
                reference for the trustee. Accordingly, this provision will not be
                moved to part 1.
                 No comments were received with respect to the substance of proposed
                Sec. 190.10(a). As the remaining paragraphs of proposed Sec. 190.10
                will be moved to part 1, this provision will be codified as Sec.
                190.10.
                 The provision proposed as Sec. 190.10(b) concerns the designation
                of hedging accounts. It incorporates concepts contained in current
                Sec. Sec. 190.04(e) and 190.06(d) and the current Bankruptcy appendix
                form 3 instructions. As it sets
                [[Page 19364]]
                forth obligations for an FCM during business as usual, it will be moved
                to part 1. As it does not fit under any existing part 1 regulation, it
                will be moved under the miscellaneous heading of part 1, and codified
                as Sec. 1.41.
                 For purposes of Sec. 1.41, a customer will not need to provide,
                and an FCM will not be required to judge, evidence of hedging intent
                for purposes of bankruptcy treatment. Rather, Sec. 1.41 will permit
                the FCM to treat the account as a hedging account for such purposes
                based solely upon the written record of the customer's representation.
                Hedging treatment for these bankruptcy purposes will not be
                determinative for any other purpose.
                 Section 1.41(a) will require an FCM to provide a customer an
                opportunity to designate an account as a hedging account when the
                customer first opens the account, rather than when the customer
                undertakes its first hedging contract, as specified in current Sec.
                190.06(d)(1). This provision will also require that the FCM indicate
                prominently in its accounting records for each customer account whether
                the account is designated as a hedging account.
                 Section 1.41(b) will set forth the requirements for an FCM to treat
                an account as a hedging account: If, but only if, the FCM obtains the
                customer's written representation that the customer's trading in the
                account will constitute hedging as defined under any relevant
                Commission regulation or rule of a DCO, DCM, SEF, or FBOT. CME
                supported this approach, and the clarity it adds.
                 In order to avoid the significant burden that would be associated
                with requiring FCMs to re-obtain hedging instructions for existing
                accounts, Sec. 1.41(c) will provide that the requirements of Sec.
                1.41(a) and (b) do not apply to commodity contract accounts opened
                prior to the effective date of these revisions. Rather, the provision
                will recognize expressly that an FCM may continue to designate existing
                accounts as hedging accounts based on written hedging instructions
                obtained under former Sec. 190.06(d).
                 Finally, Sec. 1.41(d) will permit an FCM to designate an existing
                futures, foreign futures or cleared swaps account of a particular
                customer as a hedging account, provided that the FCM obtains the
                representation required under Sec. 1.41(b).
                 The provision proposed as Sec. 190.10(c) addresses the
                establishment of delivery accounts during business as usual.\147\ As it
                sets forth obligations for an FCM during business as usual, it will be
                moved to part 1. As it does not fit under any existing part 1
                regulation, it will be moved under the miscellaneous heading, and
                codified as Sec. 1.42.
                ---------------------------------------------------------------------------
                 \147\ See Sec. 190.06 regarding the making and taking of
                deliveries during bankruptcy.
                ---------------------------------------------------------------------------
                 When a commodity contract is in the delivery phase, or when a
                customer has taken delivery of commodities that are physically
                delivered, associated property may be held in a ``delivery account''
                rather than in the segregated accounts pursuant to, e.g., Sec. 1.20 or
                Sec. 22.2. Section 1.42 recognizes that when an FCM facilitates
                delivery under a customer's physical delivery contract, and such
                delivery is effected outside of a futures account, foreign futures
                account, or cleared swaps account, it must be effected through (and the
                associated property held in) a delivery account. If, however, the
                commodity that is subject to delivery is a security, the FCM may effect
                delivery through (and the property may be held in) a securities
                account. The regulation clarifies that the property must be held in one
                of these types of accounts. ICE and CME generally support this
                provision.\148\
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                 \148\ CME again recommended that the Commission consider
                adopting customer protection requirements with respect to delivery
                accounts via a separate rulemaking.
                ---------------------------------------------------------------------------
                 The provision proposed as Sec. 190.10(d) addresses letters of
                credit that an FCM accepts as collateral. As it sets forth obligations
                for an FCM during business as usual, it will be moved to part 1. As it
                does not fit under any existing part 1 regulation, it will be moved
                under the miscellaneous heading, and codified as Sec. 1.43.
                 Section 1.43 will prohibit an FCM from accepting a letter of credit
                as collateral unless certain conditions (1) are met at the time of
                acceptance and (2) remain true through its date of expiration.
                 First, pursuant to Sec. 1.43(a), the trustee must be able to draw
                upon the letter of credit, in full or in part, in the event of a
                bankruptcy proceeding, the entry of a protective decree under SIPA, or
                the appointment of FDIC as receiver pursuant to Title II of the Dodd-
                Frank Act. Second, pursuant to Sec. 1.43(b), if the letter of credit
                is permitted to be and is passed through to a clearing organization,
                the bankruptcy trustee for such clearing organization or (if
                applicable) FDIC must be able to draw upon the letter of credit, in
                full or in part, in the event of a bankruptcy proceeding, or where the
                FDIC is appointed as receiver pursuant to Title II.
                 The Commission has considered the impact that implementation of
                this regulation would have on FCMs and their customers, since letters
                of credit are currently in use by the industry.\149\ The Commission
                proposed that, upon the effective date of the regulation, what is now
                codified as Sec. 1.43 would apply only to new letters of credit and
                customer agreements. In order to mitigate the impact of implementing
                this regulation with respect to existing letters of credit and customer
                agreements, the Commission proposed a transition period of one year
                from the effective date until Sec. 1.43 will apply to existing letters
                of credit and customer agreements.
                ---------------------------------------------------------------------------
                 \149\ The Joint Audit Committee (``JAC'') forms for an
                Irrevocable Standby Letter of Credit (both Pass-Through and Non
                Pass-Through) appear to be consistent with the requirements of Sec.
                1.43.
                ---------------------------------------------------------------------------
                 CME supported this one-year transition period. By contrast, SIFMA
                AMG/MFA urged the Commission to shorten it in the interest of investor
                protection. They asked how letters of credit would be treated if an FCM
                were to go into bankruptcy during the transition period?
                 The provisions in this rulemaking regarding letters of credit are
                intended to codify the Commission's longstanding policy that
                ``customers using a letter of credit to meet original margin
                obligations [sh]ould be treated no differently than customers
                depositing other forms of non-cash margin or customers with excess cash
                margin deposits.'' \150\ This is the policy that has been advanced by
                the Commission, including in litigation,\151\ under the current rules.
                Moreover, this policy is supported by the provision in revised Sec.
                190.04(d)(3)(ii) that, for a letter of credit posted as collateral,
                ``the trustee shall treat any portion that is not drawn upon (less the
                value of any substitute customer property delivered by the customer) as
                having been distributed to the customer for purposes of calculating
                entitlements to distribution or transfer.'' That provision is not
                subject to the one-year transition period.
                ---------------------------------------------------------------------------
                 \150\ See, e.g., 48 FR 8716, 8718 (March 1, 1983) (Adopting
                release for part 190); Proposal, 86 FR at 36019 & n. 103.
                 \151\ See, e.g. Brief of the Commodity Futures Trading
                Commission In Support Of The Trustee's Motion To Confirm in
                ConocoPhillips v. Giddens, Case No. 1:12-cv-06014-KBF, Document 33.
                ---------------------------------------------------------------------------
                 While the Commission will decline to shorten the one-year
                transition period for existing letters of credit, trustees will be
                expected to treat such letters of credit in accordance with the
                Commission's policy.
                 The provision proposed as Sec. 190.10(e) concerns the disclosure
                statement for non-cash margin. No comments were received specific to
                this provision.
                [[Page 19365]]
                 As it sets forth obligations for an FCM during business as usual,
                it will be moved to part 1. This provision does fit under existing
                Sec. 1.55 (Public disclosures by futures commission merchants), and
                will be added at the end, codified as Sec. 1.55(p).
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, Sec. 190.10 will be adopted as proposed, with
                modifications: Proposed Sec. 190.10(a) will be codified as Sec.
                190.10, proposed Sec. 190.10(b) will be codified as Sec. 1.41,
                proposed Sec. 190.10(c) will be codified as Sec. 1.42, proposed Sec.
                190.10(d) will be codified as Sec. 1.43, and proposed Sec. 190.10(e)
                will be codified as Sec. 1.55(p).
                C. Subpart C--Clearing Organization as Debtor
                 The Commission is adopting a new subpart C of part 190 (proposed
                Sec. Sec. 190.11-190.19), with certain modifications discussed below,
                to address the currently unprecedented scenario of a clearing
                organization as debtor.\152\
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                 \152\ After considering comments that were received on the
                original Proposal, the Commission subsequently issued a Supplemental
                Proposal that withdrew Sec. 190.14(b)(2) and (3), and proposed
                other revisions to Sec. 190.14. Bankruptcy Regulations, 85 FR 60110
                (Sept. 24, 2020).
                ---------------------------------------------------------------------------
                 The customers of a clearing organization are its members,
                considered separately in two roles: (1) Each member may have a
                proprietary (also known as ``house'') account at the clearing
                organization, on behalf of itself and its non-public customers (i.e.,
                affiliates). The property that the clearing organization holds in
                respect of these accounts is referred to as ``member property.'' (2)
                Each member may have one or more accounts (e.g., futures, cleared
                swaps) for that members' public customers. The property that the
                clearing organization holds in respect of these accounts is referred to
                as ``customer property other than member property.'' Many clearing
                members will have both such types of accounts, although some may have
                only one or the other.
                1. Regulation Sec. 190.11: Scope and Purpose of Subpart C
                 The Commission is adopting Sec. 190.11 as proposed, but designated
                as new paragraph (a), and adding a new paragraph (b), as set forth
                below. The Commission is adopting Sec. 190.11 to establish that
                subpart C of part 190 will apply to proceedings under subchapter IV to
                chapter 7 of the Bankruptcy Code where the debtor is a clearing
                organization.
                 When originally proposing part 190 in 1981, the Commission proposed
                to (and ultimately did) forego providing generally applicable rules for
                the bankruptcy of a clearing organization.\153\ The Commission
                explained that it had proposed no other rules with respect to the
                operation of clearing organization debtors--other than proposing that
                all open commodity contracts, even those in a deliverable position, be
                liquidated in the event of a clearing organization bankruptcy--because
                the Commission viewed it as highly unlikely that an exchange could
                maintain a properly functioning futures market in the event of the
                collapse of its clearing organization. The Commission noted that, under
                section 764(b)(2) of the Bankruptcy Code, it had the power to permit a
                distribution of the proceeds of a clearing organization liquidation
                free from the avoidance powers of the trustee. The Commission further
                explained that it was not proposing a general rule, because the
                bankruptcy of a clearing organization would be unique. Instead, the
                Commission was inclined to take a case-by-case approach with respect to
                clearing organizations, given the potential for market disruption and
                disruption of the nation's economy as a whole, in the case of a
                clearing organization bankruptcy, as well as the desirability of the
                Commission's active participation in developing a means of meeting such
                an emergency.\154\
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                 \153\ At the time, the definition of clearing organization in
                section 761(2) of the Bankruptcy Code was an ``organization that
                clears commodity contracts on, or subject to the rules of, a
                contract market or board of trade.'' See Public Law 95-598 (1978),
                92 Stat 2549.
                 \154\ 46 FR 57535, 57545 (Nov. 24, 1981).
                ---------------------------------------------------------------------------
                 Much has changed in the intervening 39 years. Markets move much
                more quickly, and thus the importance of quick action in respect to the
                bankruptcy of a clearing organization has increased. The Commodity
                Futures Modernization Act established DCOs as a separate registration
                category.\155\ The bankruptcy of a clearing organization would remain
                unique--it remains the case that no clearing organization registered
                with the Commission has ever entered bankruptcy--and thus the need for
                significant flexibility remains, but the balance has shifted towards
                establishing ex ante the approach that would be taken.
                ---------------------------------------------------------------------------
                 \155\ Commodity Futures Modernization Act of 2000 Public Law
                106-554 section 1(a)(5); Appendix E, section 112(f).
                ---------------------------------------------------------------------------
                 Two clearing organizations for which the Commission has been
                designated the agency with primary jurisdiction have been designated as
                systemically important to the United States financial system pursuant
                to Title VIII of Dodd-Frank.\156\ If any clearing organization were to
                approach insolvency, it is possible, though not certain, that such an
                entity would be resolved pursuant to Title II of Dodd-Frank.\157\
                ---------------------------------------------------------------------------
                 \156\ See Dodd-Frank section 804 (designation of systemic
                importance), section 803(8) (definition of ``supervisory agency''),
                12 U.S.C. 5463, 5462(8). These are CME and ICE Clear Credit. A third
                clearing organization (Options Clearing Corporation) has also been
                so designated, but the SEC is the supervisory agency in that case.
                 \157\ Resolution under Title II would require a recommendation
                concerning factors specified in section 203(a)(2) of Dodd-Frank, 12
                U.S.C. 5383(a)(2), by a \2/3\ majority of the members then serving
                of each of the Board of Governors of the Federal Reserve System and
                of the FDIC, followed by a determination concerning a related set of
                factors specified in section 203(b), 12 U.S.C. 5383(b), by the
                Secretary of the Treasury in consultation with the President. Thus,
                the choice of resolution versus bankruptcy for a DCO that is, in the
                terminology of Dodd-Frank, ``in default or in danger of default,''
                see Dodd-Frank section 203(c)(4), 12 U.S.C. 5383(c)(4), cannot be
                considered certain.
                 It is, however, clear that Title II applies to clearing
                organizations. See, e.g., Dodd-Frank section 210(m), 12 U.S.C.
                5390(m) (applying ``the provisions of subchapter IV of chapter 7 of
                the bankruptcy code'' to ``member property'' of ``commodity
                brokers''). Pursuant to section 761(16) of the Bankruptcy Code,
                ``member property'' applies only to a debtor that is a ``clearing
                organization.'' 11 U.S.C. 761(16).
                ---------------------------------------------------------------------------
                 Administration of a resolution under Title II of Dodd-Frank
                depends, in part, on clarity as to entitlements under chapter 7 of the
                Bankruptcy Code. Specifically, section 210(a)(7)(B) of Dodd-Frank \158\
                provides with respect to claims against the covered financial agency in
                resolution, that ``a creditor shall, in no event, receive less than the
                amount that the creditor is entitled to under paragraphs (2) and (3) of
                subsection (d), as applicable.'' Tracing to the cross-referenced
                subsection, section 210(d)(2) \159\ provides that the maximum liability
                of the FDIC to a claimant is the amount that the claimant would have
                received if the FDIC had not been appointed receiver, and (instead),
                the covered financial company had been liquidated under chapter 7 of
                the Bankruptcy Code.\160\ Thus, it is important to have a clear
                ``counterfactual'' that establishes what creditors would be entitled to
                in the case of the liquidation of a clearing
                [[Page 19366]]
                organization under chapter 7 (subchapter IV) of the Bankruptcy Code.
                ---------------------------------------------------------------------------
                 \158\ 12 U.S.C. 5390(a)(7)(B).
                 \159\ 12 U.S.C. 5390(d)(2).
                 \160\ For the sake of completeness, it should be noted that
                section 210(d)(2), 12 U.S.C. 5390(d)(2), provides, as an additional
                comparator, ``any similar provision of State insolvency law
                applicable to the covered financial company.'' Given Federal
                regulation of DCOs, it would appear that this phrase is
                inapplicable. Similarly, section 210(d)(3), 12 U.S.C. 5390(d)(3),
                which refers to covered financial companies that are brokers or
                dealers resolved by SIPC, is also inapplicable here, given the
                inconsistency in being both a DCO and a broker-dealer.
                ---------------------------------------------------------------------------
                 Although the Commission believes that the potential--albeit
                unprecedented--scenario of a clearing organization as debtor would
                require significant flexibility, the Commission also believes it
                necessary and appropriate to establish an ex ante set of regulations
                for such a scenario.
                 The Commission requested comment regarding the proposed scope of
                subpart C, as set forth in proposed Sec. 190.11. The Commission also
                specifically asked commenters whether they supported or opposed the
                establishment of an explicit, bespoke set of regulations for the
                bankruptcy of a clearing organization.
                 The Commission received two comments that raised concerns about how
                the proposed subpart C regulations would apply in the case of a debtor
                clearing organization that is organized and/or domiciled in a foreign
                country. SIFMA AMG/MFA commented that ``Part 190 should include a clear
                statement of public policy . . . that if an insolvency proceeding is
                commenced in respect of a DCO located outside the United States, such
                home country proceeding should take precedence over any case under the
                [U.S.] Bankruptcy Code.''
                 ICE commented that such a clearing organization, if insolvent, ``is
                likely to be subject to an insolvency proceeding in its home
                jurisdiction.'' ICE also commented that many such DCOs ``have
                significant assets (including for this purpose, the assets of clearing
                members and their customers.'' In particular, ICE stated that ``a
                foreign DCO may have, in addition to the customer account classes
                contemplated by the CEA and CFTC regulations (and the Part 190
                regulations), one or more classes of customer accounts that are
                required to be segregated or separately accounted for under applicable
                foreign law, generally for the protection of foreign clearing members
                and their customers.'' ICE further commented that, ``[t]o the extent
                the Part 190 rules mandate a distribution scheme for property of the
                [DCO in bankruptcy] that would be inconsistent with foreign law
                applicable to the DCO, and that could disadvantage foreign members or
                their customers, significant conflicts may arise . . . .'' ICE
                suggested two alternative approaches for the Commission to consider:
                (1) The ``Commission could provide that the new Part 190 regulations
                would not apply to a foreign DCO;'' or (2) ``[a]lternatively, the
                Commission could provide that the new Part 190 regulations, including
                the distributional regime, would apply only to the separate customer
                account class structure provided for under U.S. law (futures, cleared
                swaps and foreign futures), to the extent carried through FCM clearing
                members.''
                 After considering the comments, the Commission is adopting Sec.
                190.11 with modifications. With respect to the protection of customer
                property in connection with foreign DCOs, the Commission has
                traditionally focused its efforts on the protection of the public
                customers of FCM members of such foreign DCOs. While protecting public
                customers of FCM members of foreign DCOs would not be well served by
                disapplying part 190 in the case of foreign DCOs, as suggested in ICE's
                first approach, as well as in the comment by SIFMA AMG/MFA, balancing
                the goal of protecting public customers of FCM members with the goal of
                mitigating conflict with foreign proceedings would appear to be
                supported by following ICE's second approach, and limiting the
                applicability of part 190, in the case of a foreign DCO subject to a
                proceeding in its home jurisdiction, to focus on the contracts and
                property of public customers of FCM members.
                 In order to balance the goal of protecting public customers of FCM
                members with the goal of mitigating conflict with foreign proceedings,
                the Commission believes it to be appropriate that, in a situation where
                a debtor clearing organization is organized outside the United States
                and is subject to a foreign bankruptcy proceeding, part 190 should
                apply as follows. First, the Commission believes it to be appropriate
                that subpart A should apply to such proceedings, given that those
                provisions set forth core concepts, definitions and general provisions.
                Second, the Commission believes it to be appropriate that Sec. 190.12
                should apply to such proceedings, given that the regulation sets forth
                requirements for records and reporting, which are critical in such
                proceedings. And third, the Commission believes it to be appropriate
                that three regulations should be applicable in a limited fashion, to
                focus on the contracts and property of public customers of FCM members:
                \161\ (1) Sec. 190.13, setting forth the prohibition on avoidance of
                transfers, but only with respect to futures and cleared swaps contracts
                cleared by FCM clearing members on behalf of their public customers;
                (2) Sec. 190.17, setting forth the calculation of net equity; and (3)
                Sec. 190.18, setting forth the treatment of property. In such a
                scenario, Sec. Sec. 190.13, 190.17, and 190.18 would only apply with
                respect to: (1) Claims of FCM clearing members on behalf of their
                public customers; and (2) property that is or should have been
                segregated for the benefit of FCM clearing members' public customers,
                or that has been recovered for the benefit of FCM clearing members'
                public customers.
                ---------------------------------------------------------------------------
                 \161\ As noted above, the Commission has traditionally focused
                its efforts on the protection of the public customers of FCM members
                of such foreign DCOs. In a DCO bankruptcy, the Commission believes
                that the application of these three regulations would be critical to
                fulfilling the agency's mission to protect customers.
                ---------------------------------------------------------------------------
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is: (1) Adopting the language of
                Sec. 190.11 as proposed, but designated as new paragraph (a); and (2)
                modifying proposed Sec. 190.11 by adding the following as new
                paragraph (b): If the debtor clearing organization is organized outside
                the United States, and is subject to a foreign proceeding, as defined
                in 11 U.S.C. 101(23), in the jurisdiction in which it is organized,
                then only the following provisions of part 190 shall apply: (1) Subpart
                A; (2) Sec. 190.12; (3) Sec. 190.13, but only with respect to futures
                contracts and cleared swaps contracts cleared by FCM clearing members
                on behalf of their public customers and the property margining or
                securing such contracts; and (4) Sec. Sec. 190.17 and 190.18, but only
                with respect to claims of FCM clearing members on behalf of their
                public customers, as well as property that is or should have been
                segregated for the benefit of FCM clearing members' public customers,
                or that has been recovered for the benefit of FCM clearing members'
                public customers.''
                2. Regulation Sec. 190.12: Required Reports and Records
                 The Commission is adopting Sec. 190.12 to establish the
                recordkeeping and reporting obligations of a debtor clearing
                organization and/or trustee in a bankruptcy proceeding under subpart C.
                 The operations of a clearing organization are extremely time-
                sensitive. For example, Sec. 39.14 requires that a clearing
                organization complete settlement with each clearing member at least
                once every business day. It is thus critical that the Commission
                receive notice of a DCO bankruptcy in an extraordinarily rapid manner.
                Similarly, the trustee that is appointed (as well as the Commission)
                must receive critical documents rapidly, and proper notice should be
                provided to the DCO's members.
                 Regulation Sec. 190.12 sets forth the timing and content of
                notices that must be provided to the Commission and the DCO's members,
                as well as the timing and content of reports and records that
                [[Page 19367]]
                must be provided to the Commission and trustee.
                 Section 190.12(a)(1) is analogous to Sec. 190.03(a), as amended
                herein, in that it would provide instructions regarding how to give
                notice to the Commission and to a clearing organization's members,
                where such notice would be required under subpart C of part 190.\162\
                Section 190.12(a)(2) would require the clearing organization to notify
                the Commission either in advance of, or at the time of, filing a
                petition in bankruptcy (or within three hours of receiving notice of a
                filing of an involuntary petition against it).\163\ Notice would need
                to include the filing date and the court in which the proceeding has
                been or will be filed. While the clearing organization would also need
                to provide notice of the docket number, if the docket number is not
                immediately assigned, that information would be provided separately as
                soon as available.
                ---------------------------------------------------------------------------
                 \162\ While Sec. 190.03(a)(2), as amended herein, applies to
                notice to an FCM's customers, and Sec. 190.12(a)(1)(ii) applies to
                notice to a clearing organization's members, the means of giving
                notice are identical. For a discussion of how these notice
                provisions differ from the prior iteration of part 190, please refer
                to the discussion of Sec. 190.03(a) above.
                 \163\ Commodity broker bankruptcies are rare, and outside the
                experience of most chapter 7 trustees, who are chosen from a panel
                of private trustees eligible to serve as such for all chapter 7
                cases. See generally 11 U.S.C. 701(a)(1), 28 U.S.C. 586(a)(1).
                Historically, Commission staff, on being notified of an impending
                commodity broker bankruptcy, have worked with the office of the
                relevant regional United States Trustee, see generally 28 U.S.C. 581
                et seq., to identify, and have then briefed, the chapter 7 trustee
                that would then be appointed. This would be even more important in
                the context of a clearing organization bankruptcy.
                ---------------------------------------------------------------------------
                 It is also important to permit the trustee to begin to understand
                the business of the clearing organization as soon as practicable, and
                within hours. Accordingly, Sec. 190.12(b)(1) requires the clearing
                organization to provide to the trustee copies of each of the most
                recent reports filed with the Commission under Sec. 39.19(c), which
                includes Sec. 39.19(c)(1) (daily reports, including initial margin
                required and on deposit by clearing member, daily variation and end-of-
                day positions (by member, by house and customer origin), and other
                daily cash flows), Sec. 39.19(c)(2) (quarterly reports, including of
                financial resources), Sec. 39.19(c)(3) (annual reporting, including
                audited financial statements and a report of the chief compliance
                officer), Sec. 39.14(c)(4) (event-specific reporting, which would
                include the most up-to-date version of any recovery and wind-down plans
                the debtor maintained pursuant to Sec. 39.39(b),\164\ and which may
                well include events that contributed to the clearing organization's
                bankruptcy), and Sec. 39.19(c)(5) (reporting specially requested by
                the Commission or, by delegated authority, staff). In order to provide
                the trustee with an initial overview of the business and status of the
                clearing organization, with respect to quarterly, annual, or event-
                specific reports, the clearing organization would be required to
                provide any such reports filed during the preceding 12 months. These
                reports would need to be provided to the trustee as soon as
                practicable, but in any event no later than three hours following the
                later of the commencement of the proceeding or the appointment of the
                trustee. It is the Commission's expectation that in the event of an
                impending bankruptcy event, staff at the DCO would, as soon as
                practicable, be preparing these materials for transmission to the
                trustee.
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                 \164\ See Sec. 39.19(c)(4)(xxiv).
                ---------------------------------------------------------------------------
                 Similarly, Sec. 190.12(b)(2) requires the debtor clearing
                organization, in the same time-frame, to provide the trustee and the
                Commission with copies of the default management plan and default rules
                and procedures maintained by the debtor pursuant to Sec. 39.16 and, as
                applicable, Sec. 39.35. While some of this information may have
                previously been filed with the Commission pursuant to Sec. 39.19, it
                is important that the Commission have readily available what the
                clearing organization believes are the most up-to-date versions of
                these documents. Moreover, given that these documents must be provided
                to the trustee, providing copies to the Commission should impose
                minimal additional burden (particularly if the documents are provided
                in electronic form).
                 Regulation Sec. 39.20(a) requires a DCO to maintain records of all
                activities related to its business as such, and sets forth a non-
                exclusive list of the records that are included in that term. To enable
                the trustee and the Commission further to understand the business of
                the clearing organization, Sec. 190.12(c) requires the debtor clearing
                organization to make copies of such records available to the trustee
                and to the Commission no later than the business day after the
                commencement of the proceeding. In order to inform the trustee and the
                Commission better concerning the enforceability in bankruptcy of the
                clearing organization's rules and procedures, the clearing organization
                is similarly required to make available any opinions of counsel or
                other legal memoranda provided to the debtor, by inside or outside
                counsel, in the five years preceding the commencement of the
                proceeding, relating to the enforceability of those arrangements in the
                event of an insolvency proceeding involving the debtor.\165\
                ---------------------------------------------------------------------------
                 \165\ The trustee of a corporation in bankruptcy controls the
                corporation's attorney-client privilege for pre-bankruptcy
                communications. Commodity Futures Trading Comm'n v. Weintraub, 471
                U.S. 343 (1985). Production to the Commission pursuant to the
                proposed regulation would not waive that privilege (although
                voluntary production would). See, e.g., U.S. v. de la Jara, 973 F.2d
                746, 749 (9th Cir. 1992) (``a party does not waive the attorney-
                client privilege for documents which he is compelled to produce'')
                (emphasis in original); Office of Comptroller of the Currency
                Interpretative Letter, 1991 WL 338409 (with respect to ``internal
                Bank documents'' that are ``subject to the attorney-client
                privilege'' and are ``requested by OCC examiners for their use
                during examinations of the Bank,'' OCC ``has the power to request
                and receive materials from national banks in carrying out its
                supervisory duties. It follows that national banks must comply with
                such requests. That being the case, it is our position that when
                national banks furnish documents to us at our request they are not
                acting voluntarily and do not waive any attorney-client privilege
                that may attach to such documents.'').
                ---------------------------------------------------------------------------
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.12. The Commission raised specific questions as to
                whether the reports and records identified in proposed Sec. 190.12 to
                be provided to the Commission are useful and appropriate, and whether
                additional reports and records should be included. The Commission also
                asked if the proposed time deadlines are appropriate.
                 The Commission received two comments on proposed Sec. 190.12.
                 CME expressed support for proposed Sec. 190.12, and agreed with
                the Commission that ``the reports and records identified in [the
                proposed regulation] would be useful for the trustee and the
                Commission.'' CME also agreed with the Commission that certain items,
                such as the DCO's default rules and recovery and wind-down plans,
                should be furnished as soon as possible.
                 OCC ``generally support[ed] a requirement for a DCO to provide a
                trustee and the Commission with information they need for efficient
                resolution of the DCO,'' recognizing that ``time would be of the
                essence in such a proceeding.'' OCC also noted that, because the
                ``information is periodically reported to, or filed with, the
                Commission,'' OCC did not ``foresee any challenge in identifying and
                providing this information without delay.'' However, OCC requested that
                proposed Sec. 190.12(b) be amended to require a DCO to provide the
                information delineated therein ``as soon as practicable.'' OCC
                ``believe[d] that a specific deadline of three hours is overly
                prescriptive.''
                 After considering the comments, the Commission is adopting Sec.
                190.12 as proposed. As the commenters observed, the information
                specified in Sec. 190.12 is
                [[Page 19368]]
                important for the trustee and the Commission, and time would be of the
                essence in a DCO bankruptcy. Moreover, the prescribed task in Sec.
                190.12 is to gather and transmit documents that already exist, rather
                than to generate new information. The documents to be sent to the
                trustee are documents that were recently sent to the Commission, and
                the documents to be sent to the trustee and to the Commission are
                documents that one would expect, as the commenter noted, to be readily
                accessible. In this context, the Commission believes that a deadline of
                ``as soon as practicable and in any event no later than three hours
                following the commencement of the proceeding'' (or, where appropriate,
                the appointment of the trustee) is reasonable and will set clear
                expectations for relevant parties that will facilitate DCOs'
                contingency planning.
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is adopting Sec. 190.12 as
                proposed.
                3. Regulation Sec. 190.13: Prohibition on Avoidance of Transfers
                 The Commission is adopting Sec. 190.13 as proposed, to implement
                section 764(b) of the U.S. Bankruptcy Code, protecting certain
                transfers from avoidance (sometimes referred to as ``claw-back'') with
                respect to a debtor clearing organization. Regulation Sec. 190.13 is
                analogous to new Sec. 190.07(e) (and current Sec. 190.06(g)), with
                certain changes. Specifically, while Sec. 190.07(e) allows FCM
                transfers unless they are explicitly disapproved by the Commission,
                Sec. 190.13 requires explicit Commission approval for DCO transfers.
                The difference in approach is rooted in the inherent difference between
                FCM transfers and DCO transfers: Whereas an FCM is capable of
                transferring only a portion of its customer positions, a DCO would be
                expected to transfer all of its customer positions (or at least all
                positions in a given product set) simultaneously in order to maintain a
                balanced book. Given the importance of transferring all open commodity
                contracts--and the property margining such contracts--in the event of a
                DCO bankruptcy, the Commission believes that any such transfer should
                require explicit Commission approval, either before or after such
                transfer.
                 Thus, whereas Sec. 190.07(e)(1) provides that a pre-relief
                transfer by a clearing organization cannot be avoided as long as it is
                not disapproved by the Commission, Sec. 190.13(a) instead provides
                that a pre-relief transfer of open commodity contracts and the property
                margining or securing such contracts cannot be avoided as long as it
                was approved by the Commission, either before or after such transfer.
                Similarly, whereas Sec. 190.07(e)(2)(i) provides (for all commodity
                brokers, including clearing organizations) that a post-relief transfer
                of a customer account cannot be avoided as long as it is not
                disapproved by the Commission, Sec. 190.13(b) instead provides that a
                post-relief transfer of open commodity contracts and the property
                margining or securing such contracts made to another clearing
                organization cannot be avoided as long as it was approved by the
                Commission, either before or after such transfer.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.13, and in particular, the Commission asked whether
                commenters agreed with the proposed approach of requiring explicit
                Commission approval of transfers by debtor DCOs.
                 The Commission received one comment on proposed Sec. 190.13. CME
                expressed support for proposed Sec. 190.13, particularly the allowance
                for Commission approval of transfers after such transfers have
                occurred. CME noted that porting customer positions to a DCO would be
                the preferred course of action in a bankruptcy, and a DCO may need to
                act quickly.
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.13 as
                proposed.
                4. Regulation Sec. 190.14: Operation of the Estate of the Debtor
                Subsequent to the Filing Date
                 The Commission is adopting Sec. 190.14 as proposed, with certain
                modifications discussed below.
                 Section 190.14(a) provides discretion to the trustee to design the
                proof of claim form and to specify the information that is required.
                The Commission believes that broad discretion is appropriate in this
                context, given the bespoke nature of a clearing organization
                bankruptcy.
                 Section 190.14(b) addresses the operation of a debtor clearing
                organization in bankruptcy and provides that, after the order for
                relief, the DCO shall cease making calls for either variation or
                initial margin.
                 As originally proposed, Sec. 190.14(b) included additional
                provisions that were intended to provide a brief opportunity, after the
                order for relief, to enable paths alternative to liquidation--that is,
                resolution under Title II of the Dodd-Frank Act, or transfer of
                clearing operations to another DCO--in cases where a short delay (i.e.,
                less than or equal to six days) might facilitate such an alternative
                path. Subsequent to the issuance of the Proposal, the Commission
                received several comments on proposed Sec. 190.14(b), and based on its
                consideration of those comments, the Commission determined it to be
                appropriate to issue the Supplemental Proposal. The Supplemental
                Proposal modified proposed Sec. 190.14(b) in several respects,
                including the withdrawal of proposed Sec. 190.14(b)(2) and (3) and the
                new proposal of an alternative approach.\166\ Further discussion of the
                Supplemental Proposal, including the Commission's consideration of
                comments received in response to the Supplemental Proposal, is set
                forth in section II.H below.
                ---------------------------------------------------------------------------
                 \166\ In withdrawing proposed Sec. 190.14(b)(2) and (3), the
                Commission determined, after considering the comments, that those
                provisions would not be a practicable and effective way to foster
                the transfer of clearing operations--to the extent that such an
                opportunity presents itself--at an acceptable cost. The Commission
                also endeavored to propose (in the Supplemental Proposal) a more
                cost-effective alternative to foster the resolution of a DCO--in
                particular, a systemically important DCO--under Title II of the
                Dodd-Frank Act. Specifically, as set forth in the Supplemental
                Proposal, the Commission proposed ``a limited revision to the
                Proposal that would (1) stay the termination of SIDCO contracts for
                a brief time after bankruptcy in order to foster the success of a
                Title II Resolution, if the FDIC is appointed receiver in such a
                Resolution within that time, but (2) do so in a manner that does not
                undermine the QMNA status of SIDCO rules.''
                 The Commission sought comment on the Supplemental Proposal, and
                in particular, whether the new approach could reasonably be expected
                to achieve the Commission's stated goals, would be feasible, would
                be the best design for such a solution, and appropriately reflected
                consideration of benefits and costs.
                ---------------------------------------------------------------------------
                 Section 190.14(c)(1) requires the trustee to liquidate, no later
                than seven calendar days after the order for relief, all open commodity
                contracts that had not earlier been terminated, liquidated or
                transferred. However, in the Proposal, paragraph (c)(1) also provided
                that such liquidation would not be required if the Commission (whether
                at the request of the trustee or sua sponte) determined that such
                liquidation would be inconsistent with the avoidance of systemic risk
                \167\ or, in the expert judgment of the Commission, would not be in the
                best interests of the debtor clearing organization's estate.\168\ In
                such a situation, the trustee would be directed to carry out such
                liquidation in accordance with the rules and procedures of the debtor
                clearing
                [[Page 19369]]
                organization, to the extent applicable and practicable.\169\
                ---------------------------------------------------------------------------
                 \167\ See section 3(b) of the CEA, 7 U.S.C. 5(b) (``It is the
                purpose of [the CEA] . . . to ensure . . . the avoidance of systemic
                risk . . . .'').
                 \168\ See section 20(a)(3) of the CEA, 7 U.S.C. 24(a)(3)
                (``Notwithstanding title 11 . . . , the Commission may provide, with
                respect to a commodity broker that is a debtor . . . [,] 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 . . . .'').
                 \169\ As discussed below, Sec. 190.14(c)(1) is being modified
                to remove language that commenters stated would raise uncertainties
                concerning the enforceability of close-out netting provisions in a
                DCO bankruptcy.
                ---------------------------------------------------------------------------
                 Section 190.14(c)(2) permits the trustee to make distributions to
                members in the form of securities that are equivalent (i.e., securities
                of the same class and series of an issuer) to those that were
                originally delivered to the debtor by the clearing member or such
                member's customer, rather than liquidating securities and making
                distributions in the form of cash. Section 190.14(c)(2) is analogous to
                Sec. 190.09(d)(3), discussed above in section II.B.7.
                 Section 190.14(d) requires the trustee to use reasonable efforts to
                compute the funded balance of each customer account immediately prior
                to the distribution of any property in the account, ``which shall be as
                accurate as reasonably practicable under the circumstances, including
                the reliability and availability of information.'' Section 190.14(d) is
                analogous to Sec. 190.05(b), discussed above in section II.B.3, but is
                modified for the context of a DCO bankruptcy. Similar to Sec.
                190.05(b), the Commission's objective in Sec. 190.14(d) is to provide
                the bankruptcy trustee with the latitude to act reasonably, given the
                circumstances they are confronted with, recognizing that information
                may be more reliable and/or accurate in some insolvency situations than
                in others. However, at a minimum, the trustee is required to calculate
                each customer's funded balance prior to distributing property, to
                achieve an appropriate allocation of property between customers.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.14. The Commission also raised specific questions
                regarding Sec. 190.14(b)(2).\170\ The comments received in response to
                those specific questions on Sec. 190.14(b)(2) have already been
                considered by the Commission in the Supplemental Proposal, wherein the
                Commission ultimately withdrew Sec. 190.14(b)(2) and (3). Although
                such comments on the Proposal relate to proposed paragraphs that were
                withdrawn in the Supplemental Proposal, the comments relating to
                proposed Sec. 190.14(b)(2) and (3) nonetheless are noted below.\171\
                ---------------------------------------------------------------------------
                 \170\ In particular, the Commission asked about the framing of
                the concepts of usefulness and practicability in the context of
                permitting the trustee to continue to operate a DCO in insolvency,
                in accordance with proposed Sec. 190.14(b)(2), in order to
                facilitate the transfer of clearing operations to another DCO or
                placing the debtor DCO into resolution pursuant to Title II of the
                Dodd-Frank Act. The Commission also asked whether there is a better
                way to frame either of those terms, and whether it is appropriate to
                provide for the possibility that the trustee may be permitted to
                delay liquidating contracts.
                 \171\ For further discussion of the Supplemental Proposal and
                the Commission's consideration of comments received thereto, see
                section II.H below.
                ---------------------------------------------------------------------------
                 The Commission received some comments that related to Sec. 190.14
                generally. ICI commented in favor of the requirement proposed in Sec.
                190.14 that ``any decision to continue operating a DCO in liquidation
                must be made with [the Commission's] input and consent.'' ICI asserted,
                however, that the Commission should only approve an application from a
                trustee to continue operating a DCO in liquidation if the Commission
                determines that the trustee ``has the knowledge and experience to
                manage such operations.'' Noting that the continued operation of a DCO
                has the potential to result in significant continued losses for
                customers and exacerbate stress, ICI further asserted that, ``[i]n
                considering whether to grant a request to allow a failed DCO to
                continue operating, the Commission should consider the potential harm
                to customers and should request input from both DCO members and
                customers.'' OCC commented that additional considerations should be
                considered in determining ``whether continued operation of a DCO in
                bankruptcy would be practical.'' Specifically, OCC stated that ``a DCO
                may . . . maintain contractual arrangements with various counterparties
                . . . that are necessary for the DCO's continued operation,'' such as
                contract markets and other trade sources, other DCOs, banking and
                liquidity providers, and information technology vendors). OCC asserted
                that ``a trustee would need to review the DCO's recovery and wind-down
                plan[s] and/or consult with a DCO to determine whether such
                arrangements necessary for the DCO's continued operation would--or
                could--be terminated [by the counterparties] upon the DCO's entry into
                bankruptcy and, if so, determine whether the counterparties . . . would
                continue to provide those necessary services for a period of time.''
                 The Commission also received comments on Sec. 190.14(a). CME
                commented in support of paragraph (a). ICE commented that Sec.
                190.14(a) did not clearly account for ``non-CFTC-regulated clearing or
                other activity occurring at a DCO, including security-based swaps and
                other securities, cleared forward contracts or spot contracts to the
                extent such instruments are not carried in a CFTC regulated futures or
                swap account.'' ICE recommended that while ``such activity may be
                outside the scope of the Part 190 regulations, claims of members with
                respect to such activity, whether for their proprietary or customer
                accounts, need to be properly accounted for in a DCO's bankruptcy and
                should not be disadvantaged.''
                 Several commenters expressed concern that proposed Sec. 190.14(b)
                would inadvertently create legal uncertainty with respect to the
                enforceability of a DCO's close-out netting rules and related issues,
                and requested that the Commission address these concerns in varying
                ways.
                 ICE did not object to proposed Sec. 190.14(b), but believed that
                the Commission ``should clarify that the rule does not interfere with
                either the automatic termination of contracts upon insolvency or
                clearing member rights to terminate contracts upon insolvency.'' Noting
                ``that clearing member capital and accounting often take into account
                the ability of a clearing member to terminate, or the automatic
                termination of, its cleared positions in the event of a clearinghouse
                insolvency,'' ICE asserted that it would be important that the final
                rules ``not upset settled expectations of clearing members'' in this
                regard. ICE further noted that ``automatic termination is common,'' and
                thus, continuing the operations of a clearinghouse after insolvency
                would likely be infeasible, in practice.
                 CME requested that the Commission add a provision to Sec. 190.14
                stating that: ``if the Commission permits the trustee to continue to
                operate the DCO, that the action is not in derogation of, and clearing
                members fully retain and may exercise, their right under the DCO's
                rules and procedures with respect to close-out netting.'' CME stated
                that ``[s]ome have expressed concern that proposed Regulation 190.14
                creates uncertainty around the enforceability of close-out netting
                rules if the trustee is allowed to continue the DCO's operations under
                the conditions as drafted.'' CME asserted that it would be ``critical
                that any decision to continue to operate the DCO not be contrary to the
                DCO's rules or be construed in any way to abrogate clearing members'
                close-out netting rights under the rules.'' CME noted that the
                enforceability of close-out rights is of ``paramount importance'' to
                clearing members as part of their contract with the DCO, and that CME
                and other DCOs have obtained detailed legal analyses on the
                enforceability of their close-out netting rules and other features of
                their default rules to assure clearing members of their rights. CME
                commented that it did not believe that
                [[Page 19370]]
                proposed Sec. 190.14 would create an issue with respect to its own
                close-out netting rules or netting opinions, because its own rules
                ``would compel termination of open contracts upon a CME bankruptcy
                event and, thus the conditions of Regulation 190.14(b) would not be
                satisfied and the trustee could not continue CME's DCO operations.''
                Nonetheless, CME speculated that other DCOs ``could potentially have
                rules that permit a clearing member to terminate open positions at
                their discretion without compelling termination.''
                 ISDA supported the provision in proposed Sec. 190.14(b) that would
                ``prevent the trustee from continuing operation of the DCO subsequent
                to the order for relief if the DCO's rules contain closeout netting
                provisions.'' However, ISDA also recommended that the Commission modify
                proposed Sec. 190.14(c)(1) to delete the second sentence and amend the
                first sentence to affirmatively provide that: ``notwithstanding
                anything else to the contrary in Subpart C, the trustee shall liquidate
                all open contracts in accordance with the close-out needing provisions
                in the DCO's rules (or bylaws) and, in any event, no later than seven
                calendar days after the entry of the order for relief.'' ISDA commented
                that it is ``critical'' that ``all aspects of [the] Part 190
                regulations . . . support, and in no event be inconsistent with, . . .
                exposure netting.'' ISDA noted that ``[e]nforceable close-out netting
                rights provide the legal basis for netting of exposures between
                derivative counterparties, which reduces costs, increases market
                liquidity and reduces credit and systemic risks.'' ISDA stated that a
                ``firm's right to terminate outstanding transactions with a
                counterparty following an event of default and calculate the net amount
                due to one party by another is the primary means of mitigating credit
                risks associated with financial contracts.'' ISDA further argued that,
                [w]ithout enforceable close-out netting rights, firms would need to
                manage their credit risk on a gross basis, dramatically reducing
                liquidity and credit capacity.''
                 OCC commented that ``the Commission should continue to consult with
                DCOs and market participants who rely on closeout netting opinions to
                ensure that the proposed rules[, including proposed Sec.
                190.14(b)(2),] do not raise uncertainty related to the enforceability
                of DCOs' closeout netting rules or have other unintended
                consequences.''
                 FIA commented that proposed Sec. 190.14(b)(2) and proposed Sec.
                190.14(c) are ``fundamentally flawed and should not be adopted.'' FIA
                raised concerns that those provisions may inadvertently create ``an
                unacceptable level of legal uncertainty related to the enforcement of
                closeout netting provisions'' set out in DCO rulebooks, which all but
                four DCOs maintain. FIA asserted that, if proposed Sec.
                190.14(b)(2)(ii)(A) ``could be read to provide the trustee some level
                of discretion to determine whether or when DCO rules may `compel' the
                termination of contracts, such discretion, in turn, may call into
                question whether the DCO's rules constitute a `qualifying master
                netting agreement' as described in the rules of the several bank
                regulatory authorities.'' FIA also commented that the ``continued
                operation of a DCO after an order for relief would be ill-advised'' and
                impracticable. FIA stated that a trustee with no familiarity or
                understanding of central clearing would be highly unlikely to be able
                to manage effectively the operation of a bankrupt DCO. In the case of
                SIDCOs, FIA noted that ``the prospect of a bankruptcy trustee operating
                the DCO for even a brief interim period prior to commencement of Title
                II [resolution] proceedings could result in a loss of market confidence
                and a destabilizing rush to exit by clearing members and their clients,
                [thereby] potentially frustrat[ing] the successful resolution of the
                DCO.'' In the case of other DCOs, FIA commented that ``the post-filing
                transfer of . . . clearing operations to another DCO would be difficult
                at best,'' and ``clearing members and their clients should not be
                expected to take the execution risk of being forced to continue
                clearing through a bankrupt DCO when successful completion of a
                transfer to a new DCO in bankruptcy is not certain.'' FIA also stated
                its belief that ``non-defaulting clearing members or their clients
                would be [unwilling] to continue to pay margin to the estate of a
                bankrupt DCO.''
                 The ABA Subcommittee requested that the Commission revise proposed
                Sec. 190.14(b) ``to clarify that the DCO's close-out netting rules
                remain in effect and are enforceable as written, notwithstanding any
                decision under [proposed Sec. ] 190.14(b) by the Commission to allow
                the trustee to continue making calls for variation settlement and
                margin.'' The ABA Subcommittee raised a concern that proposed Sec.
                190.14(b) ``may create unintended ambiguity'' regarding the
                enforceability of such rules.
                 After considering the comments, the Commission is adopting Sec.
                190.14(a) as proposed. The Commission notes that Sec. 190.14(a)
                provides that the trustee shall ``instruct each customer [a term that,
                in the context of a debtor DCO, includes members] to file a proof of
                claim containing such information as is deemed appropriate by the
                trustee.'' To the extent that the DCO is conducting non-CFTC-regulated
                activity that is outside the scope of the part 190 regulations, the
                proof of claim form should include an opportunity to claim for debts of
                the DCO related to activity that is not regulated by the CFTC. These
                would be payable from the general estate (outside of customer property)
                or, if secured, from the property securing the debts. Thus, such
                activity will be properly accounted for in the DCO bankruptcy, and
                members will not be disadvantaged. For those reasons, the Commission
                does not believe that Sec. 190.14(a) should be modified in the manner
                recommended by ICE.
                 The Commission is adopting Sec. 190.14(b)(1) as proposed, with two
                modifications that reflect the Commission's previous withdrawal of
                paragraphs (b)(2) and (3) in the Supplemental Proposal: (1) Proposed
                paragraph (b)(1) is re-designated as paragraph (b); and (2) new
                paragraph (b) is modified to remove the phrase: ``except as otherwise
                explicitly provided in this paragraph (b).'' \172\
                ---------------------------------------------------------------------------
                 \172\ See 85 FR at 60112 n.12 (``The Commission will make
                appropriate edits to the language in proposed Sec. 190.14(b)(1) as
                part of the process of finalizing the [p]art 190 rule proposal.'').
                ---------------------------------------------------------------------------
                 Several commenters expressed concern that proposed Sec. 190.14(b)
                inadvertently creates legal uncertainty with respect to the
                enforceability of a DCO's close-out netting rules and requested that
                the Commission address this concern in varying ways.\173\ The
                Commission considered those comments in advance of issuing the
                Supplemental Proposal, and determined that Sec. 190.14(b)(2) and (3)
                would not be a practicable and effective way to foster the transfer of
                clearing operations--to the extent that such an opportunity presents
                itself--at an acceptable cost. Consequently, the Commission withdrew
                Sec. 190.14(b)(2) and (3) in the Supplemental Proposal and instead
                proposed an alternative approach. The Supplemental Proposal, including
                the Commission's consideration of comments thereto, is discussed below
                in section II.H of this adopting release.
                ---------------------------------------------------------------------------
                 \173\ See comment letters from ICE, CME.
                ---------------------------------------------------------------------------
                 Commenters' concerns regarding the legal uncertainty of close-out
                netting rules in the context of Sec. 190.14(b) also apply to Sec.
                190.14(c), as proposed, specifically the language that states that the
                trustee shall liquidate all open positions no later than seven calendar
                days after the order for relief ``unless the
                [[Page 19371]]
                Commission determines that liquidation would be inconsistent with the
                avoidance of systemic risk or would not be in the best interests of the
                debtor's estate'' (the ``Unless Clause''). Some commenters--including
                FIA and ISDA--explicitly raised this issue in the context of Sec.
                190.14(c), to the extent that the proposed language would afford the
                trustee with some level of discretion to determine whether or when a
                DCO rule may ``compel'' the termination of contracts. Although the
                Commission believes that commenters' concerns were largely addressed in
                the Supplemental Proposal through the withdrawal of Sec. 190.14(b)(2)
                and (3), the Commission agrees that the Unless Clause raises similar
                concerns, in that it suggests that the Commission may decide that a
                DCO's contracts should not be terminated in bankruptcy, and accordingly
                that paragraph (c)(1) should be modified by removing the Unless Clause.
                Thus, after considering the comments, the Commission is adopting Sec.
                190.14(c) as proposed, with a modification to paragraph (c)(1) by
                deleting the phrase: ``unless the Commission determines that
                liquidation would be inconsistent with the avoidance of systemic risk
                or would not be in the best interests of the debtor's estate.'' This
                modification--when taken in conjunction with the Commission's prior
                withdrawal of Sec. 190.14(b)(2) and (3)--should remove any lingering
                uncertainties in Sec. 190.14 concerning the enforceability of close-
                out netting provisions in a DCO bankruptcy.
                 The Commission received no specific comments on the proposed
                language of Sec. 190.14(d) and, thus, is adopting that paragraph as
                proposed.
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.14 as
                proposed, with the deletion of paragraphs (b)(2) and (3) and
                modifications to paragraphs (b)(1) and (c)(1), as set forth above.\174\
                ---------------------------------------------------------------------------
                 \174\ The modifications to paragraph (b)(1) include both the
                addition of the language described above and the re-designation of
                proposed paragraph (b)(1) as new paragraph (b), in light of the
                withdrawal of proposed paragraphs (b)(2) and (3) in the Supplemental
                Proposal.
                 For further discussion of the Supplemental Proposal and the
                Commission's consideration of comments thereto, see section II.H
                below.
                ---------------------------------------------------------------------------
                5. Regulation Sec. 190.15: Recovery and Wind-Down Plans; Default Rules
                and Procedures
                 The Commission is adopting Sec. 190.15 substantially as proposed
                (with a modification, as discussed below), to favor the implementation
                of a debtor clearing organization's default rules and procedures
                maintained pursuant to Sec. 39.16 and, as applicable, Sec. 39.35, and
                any recovery and wind-down plans maintained by the debtor and filed
                with the Commission, pursuant to Sec. Sec. 39.39 and 39.19,
                respectively. Section 39.16 requires each DCO to, among other things,
                ``adopt rules and procedures designed to allow for the efficient, fair,
                and safe management of events during which clearing members become
                insolvent or default on the obligations of such clearing members to
                the'' DCO. In adopting Sec. 39.35, the Commission explained that it
                ``was designed to protect SIDCOs, [s]ubpart C DCOs, their clearing
                members, customers of clearing members, and the financial system more
                broadly by requiring SIDCOs and [s]ubpart C DCOs to have plans and
                procedures to address credit losses and liquidity shortfalls beyond
                their prefunded resources.'' \175\ Similarly, in adopting Sec. 39.39,
                the Commission explained that it was ``designed to protect the members
                of such DCOs and their customers, as well as the financial system more
                broadly, from the consequences of a disorderly failure of such a DCO.''
                \176\
                ---------------------------------------------------------------------------
                 \175\ 78 FR 72476, 72492 (Dec. 2, 2013).
                 \176\ Id. at 72494.
                ---------------------------------------------------------------------------
                 Section 190.15(a) states that the trustee shall not avoid or
                prohibit any action taken by the debtor DCO that was reasonably within
                the scope of, and was provided for, in any recovery and wind-down plans
                maintained by the debtor and filed with the Commission, subject to
                section 766 of the Bankruptcy Code. The Commission's intent is to
                provide finality and legal certainty to actions taken by a DCO to
                implement its recovery and wind-down plans, which are developed subject
                to Commission regulations.
                 Section 190.15(b) instructs the trustee to implement, in
                consultation with the Commission, the debtor DCO's default rules and
                procedures maintained pursuant to Sec. 39.16, and, as applicable,
                Sec. 39.35, as well as any termination, close-out and liquidation
                provisions included in the rules of the debtor, subject to the
                trustee's reasonable discretion and to the extent that implementation
                of such default rules and procedures is practicable.
                 Similarly, Sec. 190.15(c), as proposed, instructs the trustee, in
                consultation with the Commission, to take actions in accordance with
                any recovery and wind-down plans maintained by the debtor and filed
                with the Commission, to the extent reasonable and practicable. The
                Commission's intent is to provide the trustee, who will need to take
                prompt action to manage the DCO (and any member default), with a
                roadmap to manage such action. The Commission further intends that the
                roadmap be based on the rules, procedures, and plans that the DCO has
                developed in advance, and that are subject to the requirements of the
                Commission's regulations.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.15. The Commission also raised specific questions as
                to whether it is appropriate to steer the trustee towards
                implementation of the debtor DCO's default rules and procedures and
                recovery and wind-down plans, and whether the proposed language
                concerning discretion, reasonability, and practicability is appropriate
                and sufficient.
                 The Commission received several comments on proposed Sec. 190.15.
                CME and ICE generally supported the proposal, although ICE raised
                concerns about the discretion afforded to the trustee. In contrast,
                Vanguard, FIA, ACLI, SIFMA AMG/MFA, and ICI expressed concerns with the
                proposed rule, in whole or in part.
                 ICE, while generally supporting the proposal, objected to the
                language in Sec. 190.15 that a ``trustee's obligation to [follow a
                DCO's default rules and recovery and wind-down plans] is `subject to
                the reasonable discretion' of the trustee or is limited `to the extent
                reasonable and practicable.' '' While ICE acknowledged ``the need for
                some degree of flexibility in the conduct of a bankruptcy proceeding,''
                it contended that ``the Commission should make clear that the trustee
                cannot override the DCO rules . . . [or] deviate from an approved
                recovery or wind-down plan.''
                 Vanguard requested that proposed Sec. 190.15(a) be removed,
                arguing that it would be ``imprudent to give deference'' to a DCO's
                rules because such rules ``do not set forth a comprehensive roadmap to
                dealing with DCO insolvency.'' Vanguard noted that ``DCO rulebooks set
                forth a variety of powers the DCO may employ'' (e.g., ``assessments,
                variation margin gains haircutting, and tear-ups''), and that such
                rules ``lack [the] necessary specificity and detail to provide
                certainty to FCMs and customers, or to the trustee,'' with respect to
                what would follow in DCO insolvency. Vanguard was concerned that such
                uncertainty may ``contribute to further market stresses during a
                critical time,'' and that expressly instructing the trustee to
                implement a DCO's default rules and procedures ``where practicable,''
                permits a DCO to ``override the fundamental customer protections
                intended by Part 190.''
                [[Page 19372]]
                 FIA did not support the adoption of proposed Sec. 190.15(b) and
                (c), commenting that the proposal's post-bankruptcy implementation of
                all DCO default rules and procedures and recovery and wind-down plans
                is ``inappropriate.'' FIA was concerned that the proposal's ``concept
                of `default rules and procedures' could encompass a number of different
                tools or actions, some of which would be inappropriate and risky for a
                bankruptcy trustee to attempt to execute.'' In addition, ``to the
                extent that the Commission would select some but not other default
                rules and procedures for a trustee to implement,'' uncertainty with
                respect to possible bankruptcy scenarios would increase. FIA stated
                that a DCO's default rules and procedures should not be used ``for any
                purpose other than to ensure enforcement of a DCO's closeout netting
                provisions,'' and that, ``[b]y their terms, the default rules and
                procedures . . . represent contractual arrangements between a DCO and
                its members whose purpose is to provide resources and tools to the DCO
                to prevent its bankruptcy.'' FIA argued that ``a fundamental term'' of
                these arrangements is that ``such resources and tools are only
                available prior to bankruptcy,'' and that instructing a trustee in
                bankruptcy to implement, with discretion, the DCO's default rules and
                procedures would ``undermine the long-standing and settled expectations
                of DCOs and their members.'' In the alternative, FIA recommended that
                the Commission revise proposed Sec. 190.15(b) ``to confirm that, in
                administering a proceeding under Subpart C, the trustee must implement
                any termination, close-out and liquidation provisions included in the
                rules (or bylaws) of the debtor'' (including loss allocation
                provisions). FIA raised further concerns about the treatment of a DCO's
                recovery plans in proposed Sec. 190.15. FIA asserted that such plans
                are intended to address ``actions to be taken prior to the DCO's
                bankruptcy and [are] not relevant post-filing.'' FIA also stated that
                such plans ``would provide no meaningful guidance to a trustee''
                because they ``do not prescribe a particular course of action.''
                Rather, they ``present a menu of options that a DCO might consider.''
                FIA asserted that reliance on a DCO's recovery and wind-down plans is
                ``particularly inappropriate'' because some of them ``have been
                developed with no input or opportunity for comment by clearing members
                and other market participants.''
                 ACLI also expressed concern with the deference that a trustee in
                bankruptcy would be required to afford a DCO's rules and procedures and
                recovery and wind-down plans under proposed Sec. 190.15(a) and (c).
                ACLI claimed that ``DCO recovery and wind-down plans include such
                drastic measures as Variation Margin Gains Haircutting . . . and
                Partial Tear-Up . . . [that] are not subject to routine public input at
                the DCO level or at the Commission.'' ACLI identified several
                circumstances in which deference to the DCO's rules or recovery and
                wind-down plans should be reduced. ACLI asserted that: (a) A trustee
                should not be expected to defer to recovery and wind-down measures
                unless they were originally adopted with public input at the DCO level
                and made public for a reasonable period before the bankruptcy
                proceeding; (b) the trustee should ``have discretion to override a
                DCO's recovery or wind-down actions if they violate proposed [p]art
                190's goal of protecting customer property on no worse than a pro rata
                basis''; and (c) consistent with proposed Sec. 190.15(b), the trustee
                should be able to avoid or prohibit any DCO action that it determines,
                in consultation with the Commission, is not ``reasonable and
                practicable.''
                 SIFMA AMG/MFA commented that requiring a trustee to defer to a
                DCO's recovery and wind-down plans as set forth in proposed Sec.
                190.15(a) and (c) is ``inadvisable'' and, in some cases,
                ``unworkable,'' and recommended that the provisions be deleted. SIFMA
                AMG/MFA recommend that, if the Commission retains proposed Sec.
                190.15(a), the provision be amended to remove the words ``was
                reasonably in the scope of'' and replace references to the DCO's
                recovery and wind-down plans with references to the DCO's default rules
                and procedures. In support of their position, SIFMA AMG/MFA asserted
                that recovery and wind-down plans are insufficiently prescriptive, and
                that because they tend to be drafted as a menu of options, such plans
                are not likely to provide the trustee with clear direction, effectively
                causing the trustee to defer to the judgment of the debtor itself.
                SIFMA AMG/MFA also asserted that recovery and wind-down plans do not
                require Commission approval or reflect significant input from
                customers, and because DCOs are not required to make such plans public,
                the plans are not a fair reflection of the ex ante expectations of a
                DCO's stakeholders. SIFMA AMG/MFA further asserted that ``requiring the
                trustee . . . to defer to the debtor's resolution plans would be
                inconsistent with other regimes for the resolution of systemically
                important financial institutions.'' SIFMA AMG/MFA requested that the
                Commission add a new clause to proposed Sec. 190.15 requiring the
                trustee and Commission, in implementing Sec. 190.15, to ``consider
                whether implementation of the debtor's default rules and procedures
                [and recovery and wind-down plans] may undermine the core principles
                set forth in Sec. 190.00 or may pose additional systemic risk.'' \177\
                If the trustee and Commission determine that such implementation would
                have that effect, SIFMA AMG/MFA suggested that the provision permit the
                trustee to override the rules, procedures, and plans. SIFMA AMG/MFA
                further commented that, in the event that deference to a DCO's default
                management rules and procedures and recovery and wind-down plans is
                mandated in subpart C of the proposal, the Commission should amend
                parts 39 and 40 of the Commission's regulations ``to ensure that
                customers have the opportunity to provide meaningful input during the
                development and application of such rules, procedures, and plans.''
                ---------------------------------------------------------------------------
                 \177\ Alteration in original.
                ---------------------------------------------------------------------------
                 ICI did not support the proposal's deference to a DCO's loss
                allocation, recovery, and wind-down rules in a DCO liquidation. ICI
                asserted that such rules are neither ``clear'' nor ``well-vetted.'' ICI
                stated that DCO rules ``do not provide the level of specificity and
                detail that is required to give certainty to market participants,'' but
                rather, they ``enumerate a wide variety of tools that a DCO may deploy
                to recover losses,'' some of which ``have the capacity to alter the
                entitlements of customers'' under part 190 (e.g., ``a customer would
                only be entitled to such a pro rata share of customer property to the
                extent the DCO rules did not modify the distribution of the DCO's
                assets'' through variation margin gains haircutting or partial tear-
                up). ICI recommended that, ``[b]efore the Commission gives effect to
                any DCO loss allocation, recovery, and wind-down rules in a [p]art 190
                proceeding, . . . the Commission should develop and codify minimum
                principles that must be reflected in [those rules,] . . . review both
                existing DCO rules and proposed rule changes to ensure that they are
                consistent with the Commission's minimum principles . . . [, and]
                require DCOs to change their governance process for rule changes to
                give stakeholders greater opportunity for input.''
                 As an initial matter, the Commission notes that some commenters,
                including ACLI, FIA, ICI, and SIFMA AMG/MFA, objected to the
                application of DCO recovery and wind-down plans and rules, in
                particular the application of
                [[Page 19373]]
                variation margin gains haircutting, because they believed that changes
                should be made to the process by which parts 39 and 40 permit DCOs to
                adopt such plans and rules.
                 Amendments to parts 39 and 40 are beyond the scope of this
                rulemaking, and the Commission does not believe that these concerns
                with the content and operation of parts 39 and 40 should inhibit the
                use of such plans and rules in the context of part 190. However, the
                Commission continues actively to review these issues, in particular
                with respect to governance, as they relate to parts 39 and 40.
                 The Commission also notes that other commenters, including FIA,
                believed that default rules and procedures and recovery plans are
                designed to avoid bankruptcy, and should not be applied if they fail in
                achieving that goal. However, the DCO's rules, procedures, and plans
                set forth ex ante the manner in which losses are allocated--that is,
                who is exposed to them, and to what extent. In the event that losses
                must be borne in bankruptcy, the Commission believes, as was noted in
                the preamble to the proposal, that ``allocation of losses should not
                depend on the happenstance of when default management or recovery tools
                were used--e.g., when assessments were called for, or when such
                assessments were met.'' The Commission does not believe that the
                comments offer a persuasive reason why the allocation of losses--who
                wins, who loses, and how much--should change on the basis of when a
                bankruptcy is filed.
                 The Commission further notes that a number of commenters, including
                ACLI and Vanguard, were concerned with the application in bankruptcy of
                recovery tools such as variation margin gains haircutting and partial
                tear-up. Variation margin gains haircutting, to the extent set forth in
                DCO rules, will be applied in bankruptcy, in that it represents the ex
                ante manner in which losses are allocated.\178\ By contrast, partial
                tear-up of contracts will not be applied; rather, pursuant to Sec.
                190.14(c)(1), ``the trustee shall liquidate all open commodity
                contracts that have not been terminated, liquidated or transferred no
                later than seven calendar days after entry of the order for relief''
                (emphasis added).
                ---------------------------------------------------------------------------
                 \178\ Moreover, as discussed in more detail in section II.C.7
                below, there is a limited amount of customer property available. Any
                increase in some customers claims (and thus, their distributions)
                due to the disapplication of gains-based haircutting would come at
                the expense of a reduced share of that limited customer property
                (i.e., reduced distributions) to other customers, which could total
                less than the amount of their claim arising from initial margin.
                ---------------------------------------------------------------------------
                 Turning to SIFMA AMG/MFA's suggestion that ``the trustee and the
                Commission should explicitly be required to consider the core concepts
                set forth in proposed Sec. 190.00 and systemic risk in implementing a
                debtor DCO's rules procedures and plans'': With respect to the core
                concepts, Sec. 190.00(c) states that ``the specific requirements in
                [part 190] should be interpreted and applied consistently with these
                core concepts.'' In short, that requirement is already present.
                Moreover, the Commission has added Sec. 190.00(c)(3)(i)(C) to provide
                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
                by enhancing recoveries for, and mitigating disruptions to, public
                customers as a class. Thus, in exercising their discretion to determine
                what is ``reasonable'' for purposes of Sec. 190.15, the trustee is
                already directed to focus on the ``core concepts'' in Sec. 190.00(c),
                and, in particular, the ``overarching goal of protecting public
                customers.''
                 However, while a DCO's default rules and procedures are required to
                be made public, posted on the DCO's website,\179\ the same is not true
                for the DCO's recovery and wind-down plans. Thus, in implementing the
                DCO's default rules and procedures, the trustee would be implementing
                rules and procedures that, prior to the bankruptcy, were both subject
                to the supervision of the Commission and transparently available to
                both clearing members and their customers. By contrast, in implementing
                the DCO's recovery and wind-down plans, the trustee would be
                implementing plans that, prior to the bankruptcy, were subject to the
                supervision of the Commission,\180\ but may not have been transparently
                available to clearing members or their customers. In light of this
                distinction, a more customer-protective approach seems appropriate in
                the latter context.
                ---------------------------------------------------------------------------
                 \179\ See Sec. 39.21(c)(6).
                 \180\ Note that Sec. 190.15(c) only applies to recovery and
                wind-down plans that were ``filed with the Commission pursuant to
                Sec. 39.39 of this chapter.''
                ---------------------------------------------------------------------------
                 Accordingly, the Commission is modifying proposed Sec. 190.15(c),
                which reads that in administering a proceeding under this subpart, the
                trustee shall, in consultation with the Commission, take actions in
                accordance with any recovery and wind-down plans maintained by the
                debtor and filed with the Commission pursuant to Sec. 39.39, to the
                extent reasonable and practicable--to add at the end the qualifier that
                these actions should also only be taken to the extent consistent with
                the protection of customers.\181\
                ---------------------------------------------------------------------------
                 \181\ The ``customers'' of a DCO are, as noted at the top of
                this section II.C, the clearing members with respect to their public
                customers, as well as the clearing members with respect to their
                proprietary or ``house'' accounts.
                ---------------------------------------------------------------------------
                 With respect to systemic risk, while the Commission, as a
                governmental agency, is attentive to considerations of mitigating
                systemic risk in all that it does,\182\ it may be difficult for a
                trustee to make meaningful determinations as to how to do so. Moreover,
                the trustee is the representative of the bankruptcy estate, see 11
                U.S.C. 323(a), with fiduciary duties to estate beneficiaries,\183\
                rather than to the financial system as a whole. Accordingly, the
                Commission does not believe it appropriate to add an explicit
                requirement concerning considerations of systemic risk, as suggested by
                SIFMA AMG/MFA.
                ---------------------------------------------------------------------------
                 \182\ See CEA section 3(b), 7 U.S.C. 5(b) (purposes of the CEA
                include ``the avoidance of systemic risk'').
                 \183\ See U.S. Department of Justice, Executive Office for
                United States Trustees, Handbook for Chapter 7 Trustees Section 4.B,
                at 4-2.
                ---------------------------------------------------------------------------
                 The Commission does not agree that FIA's observation that DCO
                recovery and wind-down plans may ``not prescribe a particular course of
                action but, rather, present a menu of options that a DCO may consider''
                supports FIA's conclusion that ``these plans would appear to provide no
                meaningful guidance to a trustee.'' To the contrary, the Commission
                believes that providing a ``menu of options'' among which the trustee
                may select (and adapt) in a manner that is ``reasonable and
                practicable'' would provide the trustee--who would be stepping into a
                complex and difficult situation with little preparation--with a helpful
                roadmap to determine strategy and tactics, in order to act in a prompt
                and cost-effective manner.
                 The Commission also declines to provide that the trustee cannot
                override the DCO's rules or deviate from an approved recovery or wind-
                down plan. Even if part 39 were to require that such plans be
                ``approved''--and it does not--they are designed in the context of
                operation of the DCO outside of bankruptcy. Thus, the Commission
                believes it to be appropriate for the trustee to apply them with
                flexibility to the extent reasonable and practicable.
                 Accordingly, after consideration of the comments and for the
                reasons stated above, the Commission is adopting Sec. 190.15 as
                proposed, with the modification to Sec. 190.15(c) discussed above.
                [[Page 19374]]
                6. Regulation Sec. 190.16: Delivery
                 The Commission is adopting Sec. 190.16 as proposed with a
                modification to paragraph (a), as set forth below.
                 Regulation Sec. 190.16(a) instructs the trustee to use reasonable
                efforts to facilitate and cooperate with completion of delivery in a
                manner consistent with Sec. 190.06(a) (which instructs trustees of
                FCMs in bankruptcy to foster delivery where a contract has entered
                delivery phase before the filing date or where it is not practicable
                for the trustee to liquidate a contract moving into delivery position
                after the filing date) and the pro rata distribution principle in Sec.
                190.00(c)(5). The Commission believes that it is important to address
                deliveries to avoid disruption to the cash market for the commodity and
                to avoid adverse consequences to parties that may be relying on
                delivery taking place in connection with their business operations.
                However, given the potential for competing demands on the trustee's
                resources, including time, this instruction is limited to requiring
                ``reasonable efforts.''
                 Regulation Sec. 190.16(b) carries forward, to the context of a DCO
                in bankruptcy, the delineation between the physical delivery property
                account class and the cash delivery property account class in Sec.
                190.06(b), as discussed above. Specifically, physical delivery property
                that is held in delivery accounts for the purpose of making delivery
                shall be treated as physical delivery property, as will the proceeds
                from any sale of such property. By contrast, cash delivery property
                that is held in delivery accounts for the purpose of paying for
                delivery shall be treated as cash delivery property, as would any
                physical delivery property for which delivery is subsequently taken.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.16. The Commission raised specific questions as to
                whether it is appropriate, in the context of a clearing organization
                bankruptcy, to separate the physical delivery account class from the
                cash delivery account class, and if so, whether the physical delivery
                account class should be further sub-divided. The Commission also asked
                whether the delivery account class should be treated as a single,
                undivided account class.
                 CME supported the requirement in proposed Sec. 190.16 that the
                trustee use reasonable efforts to facilitate deliveries of commodity
                contracts that have moved into delivery prior to the date and time of
                relief on behalf of a clearing member or customer, but asked that the
                Commission ``expand the rule to require the trustee to facilitate
                deliveries'' under contracts that move into delivery position after the
                filing and that the trustee is unable to liquidate. CME stated that
                ``[i]t is equally important to protect deliveries under [such]
                contracts . . . to protect against disruption to commercial markets and
                operations,'' and that the trustee may not be able to terminate them.
                 The ABA Subcommittee similarly expressed concern that proposed
                Sec. 190.16(a) ``does not address contracts that are unable to be
                liquidated and that then move into delivery position,'' noting that
                ``it may be impossible or impracticable for a trustee to liquidate
                every'' physical-delivery commodity contract that is open at the date
                and time of the order for relief before the contract moves into
                delivery position. The ABA Subcommittee recommended that the Commission
                ``remove the timing limitation in Proposed Rule 190.16(a),'' and add
                language stating that ``the trustee should use reasonable efforts to
                liquidate open physical delivery commodity contracts before they move
                into a delivery position.''
                 The Commission agrees with comments raised by CME and the ABA
                Subcommittee that deliveries should be facilitated after the order for
                relief for contracts that are not otherwise terminated, liquidated, or
                transferred. The Commission believes that modifying the proposal to
                address that scenario is appropriate to avoid disruption to the cash
                market and to avoid adverse consequences to parties that may be relying
                on delivery taking place in connection with their business operations.
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is adopting Sec. 190.16 with a
                modification to apply paragraph (a) to any contract that ``moves into
                delivery after [the date and time of the order for relief], but before
                being terminated, liquidated, or transferred.''
                7. Regulation Sec. 190.17: Calculation of Net Equity
                 The Commission is adopting Sec. 190.17 as proposed, with a
                modification to Sec. 190.17(b)(2), as discussed below. Section 190.17
                establishes net equity calculations to be used in determining the
                claims against the debtor DCO (and the allocation of losses) among
                members and their accounts.
                 Section 190.17(a) with respect to net equity is parallel to Sec.
                190.18(a) with respect to the treatment of customer property. Section
                190.17(a)(1) confirms that a member of a clearing organization may have
                claims in separate capacities. Specifically, a member may have claims
                on behalf of its public customers (customer account) and claims on
                behalf of itself and its non-public customers (i.e., affiliates) (house
                account), and, within those separate customer classes, the claims may
                be further separated by account class. The member shall be treated as
                part of the public customer class with respect to claims based on
                commodity customer accounts carried as ``customer accounts'' by the
                clearing organization for the benefit of the member's public customers,
                and as part of the non-public customer class with respect to claims
                based on its house account. Section 190.17(a)(2) directs that net
                equity shall be calculated separately with respect to each customer
                capacity and, within such customer capacity, by account class.
                 Section 190.17(b) sets forth how a debtor DCO's pre-existing rules
                and procedures governing the allocation of losses--including the
                default rules and procedures--should be applied in a DCO bankruptcy.
                 Section 190.17(b)(1) confirms that the calculation of members' net
                equity claims--and, thus, the allocation of losses among members and
                their accounts--shall be based on the full application of the debtors'
                loss allocation rules and procedures, including the default rules and
                procedures referred to in Sec. Sec. 39.16 and 39.35. These pre-
                existing loss allocation rules and procedures are the contract between
                and among the members and the DCO, and the Commission believes that it
                is appropriate to give them effect regardless of the bankruptcy of the
                DCO or the timing of any such bankruptcy. In other words, the pre-
                existing loss allocation rules and procedures (such as member
                assessments) should be given the same effect in a bankruptcy,
                regardless of whether default management or recovery tools were fully
                applied prior to the order for relief. While certain DCOs may have
                discretion, consistent with governance procedures, as to precisely when
                they call for members to meet assessment obligations, the Commission
                believes that allocation of losses should not depend on the
                happenstance of when default management or recovery tools were used--
                e.g., when assessments were called for, or when such assessments were
                met.
                 Section 190.17(b) also addresses DCO rules that govern how
                recoveries on claims against defaulting members are allocated to non-
                defaulting members' accounts,\184\ which effectively ``reverse
                [[Page 19375]]
                the waterfall'' by allocating recovered assets to member accounts in
                reverse order of the allocation of the losses to those member
                accounts.\185\ Section 190.17(b)(2) implements such DCO rules in
                bankruptcy, thereby adjusting members' net equity claims (and the basis
                for distributing any such recoveries) in light of such recoveries. The
                provision similarly implements DCO loss allocation rules in other
                contexts, for example, (i) rights to portions of mutualized default
                resources that are either prefunded or assessed and collected, and, in
                either event, not used, as well as (ii) rules that would allocate to
                members recoveries against third parties for non-default losses that
                are, under the DCO's rules, originally borne by members.
                ---------------------------------------------------------------------------
                 \184\ These recoveries might be based on prosecution of such
                claims in an insolvency or receivership proceeding, or, in the
                reasonable commercial judgment of the DCO, the settlement or sale of
                such claims.
                 \185\ For example, if the DCO rules allocate losses in excess of
                the defaulters' available resources first to the DCO's own
                contributions, second to the mutualized default fund contributions
                of members other than the defaulter, third to assessments, and
                fourth to gains-based haircutting (pro rata), all of which tools
                were in fact used in a particular case, then recoveries on claims
                against the defaulting members would be allocated (to the extent
                available) first to those member accounts for which gains were
                haircut, pro rata based on the aggregate amount of such haircuts per
                member account, until all such haircuts have been reversed, second
                to those members who paid assessments, pro rata based on the amount
                of such assessments paid, until all such assessments have been
                repaid, third to members whose mutualized default-fund contributions
                were consumed, pro rata based on such default-fund contributions,
                until all such contributions have been repaid, and fourth to the DCO
                to the extent of its own contribution.
                ---------------------------------------------------------------------------
                 Section 190.17(c) adopts by reference the equity calculations set
                forth in proposed Sec. 190.08, to the extent applicable.
                 Finally, Sec. 190.17(d) implements section 766(i) of the
                Bankruptcy Code, which: (1) Allocates a debtor DCO's customer property
                (other than member property) to the DCO's customers (i.e., clearing
                members) ratably based on the clearing members' net equity claims based
                on their (public) customer accounts; and (2) allocates a debtor DCO's
                member property to the DCO's clearing members ratably based on the
                clearing members' net equity claims based on their proprietary (i.e.,
                house) accounts. To implement section 766(i), Sec. 190.17(d) defines
                ``funded balance'' as a clearing member's pro rata share of member
                property (for a clearing member's house accounts) or customer property
                other than member property (for accounts for a clearing member's public
                customers). The pro rata amount shall be calculated with respect to
                each account class available for distribution to customers of the same
                customer class. Moreover, given that the calculation of funded balance
                for FCMs is an analogous exercise, the Commission intends that such
                calculations under Sec. 190.17(d) will be made in the manner provided
                in Sec. 190.08(c), to the extent applicable.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.17. The Commission raised a specific question as to
                whether it is appropriate to base the calculations proposed Sec.
                190.17 on the full application of the debtors' loss allocation rules
                and procedures, including the DCO's default rules and procedures.
                 Commenters addressed the proposed language of paragraph (b), or of
                Sec. 190.17 generally, but did not offer specific comments on the
                proposed language of paragraph (a), (c), or (d).
                 CME commented in support of Sec. 190.17(b)(1)'s application of
                ``the DCO's loss allocation rules and procedures, including the DCO's
                default rules and procedures, to the calculation of clearing members'
                net equity claims,'' but suggested a clarification to the proposed
                rule. Specifically, CME suggested that the Commission ``clarify that
                `full application' of the DCO's loss allocation rules and procedures to
                the calculation of clearing members' house net equity claims means that
                assessments or similar loss allocation arrangements thereunder are part
                of the calculation only if and to the extent that the DCO's rules and
                procedures provide for post-filing assessments and payments.'' CME
                noted that a ``DCO's rules are the contract between and among the
                members and the DCO,'' and that, ``[i]f the calculation of net equity
                claims deviates from the DCO's loss allocation under its rules,
                including determination of amounts owned under close-out netting rules,
                that could adversely affect CME's netting opinion as to the
                enforceability of its netting rules.'' CME also commented in support of
                ``giving effect to provisions in the debtor DCO's loss allocation rules
                that entitle clearing members to return of guaranty fund deposits or
                other mutualized default resources that are not used, or to payments
                out of amounts that the DCO recovers on claims against a defaulting
                clearing member, through adjustments to clearing member's net equity
                claims against member property to reflect their entitlement to such
                payments.'' CME also commented in support of Sec. 190.17(b)(2).
                 The ABA Subcommittee expressed concern with respect to perceived
                ambiguity in Sec. 190.17(b)(1) regarding ``how assessments that were
                not called for, or that were called for but not paid before the filing
                date, would impact the calculation of a clearing member's net equity
                claim with respect to its house account.'' The ABA Subcommittee
                requested that the Commission modify the proposed regulation to clarify
                that ``house account net equity claims would be adjusted to reflect
                post-filing obligations only if and to the extent that the DCO's rules
                and procedures impose obligations on clearing members to continue
                making such payments following the DCO's bankruptcy.'' Specifically,
                the ABA Subcommittee suggested that the following phrase be added to
                the end of Sec. 190.17(b)(1): If and to the extent that the debtor's
                loss allocation rules and procedures impose obligations on clearing
                members to make such payments on or after the filing date.
                 FIA did not support the adoption of Sec. 190.17(b)(1). FIA stated
                that it would be ``inappropriate to require a clearing member to reduce
                the value of its net equity claim by the amount of an assessment that,
                under the rules of the relevant DCO, either may no longer be made or
                are not required to be paid.'' FIA asserted that a DCO's default fund
                is ``a multilateral indemnification arrangement between the DCO and its
                members pursuant to which members' contributions are used to cover the
                DCO's losses resulting from member default(s) and thereby prevent the
                DCO's bankruptcy.'' FIA stated that a ``DCO has no authority under its
                rules to request or to apply these funds for any other purpose, nor do
                we believe that a trustee would have any authority under the
                [Bankruptcy] Code to do so.'' FIA noted further that, ``by requiring
                that a clearing member's net equity claim must include the full
                application of the DCO's loss allocation rules and procedures, proposed
                Rule 190.17(b)(1) appears to have the effect of reducing a clearing
                member's potential recovery, even when the full application of the
                DCO's loss allocation rules is not necessary to meet the DCO's
                obligations to non-defaulting clearing members,'' thereby impermissibly
                benefitting the DCO's general creditors and shareholders to the
                detriment of clearing members.
                 ICE commented that the Commission should refrain from adopting
                Sec. 190.17(b) or providing ``specific guidance as to what assumptions
                the CFTC would make and how the net equity claim is to be calculated
                hypothetically.'' ICE stated that, in determining a clearing member's
                net equity claim, it is neither appropriate nor feasible to consider a
                potential assessment that could have been called for before a
                bankruptcy filing but was not. ICE asserted that a DCO's determination
                of whether ``to call
                [[Page 19376]]
                for an assessment and/or implement other loss allocation arrangements''
                accounts for many considerations that would not be appropriate to
                revisit in an insolvency. ICE also asserted that calculating the full
                application of loss allocation rules, or determining what would have
                happened in any full allocation, may not be possible. ICE noted, for
                example: (a) Because a DCO is not obligated to impose assessments
                against its clearing members, it is unclear how the CFTC or the trustee
                would determine how many assessments the DCO should have made; (b) in
                the event that ``clearing members have the right to cap their liability
                by terminating their membership in a DCO,'' it is unclear how the CFTC
                or the trustee would determine whether a clearing member should have
                terminated its membership; \186\ and (c) it ``may not be possible to
                determine definitively what the [DCO's] losses . . . would have been if
                additional loss allocation steps, such as variation margin gains
                haircutting or tear-up, had been taken.''
                ---------------------------------------------------------------------------
                 \186\ But see ICE Clear Credit Rules 806, 807. To mitigate the
                risk that their members will ``rush to the exits'' after a default,
                DCOs generally hold departing members liable for assessments due to
                the defaults that occurred before they withdrew from membership, as
                well as during a ``cooling-off'' period that extends past the date
                the member gives notice of intent to withdraw. The ICE Clear Credit
                rules cited, which include a ``cooling-off period'' of at least 30
                days, are examples of this phenomenon. Thus, the possibility that
                clearing members would withdraw is not likely to affect their
                liability for assessments in this context.
                ---------------------------------------------------------------------------
                 SIFMA AMG/MFA commented that Sec. Sec. 190.17 and 190.18(b)(1)
                should be modified to explicitly state that any gains that were haircut
                during gains-based haircutting will be treated as customer property and
                included in the net equity claims of the clearing members and customers
                whose gains were haircut. SIFMA AMG/MFA further commented in support of
                Sec. 190.17(b) but suggested that the proposal be modified to provide
                that, if a debtor DCO either (i) does not have ``reverse the
                waterfall'' rules or (ii) has ``reverse the waterfall'' rules that do
                not address each level of the debtor DCO's waterfall, the net equity
                clams of the debtor DCO's clearing members and customers will be
                calculated as though the debtor DCO, in fact, ``has `reverse the
                waterfall' rules that address each level of the DCO's waterfall.
                 Vanguard commented on Sec. 190.17(b)(1)'s requirement that a
                trustee's calculation of DCO members' net equity claims include the
                full application of DCO loss allocation rules and procedures. Vanguard
                expressed concern that the requirement would result in a customer being
                entitled to only ``a pro rata share to the extent the DCO rules did not
                modify the distribution of the DCO's asset, whether pre- or post-
                petition, through measures such as variation margin gains haircutting
                or partial tear-up of transactions.'' Vanguard noted the possibility
                that, ``as the DCO begins to fail,'' the DCO's rules ``could be changed
                without the appropriate vetting by FCMs and customers who presently
                bear an inordinate share of the risk.'' Vanguard believed that ``any
                application of non-defaulting customer gains haircutting, or any other
                margin haircutting, should be prohibited as being fundamentally at odds
                with normal insolvency practice and highly counterproductive to
                incentivizing customers not to abandon a failing DCO.'' Vanguard
                asserted that, if haircutting is to be allowed, customers should
                ``receive full compensation in the form of a credit or equity claim
                against the DCO [that is] superior to that of other creditors.''
                Vanguard also suggested that Sec. 190.17(b)(2) be modified in the same
                manner as suggested by SIFMA AMG/MFA, with respect to situations in
                which a debtor DCO does not have ``reverse the waterfall'' rules, or
                has ``reverse the waterfall'' rules that do not address each level of
                the debtor DCO's waterfall.
                 ICI expressed concern that Sec. 190.17(b)(1) would permit a DCO's
                loss allocation, recovery, and wind-down rules ``to override the
                fundamental customer protections that Part 190 and Subchapter IV [of
                the Bankruptcy Code] are meant to safeguard,'' because they would ``no
                longer guarantee to a customer a pro rata share of customer property
                based on its transactions and margin in accordance with Subchapter
                IV.'' In that scenario, ICI commented that ``a customer would only be
                entitled to such a pro rata share to the extent the DCO rules did not
                modify the distribution of the DCO's assets, whether pre- or post-
                petition, through measures such as variation gains haircutting or
                partial tear-up of transactions.''
                 Having received no specific comments on the proposed language of
                paragraphs (a), (c), and (d) of Sec. 190.17, the Commission is
                adopting those paragraphs as proposed.
                 As described above, the Commission received several comments on
                paragraph (b). After considering the comments, the Commission notes
                that DCO default rules and procedures (also referred to as ``default
                waterfalls''), as a general matter, first use the resources of the
                defaulter (i.e., the defaulter's initial margin and contribution to the
                default fund) to cover a shortfall. Should those resources be
                insufficient to cover the shortfall, such default waterfalls generally
                proceed to use the DCO's own capital contribution, and only after those
                resources are extinguished is the remaining shortfall mutualized among
                the clearing members: (1) First, through the prefunded default fund
                contributions of non-defaulting clearing members; (2) then, through
                limited assessment powers against those non-defaulting clearing
                members, which are generally set as a multiple of each clearing
                member's prior contributions to the default fund; and (3) finally,
                through gains-based haircuts that affect both clearing members and
                (through customer agreements) the customers of clearing members (i.e.,
                public customers).
                 The Commission notes two important takeaways from the general
                structure of default waterfalls. First, each clearing member knows, in
                advance of a default, the maximum amount of its exposure to contribute
                to mutualized loss through the guarantee fund and the DCO's assessment
                powers. Second, should there be any reduction in the amount of funds
                collected through such assessments, then any losses in excess of the
                waterfall (i.e., up through the assessments) would instead be allocated
                to both clearing members and their public customers. In other words, if
                the losses are large enough, a reduced allocation of losses to clearing
                members would necessarily mean that their public customers would bear
                an increased allocation of losses.
                 The Commission remains of the view that, as discussed in the
                proposal, ``[w]hile certain DCOs may have discretion, consistent with
                governance procedures, as to precisely when they call for members to
                meet assessment obligations, . . . allocation of losses should not
                depend on the happenstance of when default management or recovery tools
                were used--e.g., when assessments were called for, or when such
                assessments were met.'' \187\ As discussed above, the losses in a DCO
                bankruptcy ultimately would be allocated between clearing members and
                customers, and clearing members' exposure to this allocation of losses
                is already capped by the ex ante limits on assessment powers. If the
                Commission were to modify the language of paragraph (b) in the manner
                suggested by multiple commenters, the modification would effectively
                decrease the allocation of losses that would be borne by clearing
                members--below the ex ante limits of which they are on
                [[Page 19377]]
                notice--and correspondingly increase the allocation of losses that
                would be borne by customers. In other words, in such a scenario, the
                Commission believes that the suggested language could harm customers
                and run counter to the Commission's policy that, with respect to
                customer property, public customers be favored over non-public
                customers. For those reasons, the Commission declines to adopt
                commenters' suggestions to modify the net equity calculations in Sec.
                190.17(b) by limiting (or eliminating) the allocation of assessments
                that were not exercised prior to a bankruptcy filing.
                ---------------------------------------------------------------------------
                 \187\ 85 FR at 36038.
                ---------------------------------------------------------------------------
                 By contrast, gains-based haircuts are also part of the pre-
                bankruptcy arrangements for allocating losses. If that part of the
                ``waterfall'' is reached, then that ex ante arrangement should be
                followed. Moreover, there is a limited amount of customer property
                available. Thus, to the extent the application of gains-based haircuts
                was to be reversed, and some customers would realize increases in the
                allowed amounts of their claims (and thus a greater share of customer
                property), other customers would suffer a decreased share of customer
                property; indeed, the latter customers may, as a result, receive less
                than the amount of their claims for initial margin. This could have the
                effect of reducing those customers' recoveries below the initial margin
                they have posted. The Commission stands firmly against initial margin
                haircutting as inimical to the principles of segregation. Thus, the
                Commission declines to adopt the suggestion by SIFMA AMG/MFA and
                Vanguard to reverse the application of gains-based haircutting in a DCO
                bankruptcy.
                 FIA's comment letter raised two points that should be further
                addressed. First, FIA stated that a DCO, under its rules, lacks the
                authority to apply the DCO's default fund for any purpose other than
                preventing the DCO's bankruptcy, and a trustee would similarly lack the
                authority to do so under the Bankruptcy Code.\188\ FIA further argued
                that, as a result of that limitation, the DCO's authority to make new
                assessments or otherwise require that members contribute additional
                funds to a DCO's default fund would not continue into bankruptcy.
                Consequently, FIA argued that a clearing member's net equity claim
                should not be reduced in bankruptcy by the amount of an assessment that
                would no longer be required to be paid under the DCO's rules. However,
                the Commission notes that Sec. 190.17(b)(1) does not instruct the
                trustee to call any clearing member to pay in additional funds; rather,
                paragraph (b)(1) reduces the clearing member's net equity claim against
                the estate of the DCO, to account for uncalled or uncollected
                assessments. Pursuant to section 20(a)(5) of the CEA, the Commission
                has the power to provide, with respect to a commodity broker in
                bankruptcy, ``how the net equity of a customer is to be determined,''
                \189\ and the Commission believes that by setting the net equity
                calculation as proposed, the rule would appropriately set such
                calculations in a manner that does ``not depend on the happenstance of
                when default management or recovery tools were used,'' as discussed
                more fully above.
                ---------------------------------------------------------------------------
                 \188\ FIA at 9.
                 \189\ In the bankruptcy of a clearing organization, clearing
                members are a species of customer.
                ---------------------------------------------------------------------------
                 Second, FIA noted that, ``by requiring that a clearing member's net
                equity claim must include the full application of the DCO's loss
                allocation rules and procedures, proposed [Sec. ] 190.17(b)(1) appears
                to have the effect of reducing a clearing member's potential recovery,
                even when the full application of the DCO's loss allocation rules is
                not necessary to meet the DCO's obligations to non-defaulting clearing
                members'' and that ``[s]uch a result would impermissibly benefit the
                DCO's general creditors and shareholders to the detriment of clearing
                members.'' The Commission did not intend for the potential outcome
                suggested by FIA; rather, in proposed Sec. 190.17(b)(2)(i), the
                Commission intended to provide that, where the full amount of
                assessment powers is not needed to cover a default, an appropriate
                adjustment shall be made to the net equity claims of clearing members.
                The Commission believes that the rule text should be modified in order
                to communicate its intent more clearly, and avoid the possibility of
                the unintended outcome raised by FIA. Accordingly, the Commission is
                modifying Sec. 190.17(b)(1) to clarify that the DCO's ``loss
                allocation arrangements shall be applied to the extent necessary to
                address losses arising from default by clearing members.''
                 This modification separates paragraph (b)(1) into two separate
                parts. First, paragraph (b)(1)(i) will provide that the calculation of
                a clearing member's net equity claim shall include the full application
                of the debtor's loss allocation rules and procedures, including the
                default rules and procedures referred to in Sec. 39.16 and, if
                applicable, Sec. 39.35. Second, paragraph (b)(1)(ii) will provide that
                the calculation in paragraph (b)(1)(i) will include, with respect to
                the clearing member's house account, any assessments or similar loss
                allocation arrangements provided for under those rules and procedures
                that were not called for before the filing date, or, if called for,
                have not been paid. Such loss allocation arrangements shall be applied
                to the extent necessary to address losses arising from default by
                clearing members.
                 The ABA Subcommittee, in its comment letter, was concerned that the
                proposed rule is ambiguous on whether assessments or similar loss
                allocation arrangements would be included in the calculation where the
                clearing organization's rules do not impose obligations on clearing
                members to make such payments on or after the filing date. The modified
                structure of paragraph (b)(1), as described above, should remove that
                ambiguity, albeit not in the direction that the ABA Subcommittee would
                prefer: The calculation ``will include, with respect to the clearing
                member's house account, any assessments or similar loss allocation
                arrangements that were not called for before the filing date . . . to
                the extent necessary to address losses arising from default . . .''
                (emphasis added).
                 CME's comment letter also raises a concern that should be
                addressed. In particular, CME is concerned that deviating from the
                DCO's rules with respect to loss allocation in this context could
                adversely affect the DCO's netting opinion as to the enforceability of
                its netting rules. The Commission notes that this argument conflates
                bank capital charge calculations for cleared transactions with capital
                charge calculations for default fund contributions. Pursuant to, e.g.,
                12 CFR 217.133(a)(2), a clearing member that is (or is part of) a bank
                holding company regulated by the Federal Reserve Board and that uses
                the internal ratings and advanced measurement approaches to bank
                capital requirements is required to use the methodologies described in
                the applicable paragraph of 12 CFR 217.133 to calculate its risk-
                weighted assets for a cleared transaction (that is, paragraph (c) of
                that section) and the methodologies described in a different paragraph
                to calculate its risk-weighted assets for its default fund contribution
                to a CCP (that is, paragraph (d) of that section).\190\ Netting
                opinions are necessary to treat cleared transactions
                [[Page 19378]]
                on a net basis,\191\ while assessments are related to default fund
                contributions. Thus, the treatment of assessment obligations is
                irrelevant to netting opinions for cleared transactions.
                ---------------------------------------------------------------------------
                 \190\ There are analogous provisions for bank holding companies
                regulated by the Federal Reserve Board that use the standardized
                approach for calculating bank capital requirements (12 CFR 217.35)
                as well as banks regulated by the FDIC and the Office of the
                Comptroller of the Currency.
                 \191\ See 12 CFR 217.3(d).
                ---------------------------------------------------------------------------
                 The Commission also received comments on proposed Sec.
                190.17(b)(2) concerning the treatment of ``reverse the waterfall''
                rules in the context of a DCO bankruptcy. After considering the
                comments, the Commission continues to believe that it is useful and
                appropriate to use ``reverse the waterfall'' rules for recoveries made
                by a clearing organization (including a debtor clearing organization).
                Some commenters suggested that proposed Sec. 190.17(b)(2) be modified
                to address situations where the debtor DCO lacks ``reverse the
                waterfall'' rules, or where such rules do not address each level of the
                debtor clearing organization's waterfall. Although the commenters did
                not provide specific language that could be used to apply to such
                situations, the Commission believes that such a complicated
                modification is beyond the bounds of what was proposed, and thus, the
                Commission declines to make the modification here. Nonetheless, the
                commenters' suggestion is well taken, and the Commission may consider
                further work on that issue in the future.
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is: (1) Adopting Sec. 190.17(a),
                (b)(1), (c), and (d) as proposed; and (2) adopting Sec. 190.17(b)(2)
                with the modification discussed above.
                8. Regulation Sec. 190.18: Treatment of Property
                 The Commission is adopting Sec. 190.18 to establish the allocation
                of the debtor DCO's estate in order to satisfy claims of clearing
                members, as customers of the debtor. The Commission is adopting Sec.
                190.18 as proposed, with the following modifications: (1) Adding new
                paragraph (b)(1)(iv), as described below; and (2) removing paragraph
                (c)(1) and renumbering the remaining paragraphs of paragraph (c).
                 Section 190.18(a) with respect to customer property is parallel to
                Sec. 190.17(a) with respect to net equity. Paragraph (a) provides that
                property of the debtor clearing organization's estate is allocated
                between member property, and customer property other than member
                property, in order to satisfy claims of clearing members as customers
                of the debtor. Such property would constitute a separate estate of the
                customer class (i.e., member property, and customer property other than
                member property) and the account class to which it is allocated, and
                would be designated by reference to such customer class and account
                class.
                 Section 190.18(b) sets out the scope of customer property for a
                clearing organization,\192\ and is based in large part on Sec.
                190.09(a). Specifically, in Sec. 190.18, paragraphs (b)(1)(i)(A)
                through (G) are based on Sec. 190.09(a)(1)(i)(A) through (G). Section
                190.18(b)(1)(i) does not include a provision that is parallel to Sec.
                190.09(a)(1)(i)(H), because loans of margin are not applicable to DCOs.
                In Sec. 190.18, paragraphs (b)(1)(ii)(A) through (D) are based on
                Sec. 190.09(a)(1)(ii)(A), (D), (E), and (F), while Sec.
                190.18(b)(1)(ii)(E) adopts by reference Sec. 190.09(a)(1)(ii)(H)
                through (K) as if the term debtor used therein refers to a clearing
                organization as debtor. Section 190.18(b)(1)(ii) does not include
                provisions that are parallel to Sec. 190.09(a)(1)(ii)(B), (C), (G),
                and (L), because they would not be applicable due to the differences in
                business models, structures, and activities of DCOs and FCMs,
                respectively. Section 190.18(b)(1)(iii) is unique to clearing
                organizations, and includes as customer property any guarantee fund
                deposit, assessment, or similar payment or deposit made by a member, to
                the extent any remains following administration of the debtor's default
                rules and procedures. Section 190.18(b)(1)(iii) also includes any other
                property of a member that, pursuant to the debtor's rules and
                procedures, is available to satisfy claims made by or on behalf of
                public customers of a member. Finally, Sec. 190.18(b)(2), which
                identifies property that is not included in customer property, adopts
                by reference Sec. 190.09(a)(2) as if the term debtor used therein
                refers to a clearing organization as debtor and to the extent relevant
                to a clearing organization.
                ---------------------------------------------------------------------------
                 \192\ This is another provision prescribed pursuant to the
                Commission's authority under section 20(a)(1) of the CEA, 7 U.S.C.
                24(a)(1).
                ---------------------------------------------------------------------------
                 Section 190.18(c) allocates customer property between customer
                classes, favoring allocation to customer property other than member
                property over allocation to member property, so long as the funded
                balance in any account class for members' public customers is less than
                one hundred percent of net equity claims. Once all account classes for
                customer property other than member property are fully funded (i.e., at
                one hundred percent of net equity claims), any excess could be
                allocated to member property. Section 190.18(c)(1), as proposed (but
                not adopted herein, as discussed below), would allocate any property
                referred to in Sec. 190.18(b)(1)(iii) (guarantee deposits,
                assessments, etc.) first to customer property other than member
                property, to the extent that any account class therein is not fully
                funded, and then to member property. In proposing this provision, the
                Commission intended such treatment of property to favor public
                customers over non-public customers. Section 190.18(c)(2) allocates any
                excess funds in any account class for members' house accounts first to
                customer property other than member property to the extent that any
                account class therein is not fully funded, and then any remaining
                excess to house accounts to the extent that any account class therein
                is not fully funded. Finally, Sec. 190.18(c)(3) allocates any excess
                funds in any account for members' customer accounts first to customer
                property other than member property to the extent that any account
                class therein is not fully funded, and then any remaining excess to
                house accounts, to the extent that any account class therein is not
                fully funded.
                 Section 190.18(d) allocates customer property among account classes
                within customer classes. Section 190.18(d)(1) confirms that, where
                customer property is tied to a specific account class--that is, where
                it is segregated on behalf of, readily traceable on the filing date to,
                or recovered by the trustee on behalf of or for the benefit of an
                account class within a customer class--the property must be allocated
                to the customer estate of that account class (that is, the account
                class for which it is segregated, to which it is readily traceable, or
                for which it is recovered). Section 190.18(d)(2) provides that customer
                property that cannot be allocated in accordance with paragraph (d)(1)
                shall be allocated in a manner that promotes equality of percentage
                distribution among account classes within a customer class. Thus, in
                such a scenario, such property would be allocated first to the account
                class for which funded balance--that is, the percentage that each
                member's net equity claim is funded--is the lowest. This would continue
                until the funded balance percentage of that account class equals the
                funded balance percentage of the account class with the next lowest
                percentage of funded claims. The remaining customer property would be
                allocated to those two account classes so that the funded balance for
                each such account class remains equal. This would continue until the
                funded balance percentage of those two account classes is equal to the
                funded balance of the account class with the next lowest percentage of
                funded claims, and so
                [[Page 19379]]
                forth, until all account classes within the customer class are fully
                funded.
                 Section 190.18(e) confirms, however, that where the debtor DCO has,
                prior to the order for relief, kept initial margin for house accounts
                in accounts without separation by account class, then member property
                will be considered to be in a single account class.
                 Section 190.18(f) reserves the right of the trustee to assert
                claims against any person to recover the shortfall of property
                enumerated in Sec. 190.18(b)(1)(i)(E) and (b)(1)(ii) and (iii).
                Paragraph (f) is analogous in the DCO context to Sec. 190.09(a)(3) in
                the context of FCMs. The purpose of paragraph (f), as with Sec.
                190.09(a)(3), is to clarify that any claims that the trustee may have
                against a person to recover customer property will not be undermined or
                reduced by the fact that the trustee may have been able to satisfy
                customer claims by other means.
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.18. The Commission raised a specific question about
                the comprehensiveness of the scope of customer property for a clearing
                organization in proposed Sec. 190.18(b). The Commission also asked
                specifically about the appropriateness of the proposed allocation of
                customer property between customer classes in proposed Sec. 190.18(c)
                and within customer classes in proposed Sec. 190.18(d).
                 The Commission received several comments on the proposal. Whereas
                some commenters supported the proposal, in whole or in part, others
                raised concerns particularly with respect to the scope of customer
                property in proposed Sec. 190.18(b) and the treatment of guarantee
                fund deposits and other payments in proposed Sec. 190.18(c)(1), among
                other issues.
                 ICI commented in support of the proposal and agreed with the
                Commission that the proposal is necessary to further the policy in
                section 766(h) of the Bankruptcy Code of prioritizing the claims of
                public customers over the claims of non-public customers. ICI stated
                that public customers need the proposed protections because they
                ``typically have no direct participation in the DCO's risk management
                and no insight into the transactions other customers have with the
                DCO.'' ICI also stated that public customers may have less access to
                information concerning the DCO's financial health, and may have fewer
                tools available to protect themselves against losses, when compared to
                DCO members.
                 The ABA Subcommittee commented that the treatment of clearing
                members' guaranty fund deposits and similar payments in proposed Sec.
                190.18(c)(1) represents a ``significant policy change'' with
                ``significant competing policy considerations and complex issues'' that
                warrant consideration outside of the Proposal. The ABA Subcommittee
                contended, for example, that such payments ``may be exposed to risk in
                asset classes in which [the clearing member] does not trade, and which
                the clearing member does not expect to assume based on the DCO's
                rules.'' Without taking a formal position on the proposal, the ABA
                Subcommittee identified issues that it believed warrant further
                attention by the Commission and market participants, including whether
                the language in paragraph (c)(1): (a) Should be implemented ``through a
                Part 190 rule that would have the effect of overruling inconsistent DCO
                rules,'' or through an amendment to part 39 to require DCOs ``to have
                loss allocation rules that align with [the] policy change''; (b) would
                place U.S. DCOs ''at a competitive disadvantage to non-U.S. DCOs''; (c)
                would ``discourage firms from becoming or remaining direct clearing
                members of a DCO for the purpose of clearing trades solely for their
                own account or for non-public customers''; and/or (d) would ``create a
                risk that U.S. banking regulators will want to revisit the methodology
                for determining the amount of regulatory capital that bank and bank-
                affiliated clearing members must hold with respect to cleared
                derivatives.'' The ABA Subcommittee therefore recommended that the
                Commission maintain the status quo by revising proposed Sec.
                190.18(c)(1) ``to confirm that customer property described in Rule
                190.09(b)(1) will be allocated to member property after such property
                is applied to cover losses in accordance with the DCO's rules . . .
                [until] the Commission separately considers the merits of the
                [proposed] policy change.''
                 SIFMA AMG/MFA requested that the Commission amend proposed Sec.
                190.18(b)(1) to provide explicitly ``that customer property includes
                property a debtor DCO contributes to its default waterfall,'' as
                seemingly was intended by proposed Sec. 190.18(b)(1)(ii)(E).
                 Consistent with its comments on proposed Sec. 190.17(b), FIA
                commented that customer property should not include guaranty fund
                deposits as set forth in proposed Sec. 190.18(b)(1)(iii) and
                recommended that the Commission remove that provision. FIA stated that
                a ``default fund represents a multilateral indemnification arrangement
                between the DCO and its members pursuant to which members'
                contributions are used to cover the DCO's losses resulting from member
                default(s) and thereby prevent the DCO's bankruptcy.'' FIA contended
                that a DCO has no authority under its rules, and a trustee has no
                authority under the Bankruptcy Code, ``to request or to apply these
                funds for any other purpose.''
                 CME commented in support of the decision to set forth the elements
                that comprise customer property in proposed Sec. 190.18(b)(1). CME
                specifically agreed that the scope of customer property should include
                any guaranty fund deposit, assessment or similar deposit made by a
                clearing member or recovered by the trustee, to the extent any remains
                following administration of the debtor's default rules and procedures,
                and any other property of a member available under the debtor's default
                rules and procedures to satisfy claims made by or on behalf of pubic
                customers of a member. For clarity and transparency, CME encouraged the
                Commission to expand the scope of customer property to explicitly
                include the amounts that the DCO commits to the financial resources in
                the waterfall under its rules, to the extent that those resources have
                not already been applied under the DCO's default rules. CME stated,
                however, that the Commission should eliminate the requirement set forth
                in proposed Sec. 190.18(c)(1) that the payments described in proposed
                Sec. 190.18(b)(1) be allocated to customer property other than member
                property for use ``to cover a shortfall in the funded balances for
                clearing members' customer accounts in any account class'' and,
                instead, ``reaffirm that guaranty fund deposits are to be applied to
                cover losses in accordance with the DCO's rules, with any remaining
                funds allocated to member property.'' In support of its view, CME
                stated that such requirement set forth in proposed Sec. 190.18(c)(1):
                (1) Would materially change ``the definition of member property in
                current Regulation 190.10, under which any guaranty funds remaining
                after payments in accordance with the DCO's rules would be returned to
                clearing members as member property''; (2) ``may significantly alter
                how clearing members assess the risks they have assumed in joining
                CME,'' by undermining CME's ``rules limiting use of clearing members'
                guaranty fund deposits to cover losses in the relevant product class to
                which they have contributed to the guaranty fund and in which they
                participate''; and (3) would ``compromise CME's ability under
                Regulation 39.27 to `operate pursuant to
                [[Page 19380]]
                a well-founded, transparent, and enforceable legal framework that
                addresses each aspect' of CME's obligations as a DCO, including netting
                arrangements and `other significant aspects' of CME's `operations, risk
                management procedures, and related requirements' as a DCO.'' \193\ CME
                also asserted that: (a) Proposed Sec. 190.18(c)(1) ``is vulnerable to
                legal challenge as exceeding the Commission's authority'' in section 20
                of the CEA, because such authority is not being exercised consistent
                with the Bankruptcy Code and other provisions of the CEA; \194\ (b) the
                Commission does not have the authority under the CEA ``to adopt rules
                that have the effect of directly rewriting a DCO's rules,'' and that
                doing so would be contrary to the reasonable discretion afforded to
                DCOs under section 5b of the CEA to comply with DCO core principles and
                Commission regulations; (c) the Commission may not alter or supplement
                the rules of a registered entity until it satisfies the requirement
                under section 8a(7) of the CEA to request that the registered entity
                amend its rules and provide the registered entity with notice and an
                opportunity for a hearing if it does not do so; (d) amending the
                contract between and among clearing members and the DCO through a
                Commission regulation ``would call into question . . . the
                enforceability of the DCO's rules''; and (e) ``a proposed rule
                impacting the manner in which bank or bank-affiliated clearing members'
                guaranty fund deposits and assessment obligations can be utilized may
                drive subsequent changes to the methodology and resulting amount of
                capital such members must hold for those exposures under the Cleared
                Transactions Framework in the Regulatory Capital Rules.''
                ---------------------------------------------------------------------------
                 \193\ Emphasis in original.
                 \194\ CME commented that the proposal would be contrary to the
                Bankruptcy Code's definition of ``member property'' as ``customer
                property received, acquired, or held by or for the account of a
                debtor that is a clearing organization, from or for the proprietary
                account of a customer that is a clearing member of the debtor.''
                ---------------------------------------------------------------------------
                 ICE agreed with the Commission's approach not to propose ``that
                property in an insolvent DCO's general estate can be treated as
                customer property where customer property is otherwise insufficient to
                pay customer claims.'' ICE suggested that the Commission clarify ``that
                any ability to use residual assets should be only to the extent such
                assets are not required to be used for any other purpose under other
                applicable law (e.g.[,] for other classes of customers or for other
                products).'' ICE suggested that ``[t]he definition of customer property
                should also respect any express limitations on recourse that have been
                implemented under DCO rules.'' ICE did not believe that the
                distributional preference for public customers over clearing members
                and any non-public customers of clearing members, as established by
                proposed Sec. 190.18, is appropriate in the context of a DCO failure,
                because it could ``impose losses, or greater losses, on non-defaulting
                clearing members in a manner that overrides the negotiated and approved
                frameworks in the DCO's rules.'' ICE asserted that this ``change could
                require fundamental restructuring of DCO operations,'' and should be
                ``part of a separate rulemaking that addresses the interaction [of the
                proposal] with the Part 39 requirements.'' ICE also noted that the
                liability caps that limit the overall amount of a clearing member's
                contributions and assessments--and the manner in which they may be used
                for a particular default--are important for the clearing members' risk
                management and are often necessary under such clearing members' capital
                requirements. ICE stated that requiring the use of contributions or
                assessments for purposes other than what is set forth in the DCO's
                rules ``would render such caps and limitations ineffective.'' ICE
                further posited that proposed Sec. 190.18 is ``unworkable for clearing
                houses that have separate guaranty funds for separate products, or
                other limited recourse provisions in their rulebooks [that are used] to
                designate particular default resources for particular products, and to
                ring-fence the liability of clearing members from particular products
                that they may choose not to clear.'' ICE also raised a concern that
                proposed Sec. 190.18's potential subordination of the claims of the
                self-clearing members of a defaulting DCO to customers of other
                clearing members could serve as a ``significant disincentive'' to self-
                clearing, sponsored clearing, or direct clearing. ICE commented that
                proposed Sec. 190.18 ``should not be applied to require the use of
                clearing member guarantee fund, margin, or other resources in the
                context of a non-default loss where the rules of the DCO specifically
                do not contemplate (or expressly forbid) the use of such assets for
                such purposes.'' On that issue, ICE noted that many DCOs have sought to
                address separately the allocation of non-default losses through rules
                that ``may allocate certain losses, and not others, to clearing members
                and/or to the clearing organization itself, and/or provide for the
                sharing of certain losses in certain amounts.''
                 After considering the comments, the Commission is adopting Sec.
                190.18 with modifications, specifically with respect to paragraphs
                (b)(1) and (c)(1).
                 Multiple commenters suggested that the Commission modify Sec.
                190.18(b)(1) to make explicit that customer property includes the
                amounts of its own funds that a debtor DCO had committed as part of its
                loss allocation rules. Given that the DCO's commitment, in DCO rules,
                of a specified amount of its own funds to loss allocation sets a
                market-wide understanding and expectation that such an amount will be
                used for such a purpose, the Commission agrees that this clarification
                is warranted. Therefore, the Commission is modifying Sec. 190.18(b)(1)
                by adding a new paragraph (b)(1)(iv), which will explicitly include in
                customer property: ``Amounts of its own funds that the debtor had
                committed as part of its loss allocation rules, to the extent that such
                amounts have not already been applied under such rules.''
                 Multiple commenters addressed proposed Sec. 190.18(c)(1)(i), which
                assigned guarantee funds to customer property other than member
                property (i.e., to the benefit of members' public customers) if and to
                the extent that a shortfall existed in the funded balance for such
                customers. The proposal was supported by ICI, but opposed by CME, FIA,
                and ICE, while the ABA Subcommittee also noted potential issues.
                 The Commission separately considered each of the arguments raised
                by the commenters in opposition to proposed Sec. 190.18(c)(1). In the
                discussion below, the Commission reviews the arguments raised by the
                commenters and explains why it is modifying the proposal by not
                adopting proposed Sec. 190.18(c)(1), and renumbering the remaining
                paragraphs of proposed Sec. 190.18(c).
                 In response to concerns that the Commission lacks the authority to
                implement this provision, the Commission notes that it has the
                authority under section 20(a)(1) of the CEA to determine,
                ``[n]otwithstanding title 11 of the United States Code'' (i.e., the
                Bankruptcy Code) both ``(1) that certain . . . property [including,
                e.g., guarantee fund deposits] [is] to be included in or excluded from
                . . . member property'' and ``(5) how the net equity of a customer is
                to be determined.'' Thus, Sec. 190.18(c)(1) is legally sound because
                of the ``notwithstanding title 11'' clause in section 20 of the CEA.
                 Moreover, proposed Sec. 190.18(c)(1) would allocate guarantee fund
                deposits to customer property other than member
                [[Page 19381]]
                property only where the funded balance is less than one hundred percent
                of net equity claims for members' public customers in an account class,
                i.e., where the DCO had failed to maintain in segregation sufficient
                funds to pay members' public customer account balances in full. In
                other words, in that scenario, the debtor DCO would be non-compliant
                with Commission regulations. This is not a re-writing of the DCO's
                rules,\195\ nor a re-writing of the contract between the DCO and its
                members, nor an undermining of the DCO's ``well-founded, transparent,
                and enforceable legal framework,'' but an allocation of shortfall in a
                bankruptcy case where the DCO is non-compliant with Commission
                regulations.
                ---------------------------------------------------------------------------
                 \195\ And, thus, does not require the Commission to invoke or
                follow the procedures of CEA section 8(a)(7).
                ---------------------------------------------------------------------------
                 The use of guarantee funds in the manner specified in proposed
                Sec. 190.18(c)(1) would not be an ``unexpected loss'' to non-
                defaulting clearing members, given that the regulation would be
                transparently available to all. To the extent that the consequences of
                the application of the regulation (re-allocation of their default fund
                contributions to cover a shortfall in customer property for members'
                public customers) would be unexpected by clearing members, and
                unpredicted by their risk management systems, it is equally the case
                that the public customers of clearing members would be surprised by a
                shortfall in customer property, which their risk management systems
                would also see as unexpected.\196\ Thus, the choice is not simply
                whether to impose an unexpected loss to clearing members or not, but
                rather a choice of who should bear that unexpected loss, clearing
                members (as a group) or their customers (as a group). To that point, in
                addition to the statutory authority that is provided in the CEA, the
                Commission agrees with the comment from ICI that Sec. 190.18(c)(1)
                would further the policy goal--stated in section 766(h) of the
                Bankruptcy Code, but also running throughout the Commission's approach
                to part 190--of prioritizing the claims of public customers over the
                claims of non-public customers.
                ---------------------------------------------------------------------------
                 \196\ Indeed, the risk would be even more unexpected by public
                customers: Clearing members are entirely aware that their default
                fund contributions are at risk of use to cover a mutualized default.
                Their customers, on the other hand, expect that their customer funds
                are fully protected by the CEA's and the Commission's segregation
                requirements.
                ---------------------------------------------------------------------------
                 However, despite the foregoing analysis supporting adoption of
                Sec. 190.18(c)(1), the Commission is concerned about bank regulators'
                potential analysis of Sec. 190.08(c)(1). In particular, the Commission
                has considered that bank regulators may conclude that, because Sec.
                190.08(c)(1) directs the use of DCO default funds for reasons other
                than addressing mutualized member defaults, member contributions to DCO
                default funds do not fit within the definition (in bank capital
                regulations) of ``default fund contribution,'' see, e.g., 12 CFR 217.2.
                Specifically, such member contributions may not constitute ``funds
                contributed or commitments made by a clearing member to a CCP's
                mutualized loss sharing arrangement,'' see, e.g., id. If this were the
                case, members' default fund contributions would be subject to more
                onerous capital treatment than they would receive if such contributions
                did fit within the definition of ``default fund contributions.'' \197\
                That more onerous capital treatment would have a direct, negative
                impact on normal day-to-day activities for bank-affiliated clearing
                members, and not merely in the uncertain future event of a DCO
                bankruptcy. In other words, as discussed further below in section
                III.D.8, while the benefits to public customers of Sec. 190.18(c)(1)
                in case of bankruptcy would be balanced by the costs to clearing
                members, the present-day costs to (bank-affiliated) clearing members of
                more onerous capital treatment would not be offset by significant
                benefits to public customers.
                ---------------------------------------------------------------------------
                 \197\ That treatment could be significantly more onerous: For
                example, under the FDIC's regulations, the capital requirement for a
                clearing member's prefunded default fund contribution to a
                qualifying CCP can be as low as 0.16% of that default fund
                contribution. See 12 CFR 324.133(d)(4). By contrast, the capital
                requirement for a clearing member's prefunded default fund
                contribution to a non-qualifying CCP is 100% of that default fund
                contribution. See 12 CFR 324.10(a)(1)(iii), (b)(3) (requiring
                capital of 8% of risk-weighted asset amount, 324.133(d)(2) (setting
                risk-weighted asset amount for default fund contributions to non-
                qualifying CCP at 1,250% of the contribution). (1,250% * 8% = 100%).
                The Federal Reserve and Office of the Comptroller of the Currency
                have similar regulations.
                 Default fund contributions to DCOs total many billions of
                dollars. While not all default fund contributions to DCOs come from
                bank-affiliated clearing members, the majority of them do.
                ---------------------------------------------------------------------------
                 The Commission acknowledges that the decision not to adopt proposed
                Sec. 190.18(c)(1) differs from the Commission's approach to Sec.
                190.17(b)(1). In Sec. 190.17(b)(1), uncalled or unmet assessments
                would be applied to address default losses, with the only difference
                being the timing of the bankruptcy relative to the timing of the calls
                for, or payment of, the assessments. In short, the Commission concludes
                in that context that the default fund contributions would be treated as
                such for bank capital purposes, and thus would not be subject to more
                onerous capital treatment. In contrast, proposed Sec. 190.18(c)(1)
                would apply guarantee funds to cases that are distinct from a member
                default. As discussed above, it seems entirely plausible that doing so
                would take such contributions outside of the definition (in bank
                capital regulations) of ``default fund contribution,'' and thus subject
                them to more onerous capital treatment. The Commission believes that
                this distinction is significant and forms the basis for the difference
                in the Commission's respective approaches to Sec. 190.17(b)(1) and
                proposed Sec. 190.18(c)(1).
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is adopting Sec. 190.18 as
                proposed, with the following modifications, as set forth above: (1)
                Adding new paragraph (b)(1)(iv), as described above; and (2) by
                removing paragraph (c)(1) and renumbering the remaining paragraphs of
                paragraph (c).
                9. Regulation Sec. 190.19: Support of Daily Settlement
                 The Commission is adopting Sec. 190.19 as proposed, with a
                modification to paragraph (b)(1), as discussed below.
                 As the Commission noted in proposing Sec. 39.14(b), ``[t]he daily
                settlement of financial obligations arising from the addition of new
                positions and price changes with respect to all open positions is an
                essential element of the clearing process at a DCO.'' \198\ Indeed,
                Congress confirmed this by requiring that each DCO complete money
                settlements not less frequently than once each business day.\199\
                ---------------------------------------------------------------------------
                 \198\ 76 FR 3608, 3708 (Jan. 11, 2011).
                 \199\ See Core Principle E(i), 7 U.S.C. 7a-1(c)(2)(E)(i).
                ---------------------------------------------------------------------------
                 In the ordinary course of business, variation settlement payments
                are, at a set time or times each day,\200\ sent to the DCO from the
                customer and proprietary accounts of each clearing member with net
                losses in such accounts (since the last point of computation of
                settlement obligations for that member), and then sent from the DCO to
                the customer and proprietary accounts of each clearing member with net
                gains in such accounts over that time period.
                ---------------------------------------------------------------------------
                 \200\ DCOs are required to effect settlement with each clearing
                member at least once each business day. They are additionally
                required to have the capability to effect a settlement with each
                clearing member on an intraday basis. See Sec. 39.14(b).
                ---------------------------------------------------------------------------
                 There is no necessary relationship between the aggregate amount of
                payments to the DCO from all clearing
                [[Page 19382]]
                member customer accounts with net losses and the aggregate amount of
                payments from the DCO to clearing members' customer accounts with net
                gains. On the other hand, it is the case that, for each business day,
                the sum of variation settlement payments to the clearinghouse from
                clearing members' customer and house accounts with net losses will
                equal the sum of variation settlement payments from the clearinghouse
                to clearing members' customer and house accounts with net gains.\201\
                Those variation settlement payments will be received into the DCO's
                accounts at one or more settlement banks from the accounts of the
                clearing members with net losses and subsequently be disbursed from the
                DCO's accounts at settlement banks to the accounts of the clearing
                members with net gains.\202\ Depending on the settlement bank and
                operational arrangements of the particular DCO, the variation
                settlement funds will remain in the DCO's accounts between receipt and
                disbursement for a time period of between several minutes and several
                hours.
                ---------------------------------------------------------------------------
                 \201\ Thus, while (for each settlement cycle), customer account
                losses (x) plus house account losses (y) will equal customer account
                gains (p) plus house account gains (q) (that is, x + y = p + q), x
                would only equal p by random chance.
                 \202\ In some cases, the DCO will use one settlement bank, and
                all settlement funds will flow into and out of that bank. In other
                cases, the DCO may use a system of settlement banks, and the DCO
                may, after receiving payments from members with payment obligations,
                move funds between and among the settlement banks (possibly through
                a ``concentration bank'') to match the settlement funds at each bank
                to the DCO's settlement obligations to members who are entitled to
                settlement payments.
                ---------------------------------------------------------------------------
                 The Commission believes that it is crucial to the settlement
                process that the variation settlement payments that flow into the DCO
                from accounts with net losses are available promptly to flow out of the
                DCO as variation settlement to accounts with net gains.
                 The Commission is adopting Sec. 190.19(a), pursuant to section
                20(a)(1) of the CEA,\203\ to provide that, upon and after an order for
                relief, variation settlement funds shall be included in the customer
                property of the DCO, and that they shall be considered traceable to--
                and shall promptly be distributed to--member and customer accounts
                entitled to payment with respect to the same daily settlement.\204\
                This customer property would be allocated to (i) member property and
                (ii) customer property other than member property, in proportion to the
                ratio of total gains in member accounts with net gains, and total gains
                in customer accounts with net gains, respectively.
                ---------------------------------------------------------------------------
                 \203\ 7 U.S.C. 24(a)(1) (``Notwithstanding title 11 of the
                United States Code, the Commission may provide, with respect to a
                commodity broker that is a debtor under chapter 7 of title 11 of the
                United States Code, by rule or regulation . . . that certain cash,
                securities, other property, or commodity contracts are to be
                included in or excluded from customer property or member
                property.'').
                 \204\ Because deposits of initial margin described in Sec.
                39.14(a)(1)(iii) are separate from the variation settlement process,
                they are treated separately in Sec. 190.19(a). Such funds would be
                member property to the extent that they are deposited on behalf of
                members' house accounts, and customer property other than member
                property to the extent that they are deposited on behalf of members'
                customer accounts.
                ---------------------------------------------------------------------------
                 The Commission is adopting Sec. 190.19(b) to address cases where
                there is a shortfall in funds received pursuant to paragraph (a) (i.e.,
                settlement payments received by the DCO), such as in the case of a
                member default. Paragraph (b)(1) sets forth how such a shortfall shall
                be supplemented, to the extent necessary, and further states that such
                funds shall be allocated in the same proportion as referred to in
                paragraph (a). Paragraph (b)(1) provides that four types of property
                shall be included as customer property: (i) Initial margin held for the
                account of a member that has defaulted on a daily settlement, including
                initial margin segregated for the customers of such member; \205\ (ii)
                Assets of the debtor to the extent dedicated to such use as part of the
                debtor's default rules and procedures, or as part of any recovery and
                wind-down plans described in the paragraph (a) (i.e., the debtor DCO's
                ``skin in the game''); (iii) Prefunded guarantee or default funds
                maintained pursuant to the DCO debtor's default rules and procedures;
                and (iv) Payments made by members pursuant to assessment powers
                maintained pursuant to the debtor DCO's default rules and procedures.
                Paragraph (b)(2) provides that, to the extent that the funds that are
                included as customer property pursuant to paragraph (a), supplemented
                as described in paragraph (b)(1), such funds would be allocated between
                (i) member property; and (ii) customer property other than member
                property, in proportion to the ratio of total gains in member accounts
                with net gains, and total gains in customer accounts with net gains,
                respectively.
                ---------------------------------------------------------------------------
                 \205\ This is restricted to the extent that such margin may only
                be used to the extent that such use is permitted pursuant to parts
                1, 22, and 30 of the Commission's regulations, which include
                provisions restricting the use of customer margin.
                ---------------------------------------------------------------------------
                 The Commission requested comment with respect to all aspects of
                proposed Sec. 190.19.
                 CME expressed support for proposed Sec. 190.19, commenting that
                the provisions in the proposal ``are appropriate to support the daily
                settlement cycle when the trustee obtains the Commission's approval to
                continue operating the DCO.'' FIA commented that it did not support
                proposed Sec. 190.19(b), stating that the provision's reliance on a
                debtor DCO's recovery and wind-down plans post-bankruptcy would be
                inappropriate.\206\ SIFMA AMG/MFA requested that the Commission modify
                proposed Sec. 190.19(b)(1) to clarify the Commission's presumed intent
                that ``the debtor's recovery and wind-down plans shall only apply with
                respect to proposed Sec. 190.19(b)(1)(ii)--the debtor's ``skin in the
                game'' [(i.e., its own capital contributions)]--and not with respect to
                the other'' categories of customer property that are enumerated in
                Sec. 190.19(b)(1). The Commission agrees that its intent should be
                clarified to reflect the comment from SIFMA AMG/MFA,\207\ and is
                modifying the language of Sec. 190.19 to reflect that clarification.
                ---------------------------------------------------------------------------
                 \206\ FIA's concerns with the language in Sec. 190.19(b) are
                the same as its concerns with Sec. 190.15(b) and (c), discussed in
                greater detail above. See supra section II.C.5. However, for the
                reasons noted in section II.C.5, the Commission believes that
                providing a ``menu of options'' among which a trustee may select
                (and adapt) in a manner that is ``reasonable and practicable'' would
                provide the trustee with a helpful roadmap to determine strategy and
                tactics, given that the trustee will likely face a complex and
                difficult situation with little preparation.
                 \207\ As SIFMA AMG/MFA correctly suggested, the Commission
                intends for the debtor DCO's recovery and wind-down plans to apply
                to the property described in Sec. 190.19(b)(1)(ii), and not to the
                property described in paragraph (b)(1)(i), (iii) or (iv), in the
                manner and to the extent described in paragraph (b)(1). As noted in
                the preamble to the proposal, and as found in the regulation itself,
                Sec. 190.19(b)(1)(ii) contains an explicit reference to ``recovery
                and wind-down plans,'' whereas Sec. 190.19(b)(1)(i), (iii) and (iv)
                do not contain such references.
                ---------------------------------------------------------------------------
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is adopting Sec. 190.19 as
                proposed, with a modification to clarify that the reference to the
                debtor's recovery and wind-down plans in paragraph (b)(1) applies only
                to paragraph (b)(1)(ii), as set forth above.
                D. Appendix A Forms
                 The Commission is deleting forms 1 through 3 contained in appendix
                A and is replacing form 4 with a streamlined proof of claim form.
                Current forms 1 through 3 contain outdated provisions that require
                unnecessary information to be collected. The Commission believes these
                changes will provide a trustee with flexibility to act based on the
                specific circumstances of the case, while still acting consistently
                with the rules.
                 As noted in Sec. 190.03(f), the trustee will be permitted, but not
                required, to use the revised template proof of claim form included as
                new appendix A. That
                [[Page 19383]]
                template is intended to implement Sec. 190.03(e), and includes cross-
                references to the detailed paragraphs of that section. Similarly, the
                instructions for this template form that are included in appendix A are
                also designed to aid customers in providing information and
                documentation to the trustee that will enable the trustee to decide
                whether, and in what amount, to allow each customer's claim consistent
                with part 190.
                 The Commission received one comment with respect to appendix A,
                from CME, which opined that ``the proposed template proof of claim form
                included as Appendix A [is a] major improvement[ ] over the current . .
                . proof of claim template. CME also support[ed] giving the trustee the
                flexibility to tailor the proof of claim form to request information of
                customers as appropriate under the circumstances.''
                 Accordingly, after consideration of this comment, and for the
                reasons stated above, appendix A to part 190 will be adopted as
                proposed.
                E. Appendix B Forms
                 Appendix B to part 190 contains special bankruptcy distribution
                rules. These rules are broken into two frameworks. Framework 1 provides
                special rules for distributing customer funds when the debtor FCM
                participated in a futures-securities cross-margining program that
                refers to that framework. Framework 2 provides special rules for
                allocating as shortfall in customer funds to customers when the
                shortfall is incurred with respect to funds held in a depository
                outside the U.S. or in a foreign currency.
                 The Commission proposed clarifying changes to framework 1. No
                comments were received with respect to framework 1. Accordingly, and
                for the reasons stated above, the Commission is adopting appendix B,
                framework 1 as proposed.
                 The Commission proposed to retain framework 2 with some clarifying
                changes to the opening paragraph, but without proposing any substantive
                change. It proposed to retain the current instructions and examples
                following the first paragraph in appendix B, framework 2 entirely
                unchanged. It requested comment with respect to framework 2. The
                Commission received two comments on framework 2: From the ABA
                Subcommittee, and from a number of individual members of that
                subcommittee writing on their own behalf.
                 The ABA Subcommittee expressed the concern that ``[f]ramework 2
                creates some ambiguity on when and how the special distribution
                framework it prescribes should apply.'' First, the ABA Subcommittee
                stated that ``framework 2 could be read to apply whenever there is a
                loss resulting from a sovereign action, even if there is sufficient
                customer property to otherwise pay all customer net equity claims in
                full.'' The ABA Subcommittee suggested that an additional sentence be
                added to the opening paragraph of framework 2 clarifying that it
                applies only when there is a loss due to sovereign action and there is
                insufficient customer property to pay all customer net equity claims in
                full. Second, the ABA Subcommittee (in conjunction with a clarifying
                comment from the Subcommittee Members) noted that framework 2 uses the
                term ``reduction in claims'' in a potentially confusing manner--
                framework 2 is intended to reduce distributions allocated to those
                customers who are allocated losses due to sovereign risk; those
                customers claims are not reduced. If the sovereign action is later
                reversed or modified, those customers whose distributions were reduced
                will receive increased distributions on their claims.
                 Third, the existing instructions to framework 2 ``establish the
                `Final Net Equity Determination Date' as the date for both converting
                customer claims to U.S. dollars and determining the amount of the
                Sovereign Loss.'' However, in prior bankruptcies of FCM/commodity
                brokers, ``claims stated in foreign currencies were either valued on
                the date of transfer (where porting was available), or converted to
                U.S. dollars as of either as of the petition date or the date on which
                the foreign currency reflected in the customer's account was liquidated
                (and thus the customer bore the risk of interim currency
                fluctuations).'' Furthermore, ``a sovereign action could take place at
                any time after the petition date, and the trustee is required to make
                funded balance calculations throughout the course of the bankruptcy
                case for purposes of porting and/or making interim distributions.''
                 The Commission finds the comments on framework 2 of the ABA
                Subcommittee, as clarified by the comment of the Subcommittee Members,
                persuasive. First, framework 2 is indeed only intended to address cases
                where there is insufficient customer property to pay all customer net
                equity claims in the relevant account class in full (if there is no
                shortfall, then there is no need to allocate losses), and that point
                should be made clear. Second, it is correct that framework 2 is
                intended to reduce distributions, it is not intended to reduce claims,
                and it is indeed appropriate to change the language used in framework 2
                to clarify this fact.\208\ Third, the relevant date is the date of the
                calculation, not the ``Final Net Equity Determination Date,'' and this
                should be clarified as well.
                ---------------------------------------------------------------------------
                 \208\ The fact that sovereign action reduces distributions
                rather than claims means that, if the sovereign action is later
                reversed or modified (e.g., by appeal in the foreign courts, or due
                to recovery of assets in the foreign insolvency proceeding)
                resulting in reduced losses due to sovereign action in a particular
                jurisdiction, those customers whose distributions have been reduced
                due to sovereign action in that jurisdiction will receive increased
                distributions on their claims (with those distributions adjusted to
                reflect the revised amount of losses due to sovereign action). Thus,
                in this case, the claims remain constant, while the distributions
                increase.
                ---------------------------------------------------------------------------
                 Accordingly, the Commission is:
                 (1) Modifying the first paragraph of framework 2 to include the
                statement that: ``If a futures commission merchant enters into
                bankruptcy and maintains futures customer funds or Cleared Swaps
                Customer Collateral in a depository outside the U.S. or in a depository
                located in the U.S. in a currency other than U.S. dollars, and a
                sovereign action of a foreign government or court has occurred that
                contributes to shortfalls in the amounts of futures customer funds or
                Cleared Swaps Customer Collateral, the trustee shall use the following
                allocation procedures'' (emphasis added solely for illustration).
                 (2) Amending the instructions and examples within the whole of
                framework 2 to replace references to ``reduction in claims'' with
                references to ``reduction in distributions,'' and with conforming
                changes to other text.
                 (3) Deleting the phrase ``Final Net Equity Determination Date''
                from current section II.B.2.b of framework 2, and replacing it with the
                phrase ``date of the calculation.''
                 Accordingly, after consideration of the comments, and for the
                reasons stated above, the Commission is adopting appendix B, framework
                2 as proposed, with the modifications described above.
                F. Technical Corrections to Other Parts
                1. Part 1
                 The Commission is making as proposed several technical corrections
                and updates to part 1 in order to update cross-references. These are as
                follows:
                 In Sec. 1.25(a)(2)(ii)(B) the Commission will revise the
                cross-reference to specifically identifiable property, since the
                definition will be updated in Sec. 190.01.
                 In Sec. 1.55(d) introductory text and (d)(1) and (2),
                references to current Sec. 190.06 will be removed consistent
                [[Page 19384]]
                with the revisions to new Sec. 1.41 (which was proposed as Sec.
                190.10(b) and renumbered).
                 In Sec. Sec. 1.55(f) and 1.65(a)(3) introductory text and
                (a)(3)(iii) the Commission will update references to the customer
                acknowledgment in Sec. 1.55(p) (which was proposed as Sec. 190.10(e)
                and renumbered).
                2. Part 4
                 In part 4, the Commission is making as proposed minor technical
                corrections: In Sec. Sec. 4.5(c)(2)(iii)(A), 4.12(b)(1)(i)(C), and
                4.13(a)(3)(ii)(A), the Commission will change the cross-references to
                the defined term for ``in-the-money-amount.''
                3. Part 41
                 In part 41, the Commission is making as proposed one technical
                correction. In Sec. 41.41(d), the Commission will delete the cross-
                reference to the recordkeeping obligations in current Sec. 190.06,
                pursuant to the revisions to Sec. 1.41 (which was proposed as Sec.
                190.10(b) and renumbered).
                 No comments were received with any of these technical corrections
                and accordingly, for the reasons stated above, they are being adopted
                as proposed.
                G. Additional Comments
                 In addition to the comments discussed above, the Commission
                received several general comments that addressed matters outside the
                scope of the Proposal. The Commission appreciates the additional
                feedback. Because these comments do not address proposed changes and
                are therefore outside the scope of this rulemaking, the Commission may
                take the comments under advisement for future rulemakings.
                 ISDA encouraged the Commission to continue working on DCO recovery
                and resolution issues alongside the Federal Deposit Insurance
                Corporation (FDIC) in the United States, and with global standard
                setters such as CPMI-IOSCO and the Financial Stability Board and other
                CCP supervisors and resolution authorities internationally. The
                Commission notes that staff are actively doing each of those things.
                 ISDA also noted that it would be advisable to engage in workshops
                with both market participants (including DCOs, FCMs and other clearing
                members and customers) and the FDIC prior to finalizing the Proposal to
                develop examples that illustrate both how net equity claims would be
                calculated in a hypothetical DCO insolvency under various loss
                scenarios and how the claims of creditors and equity would be treated
                in a resolution of the DCO under Title II of the Dodd-Frank Act. ISDA
                observed that the Proposal's treatment of a DCO's insolvency contains
                significant subtleties and nuances that could have implications for the
                counterfactual in a DCO resolution. ISDA suggested that further
                engagement could help ensure that these subtleties and nuances would
                not result in any unintended consequences, and that they are broadly
                understood by all entities that could be impacted by a DCO's insolvency
                or resolution.
                 While the Commission is finalizing the Proposal, it agrees that
                workshops and similar interactions between staff and other agencies, as
                well as with industry participants, are an excellent way to expose
                subtleties and nuances, build common understanding, and enhance
                planning.
                 CME and CMC commented on various issues relating to delivery, and
                requested that ``the Commission consider, in a separate rulemaking, the
                merits of imposing custody requirements or other customer protection
                requirements with respect to delivery accounts, along with the
                possibility of further subdividing delivery accounts and delivery
                account classes by underlying asset class or delivery mechanism, e.g.,
                electronic transfer versus physical load-out.'' \209\ CME recommended
                that the separate rulemaking consider requirements such as whether FCMs
                should hold such property in custody accounts or limitations on how
                long cash or cash equivalents should be held in delivery accounts that
                are not subject to custody requirements.\210\ CME believed that any
                such rules would fit best in the Commission's part 1 regulations and
                not in part 190 as parties with delivery obligations may not
                necessarily be aware of requirements in the bankruptcy regulations. CME
                recommended that the part 190 provisions relating to the delivery
                account class should be consistent with any such rules the Commission
                may ultimately adopt. Thus, CME believed that the Commission may have
                to revisit the delivery account class definition, and any appropriate
                subdivisions within the account class, along with the definitions of
                cash delivery property and physical delivery property definitions,
                based on the outcome of such a rulemaking.
                ---------------------------------------------------------------------------
                 \209\ See CMC, CME.
                 \210\ See CME. CME believed that the Commission has authority to
                adopt such a rule pursuant to its anti-fraud authority under CEA
                section 4b and its plenary authority to regulate commodity options
                under CEA section 4c(b).
                ---------------------------------------------------------------------------
                 As noted above, the Commission recognizes the importance of
                addressing deliveries and delivery accounts, in order to protect
                customer funds in delivery accounts, to avoid disruptions to cash
                markets for delivered commodities, and to avoid adverse consequences to
                parties that may be relying on delivery taking place in connection with
                their business operations. The Commission notes that there potentially
                would be benefits to requiring segregation for delivery accounts, but
                there would be corresponding costs as well. The Commission expects to
                continue its consideration of such delivery and delivery account issues
                in the future.
                 SIMFA AMG/MFA understood the Commission's decision, due to limited
                resources, not to amend certain key definitions and concepts outside
                part 190, as proposed by the ABA Subcommittee in its model set of part
                190 rules, within this rulemaking. These amendments include, e.g., the
                definitions of foreign option and variation margin, as well as
                regulations concerning non-swap and non-futures over-the-counter
                transactions cleared by a DCO and concerning leverage transaction
                merchants. However, SIFMA AMG/MFA recommended that the Commission make
                these amendments as soon as possible, given the beneficial impact such
                changes will have on the administration of an FCM or DCO insolvency.
                The Commission may consider these proposed changes in the future.
                 ICI and Vanguard encouraged the Commission to work with other
                regulators to minimize existing barriers to porting, particularly for
                FCMs dually registered as broker-dealers, FCMs within consolidated
                groups that are subject to certain due diligence requirements, and FCMs
                that are subject to the FDIC's Orderly Liquidation Authority
                proceedings. The commenters encouraged the Commission to work with
                regulators to permit similar six-month grace periods and remove the
                requirement to port ``all or none'' of the positions instead of
                allowing partial transfers of customer positions, including those of
                separately managed accounts.
                 ICI also recommended that the Commission engage with SIPC or the
                relevant bankruptcy court to ensure that any selected trustee has the
                experience and knowledge to act in accordance with the duties contained
                in part 190 and Subchapter IV of the Bankruptcy Code.
                 Commission staff have and will continue to work with staff of other
                regulators to minimize barriers to
                [[Page 19385]]
                porting, and have worked and will, if and when necessary in future,
                work with SIPC and the office of the U.S. Trustee, to promote the
                appointment of the most knowledgeable trustees available in the context
                of SIPA or Chapter 7 proceedings, respectively, involving a commodity
                broker.
                 ICI recommended that the Commission continue its portfolio
                margining harmonization efforts with the SEC to further facilitate
                portfolio margining, including with respect to security-based swaps and
                swaps. The Commission notes that the two Commissions are actively
                engaging in such efforts, and, on October 22, 2020, held a joint
                meeting during which they jointly approved a ``Request for Comment:
                Portfolio Margining of Uncleared Swaps and Non-Cleared Security-Based
                Swaps.'' \211\
                ---------------------------------------------------------------------------
                 \211\ 85 FR 70536 (November 5, 2020).
                ---------------------------------------------------------------------------
                 ICI and Vanguard recommended that the Commission extend the
                ``legally segregated operationally commingled'' (``LSOC'') model
                applied to cleared swaps contracts (and associated collateral) within
                part 22 to also apply to futures, foreign futures, and options thereon
                (and associated collateral) to limit non-defaulting customer exposure
                to defaulting customers.
                 ICI also requested that the Commission or Commission staff provide
                guidance, such as an interpretive letter, that interprets part 22 to
                require that OTC transactions cleared by DCOs and carried in a cleared
                swaps account be treated as cleared swaps subject to part 22.\212\
                ---------------------------------------------------------------------------
                 \212\ Such an interpretation may be superfluous. Previously, the
                Commission issued an ``Interpretative Statement Regarding Funds
                Related to Cleared-Only Contracts Determined To Be Included in a
                Customer's Net Equity.'' 73 FR 57235 (October 2, 2008). At the time,
                prior to Dodd-Frank, there were questions as to whether cleared-only
                transactions were commodity contracts. The Commission noted that, in
                cases where such contracts are held in a futures account at an FCM
                and margined as a portfolio with exchange-traded futures, assets
                margining that portfolio are likely to be includable within ``net
                equity'' even if such contracts were found not to be commodity
                contracts: Where the assets in an entity's account collateralize a
                portfolio containing both commodity contracts and other contracts,
                the entirety of those serves as performance bond for each type of
                contracts. See id. at 57236. See also 17 CFR 22.1 (defining
                ``Cleared Swaps Customer Collateral,'' in relevant part, as all
                property that ``[i]s intended to or does margin, guarantee, or
                secure a Cleared Swap . . . .'').
                ---------------------------------------------------------------------------
                 ICI and Vanguard recommended that the Commission prohibit non-
                defaulting customer gains haircutting, or any other margin haircutting,
                and if such gains haircutting is allowed at all, it should be limited
                in scope and duration, overseen by the DCO's resolution authority and/
                or the systemic risk authority, and the customer must receive full
                compensation in the form of a credit or equity claim against the DCO,
                superior to that of other creditors.
                 ICI and Vanguard also requested that the Commission require DCOs to
                increase their ``skin-in-the-game'' as a foundational incentive for the
                DCO to set appropriate margin levels and avoid clearing illiquid or
                highly volatile products. Vanguard also recommended that a DCO's
                capital should be required to backstop clearing risk, should the assets
                available for DCO recovery prove inadequate.
                 FIA requested that the Commission confirm that amendments to part
                190, including to appendix B, framework 2, would not prohibit the
                Commission from amending Sec. 1.49 at a later date to expand the
                definition of ``money center currency.''
                 The Commission confirms that the amendments to part 190 that are
                being made herein will not prohibit the Commission from amending any
                other regulation, including Sec. 1.49, in the future. If future
                amendments to other parts of the Commission's regulations lead to a
                situation where it would be advisable to make conforming changes to
                part 190, the Commission will consider such conforming changes along
                with those amendments.
                H. Supplemental Proposal
                 In the Supplemental Proposal, the Commission noted a problem to be
                solved: There is a possibility that a SIDCO could file for bankruptcy
                before the process for placing that SIDCO into Title II resolution is
                complete. Due to closeout netting rules adopted by many DCOs, including
                the SIDCOs, that filing could have the consequence of terminating all
                of the SIDCO's cleared contracts. Terminating those contracts could
                undermine the success of any subsequent Title II resolution.
                 The Supplemental Proposal suggested one approach to solve the
                problem, and requested comment, inter alia, on better ways to do so. In
                light of concerns raised in the comments received in response to the
                Supplemental Proposal, and for reasons discussed below, the Commission
                has determined not to finalize the alternative that was proposed in the
                Supplemental Proposal.
                 The process for placing a financial company into Title II
                Resolution is deliberate and intricate.\213\ By contrast, a voluntary
                petition in bankruptcy commences the case, which in turn constitutes an
                order for relief. Accordingly, there exists a possibility that, in the
                highly unlikely event that a SIDCO would consider bankruptcy, the SIDCO
                could file for bankruptcy before a process to place that SIDCO into a
                Title II Resolution would have completed. While the appointment of the
                FDIC as receiver under Title II would automatically result in the
                dismissal of the prior bankruptcy, if the bankruptcy filing were to
                necessarily result in the termination of the SIDCO's derivatives
                contracts with its members, that would undermine the potential success
                of any subsequent Title II Resolution.
                ---------------------------------------------------------------------------
                 \213\ In the case of a SIDCO, this would include a written
                recommendation by each of the FDIC and the Federal Reserve covering
                eight statutory factors. Following that recommendation, the
                Secretary of the Treasury would then need to make a determination,
                in consultation with the President, that each of seven statutory
                factors is met. (The FDIC, Federal Reserve, and Secretary of the
                Treasury are often referred to as the ``key turners'' for Title II
                resolution). Following such a determination, the board of directors
                of the financial company may acquiesce or consent to the appointment
                of the FDIC as receiver, or there may be a period of judicial review
                which may extend to 24 hours.
                ---------------------------------------------------------------------------
                 To address the problem, the Commission proposed, in the
                Supplemental Proposal, to adopt a provision that would stay the
                termination of SIDCO contracts for a brief time after bankruptcy in
                order to provide advance notice to the Commission (and, thus, to enable
                the Commission to notify the key turners) of the point at which the
                SIDCO's contracts could be terminated, in order to foster the success
                of a Title II resolution by avoiding that termination, if the FDIC is
                appointed receiver in such a Resolution within that time. During this
                stay, variation margin would neither be collected nor paid. Due to
                concerns raised by commenters to the original Proposal regarding the
                effect of any restriction on termination of DCO contracts on treatment,
                under the capital regulations of Prudential Regulators of the banks
                that many clearing members are affiliated with, of SIDCO rules, the
                proposal provided that this provision would become effective only if
                the Commission were to find that the Prudential Regulators (i.e., the
                Federal Reserve, the FDIC, and the Office of the Comptroller of the
                Currency) have taken steps to make such a stay consistent with SIDCO
                rules retaining status as QMNAs.\214\
                ---------------------------------------------------------------------------
                 \214\ Any stay (in bankruptcy) on the termination of the SIDCO's
                derivatives contracts would--under the regulations of the Prudential
                Regulators of the banks and bank holding companies that SIDCO
                clearing members may be affiliated with or part of--be inconsistent
                with the status of a DCO's rules as a qualifying master netting
                agreement (``QMNA''). Qualification of DCO rules as a QMNA is
                necessary in order for the banks and bank holding companies that
                clearing members are affiliated with or part of to net the exposures
                of their contracts cleared with the DCO in calculating bank capital
                requirements. If they cannot net such exposures, there would be
                significantly increased bank capital requirements associated with
                such contracts. Such an increase in bank capital requirements would
                disrupt both proprietary and customer clearing. See generally
                Supplemental Proposal, 85 FR 60110, 60112 (Sept. 24, 2020).
                ---------------------------------------------------------------------------
                [[Page 19386]]
                 The Commission requested comment on all aspects of the Supplemental
                Proposal, including as to whether the approach proposed ``is the best
                design for such a solution.''
                 The Commission received five comments on the Supplemental Proposal,
                each of which was from an entity that commented on the Proposal.\215\
                ---------------------------------------------------------------------------
                 \215\ Comments on the Supplemental Proposal were submitted by:
                CME Group Inc. (``CME (2)''); Futures Industry Association (``FIA
                (2)''); Intercontinental Exchange Inc. (``ICE (2)''); Investment
                Company Institute (``ICI (2)''), and Securities Industry and
                Financial Markets Asset Management Group and Managed Funds
                Association (``SIFMA AMG/MFA (2)'').
                ---------------------------------------------------------------------------
                 Many of the commenters argued that the proposed stay is
                unnecessary, because the Commission would inevitably have received
                notice of the impending bankruptcy. For instance, ICI (2) commented
                that:
                 Although it may indeed take some time for the relevant agencies
                to ``turn the three keys,'' a DCO's recovery tools should give the
                agencies more than enough time. DCOs have clearing fund provisions,
                operational default provisions, and a variety of other risk
                management tools at their disposal. In practice, these tools may not
                be completely effective to preclude an insolvency. However, it seems
                extraordinarily unlikely that they would be so ineffective as to
                fail to give the FDIC, Federal Reserve Board, and Secretary of the
                Treasury enough time to decide whether to trigger OLA proceedings.
                 Similarly, SIFMA AMG/MFA (2) stated that ``the possibility of a
                surprise bankruptcy filing [is] implausible given the regulatory
                oversight framework.''
                 FIA (2) agreed, stating that:
                 A determination with regard to invoking Title II will almost
                certainly be made before a SIDCO is subject to an order for relief.
                . . . [W]e fully anticipate that the Commission, the FRB, the FDIC,
                and the Department of the Treasury will be making an assessment
                regarding the necessity and feasibility of recommending that the
                President invoke Title II and taking appropriate action before the
                SIDCO concludes that it must file a petition for bankruptcy.
                 CME (2) argued that:
                under the CEA oversight framework, including a SIDCO's reporting
                obligations, surely it is reasonable to expect that the Commission,
                FDIC, FRB and Treasury will be well aware of any circumstances that
                could portend a SIDCO's failure, whatever the cause, and will be
                closely monitoring the situation. If the relevant parties are
                contemplating placing the SIDCO into a Title II resolution
                proceeding, and doing so is feasible, it is hard to imagine that a
                SIDCO could file a voluntary petition for relief under subchapter IV
                of Chapter 7 of the Bankruptcy Code without their prior knowledge.
                * * *
                 In the highly unlike event a SIDCO were to face a decision
                whether to file for bankruptcy, it would be one of last resort,
                taken only after careful deliberation. The decision to file a
                voluntary petition for relief is certainly not one that CME, or any
                DCO, would take lightly.
                 The Commission agrees that, pursuant to the DCO oversight
                framework, including a SIDCO's reporting obligations under Sec. 39.19,
                the Commission would promptly be notified of a DCO's financial
                distress. Upon learning of such distress--whether through notification
                by the DCO or by risk surveillance by Commission staff--the Commission
                and staff would monitor the situation closely, and, in appropriate
                cases, promptly contact and act in coordination with fellow regulators,
                including the Federal Reserve and FDIC (and, as appropriate, the
                Department of the Treasury). Moreover, DCOs have strong and effective
                ``clearing fund provisions, operational default provisions, and other
                risk management tools at their disposal,'' as noted in the comment
                letter from ICI (2). The Commission believes it to be ``extraordinarily
                unlikely'' that these tools would fail, let alone fail before the ``key
                turners'' have time to act.
                 It is also true that, given prior experience with discussions with
                DCOs concerning defaults of clearing members (none of which resulted in
                financial distress to the DCOs), the Commission fully expects that any
                DCO that is in financial distress would be in close contact with
                Commission staff. The Commission also appreciates the sentiment
                expressed by CME and quoted above, implying that ``it is hard to
                imagine'' that a SIDCO would not provide the Commission with prior
                knowledge of a voluntary bankruptcy filing. Finally, the Commission is
                confident that the decision to file a voluntary petition for relief in
                bankruptcy is ``not one that . . . any DCO would take lightly.''
                 Nevertheless, given the destructive impact that termination of the
                derivatives contracts of a SIDCO would cause, the Commission remains
                concerned about the effects that a bankruptcy filing would have on the
                ability to resolve the SIDCO pursuant to Title II successfully. In this
                context, it is not enough that such an event is ``implausible,'' ``hard
                to imagine,'' or ``extraordinarily unlikely.'' Knowledge of the SIDCO's
                financial distress is distinct from knowledge of the timing of a
                potential bankruptcy filing. While the Commission would most likely be
                aware of the SIDCO's distress, it is at this point not certain that
                there would be clear communication of the SIDCO's intention to file for
                bankruptcy sufficiently in advance that the key turners would have time
                to act.
                 As noted in the Supplemental Proposal, the destructive impact of a
                full tear-up of a SIDCO's contracts would be significant. The FSOC has
                found that a significant disruption or failure of either SIDCO could
                have a major adverse impact on the U.S. financial markets, the impact
                of which would be exacerbated by the limited number of clearing
                alternatives currently available for the products cleared by each
                SIDCO. A failure or disruption of either SIDCO would likely have a
                significant detrimental effect on the liquidity of the futures and
                options markets (for CME) or swaps markets (for ICC), and on clearing
                members, which include large financial institutions, and other market
                participants. These significant effects would, in turn, likely threaten
                the stability of the broader U.S. financial system.\216\ For those
                reasons, inter alia, the Commission continues to be concerned about
                avoiding a circumstance where the derivatives contracts of a SIDCO are
                irrevocably terminated because the SIDCO files for bankruptcy before a
                process to place that SIDCO into a Title II Resolution.
                ---------------------------------------------------------------------------
                 \216\ See 2012 FSOC Annual Report, Appendix A, at 163, 178.
                ---------------------------------------------------------------------------
                 However, the comments expressed strong concerns about achieving
                those goals through the use of a bankruptcy stay, especially in light
                of the fact that variation margin would neither be collected nor paid
                during that period.
                 The Supplemental Proposal acknowledged that risk levels would
                increase during the stay period. Commenters argued that such increase
                in risk exposures during the stay period would pose unacceptable risks.
                For example, CME (2) stated that ``permitting the accumulation of
                uncovered risk for 48 hours during an extremely volatile time would
                pose a risk to financial stability.'' Similarly, SIFMA AMG/MFA (2)
                warned that the proposed part 190 stay, in conjunction with the Title
                II stay, ``would result in extraordinary market exposures to market
                participants during highly volatile market conditions. The non-payment
                of margin could also result in a multiple day liquidity problem for
                [[Page 19387]]
                market participants clearing at the SIDCO.''
                 The Supplemental Proposal also acknowledged that there is a
                significant cost to the proposed stay, in that ``[f]or the duration of
                the stay period, clearing members and clients will be uncertain whether
                their contracts will continue (as part of a Resolution) or be
                terminated (and thus would need to be replaced). That uncertainty would
                mean that clearing members and clients would be disadvantaged in
                determining how best to protect their positions.'' Again, commenters
                agreed that this cost would ensue, and argued that it would be
                unacceptable. For example, ICI (2) observed that during the stay:
                the price of the relevant underlying assets could (and if a SIDCO is
                insolvent, likely would) move dramatically. However, customers would
                be precluded from entering into risk-reducing or replacement
                transactions to stem potential losses, since they will not know
                whether their contracts will be terminated or reinstated. Such a
                freeze not only threatens to cause public customers significant
                losses that they cannot mitigate; it would also create a liquidity
                event because customers will need to preserve as much liquidity as
                possible during the pendency of the stay in order to meet potential
                margin calls.
                 Commenters also raised issues relating to legal uncertainty. For
                instance, FIA (2) acknowledged that section 20 ``authorizes the
                Commission to adopt rules `[n]otwithstanding title 11 of the United
                States Code' '' (i.e., the Bankruptcy Code). However, FIA observed that
                ``[w]hether a stay contemplated under the Supplemental Proposal would
                conflict with section 404(a) of FDICIA . . . is unclear.''
                 In light of the persuasive arguments of the commenters, the
                Commission concludes that a bankruptcy stay is not an appropriate means
                of achieving the goal of fostering the success of a Title II Resolution
                by avoiding the possibility that the SIDCO could file for bankruptcy
                before a process to place that SIDCO into a Title II Resolution would
                have completed with the result that all of the SIDCO's contracts were
                terminated. This would be true even if action was taken by the
                Prudential Regulators to avoid having such a stay undermine the QMNA
                status of SIDCO rules. Thus, while the goal remains important, the
                Commission will not adopt such a stay.
                 A number of the comments answered the Commission's call for a
                better way of achieving that goal. SIFMA AMG/MFA(II) stated that ``[a]s
                an alternative to the proposed stay, the Commission could require, as
                part of its Part 39 or Part 190 rules, that a SIDCO provide a 1 or 2
                day notice to the Commission of any bankruptcy petition by a SIDCO. We
                believe this notice requirement would achieve the same goal in a
                materially less detrimental manner.''
                 CME (2) suggested the same alternative approach to achieve the same
                regulatory goal, in somewhat more detail. CME (2) urged that the
                Commission should address the problem:
                in a more direct manner, consistent with its rulemaking authority.
                For example, the Commission could require a DCO to notify the CFTC
                in advance of its plan to file a voluntary petition for relief under
                subchapter IV of Chapter 7 of the Code, to allow Treasury time to
                determine whether to appoint the FDIC as receiver before the SIDCO
                files its petition. We note that before a commodity broker may file
                a voluntary petition for relief under subchapter IV, its board of
                directors must approve a resolution authorizing the debtor to take
                that step.
                 The Commission agrees that the alternative suggested by the
                commenters in response to the Commission's request--providing the
                advance notice sought by the Commission, but before a bankruptcy filing
                rather than thereafter--is one that, as FIA (2) observed, ``deserves
                the Commission's strong consideration.'' It appears that it may achieve
                the regulatory goals specified in the Supplemental Proposal while
                avoiding the concerns raised by the commenters: By providing advance
                notice to the Commission, it appears that it may allow the Commission,
                which will be coordinating with the ``key-turners,'' to advise those
                agencies of the imminence of a bankruptcy filing, and to provide them
                with warning at a time that may be sufficient to enable them to act
                with dispatch to complete the process.
                 Because the alternative approach would not involve a post-
                bankruptcy stay, it would appear to avoid affecting the QMNA status of
                SIDCO rules (and, thus, would appear not to require any action by the
                Prudential Regulators).\217\ Moreover, because this notice would occur
                in advance of a bankruptcy filing, the suspension of payments and
                collections of variation margin would not occur, and there would appear
                to be no ambiguity concerning the status of the cleared contracts of
                market participants. By avoiding the mechanism of a bankruptcy stay,
                the Commission would also appear to avoid the legal uncertainty issues
                raised by the commenters with respect to that mechanism. Instead, this
                notice approach would appear to be, as noted by CME, well within the
                Commission's rulemaking authority.\218\
                ---------------------------------------------------------------------------
                 \217\ This also avoids the issue, raised by ICE (2), that action
                by the Prudential Regulators with respect to QMNA status may not be
                sufficient to address netting issues for non-U.S. clearing members.
                 \218\ See, e.g., CEA section 5b(c)(2)(J), 7 U.S.C. 7a-1(c)(2)(J)
                (reporting core principle); CEA section 3(b), 7 U.S.C. 5(b) (purpose
                of the CEA is to ensure the financial integrity of transactions
                subject to the CEA and the avoidance of systemic risk); CEA section
                8a(5), 7 U.S.C. 12a(5) (general rule-making authority).
                ---------------------------------------------------------------------------
                 However, in light of the concerns raised with the previous
                approaches to addressing this problem, both the one advanced in the
                Supplemental Proposal as well as one advanced in the Proposal, the
                Commission concludes that, at this point, it should engage in further
                analysis and development before proposing this, or any other,
                alternative approach. Such further analysis and development might
                better enable the Commission to propose, in detail, a solution that is
                effective, and that mitigates any attendant costs. Thus, the Commission
                will, at present, keep this issue under advisement.
                III. Cost-Benefit Considerations
                A. Introduction
                 Section 15(a) of the CEA requires the Commission to consider the
                costs and benefits of its actions before promulgating a regulation
                under the CEA or issuing certain orders.\219\ Section 15(a) further
                specifies that the costs and benefits shall be evaluated in light of
                the following five broad areas of market and public concern: (1)
                Protection of market participants and the public; (2) efficiency,
                competitiveness, and financial integrity of futures markets; (3) price
                discovery; (4) sound risk management practices; and (5) other public
                interest considerations. The Commission considers the costs and
                benefits resulting from its discretionary determinations with respect
                to the section 15(a) factors (collectively referred to herein as
                ``Section 15(a) Factors'') below.
                ---------------------------------------------------------------------------
                 \219\ CEA section 15(a), 7 U.S.C. 19(a).
                ---------------------------------------------------------------------------
                 In the Proposal, the Commission endeavored to assess the expected
                costs and benefits of the proposed rulemaking in quantitative terms,
                including costs related to matters addressed in the Paperwork Reduction
                Act \220\ (``PRA-related costs''), where possible. In situations where
                the Commission was unable to quantify the costs and benefits, the
                Commission identified and considered the costs and benefits of the
                applicable proposed rules in qualitative terms. The lack of data and
                information to estimate those costs was attributable in part to the
                nature of the proposed
                [[Page 19388]]
                rules. None of the comments identified quantifiable costs or benefits.
                ---------------------------------------------------------------------------
                 \220\ 44 U.S.C. 3501 et seq.
                ---------------------------------------------------------------------------
                 In a number of cases, commenters suggested alternative approaches
                or modifications to the proposed provisions. The Commission has
                carefully considered these alternatives and modifications and in a
                number of instances, for reasons discussed in detail above, has adopted
                such alternative approaches or modifications where, in the Commission's
                judgment, the alternative or modified approach is more appropriate to
                accomplish the regulatory objectives. The rationale in these cases was
                discussed in detail above.
                1. Baseline
                 The baselines for the Commission's consideration of the costs and
                benefits of this rulemaking are: (1) The Commission's current
                regulations in part 190, which establish bankruptcy rules in the event
                of an FCM bankruptcy; (2) current appendix A to part 190, which
                contains four bankruptcy forms (form 1--Operation of the Debtor's
                Estate--Schedule of Trustee's Duties; form 2--Request for Instructions
                Concerning Non-Cash property Deposited with (Commodity Broker); form
                3--Request for Instructions Concerning Transfer of Your Hedging
                Contracts Held by (Commodity Broker); and form 4--Proof of Claim); and
                (3) current appendix B to part 190, which contains two frameworks
                setting forth rules concerning distribution of customer funds or
                allocation of shortfall to customer claims in specific circumstances.
                2. Overarching Concepts
                a. Changes to Structure of Industry
                 The Commission is making several revisions to part 190 in order to
                reflect the changes to the structure of the industry since part 190 was
                originally published in 1983. In particular, FCMs and DCOs now operate
                in a different world, where matters such as market moves, transactions,
                and movements of funds tend to happen much more quickly, in part due to
                the advances in technology and the global nature of underlying markets.
                 These changes include major structural changes in the financial
                markets, including regulatory reforms following the 2008 financial
                crisis and consequent changes to the structure of the derivatives
                markets, changes in the governance of the market utilities, such as
                DCOs, from non-profit organizations to public companies, and major
                reforms in the banking sector, followed by the creation of large,
                publicly held financial holding companies with different attitudes
                towards risk.
                 As a result, several of the changes to part 190 will address these
                changed circumstances. The Commission believes that the revisions in
                proposed part 190 that address the computerized and fast-paced nature
                of the industry will benefit all parties involved in a bankruptcy
                proceeding, since the rules would reflect how the industry actually
                works today and will avoid unnecessary delay to the administration of a
                bankruptcy proceeding.
                b. Trustee Discretion
                 In several places in revised part 190, the Commission provides
                additional flexibility and discretion to the bankruptcy trustee in
                taking certain actions.\221\ This principles-based approach is in
                contrast to the customer notice procedures in current part 190, which
                are more prescribed and depend on the type of notice being given.
                ---------------------------------------------------------------------------
                 \221\ The alternative, to forego providing such flexibility or
                discretion, would invert the benefits and costs discussed below.
                ---------------------------------------------------------------------------
                 The Commission has concluded that, in general, affording more
                discretion to the bankruptcy trustee in appropriate circumstances is
                beneficial, and indeed necessary, where matters are unique and fast-
                paced, as they often are in commodity broker bankruptcy proceedings. In
                many areas, it is unlikely that a prescriptive approach can be designed
                that will reliably be ``fit for purpose'' in all plausible future
                circumstances.
                 Granting the trustee discretion is expected to decrease, though it
                certainly does not eliminate, the number and extent of cases in which
                the trustee will petition the bankruptcy court for formal approval of
                an action. Each formal approval the trustee is required to obtain--
                i.e., each time the trustee moves for an order from the bankruptcy
                court authorizing the trustee to take a particular action in a
                particular way--takes significant time and involves significant
                administrative costs--in particular, the time of professionals such as
                attorneys and financial experts to draft legal pleadings and analyses.
                These professionals charge significant hourly fees, and thus their time
                leads to significant administrative costs. As discussed further below,
                administrative costs can be charged against customer property, leading
                to reduced recoveries by public customers.
                 Therefore, increased discretion of the trustee will benefit the
                estate by allowing the trustee to make principles-based decisions that
                are uniquely tailored to the facts and circumstances of the particular
                case, rather than compelling the trustee to follow a procrustean
                framework, or requiring the trustee to request formal approval from the
                bankruptcy court or the Commission before implementing those decisions.
                This approach leads to approaches that are better tailored to the
                specifics of the circumstances, reductions in administrative costs
                (leaving more funds available for distribution to public customers and/
                or other creditors) and faster distributions of customer property (to
                the benefit of public customers). It is also intended to mitigate the
                negative externalities arising from the distressed circumstances that
                tend to result in further reduction in the value of customer
                assets.\222\
                ---------------------------------------------------------------------------
                 \222\ As discussed above, see section II.B.2, while the trustee
                has discretion as to how they administer the affairs of the
                bankruptcy estate, a DCO of which that FCM is a member retains its
                rights to act under its rules.
                ---------------------------------------------------------------------------
                 The Commission recognizes, however, that with increased discretion
                comes a risk of trustee mistake or misfeasance; in other words, a
                trustee making decisions that turn out not to be in the best interests
                of public customers as a class, or other creditors.\223\ While this is
                certainly a potential cost in situations where the trustee is given
                increased discretion or flexibility, the Commission believes that this
                potential cost will be mitigated by (1) the high degree of informal
                (and, where necessary, formal) involvement of Commission staff in FCM
                and DCO bankruptcy matters,\224\ and (2) the fact that such discretion
                would not be unbounded and would apply only in particular
                circumstances, as discussed below.
                ---------------------------------------------------------------------------
                 \223\ Certain discretionary decisions a trustee may take, for
                example, the frequency with which the trustee provides information.
                 \224\ As a formal matter, the Commission has the right to appear
                and be heard on any issue in any such case. See 11 U.S.C. 762(b). As
                a practical matter, trustees and their counsel have, in previous
                commodity broker bankruptcies, consulted with Commission staff
                frequently and on an ongoing basis, particularly in making and
                implementing important decisions.
                ---------------------------------------------------------------------------
                 Moreover, in response to a comment by ICI, and as discussed further
                below, the Commission is adding a clarification in Sec. 190.00 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. The Commission is of the view that adding
                this principles-based provision will further clarify the duty of
                trustees in commodity broker bankruptcy proceedings to act in a
                [[Page 19389]]
                manner that adds benefits, and reduces costs, to public customers as a
                class by, respectively, enhancing their recoveries and mitigating
                disruptions to them.
                 However, channeling the trustee's discretion towards protecting
                public customers as a class may well work to the detriment of (and thus
                impose costs upon) individual public customers, or classes of public
                customers, whose interests differ from that of the class in general.
                For example, certain customers may have a particular need for current
                and precise information about their account balances and
                positions.\225\ It is possible (though unlikely) that the trustee might
                determine that it is inordinately costly to do so for a particular
                time, looking at the interests of public customers as a class. Such a
                decision would not be a mistake or malfeasance, though one would expect
                the trustee to endeavor to avoid the necessity for doing so.
                ---------------------------------------------------------------------------
                 \225\ See ICI at 22 (failure of trustee to provide account
                statements or information about funded balances could ``hinder the
                ability of a regulated fund to confirm the existence and value of
                its transactions and associated margin.'')
                ---------------------------------------------------------------------------
                 An additional risk related to increased discretion is the
                possibility that parties that are dissatisfied with the trustee's
                exercise of discretion may challenge it in court, potentially leading
                to increased litigation costs. The Commission believes that this risk
                is mitigated by (1) the fact that certain of these decisions would be
                made in contexts where the trustee would be seeking an order of the
                bankruptcy court approving the trustee's approach (and thus the
                trustee's discretion would be subject to judicial review within a
                proceeding in which interested parties already have an opportunity to
                object) and (2) the likelihood that bankruptcy courts would respect the
                Commission's rules granting the trustee discretion, rendering such
                litigation less likely to succeed, and quicker to resolve. Litigation
                that is less likely to succeed is less likely to be brought, and
                litigation that is quicker to resolve is likely to cost less. Thus, by
                granting the trustee discretion, the Commission mitigates the cost of
                such litigation.
                 Instances where the revisions to proposed part 190 will afford more
                flexibility or discretion to the bankruptcy trustee are discussed in
                further detail where they appear in each provision below.
                c. Cost Effectiveness and Promptness Versus Precision
                 In revising part 190, the Commission has endeavored to effect a
                proper balance between cost effectiveness and promptness, on the one
                hand, and precision, on the other hand. Current part 190 favors cost
                effectiveness and promptness over precision in certain respects,
                particularly with respect to the concept of pro rata treatment. As a
                result of the policy choice made by Congress in section 766(h) of the
                Bankruptcy Code, part 190 proceeds from the principle 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 public
                customers as part of a class) than it is to value each customer's
                entitlements on an individual basis. The revisions to part 190 take
                this concept further, recognizing that there are additional
                circumstances where cost effectiveness and promptness in the
                administration of a bankruptcy proceeding should have higher priority
                than precision. However, in response to ICI's comment, the Commission
                has clarified that 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 goal of protecting public
                customers by enhancing recoveries for, and mitigating disruptions to,
                public customers as a class.\226\ Thus, the Commission recognizes that
                there are limits to the extent to which cost effectiveness and
                promptness will be favored over precision as discretion must be
                exercised in furtherance of the overarching goal of protecting the
                interests of public customers as a class.
                ---------------------------------------------------------------------------
                 \226\ See comparison of best efforts to reasonable efforts in
                section II.A.1 above.
                ---------------------------------------------------------------------------
                 The Commission believes that these revisions favoring cost
                effectiveness and promptness over precision further the policy embodied
                in section 766(h) of the Bankruptcy Code and benefit parties involved
                in a bankruptcy proceeding overall, in that they will in general lead
                to: (1) A faster administration of the proceeding; (2) public customers
                receiving their share of the debtor's customer property more quickly;
                and (3) a decrease in administrative costs.
                 There could, however, be corresponding costs to this approach for
                some public customers in that they may lose out on being treated
                precisely in terms of their individual circumstances (and, for example,
                may receive a smaller distribution of customer property than
                otherwise).
                d. Unique Nature of Bankruptcy Events
                 The Commission recognizes in revised part 190 that there is no one-
                size-fits-all approach to the administration of the bankruptcy of an
                FCM or a DCO, and that it is important that the rules allow the
                trustee, in conducting that administration, to take into account the
                unique nature of each of these events. The revisions to proposed part
                190, therefore, address the uniqueness of these bankruptcy events and
                allow for the bankruptcy trustee to tailor their approach in the way
                that most makes sense given the individual circumstances of the case at
                hand.\227\ History has shown that FCM bankruptcies play out in very
                different ways, and several of the Commission's revisions to part 190
                address that reality. These new provisions reflect the fact that each
                FCM and DCO bankruptcy presents individual circumstances, and that the
                proof of claim form will likely have to be modified to fit the unique
                facts and circumstances of each case. The Commission believes that the
                revisions of this type will benefit all parties involved in a
                bankruptcy proceeding by better tailoring such a proceeding to the
                unique needs of the particular case.
                ---------------------------------------------------------------------------
                 \227\ Circumstances that may vary include: The accuracy of the
                commodity broker's records at the time of bankruptcy; whether the
                bulk of an FCM's customer accounts were transferred in the days
                after the filing date (or otherwise migrated in the days before);
                the number of customer accounts; the existence and extent of a
                shortfall in customer funds; and the complexity of the positions
                carried by the commodity broker.
                ---------------------------------------------------------------------------
                 However, by providing for a bespoke tailoring of the approach to
                commodity broker bankruptcy, the Commission inherently provides less
                transparency, and thus less certainty, of the particulars of the
                approach that will be followed.
                e. Administrative Costs are Costs to the Estate, and Often to the
                Customers
                 In many instances in this adopting release, the Commission is
                noting that a certain provision will impose or reduce administrative
                costs, that is, the actual and necessary costs of preserving the
                bankruptcy estate and administering the case. In each of these cases,
                administrative costs will be a cost to the estate of the debtor, since
                administrative expenses that the bankruptcy trustee incurs in
                administering the estate (including for the time of the trustee,
                accountants, counsel, consultants, etc.) \228\ will be passed onto the
                estate
                [[Page 19390]]
                itself. This means that, in the event of a shortfall, such costs will
                ultimately be borne by the public customers of the debtor, who will
                receive smaller dividends on their claims as the value of the debtor's
                estate decreases.\229\ By a parity of reasoning, reducing such
                administrative costs will reduce the shortfall, and increase recoveries
                by public customers.
                ---------------------------------------------------------------------------
                 \228\ Pursuant to section 503(b)(1) of the Code, administrative
                costs include the actual, necessary costs and expenses of preserving
                the estate; and pursuant to section 330(a)(1)(A) of the Code, the
                Court may award ``reasonable compensation for actual, necessary
                services rendered by the trustee . . . professional person, or
                attorney . . . .'' Factors that are considered in determining
                ``reasonable compensation'' include the time spent on the services,
                the rates charged, the customary compensation charged by comparably
                skilled practitioners, and whether the services were necessary to
                the administration of the case. See generally 11 U.S.C. 330(a)(3).
                 \229\ While such costs may in certain cases be borne instead by
                general creditors, section 766(h) permits customer property to be
                used to meet ``claims of a kind specified in section 507(a)(2)'' of
                the Bankruptcy Code (which in turn include claims for the expenses
                of administering the estate) ``that are attributable to the
                administration of customer property.''
                ---------------------------------------------------------------------------
                 To be sure, the actions taken to achieve these cost efficiencies
                that enhance the value of the estate for public customers as a whole
                may impose costs on individual public customers.
                f. Preference for Public Customers Over Non-Public Customers and for
                Both Over General Creditors
                 As noted repeatedly above, and consistent with the requirements of
                section 766(h) of the Bankruptcy Code and longstanding Commission
                policy, many provisions in part 190 favor public customers over non-
                public customers, and both over general creditors, whenever there is a
                shortfall in customer property in any account class for public
                customers (or, with reference to general creditors, for non-public
                customers).
                 The preference for public customers benefits them, and provides
                them with incentives to participate in transactions protected by part
                190, and to post collateral willingly. However, this preference
                correspondingly disfavors non-public customers. Accordingly, it
                arguably provides them with incentives to participate less in
                transactions protected by part 190--or, perhaps, to clear through
                unaffiliated FCMs (and thus, to do so as public customers of those
                FCMs).
                 Similarly, the preference for both public and non-public customers
                over general creditors may incentivize general creditors to be less
                willing to extend credit to commodity brokers. However, in light of the
                fact that commodity brokers are highly regulated entities subject to
                stringent capital or resource requirements, this incentive effect with
                respect to general creditors is not likely to be strong.
                B. Subpart A--General Provisions
                1. Regulation Sec. 190.00: Statutory Authority, Organization, Core
                Concepts, Scope, and Construction: Consideration of Costs and Benefits
                 Section 190.00 contains general provisions applicable to all of
                part 190. These provisions set forth the concepts that guide the
                Commission's bankruptcy regulations. All of Sec. 190.00 is new, in
                that current part 190 does not contain an analogous regulation.
                However, only certain provisions within Sec. 190.00 have cost-benefit
                implications, since the bulk of Sec. 190.00 is designed to explain
                concepts that are either (1) not different from those contained in
                current part 190, but are simply stated more explicitly in the revised
                rules, or (2) new, in that they are not contained in current part 190,
                but are concepts that are meant to clarify how revised substantive
                provisions operate. In the latter case, cost and benefit considerations
                are addressed with respect to the substantive provisions.
                 The Commission requested comment on all aspects of its cost and
                benefit considerations with respect to proposed Sec. 190.00.
                 There are potential costs associated with Sec. 190.00(c)(4) which
                promotes the transfer or porting of the open commodity contract
                positions of a bankrupt FCM's public customers rather than the
                liquidation of these positions. For example, OCC commented that while
                liquidating customer positions may introduce market risk associated
                with closing out and reopening positions for certain customers, those
                risks should be weighed against the potential drawbacks of porting,
                especially if an FCM to accept the transfer is not immediately
                identified. Specifically, OCC identified three potential drawbacks with
                the proposed Sec. 190.00(c)(4). First, that it could be difficult for
                a trustee (or DCO) to identify a transferee to accept the open
                positions and collateral, which depending on the market conditions
                could be a difficult and time-consuming process. Second, a customer
                could face uncertainty as to how its position and associated collateral
                will be resolved until a transfer is complete and also may be unable to
                exit a position in a timely and efficient manner. Third, a customer
                might need to post additional collateral at a new FCM prior to or
                immediately after a transfer.
                 In considering the costs and benefits of the preference for
                transfer versus liquidation, the Commission notes first that, as OCC
                forthrightly acknowledged, 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.
                 Furthermore, Sec. 190.00(c)(4) establishes a preference for
                transfer rather than a mandate. Thus, if after exerting their best
                efforts, the trustee finds that the process of transfer is indeed too
                ``difficult and time-consuming,'' the trustee is not obligated to
                implement a transfer. Moreover, as a practical matter, there are narrow
                limits to how long a trustee will have to endeavor to transfer before
                being compelled to liquidate positions by the DCO at which they are
                held, or, if applicable, an FCM through which they are held. (Either
                the DCO or the FCM, whichever is applicable, will have the discretion
                to liquidate positions that are being cleared/carried for an FCM that
                is in bankruptcy).\230\ Pursuant to Sec. 190.04(d), if the trustee is
                not successful in transferring an open contract by the seventh calendar
                day after the order for relief consistent with Sec. 190.04(a), the
                trustee is directed to liquidate such contract promptly and in an
                orderly manner. Thus, while a customer could face uncertainty as to how
                its position and associated collateral will be resolved until a
                transfer is complete (or until the customer's positions are otherwise
                liquidated), the time of that uncertainty is both practically and
                legally limited. Finally, a customer who does not wish to post
                additional collateral at a new FCM would be entitled to have the new
                FCM liquidate their positions, and promptly receive any remaining
                transferred collateral. In this light, the Commission believes that the
                benefits of continuing the preference for transfer remain significant,
                while the costs of this preference are mitigated.
                ---------------------------------------------------------------------------
                 \230\ For example, as noted above in section II.A.1, OCC's own
                rules would appear to permit it to liquidate such positions.
                ---------------------------------------------------------------------------
                 There are potential benefits arising from reduced uncertainty as a
                result of clarifications provided in several provisions. For example,
                Sec. 190.00(d)(1)(ii), clearly expresses that part 190 applies to a
                proceeding commenced under SIPA with respect to a debtor that is
                registered as a broker or dealer under the CEA when the debtor also is
                an FCM. Similarly, Sec. 190.00(e) clarifies how transactions and
                collateral that are portfolio margined are treated as an important
                prerequisite to an effective portfolio margining program. Cboe's
                comment letter expressed the view that the clarity provided in Sec.
                190.00(d)(1)(ii) will be beneficial to the entire
                [[Page 19391]]
                ecosystem, including customers of FCMs and broker-dealers, as it
                furthers the ability of market participants to utilize portfolio
                margining and the associated efficiencies. CME also saw benefits to
                ``remov[ing] any doubt'' that part 190 applies to a SIPA proceeding
                involving an FCM that is also registered with the SEC as a broker-
                dealer.
                 Similarly, ICI's comment letter considered that the ``home field''
                rule in Sec. 190.00(e) is highly beneficial.
                 With respect to the remaining provisions within proposed Sec.
                190.00, the Commission has not received comment letters that identify
                costs or benefits explicitly attributed to these provisions, and does
                not believe that there are material cost-benefit implications with
                respect to them:
                 Proposed Sec. 190.00(a), which sets forth the statutory
                authority pursuant to which the Commission is proposing to adopt
                proposed part 190.
                 Proposed Sec. 190.00(b), which describes how the proposed
                rules are organized into three subparts. While the addition of DCO-
                specific rules in this proposal is new, the cost-benefit implications
                of the DCO-specific provisions (Sec. Sec. 190.11 through 190.18) are
                discussed separately below.
                 Section 190.00(c)(2), which provides that part 190
                establishes four separate account classes, each of which is treated
                differently under the regulations. In the Commission's view, this
                provision is a mere clarification, as current part 190 also establishes
                different account classes for different types of cleared commodity
                contracts, and treats each account class differently.
                 Section 190.00(c)(5), which explains that part 190 applies
                the concept of pro rata distribution when it comes to shortfalls of
                property in a particular account class. This provision is merely
                explanatory.
                 Section 190.00(d)(1)(i)(A), which provides that the
                definition of ``commodity broker'' in proposed part 190 covers both
                ``futures commission merchants'' and ``foreign futures commission
                merchants'' because both are required to register as FCMs under the CEA
                and Commission regulations.
                 Section 190.00(d)(2)(i), which states that the bankruptcy
                trustee may not recognize any account class that is not one of the
                account classes enumerated in proposed Sec. 190.01.
                 Section 190.00(d)(3), which sets forth the transactions
                that are excluded from the definition of ``commodity contract.'' This
                provision explains and carries over concepts that are already embedded
                in current part 190.
                 While the Commission has not received comment letters that identify
                costs or benefits explicitly attributed to the following provisions in
                Sec. 190.00, it believes that there will be cost-benefit implications
                to these provisions:
                 Section 190.00(c)(1) states that part 190 is limited to a
                commodity broker that is (1) an FCM as defined by the CEA and
                Commission regulations, or (2) a DCO under the CEA and Commission
                regulations. Current part 190 applies to a broader set of ``commodity
                brokers,'' including FCMs, clearing organizations, commodity options
                dealers, and leverage transaction merchants. This narrowing of the
                application of part 190 (by excluding the empty categories of commodity
                options dealers and leverage transaction merchants) benefits the
                bankruptcy estate, and the customers, by allowing the Commission to
                promulgate regulations that are less complex and better tailored to the
                narrower, set of commodity brokers that are covered by the revised
                regulations.\231\
                ---------------------------------------------------------------------------
                 \231\ Moreover, prescribing regulations that are intended to be
                applicable to entities that, at some unknown point in the future,
                enter these empty categories risks poor tailoring due to lack of
                data concerning the characteristics of those unknown future
                entrants.
                ---------------------------------------------------------------------------
                 Section 190.00(c)(3) explains the distinction between
                ``public customers'' and ``non-public customers,'' and the priority
                that public customers (and, after them, non-public customers) enjoy
                over all other claimants with respect to distributions of customer
                property. Both of these concepts exist in current part 190 and are
                clarified and explained further in Sec. 190.00(c)(3). In its comment,
                ICI urged the Commission to take steps ``to help ensure that the
                trustee prioritizes the protection of [public] customers.'' In
                response, Commission has added a provision, Sec. 190.00(c)(3)(i)(C),
                directing the trustee to exercise its discretion (where it has such
                discretion) in a manner that will best achieve the overarching goal of
                protecting public customers by enhancing recoveries for, and mitigating
                disruptions to, public customers as a class.\232\ This approach has the
                benefit of guiding the trustee's discretion in a manner consistent with
                the Commission's regulatory and statutory goals. However, it has the
                limitation of still leaving the trustee with discretion. As noted above
                in section III.A.2 above, with discretion comes a risk of trustee
                mistake or misfeasance.
                ---------------------------------------------------------------------------
                 \232\ As noted above in section III.A.2.vi, the preference for
                public customers over non-public customers creates incentives for
                both groups.
                ---------------------------------------------------------------------------
                 Section 190.00(c)(6) addresses the treatment of commodity
                contracts that require delivery performance. The revised regulations,
                in allowing the trustee more flexibility in how a customer could effect
                delivery outside of the debtor's estate, will benefit customers by
                allowing for a more bespoke approach to effecting delivery when
                customers incur delivery obligations under their open commodity
                contracts. There will, however, be costs in acting in such a bespoke
                fashion in contrast to following standards established during business
                as usual.
                 Section 190.00(d)(1)(i)(B) notes that while there are
                currently no registered leverage transaction merchants or commodity
                options dealers, the Commission intends to adopt rules with respect to
                leverage transaction merchants or commodity options dealers at such
                time as an entity registers as one of those categories of commodity
                brokers. This forward-looking flexibility will generate benefits by
                fostering bankruptcy rules specifically tailored to leverage
                transaction merchants or commodity options dealers when and if an
                entity registers as such.
                 Section 190.00(d)(1)(iii), provides that part 190 shall
                serve as guidance as to the distribution of customer property and
                member property in a proceeding in which the FDIC is acting as receiver
                pursuant to Title II of Dodd-Frank.\233\ This provision has the
                benefits associated with transparently providing to FDIC during
                business-as-usual the expertise and guidance of the agency with
                regulatory and supervisory responsibility for commodity brokers (i.e.,
                FCMs and DCOs).\234\
                ---------------------------------------------------------------------------
                 \233\ Section 210(m)(1)(B) of title II,12 U.S.C. 5390(m)(1)(B),
                requires the FDIC, where the covered financial company or bridge
                financial company is a commodity broker, to apply the provisions of
                subchapter IV as if the financial company were a debtor for purposes
                of such subchapter.
                 \234\ DCOs operate nearly 24-hours a day, between Sunday
                afternoon and Friday evening. Moreover, the risks that a DCO is
                required to manage are based on market movements and events
                (including in OTC markets) that may occur whether or not the DCO is
                able to operate. Accordingly, Commission staff (in cooperation with
                FDIC staff) have engaged, and will continue to engage, in
                significant efforts to plan for the unlikely event that resolution
                under Title II would be necessary for a DCO.
                 Thus, there is a public benefit to facilitating FDIC's efforts
                in resolution planning for DCOs by setting forth clear guidance as
                to the distribution of customer property and member property in a
                DCO resolution proceeding.
                ---------------------------------------------------------------------------
                 Section 190.00(d)(2)(ii) provides that no property that
                would otherwise be included in customer property shall be excluded from
                customer property because it is considered to be held in a
                constructive, resulting, or other trust that is implied in equity. It
                prevents public customers from evading pro rata exposure to shortfalls
                in customer property by keeping their collateral in a trust structure.
                This provision has the
                [[Page 19392]]
                benefit of supporting the statutory policy of pro rata distribution for
                the pool of customers, by ensuring that all property that properly
                belongs in the category of ``customer property'' would be considered
                such customer property. It should mitigate costs in cases where
                particular customers might structure their relationships with their
                FCMs in order to establish such a trust for the purpose of thwarting
                their exposure to pro rata distribution, rather than structuring those
                relationships in ways that otherwise make sense for their business. It
                would also reduce those customers' incentives to do so, and would
                mitigate the costs of litigation within the bankruptcy proceeding over
                the effectiveness of such structures in achieving that goal. It also
                benefits the remaining customers, since if such litigation were
                successful, it would spread the pro rata shortfall over a smaller
                volume of customer claims.
                 However, this approach will impose costs on those
                customers, if any there be, who would otherwise endeavor to rely on the
                trust concept to shield certain of their property from entering the
                pool of customer property. Such customers might (despite opposition
                from the Commission and the trustee) otherwise be successful in
                litigation over the effectiveness of such arrangements, or may obtain
                settlements that would benefit their individual claims (albeit to the
                detriment of other customers, and to the policy of pro rata
                distribution). Such customers may view the inability to protect their
                collateral under a trust concept as an incentive to reduce their use of
                transactions subject to part 190.
                2. Regulation Sec. 190.01: Definitions: Consideration of Costs and
                Benefits
                 Section 190.01 sets forth definitions as they are used for purposes
                of part 190. In the Commission's view, only certain of the definitions
                in proposed Sec. 190.01 will have cost-benefit implications, and these
                are discussed in more detail below, as are any definitions concerning
                which there were comments. The remainder of the definitions set forth
                in revised Sec. 190.01 do not, in the Commission's view, impose any
                costs or benefits, as the changes to the definitions are minor (in the
                vein of, for example, updating cross-references or updating language to
                reflect the changes in the rest of revised part 190) or merely clarify
                the current definition.
                 Where, in the Commission's view, a definition in revised Sec.
                190.01 has cost-benefit implications, and/or where comments have
                identified costs or benefits concerning such a definition, those
                implications are discussed in more detail below:
                 ``Account class,'' ``cash delivery property,'' and
                ``physical delivery property'': The definition of the term ``account
                class'' is expanded to include definitions of each type of account
                class set forth in proposed part 190: Futures account, foreign futures
                account, cleared swaps account, and delivery account. The ABA
                Subcommittee recommended that the Commission clarify that these types
                of account classes apply to non-public customers in addition to public
                customers. The Commission agrees that it is appropriate to clarify this
                point, and to include a specific definition for each type of account
                class. Doing so will benefit all parties involved in a bankruptcy
                proceeding by ensuring that all have a common understanding of how
                these various types of accounts are defined for purposes of part 190.
                Accordingly, the Commission is adopting the ABA Subcommittee's
                recommendation.
                 The definition of ``account class'' also removes the
                category in current part 190 of ``leverage account'' because, as noted
                above, there are currently no registered leverage transaction
                merchants. Rather, the Commission intends to adopt rules with respect
                to leverage transaction merchants (and, accordingly, with respect to
                leverage accounts) at such time as an entity registers as such. Removal
                of the category of ``leverage account'' from the ``account class''
                definition benefits market participants by allowing the Commission to
                promulgate bankruptcy rules specifically tailored to leverage
                transaction merchants (and, accordingly, to leverage accounts) in the
                event an entity registers as such.
                 The definition of ``account class'' also splits ``delivery
                accounts'' into separate physical and cash delivery account classes.
                Because cash delivery property is, in some cases, more difficult to
                trace to specific customers and more vulnerable to loss,\235\ this
                separate treatment of physical delivery property and cash delivery
                property should benefit customers with physical delivery property by
                allowing for more prompt distribution of such physical delivery
                property. This separation should also benefit the estate, because the
                trustee will not have to wait to distribute physical delivery property
                to customers while attempting to trace cash delivery property, which
                could result in a more prompt resolution of the bankruptcy as a whole.
                However, there may be costs as a result of complications, since the
                trustee will have to deal with two delivery account subclasses rather
                than one delivery account class. Moreover, in the event of a shortfall,
                some customers could ultimately obtain larger recoveries than they
                would have if the delivery account had not been split into two
                subclasses, while others could obtain smaller recoveries.
                ---------------------------------------------------------------------------
                 \235\ These reasons for this difficulty and vulnerability are
                discussed above in section II.B.4 in the explanation of the changes
                to proposed Sec. 190.06(b).
                ---------------------------------------------------------------------------
                 The ABA Subcommittee and CME suggested changes to the definition of
                ``cash delivery property.'' Under the current definition, cash falls
                within the delivery class if, inter alia, it is received on or after
                three calendar days before the first notice date or exercise date. The
                definition of cash delivery property in the Proposal continued that
                limitation. CME suggested that the three-day limitation should be
                removed to address cases where
                ``a customer will legitimately post cash to its delivery account
                sooner than the definition would allow, for example, out of caution
                to assure that the necessary funds are available to pay for a
                delivery when the first notice date or exercise date immediately
                follows a weekend or holiday, or to meet payment deadlines imposed
                by the FCM, or based on market convention.''
                 The comments acknowledged that the Commission's policy objective is
                to ``encourage FCMs and their delivery customers to hold cash intended
                to pay for delivery in a segregated account until bilateral delivery
                obligations are near at hand'' (the segregation obligations that apply
                to futures, foreign futures, and cleared swaps accounts do not apply to
                delivery accounts), but express some doubt that the limitation is
                effective in encouraging the desired behavior, because parties with
                delivery obligations may not be aware of it.
                 Thus, the benefit of retaining the three-calendar day limitation is
                mitigating the time during which cash delivery property is held in an
                account that is not subject to the protection of segregation
                requirements, and in encouraging business models that take that
                approach. The cost of doing so is the risk that funds may nonetheless
                be transferred earlier into a delivery account, and would then be
                denied protection as delivery property in an FCM bankruptcy.\236\
                ---------------------------------------------------------------------------
                 \236\ The Commission also notes CME's suggestion that it
                ``consider adopting more formal requirements with respect to
                delivery accounts through separate rulemaking.''
                ---------------------------------------------------------------------------
                 As discussed above,\237\ the Commission has determined to take a
                middle-ground approach by expanding the three-calendar day limitation
                to a
                [[Page 19393]]
                seven-calendar day limitation. This approach has the benefit of
                addressing fully the possibility that delivery property is transferred
                slightly early because of, e.g., a holiday weekend (and especially
                cases where FCMs and their customers or contracts span across
                jurisdictions with different holidays). By expanding the period by four
                days, it should address most of the cases where there are legitimate
                reasons to transfer the funds in advance of when they are needed, to
                account for the possibility of a failure in the transfer process.\238\
                Significantly, it avoids the cost of encouraging the use of the
                delivery account (that is not subject to segregation requirements) as a
                long-term place to hold cash.
                ---------------------------------------------------------------------------
                 \237\ See section II.A.2 above.
                 \238\ The commenters have not identified any legitimate reason
                for an FCM to impose a payment deadline of more than seven days
                before first notice or exercise date, or any relevant market
                convention that would require earlier payment, which in either case
                would require that the funds be held in a delivery account.
                ---------------------------------------------------------------------------
                 Commenters also suggested technical additions to the definitions of
                cash delivery property (to address cash provided post-petition to
                facilitate taking deliveries in cases where necessary) to physical
                delivery property (to address the possibility of a negative final
                settlement price), and (in the case of both cash delivery property and
                physical delivery property) to provide that, for contracts exchanging
                one fiat currency for another, both ends of the transaction would be
                considered cash delivery property. The Commission incorporated these
                suggestions in the definitions as adopted. The benefit of these
                approaches is to deal properly with these scenarios; there are no
                discernable material costs.
                 Pursuant to section 4d of the CEA, certain contracts and
                associated collateral that would be associated with one account class
                may instead (pursuant to Commission regulation \239\ or order) be
                commingled with a different account class.\240\ The purpose of these
                arrangements, referred to as portfolio-margining, is to associate such
                contracts with an account class in which they are risk-reducing related
                to other contracts in that latter account class.
                ---------------------------------------------------------------------------
                 \239\ See Sec. 39.15(b)(2), which provides a mechanism for
                these arrangements to be implemented pursuant to clearing
                organization rules.
                 \240\ Securities positions may also be commingled in an account
                class subject to section 4d of the CEA. 7 U.S.C. 6d.
                ---------------------------------------------------------------------------
                 Paragraph (2) of the definition of account class confirms that
                these portfolio-margining arrangements will be respected in bankruptcy,
                that is, such contracts and associated collateral will be treated as
                being part of the account class into which they are commingled. The
                benefit of this treatment in bankruptcy is to foster and incentivize
                such risk-reducing (and capital-efficient) arrangements during business
                as usual; there should be no associated costs in bankruptcy.
                 Finally, paragraph (3) of the definition of account class addresses
                cases where a commodity broker's account for a customer is non-current,
                or otherwise inaccurate. These are situations over which public
                customers have, at best, limited control, and thus it is ineffective to
                endeavor to create incentives for public customers to police the
                behavior of their FCM. Paragraph (3) confirms that a commodity broker
                is considered to maintain an account for a customer where it
                establishes internal books and records for the customer's contracts and
                collateral and related activity, regardless of whether the commodity
                broker has kept those internal books or records current or accurate.
                The benefit of this treatment will be to treat customers in accordance
                with their entitlements, regardless of whether the commodity broker has
                maintained its books and records current or accurate.
                 ``Customer,'' ``Customer class,'' ``public customer,'' and
                ``non-public customer:'' The definitions of the terms ``public
                customer'' and ``non-public customer'' are being revised to include
                separate definitions of those terms for FCMs and DCOs. This change
                reflects the new organization of part 190, which includes separate
                provisions for when the debtor is (1) an FCM (subpart B) and (2) a DCO
                (subpart C). The ``public customer'' definition for FCMs is also being
                revised to define that term with respect to each of the relevant
                account classes.\241\
                ---------------------------------------------------------------------------
                 \241\ CME suggested that the Commission should include non-U.S.
                customers of foreign broker clearing members of a DCO within the
                public customer definition. As discussed above, the Commission has
                determined to consider this suggestion as part of a comprehensive
                review of the issues, to be conducted at such time as the model of
                admitting foreign brokers as clearing members for U.S. DCOs becomes
                empirical.
                ---------------------------------------------------------------------------
                 These changes will generate benefits as they bring clarity to the
                question of who qualifies as a ``public'' versus a ``non-public''
                customer, and transparency to the distribution of property to which
                each customer is entitled. Furthermore, this clarity and transparency
                is likely to reduce the administrative costs to the estate, and the
                costs to claimants, associated with the claims allowance process, as
                well as the likelihood of litigation by dissatisfied claimants (and
                associated costs). These changes could, however, impose costs on
                customers for whom, under current part 190, it will not be clear which
                category they fall into. The pool of customer property would be
                different for public and non-public customers under the new policy
                regime. Thus, a hypothetical customer who could have been considered
                ``public'' under current part 190 but will be categorized as ``non-
                public'' under revised part 190 could receive less in the distribution
                of customer property (with other customers receiving more).
                 ``Futures, futures contract:'' The Commission is adding a
                definition for the terms ``futures'' and ``futures contract'' to
                clarify what those terms mean for purposes of part 190. This
                clarification will lower administrative costs by providing clarity and
                transparency to the types of transactions that are considered
                ``futures'' for purposes of proposed part 190 and therefore form part
                of the futures account or foreign futures account.
                 ``House account:'' The definition of the term ``house
                account'' will be revised to include a definition of that term solely
                for DCOs. This change will reflect the new organization of part 190,
                which is revised to include separate provisions for when the debtor is
                (1) an FCM (subpart B) or (2) a DCO (subpart C). CME and the ABA
                Subcommittee urged that the term ``house account'' be deleted in the
                few cases where it was proposed to be used in subpart B in order to
                avoid the implication that the accounts of non-public customers could
                not be ported. This change would enhance clarity and transparency (and,
                thus, would reduce administrative costs) by (1) avoiding that incorrect
                implication, while (2) clarifying what precisely constitutes a house
                account for a DCO bankruptcy proceeding.
                 ``Primary liquidation date:'' The definition of the term
                ``primary liquidation date'' is being revised to delete references to
                holding accounts open for later transfer. This is consistent with the
                policy of transferring as many open commodity contracts as possible
                within seven calendar days after entry of an order for relief or, if
                that is not possible, liquidating such commodity contracts. \242\ This
                change in policy should benefit some customers, who will more quickly
                have clarity as to how their positions and associated collaterals will
                be resolved.\243\ There may, however, be costs to customers who might
                have preferred having their open commodity contracts held open for
                transfer after the primary liquidation
                [[Page 19394]]
                date. \244\ In the event that a larger number of contracts is
                liquidated rather than transferred, there will be costs resulting from
                additional downward pressure on prices.
                ---------------------------------------------------------------------------
                 \242\ See Sec. 190.04(a)(1).
                 \243\ See discussion of Sec. 190.00(c)(4) in section II.B.1
                above for concerns about customers lacking such clarity for an
                extended time.
                 \244\ Given that the clearing organization for such contracts
                may not be willing to permit such contracts to be held open for an
                extended period of time, the existence of such customers is quite
                hypothetical.
                ---------------------------------------------------------------------------
                 ``Specifically identifiable property:'' The Commission is
                revising the definition of the term ``specifically identifiable
                property'' to clarify and streamline the current definition of that
                term. The use of definitions that are clearer should reduce
                administrative costs. Of course, increasing clarity may be to the
                detriment of those customers for whom such clarity results in
                assignment to a category that they view as less favorable.
                 ``Substitute customer property:'' The definition of the
                term ``substitute customer property'' is being added to refer to cash
                or cash equivalents delivered to the trustee by or on behalf of a
                customer in order to redeem specifically identifiable property or a
                letter of credit. This provision will benefit customers who, in a
                bankruptcy event, seek to redeem their specifically identifiable
                property or letters of credit.\245\ Introducing the concept of
                substitute customer property may impose administrative costs, however,
                because the trustee may have to expend time and resources on tracking
                the substitute customer property and ensuring that such property ends
                up in the proper pool of customer property once received.
                ---------------------------------------------------------------------------
                 \245\ Benefits and costs associated with the use of substitute
                customer property are addressed further below in connection with
                Sec. 190.04(d)(3) in section III.C.2.
                ---------------------------------------------------------------------------
                 ``Swap:'' The Commission is amending the definition of
                ``cleared swap'' that appears in the current rules in order to clarify
                what this term means for purposes of proposed part 190. This
                clarification should serve the goals of clarity and transparency (and,
                consequently, reducing administrative costs).
                3. Regulation Sec. 190.02: General: Consideration of Costs and
                Benefits
                 Section 190.02(a)(1) is revised to provide that the bankruptcy
                trustee may, for good cause shown, request from the Commission an
                exemption from the requirements of any procedural provision in proposed
                part 190. This is in contrast to current Sec. 190.10(b)(1), which
                provides only that a bankruptcy trustee may request an exemption from,
                or extension of, any time limit prescribed in current part 190. This
                expanded mechanism for a trustee to request exemptions should benefit
                the estate and customers by allowing the trustee to request an
                exemption that lowers administrative costs and increases timeliness.
                This change, however, may impose administrative costs if the trustee's
                request is ill-founded and the Commission were nonetheless to grant the
                request.
                 The Commission does not believe that there will be any cost-benefit
                implications to Sec. 190.02(a)(2) and (3), (b), (c), (d), and (e), as
                those provisions largely align with the provisions in current part 190
                from which they are derived.
                 Regulation Sec. 190.02(f) is a new provision which addresses the
                context of a receiver for an FCM appointed 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 FCM's
                minimum capital requirements in Sec. 1.17. In this context, the FCM
                has been found to be in precarious financial condition. This provision
                will permit the receiver to file a petition for bankruptcy of such an
                FCM in appropriate cases. This provision may benefit public customers,
                in that a bankruptcy proceeding may be necessary to protect those
                customers' interests in customer property from losses in value.
                However, this provision may have distributional effects as there may be
                some customers who do not receive as much in bankruptcy as they
                otherwise would have under the receivership. In addition, there could
                be additional administrative costs that result from this provision, as
                the bankruptcy trustee would have to spend time and resources
                overseeing a bankruptcy proceeding that might not be entered into
                absent the power granted to the receiver under this regulation. These
                costs could possibly be greater than the costs of continuing to
                administer the FCM under receivership.
                 Indeed, FIA suggested that the Commission should require that the
                receiver must receive permission from the Commission before filing a
                voluntary petition, given that this action ``would effectively close
                the FCM.'' Closing the FCM would impose significant costs on the FCM
                and, in a case where the Commission would have denied permission, those
                costs could be unnecessary.
                 In considering the costs (discussed above) of what could be an
                unnecessary voluntary filing for bankruptcy in contrast to the benefits
                of avoiding delay in filing a necessary filing for bankruptcy, the
                Commission determines that the context where this rule would be
                applicable--only cases where a receiver has been appointed due to
                violation or imminent violation of customer property protection
                requirements, or of the FCM's minimum capital requirements--minimizes
                the likelihood that a filing would turn out to be unnecessary, and
                counsels in favor of avoiding delay.
                4. Section 15(a) Factors--Subpart A
                 No comments were received on the application of the section 15(a)
                factors to subpart A.
                i. Protection of Market Participants and the Public
                 Subpart A of the proposed rules should increase the protection of
                market participants and the public by clearly setting forth how
                customers of FCMs and DCOs will be classified and treated, and how
                their accounts will be categorized and treated, in the event of an FCM
                or DCO insolvency. The goal of subpart A of the proposed rules is to
                promote an orderly and cost-effective resolution of the insolvency of
                an FCM or DCO, and to increase transparency to the customers of FCMs
                and DCOs as to how their property would be treated in the event of such
                an insolvency. However, as noted above, some of the provisions of
                subpart A provide discretion to the trustee. While enhanced discretion
                for the trustee has the benefit of permitting a more tailored approach,
                it also has the cost of increasing the possibility of trustee mistake
                or misfeasance.
                ii. Efficiency, Competitiveness, and Financial Integrity
                 Subpart A of the proposed rules should promote efficiency (in the
                sense of both cost effectiveness and timeliness) in the administration
                of insolvency proceedings of FCMs and DCOs and the financial integrity
                of derivatives transactions carried by FCMs and/or cleared by DCOs by
                clearly communicating the goals and core concepts involved in such
                insolvencies, and by setting forth clear definitions that have been
                updated to account for current market practices. These effects should,
                in turn, enhance the competitiveness and financial integrity of U.S.
                FCMs and DCOs, by enhancing market confidence in the protection of
                public customer funds and positions entrusted to U.S. FCMs and DCOs,
                even if such an entity were to become insolvent.
                iii. Price Discovery
                 Price discovery is the process of determining the price level for
                an asset
                [[Page 19395]]
                through the interaction of buyers and sellers and based on supply and
                demand conditions. To the extent that the revised regulations should
                mitigate the need for liquidations in conditions of distress, they will
                help avoid negative impacts on price discovery.
                iv. Sound Risk Management Practices
                 Subpart A of the proposed rules should generally promote sound risk
                management practices by setting forth the core concepts to which the
                bankruptcy trustee must adhere in administering an FCM or DCO
                bankruptcy.
                v. Other Public Interest Considerations
                 Some of the FCMs or DCOs that might enter bankruptcy are very large
                financial institutions, and some are (or are part of larger groups that
                are) considered to be systematically important. A bankruptcy process
                that effectively facilitates the proceedings is likely to help to
                attenuate the detrimental effects of the bankruptcy on the financial
                marketplace and thus benefit the financial system and thus the public
                interest.
                C. Subpart B--Futures Commission Merchant as Debtor
                1. Regulation Sec. 190.03: Notices and Proofs of Claims: Consideration
                of Costs and Benefits
                 Section 190.03(a)(1) replaces the requirement in current Sec.
                190.10(a) that all mandatory or discretionary notices be sent to the
                Commission via overnight mail with the requirement of sending the
                notices by electronic mail.\246\ This change is expected to result in a
                benefit to all parties required to provide notices to the Commission
                because they will be able to avoid the costs of sending such notice in
                hardcopy form via overnight mail. These revisions will also allow the
                Commission to receive such notices--and thus, to act--much more
                expeditiously.
                ---------------------------------------------------------------------------
                 \246\ See also Sec. 190.03(d), which is adopting this new
                method of providing notice to the Commission for any court filings
                filed in a bankruptcy.
                ---------------------------------------------------------------------------
                 Section 190.03(a)(2) is a new, principles-based provision that
                replaces the more specific procedures for providing notice to customers
                that appear in current Sec. 190.02(b) by allowing the trustee to
                establish and follow procedures ``reasonably designed'' for giving
                adequate notice to customers. Paragraph (a)(2) also provides that the
                trustee's procedures for providing notice to customers should include
                ``the use of a prominent website as well as communication to customers'
                electronic addresses that are available in the debtor's books and
                records.'' A generalized and more modernized approach to notifying
                customers will benefit the debtor's estate, as the process allows the
                trustee to choose cost effective means of providing notice to customers
                within the more flexible bounds of the proposed regulation, resulting
                in savings of administrative costs. Similarly, it will benefit parties
                interested in the proceedings, by permitting the trustee flexibly to
                choose methods of notification that are more prompt and effective. On
                the other hand, affording the trustee increased discretion in how to
                provide notice to customers will carry the potential cost of trustee
                misfeasance and abuse of such discretion, as discussed above in section
                III.A.2.ii.
                 Section 190.03(b)(1) will revise the time in which a commodity
                broker must notify the Commission of a bankruptcy filing. These
                revisions codify procedures whereby (1) in a voluntary bankruptcy
                proceeding, the commodity broker will provide advance notice to the
                Commission ahead of the filing to the extent practicable, and (2) in an
                involuntary bankruptcy proceeding, the commodity broker will notify the
                Commission immediately upon the filing. These revisions will foster the
                ability of the Commission and its staff to perform their duties to
                protect customers by providing the Commission with notice of any
                bankruptcy proceeding as soon as possible.
                 Section 190.03(b)(2) removes the current deadline of three days
                after the order for relief by which the trustee, the relevant DSRO or a
                clearing organization must notify the Commission of an intent to
                transfer or to apply to transfer open commodity contracts in accordance
                with section 764(b) of the Bankruptcy Code. It instead instructs such
                parties to give such notice of an intent to transfer ``[a]s soon as
                possible.'' To the extent that the three-day deadline was limiting
                transfer arrangements, this revision will benefit the estate and some
                customers by removing time constraints that could be construed to
                prohibit notification after expiration of the deadline (and thus, allow
                the trustee to form the intent to transfer after such time).
                 The revision will also enhance the orderly functioning of the
                marketplace at a time of severe market disruption by facilitating
                prompt notice of intent to transfer. On the other hand, by giving the
                trustee, DSRO, or clearing organization more latitude for providing
                notice of an intent to transfer, there will be the potential cost of
                misfeasance in waiting an unreasonable amount of time to provide such
                notice (or to form such intent), which could ultimately impose
                additional costs on customers who would have benefited from an earlier
                transfer.\247\
                ---------------------------------------------------------------------------
                 \247\ See discussion of Sec. 190.00(c)(4) in section III.b.1
                above.
                ---------------------------------------------------------------------------
                 Section 190.03(c)(1) removes the requirement that the trustee must
                publish notice to customers with specifically identifiable property in
                a newspaper of general circulation serving the location of each branch
                office of the debtor prior to liquidating such property and instead
                establishes a requirement to notify the customers with specifically
                identifiable property in accordance with Sec. 190.03(a)(2). The
                Commission believes that this change will result in lower
                administrative costs, as the trustee will be relieved of the cost of
                identifying, and publishing notice in, such newspapers. Moreover, the
                trustee will no longer be required to wait seven days after the second
                publication date to commence liquidation of specifically identifiable
                property. Rather, the trustee will be free to commence liquidation of
                specifically identifiable property starting on the seventh day after
                entry of the order for relief. This will benefit the estate, and
                potentially the affected customers, by allowing the trustee more
                freedom (from the time constraints set forth in the current
                regulations) in liquidating the specifically identifiable property,
                which, in turn, is expected ultimately to result in a better price.
                Moreover, the provisions in Sec. 190.03(a)(2) that describe the
                notification of customers with specifically identifiable property will
                benefit public customers by allowing them to receive notice on a
                ``prominent website'' and, more specifically, at their electronic
                addresses (to the extent such addresses are in the debtor's books and
                records), thereby enhancing their ability to request the return of
                their specifically identifiable property within the specified
                timeframe.
                 Section 190.03(c)(2) provides the bankruptcy trustee with authority
                to treat open commodity contracts of public customers held in hedging
                accounts designated as such in the debtor's records as specifically
                identifiable property.\248\ This is a change from the current
                framework, under which the trustee treats customers with specifically
                identifiable property on a bespoke basis. Specifically, to the extent
                the trustee does not receive transfer instructions regarding a
                customer's specifically identifiable open commodity contracts, the
                trustee will be required to liquidate
                [[Page 19396]]
                such contracts within a certain time period. To the extent the trustee
                exercises the authority derived from revised Sec. 190.03(c)(2), they
                will (subject to the revision discussed in the next paragraph) be
                required to notify each relevant customer and request instructions
                whether to transfer or liquidate the open commodity contracts. To the
                extent the trustee would not exercise such authority, the trustee will
                treat these open commodity contracts the same as other customer
                property and effect a transfer of such contracts. This new framework
                should reduce administrative costs and benefit the bankruptcy estate by
                allowing the trustee to rely on hedging designations made during
                business as usual, thereby allowing the trustee to make swift and cost
                effective decisions regarding the treatment of open commodity contracts
                during a bankruptcy situation.
                ---------------------------------------------------------------------------
                 \248\ See proposed Sec. 190.10(b)(2) for the process of
                designating an account as a ``hedging account.''
                ---------------------------------------------------------------------------
                 ACLI suggested that Sec. 190.03(c)(2) should express a preference
                for transfer over liquidation with respect to specifically identifiable
                property in the form of positions that are identified as hedging
                positions, and consult (on an individual basis) each customer's
                expressed preferences. However, Sec. 190.00(c)(4) sets forth a
                preference for porting (transfer) of all open commodity contract
                positions of public customers. Thus, while treating customers with
                hedging positions on a bespoke basis may benefit some of them, it may
                be at the cost of effectively transferring a larger group of customer
                positions. Some of those may be customers with hedging positions whose
                positions are not transferred due to limited time and resources
                available to be devoted to bespoke treatment. Indeed, SIFMA AMG/MFA
                noted that ``permitting the trustee this flexibility (subject to the
                additional customer protections [of consulting existing instructions,
                as described immediately below]) serves the interest of customers as a
                whole by facilitating a more rapid transfer of customer positions and
                property.''
                 SIFMA AMG/MFA suggested that it would ``further the goal of
                expediency'' if the regulation would require the trustee to ``first
                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,
                to then require such customer to provide the trustee with written
                instructions as contemplated by proposed Sec. 190.03(c)(2).'' The
                Commission agrees, and has made corresponding changes to the
                regulation. While there is a cost involved in scanning to determine if
                there are instructions, there is a significant benefit in avoiding
                duplication, and in avoiding cases where the customer, having already
                provided instructions, does not reply to a duplicative request in time
                for that reply to be acted upon.
                 The Commission does not believe that there are any cost-benefit
                implications to Sec. 190.03(c)(3) or (4) (other than those discussed
                above with respect to the new notice provision referenced in each) or
                to Sec. 190.03(d).
                 Section 190.03(e), sets forth the information required from
                customers regarding their claims against the debtor. As revised, Sec.
                190.03(e), reorganizes and adds certain information items to those
                listed in the current regulation. The Commission anticipates that,
                while customers are likely to have this information at their disposal,
                there could be costs associated with gathering it all in one place.
                However, this additional and more detailed information should benefit
                the estate, the bankruptcy court and customers alike by allowing all
                parties to have a fuller, more detailed and more transparent picture of
                the customer claims against the debtor. It should foster the reduction
                of administrative costs and the prompt administration of the estate.
                Moreover, the Commission is of the view that clarifying several of the
                information items listed in proposed Sec. 190.03(e) and revising the
                proof of claim form to match more closely the text of the regulation
                should result in benefits to all parties involved in an FCM
                bankruptcy--the estate, the bankruptcy court, and the customers--by
                making the bankruptcy claims process more prompt and cost effective.
                CME sees Sec. 190.03(e) and (f), and the revised proof of claim form,
                as ``major improvements over the current rules and proof of claim
                template.''
                 This regulation also provides that the specific items referred to
                are to be included ``in the discretion of the trustee.'' This
                discretion will permit the trustee to tailor the information requested
                to the specifics of the debtor's prior business, as well as the
                already-available records. This will permit the trustee to limit or to
                increase the information requested, in appropriate cases, with a
                corresponding increase in cost effectiveness. To be sure, there may be
                corresponding costs (both in administrative expense and time) if the
                set of information requested by the trustee in the exercise of their
                discretion turns out, in retrospect, to be overly narrow (or broad).
                 Proposed Sec. 190.03(f) is new and provides the trustee with
                flexibility to modify the customer proof of claim form set forth in
                appendix A to part 190. Specifically, Sec. 190.03(f) allows the
                trustee to modify the proof of claim form to take into account the
                particular facts and circumstances of the case. This provision should
                benefit the estate because the trustee will be able to modify the proof
                of claim form in a way that gathers the information necessary in a
                manner that is both effective and cost effective based on the specific
                facts of the case, and the trustee no longer will be required to get an
                order from the bankruptcy court to make such modifications, thereby
                saving time and resources. This new provision should also benefit
                customers, who will be able to take advantage of the more streamlined
                and tailored proof of claim forms developed by the trustee, and should,
                therefore, spend less time filling out such forms. It should also
                benefit the estate, which should bear less administrative cost in
                evaluating such forms. Again, there may be corresponding administrative
                costs if the set of information in a modified proof of claim form turns
                out, in retrospect, to be overly narrow (or broad).
                2. Regulation Sec. 190.04: Operation of the Debtor's Estate--Customer
                Property: Consideration of Costs and Benefits
                 Regulation Sec. 190.04(a) explicitly provides a policy and a
                direction by which the trustee should use best efforts to transfer open
                commodity contracts and property held by the failed FCM for or on
                behalf of its public customers. This policy and direction is
                substantially similar to the policy and direction under current
                regulations.\249\ The changes set forth a clear policy for trustees to
                follow, which should benefit customers of the failed FCM in a
                streamlined description of the transfer process that is consistent with
                the core concepts set forth in this part. The costs and benefits of the
                preference for transfer are discussed in section III.B.1 above, in the
                context of Sec. 190.00(c)(4).
                ---------------------------------------------------------------------------
                 \249\ See current Sec. 190.02(e).
                ---------------------------------------------------------------------------
                 In Sec. 190.04(a)(1), the Commission is clarifying language; these
                clarifications should benefit customers of the failed FCM by minimizing
                the likelihood of future disputes concerning qualification of property
                for transfer. The Commission is also changing the direction in current
                Sec. 190.02(e) that the trustee ``must immediately use its best
                efforts to effect a transfer'' to a direction that the trustee ``shall
                promptly use its best efforts to effect a transfer.'' This modest
                change in focus will benefit public customers by recognizing that,
                [[Page 19397]]
                while effecting transfer is an extraordinarily high priority, it is
                possible that there may be higher priorities at the inception of the
                bankruptcy proceeding, e.g., it may be necessary to preserve some
                portion of customer property from an immediate threat.\250\ Once again,
                by enhancing the trustee's discretion as to how to manage the
                liquidation, there is the cost that the trustee will make a mistake.
                ---------------------------------------------------------------------------
                 \250\ The Commission is implementing the same change--the
                addition of the word ``public'' before ``customers''--to Sec.
                190.04(a)(2). The anticipated cost and benefit analysis of the
                change is the same as in Sec. 190.04(a)(1).
                ---------------------------------------------------------------------------
                 Section 190.04(a)(2) directs the FCM (or a trustee, if one has been
                appointed) in a case where an involuntary petition for bankruptcy is
                filed against the FCM to use best efforts to effect a transfer within
                seven calendar days. The current regulation limits the commodity broker
                to trading for liquidation unless otherwise directed by the Commission,
                by any applicable self-regulatory organization or by the court. Revised
                Sec. 190.04(a)(2) removes this limitation. Rather, revised Sec.
                190.04(e)(4) more generally covers limitations on the business of an
                FCM in bankruptcy. Similarly, any requirement to transfer customer
                positions would more properly be addressed by Sec. 1.17(a)(4). The
                Commission believes that these changes will benefit the estate and the
                public customers by mitigating the administrative costs by removing a
                redundant regulation. The Commission does not anticipate any resulting
                increase in cost.
                 In Sec. 190.04(b)(1), the Commission is clarifying and updating
                conditions under which the trustee may make payments of variation
                settlement and initial margin. In sum, the revisions clarify that
                payments can be made prior to pending transfers or liquidation, not
                just pending liquidation. The revision should benefit the customers of
                the FCM debtor in clarifying that the trustee has two paths in treating
                open commodity contracts--transfer, and if transfer is not possible,
                liquidation. The changes describe more accurately the types of payments
                that the trustee will be permitted to make and account specifically for
                the types of entities to which the trustee is permitted to make the
                types of payments referred to in this section. The revisions clarify
                the current regulatory text, which should benefit stakeholders. The
                Commission does not anticipate any increased cost from these changes.
                 Section 190.04(b)(1)(i) prevents the trustee from making any
                payments of behalf of any commodity contract account that is in
                deficit, to the extent within the trustee's control. The revised
                provision recognizes that certain accounts may be held on an omnibus
                basis on behalf of many customers. To the extent the trustee is making
                a margin payment with respect to such an omnibus account, it may be out
                of the trustee's control to only make payment with respect to those
                customer accounts that are not in deficit. The proviso similarly will
                clarify that this prohibition on making margin payments on behalf of
                accounts in deficit is not intended to prohibit ``upstream'' entities
                (e.g., a CCP or an intermediary through which the debtor clears) from
                exercising legal rights to margin under applicable law. Due to the
                structure of omnibus accounts and the explicit requirement of lack of
                trustee control, any payments that are made under the revised provision
                would have been made pursuant to Commission authorization under the
                current regulation. Thus, neither provision should add any new
                regulatory burden and the Commission does not estimate that there will
                be any additional cost associated with the proposed changes.
                 Section 190.04(b)(1)(ii) is a new regulation that adds an explicit
                restriction, that the trustee cannot make a margin payment with respect
                to a specific customer account that would exceed the funded balance of
                that account. ICI agrees that this restriction supports the pro rata
                distribution principle, and should benefit the other customers of the
                FCM debtor--any payment of customer property in excess of a particular
                customer's funded balance is to the detriment of other customers.\251\
                ---------------------------------------------------------------------------
                 \251\ While there will be a corresponding detriment to the
                customers who may have benefited from such excess payments, those
                customers would only be losing something that runs counter to the
                statutory goal of pro rata distribution. Moreover, there are no
                likely incentive effects because, on this issue, customers stand
                behind the ``veil of ignorance''--it is difficult to identify, ex
                ante, which customers would be in the group of gaining customers (or
                in the group of losing customers).
                ---------------------------------------------------------------------------
                 Section 190.04(b)(1)(iii) is a minor, non-substantive clarification
                of current Sec. 190.02(g)(1)(ii), that should not create any changes
                from the status quo with regards to costs and benefits.
                 In Sec. 190.04(b)(1)(iv)-(v), the Commission is clarifying that
                margin must only be used (i.e., paid to a clearing organization or
                upstream intermediary) consistent with section 4d of the CEA. Section
                190.04(b)(1)(vi) states explicitly the conditions under which the
                trustee may make payments to meet margin obligations.
                 Together, these changes protect customers who make payments after
                the order for relief by ensuring that they fully benefit from those
                payments (and thus incentivize customers to make such payments in
                appropriate circumstances). Moreover, more clearly permitting the
                trustee, for the purpose of curing customer margin deficiencies, to use
                funds in an account class that exceed the sum of all of the net equity
                claims for that account class, should facilitate the orderly transfer
                of positions and contracts following the default, lessening the
                potential for further roiling markets. Finally, these changes taken
                together also benefit the broader group of customers of the FCM debtor
                by clarifying the treatment of funds in segregated accounts, and thus
                mitigating administrative costs.
                 These changes are designed to clarify the statutory requirements
                applicable to funds in the customer account. While there may be
                accounting requirements associated with funds in segregated accounts,
                substantially all of the costs of such accounting are already incurred
                pursuant to the segregation rules. Thus, the Commission does not
                anticipate that there should be any material additional costs
                associated with this change.
                 Section 190.04(b)(2) allows the trustee discretion as to whether to
                issue margin calls to customers who are undermargined, deleting highly
                prescriptive conditions from the current rule. The revision should
                benefit public customers of the FCM debtor by giving the trustee the
                flexibility to recognize that there may be situations in which issuing
                a margin call is impracticable because the trustee is operating the FCM
                in ``crisis mode'' and may be pending wholesale transfer of liquidation
                of open positions.
                 It is, however, possible that the trustee would exercise their
                discretion poorly, or in a manner that, in retrospect, would be seen to
                be to the detriment of the estate, and that the trustee would have
                failed to issue a margin call in a situation in which a public customer
                would have paid the call (and in which the balance of administrative
                cost and amount recovered would mean that, in retrospect, it would have
                profited the estate if the call was made). Such failure could result in
                a cost to the estate of the FCM debtor to the extent that such funds
                are not available.
                 The balance of the revisions to Sec. 190.04(b) should cause no
                change to the related costs and benefits.
                 Section 190.04(b)(3) retains the concept in current Sec.
                190.02(g)(3), with updated cross-references. The Commission does not
                anticipate that there will be any costs or benefits to the proposed
                minor revisions.
                [[Page 19398]]
                 Section 190.04(b)(4) addresses the trustee's obligation to
                liquidate accounts in deficit, or where a mark-to-market calculation
                would result in a deficit, or where the customer fails to meet a margin
                call within a reasonable time. The revision will clarify the
                applicability of current authority to a situation that is already
                implicit in the current rule. The regulation does not require the
                trustee to make additional calculations but, if a calculation made by
                the trustee reveals that the mark-to-market value of the account is a
                deficit, the trustee is instructed to liquidate the account as soon as
                practicable rather than to wait for the time that payment would be due.
                The benefit of this change should be to liquidate accounts in deficit
                more promptly (thus mitigating potential further losses); the cost will
                be the cost of engaging in such liquidation, as well as the possibility
                that, absent prompt liquidation, the deficit would have been mitigated
                due to favorable intervening changes in market value (or, potentially,
                an intervening deposit of additional collateral by the customer).\252\
                ---------------------------------------------------------------------------
                 \252\ This change may also provide incentives for a customer
                whose account is in, or is approaching, deficit to make such
                payments promptly to avoid liquidation of their positions.
                ---------------------------------------------------------------------------
                 Second, the Commission is adding the concept of ``exigent
                circumstances'' as a new exception to the general and long-established
                rule that a minimum of one hour is sufficient notice for a trustee to
                liquidate an undermargined account.
                 SIFMA AMG/MFA urged the Commission to curtail the trustee's
                discretion in Sec. 190.04(b)(4) in a number of ways: By requiring the
                trustee to defer to the margin call timings present in applicable
                underlying agreements between the customer and the (pre-bankruptcy)
                debtor, and by providing customers with the opportunity to demonstrate
                that a margin payment was made even if the FCM's books and records do
                not yet reflect its receipt. By contrast, ICI noted that it is vital
                that the trustee be required to swiftly crystallize, and therefore cap
                the losses resulting from, such deficits by promptly liquidating
                accounts in deficit or for which a customer has failed to meet a margin
                call. ICI further stated that if the accounts were allowed to remain
                open, additional losses on the delinquent customers' transactions would
                be borne by the FCM's non-defaulting customers.
                 The Commission has determined not to make the requested changes.
                While making those changes would benefit those customers who are
                treated on a more bespoke it would be to the detriment of the FCM's
                other customers. Enhancing the trustee's discretion to determine how
                long a customer has to meet a margin call, and to rely on the FCM's
                books and records in doing--and refusing to curtail that discretion (by
                forcing the trustee to defer to margin call timings in pre-bankruptcy
                agreements, or to give the customer an opportunity to demonstrate that
                the a margin payment was made) as requested by the comment--will
                benefit other customers of the debtor FCM by giving the trustee
                flexibility to respond to market conditions following an FCM default.
                It is important to recognize that in stressed markets or in situations
                where communication protocols cannot practicably be followed,
                permitting a customer time to post margin in accordance with a pre-
                bankruptcy agreement--or, in some cases, even notice of one hour--may
                be insufficiently prompt to mitigate appropriately (1) the risk that
                such customers would default, (2) the risk that delaying liquidation of
                such a customer's positions increases the potential for and likelihood
                that they would do so with a debit balance, and (3) the risk that the
                size of that debit balance would increase as a result of that delay,
                thereby reducing the funded balances of those other customers. However,
                customers who are required to make payments more promptly would bear
                associated costs, from making such payments in a reduced time frame,
                from having to make duplicate payments (while these would ultimately be
                returned in full, this would be without interest) or from having
                contracts liquidated that would otherwise not have been liquidated if
                the customer had more time to make payment.\253\
                ---------------------------------------------------------------------------
                 \253\ SIFMA AMG and MFA also suggested that the regulation
                should be amended to give customers credit for any gains that were
                haircut due to gains-based haircutting by a DCO. Any such
                haircutting of a customer's gains is due to application of the
                customer's agreement with the FCM. Moreover, giving some customers
                credit despite such agreements would increase their recovery, but at
                the expense of other customers, as discussed in detail in section
                II.C.7 above.
                ---------------------------------------------------------------------------
                 The Commission is adding Sec. 190.04(b)(5) to guide the trustee in
                assigning liquidating positions to the FCM debtor's customers when only
                a portion of the open contracts are liquidated. The benefit of this new
                provision is that it presents a clear and transparent mechanism by
                which the trustee is to allocate the positions. This mechanism will
                protect the customer account as a whole, by establishing a preference
                for assigning liquidating transactions to individual customer accounts
                in a risk-reducing manner. The allocation mechanism will, however, be
                subject to the trustee's exercise of reasonable business judgement. It
                is possible that such judgment could be exercised in a poor manner (or
                in a manner that, in retrospect, turns out to be regrettable), with
                resultant cost to the FCM debtor estate.
                 Section 190.04(c) requires the trustee to use its best efforts to
                liquidate open commodity contracts that are not settled in cash (i.e.,
                those that settle via physical delivery of a commodity) where the
                contract would move into delivery position. These clarifications are
                likely to reduce administrative costs, to the benefit of the estate
                (and, ultimately, customers). CME believed that this provision would
                have the benefit of avoiding unnecessary disruptions to the delivery
                process by customers that did not intend to participate in making or
                taking delivery. There should be no cost associated with the revision
                because, while there may be some customers who would prefer to hold
                their contracts through delivery, the current regulations, just as the
                revised regulations, direct the trustee to liquidate contracts coming
                into delivery position.\254\
                ---------------------------------------------------------------------------
                 \254\ See, e.g., current Sec. 190.03(b)(5).
                ---------------------------------------------------------------------------
                 Section 190.04(d) will clarify requirements concerning the
                liquidation and valuation of open positions. Section 190.04(d)(1) and
                (2) clarify requirements for liquidating open commodity contracts and
                specifically identifiable property other than commodity contracts.
                 Section 190.04(d)(3) codifies the Commission's longstanding
                policies of pro rata distribution and equitable treatment of customers
                in bankruptcy, as described in Sec. 190.00(c)(5) above, as applied to
                letters of credit posted as margin. Under the new provision, the
                trustee may request that a customer deliver substitute customer
                property with respect to any letter of credit received, acquired or
                held to margin, guarantee, secure, purchase, or sell a commodity
                contract. The amount of the substitute customer property to be posted
                may, in the trustee's discretion, be less than the full-face amount of
                the letter of the credit, if such lesser amount is sufficient to ensure
                pro rata treatment consistent with Sec. Sec. 190.08 and 190.09. If
                necessary, the trustee may require the customer to post property equal
                to the full-face amount of the letter of credit to ensure pro rata
                treatment. Pursuant to paragraph (d)(3)(i), if such a customer fails to
                provide substitute customer property within a reasonable time specified
                by the trustee, the trustee may draw upon the full amount of the letter
                of credit or any portion thereof (if the
                [[Page 19399]]
                letter of credit has not expired). Under paragraph (d)(3)(ii), the
                trustee is instructed to treat any portion of the letter of credit that
                is not fully drawn upon as having been distributed to the customer.
                However, the amount treated as having been distributed will be reduced
                by the value of any substitute customer property delivered by the
                customer to the trustee. Any expiration of the letter of credit after
                the date of the order for relief would not affect this calculation.
                Pursuant to paragraph (d)(3)(iii), letters of credit drawn by the
                trustee, or substitute customer property posted by a customer, are to
                be considered customer property in the account class applicable to the
                original letter of credit.
                 ICI, SIFMA AMG/MFA, and Vanguard supported Sec. 190.04(d)(3) on
                the grounds that it has the benefit of treating customers equitably by
                avoiding a more favorable treatment of customers who post letters of
                credit than those who post cash and securities.
                 These proposed new provisions could impose costs on customers who
                use letters of credit as collateral for their positions. Such customers
                could be considered to have received distributions up to the full
                amount of the letter of credit, or the trustee may draw upon a portion
                or possibly the full amount of the letter of credit.
                 Moreover, a number of commenters,\255\ expressed the concern that
                requests for substitute customer property in the special context of
                delivery letters of credit could cause sudden liquidity needs, and
                substantial hardship to customers. For example, CME noted that, while
                they support Sec. 190.04(d)(3) outside the context of delivery letters
                of credit, they see difficulties in that context, specifically in the
                case of deliveries for certain energy contracts, often which take place
                over 30 days. The delivery letters of credit for these contracts can
                involve hundreds of millions of dollars in face amounts, and CME is of
                the view that it would cause substantial liquidity hardship for buyers
                to have to substitute cash in such amounts.
                ---------------------------------------------------------------------------
                 \255\ CMC, CME, FIA.
                ---------------------------------------------------------------------------
                 While the discussion above represents potentially important costs,
                the Commission is noting factors that can alleviate these costs, and is
                implementing provisions that it believes substantially mitigate these
                costs: First, the Commission is adding a new Sec. 190.04(d)(3)(iv),
                which provides that the trustee shall, in exercising their discretion
                with regard to addressing letters of credit, including as to the timing
                and amount of a request for substitute customer property, endeavor to
                mitigate, to the extent practicable, the adverse effects upon customers
                that have posted letters of credit, in a manner that achieves pro rata
                treatment among customer claims. Second, the Commission notes the
                likelihood that requests for substitute customer property may not apply
                to the particular delivery letters of credit the commenters have
                expressed concerns about: As requested by CME, the Commission confirms
                that (1) a delivery letter of credit that is posted directly with the
                DCO or with the delivery counterparty, rather than with or through the
                FCM, and for which the FCM is not a named beneficiary, is outside the
                delivery account class, i.e., it does not constitute cash delivery
                property (or property of the debtor's estate), and (2) the provisions
                in other parts of the part 190 regulations regarding treatment of
                letters of credit posted with or through the debtor FCM do not apply
                such a letter of credit.
                 The Commission's priority in this context is to ensure the
                customers using letters of credit to meet margin obligations are
                treated in an economically equivalent manner to those who have posted
                other types of collateral, so that there is no incentive to use such
                letters of credit to circumvent the pro rata distribution of margin
                funds as set forth in section 766(h) of the Bankruptcy Code.\256\
                Moreover, if there are shortfalls in customer property in a particular
                account class, and public customers posting letters of credit are
                protected from sharing in those shortfalls, those public customers
                would benefit. However, the shortfalls would, inevitably, instead be
                allocated to other public customers, who would suffer corresponding
                losses. Regulation Sec. 190.04(d)(3) supports the policy of pro rata
                treatment of public customers embodied in section 766(h) of the
                Bankruptcy Code by clarifying that letters of credit cannot be used to
                avoid pro rata distribution of margin funds. It therefore avoids
                concentrating losses on those public customers (who are likely to be
                smaller customers) that cannot qualify for, or cannot afford the cost
                of, letters of credit, or otherwise do not use letters of credit as
                collateral. Moreover, by directing the trustee to exercise their
                discretion, including with respect to amounts and timing of requests
                for customer property, in a manner that mitigates adverse effects on
                those customers that have posted letters of credit, it will mitigate
                the liquidity costs to such customers.
                ---------------------------------------------------------------------------
                 \256\ See, e.g., 48 FR at 8718-19.
                ---------------------------------------------------------------------------
                 Section 190.04(e)(1) concerns liquidation of open commodity
                contracts in the market, while paragraph (e)(2) addresses liquidation
                by book entry offset. Both of these revised regulations delete the
                requirement in the current regulations that a clearing organization
                must obtain approval for its rules regarding liquidation of open
                commodity contracts, a requirement that is superfluous in light of the
                regulatory framework set forth in part 40 of the Commission's
                regulations, and in light of the notice-filing regime established by
                Congress in section 5c(c) of the CEA.\257\ This has the benefit of
                enabling clearing organizations to avoid the cost of filing a request
                for rule approval, pursuant to CEA section 5c(c)(4) and Regulation
                Sec. 40.5. There are potential costs, in that an ill-conceived rule
                could be more readily identified, and addressed, in a rule approval
                process. However, Commission staff, as a matter of practice, closely
                reviews all notice-filed clearing organization rules.
                ---------------------------------------------------------------------------
                 \257\ 7 U.S.C. 7a-2(c).
                ---------------------------------------------------------------------------
                 Section 190.04(e)(3) is new, and confirms that an FCM or foreign
                futures intermediary through which a debtor FCM carries open commodity
                contracts may exercise any enforceable contractual rights that the FCM
                or foreign futures intermediary has to liquidate such commodity
                contracts. It provides that the liquidating FCM or foreign futures
                intermediary must use ``commercially reasonable efforts'' in the
                liquidation and provides the trustee a damages remedy if the FCM or
                foreign futures intermediary fails to do so. Damages are the only
                remedy; under no circumstance can the liquidation be voided.
                 This new provision will benefit carrying FCMs by confirming
                explicitly that carrying FCMs are allowed to exercise enforceable
                contractual rights to liquidate contracts, which reduces ambiguity and
                thus will reduce administrative costs. At the same time, clarification
                of the availability of the damages remedy will help to protect
                creditors of the debtor FCM's estate in the event that the carrying FCM
                does not use commercially reasonable efforts in liquidating the open
                contracts (and thus will incentivize carrying FCMs to act in a
                commercially reasonable manner). Thus, the regulation itself provides
                the estate with a potential mitigant for the costs in the form of a
                damages remedy.
                 The remainder of the revisions to Sec. 190.04(e)(4) and (f) are
                non-substantive language changes and
                [[Page 19400]]
                clarifications and updated cross-references and should not have
                associated costs or benefits.
                3. Regulation Sec. 190.05: Operation of the Debtor's Estate--General:
                Consideration of Costs and Benefits
                 In Sec. 190.05, the Commission is addressing general issues
                regarding the operation of the debtor's estate. In both Sec. 190.05(a)
                and (b), the Commission is making revisions providing the trustee with
                more flexibility to act in a bankruptcy situation. Section 190.05(a),
                for example, provides that the trustee ``shall use reasonable efforts''
                to comply with the CEA and the Commission's regulations. Section
                190.05(b) requires the trustee to ``use reasonable efforts'' to compute
                a funded balance for each customer account that contains open commodity
                contracts or other property as of the close of business each business
                day until such open commodity contracts and other property in such
                account have been transferred or liquidated, ``which shall be as
                accurate as reasonably practicable under the circumstances, including
                the reliability and availability of information.'' These two revisions
                will benefit the estate by recognizing that a bankruptcy could be an
                emergency event, that perfectly reliable information could be
                unavailable or inordinately expensive to obtain, and that therefore the
                trustee should be allowed some measure of flexibility to act reasonably
                given the particular circumstances of the case. CME noted that Sec.
                190.05(b) will have the benefit of allowing the trustee to transfer
                more promptly public customers' positions and property than if the
                trustee were held to a strict standard of precision. On the other hand,
                affording the trustee increased discretion in complying with the CEA
                and the Commission's regulations, and in computing a funded balance for
                each customer account, may carry the potential cost of trustee mistake,
                misfeasance, or abuse of such discretion, as discussed above.
                 Whereas current Sec. 190.04(b) requires a trustee to compute a
                funded balance only for those customer accounts with open commodity
                contracts, revised Sec. 190.05(b) expands the scope of customer
                accounts for which a trustee is required to compute a funded balance to
                those accounts with open commodity contracts or other property
                (including, but not limited to, specifically identifiable property).
                This expansion of the trustee's duties represents an administrative
                cost, as the trustee will have to expend time and resources at the
                close of business each business day to compute the funded balance of
                all customer accounts. However, this revision should also result in a
                benefit to those customers whose accounts hold property but no open
                commodity contracts, in the form of enhanced information about their
                financial position (including with regard to collateral, the value of
                which may change on a daily basis, and with regard to the percentage
                distribution currently available). These customers will, under the
                revised provision, receive daily computations of the funded balance of
                their accounts with the debtor.
                 However, revised Sec. 190.05(b) also narrows the trustee's duty
                compared to current Sec. 190.04(b): While the current provision states
                that the trustee ``must compute a funded balance for each customer
                account . . . each day,'' the revised provision only requires the
                trustee to ``use reasonable efforts'' to do so. Regulation Sec.
                190.00(c)(3)(i)(C) provides that ``reasonable efforts'' should only be
                less than ``best efforts'' to the extent that this would benefit public
                customers as a class. Exercises of discretion by a trustee that, on a
                net basis, benefit public customers as a class may, on a net basis,
                impose costs on individuals or groups within that class. For example,
                there theoretically may be cases where, because the administrative cost
                of computing a funded balance would outweigh the benefit of doing so to
                public customers as a class, the trustee, in exerting ``reasonable
                efforts,'' determines not to do so on a particular day or for a
                particular time. As ICI points out in their comment letter, that
                decision would harm certain customers, i.e., regulated funds, who have
                a particular need to confirm the existence and value of their
                transactions and associated margin.
                 Section 190.05(c) requires the debtor to maintain ``records
                required under this chapter to be maintained by the debtor, including
                records of the computations required by this part'' ``until such time
                as the debtor's case is closed.'' This revision expands the scope of
                records that must be maintained, thereby imposing certain
                administrative costs, but should benefit the estate, because it will
                limit the amount of time the trustee will have to maintain the relevant
                records.
                 Section 190.05(d) requires the bankruptcy trustee to use all
                reasonable efforts to continue to issue account statements for customer
                accounts that contain open commodity contracts or other property, and
                to issue account statements reflecting any liquidation or transfer of
                open commodity contracts or other property promptly after such
                liquidation or transfer. This provision will likely result in
                administrative costs, as the trustee will have to expend time and
                resources issuing account statements to customers. It will benefit
                customers because it should help them to keep track of their commodity
                contracts (and the continued availability of hedges) and the property
                in their accounts, including in particular when such contracts and
                property are liquidated or transferred, even during a bankruptcy. ICI
                noted that this is of particular benefit to regulated funds, providing
                them with a basis to confirm the existence and value of their
                transactions and associated margin.
                 Section 190.05(e)(1) allows a bankruptcy trustee to effect
                transfers of customer property in accordance with Sec. 190.07, but
                requires the trustee to obtain court approval prior to making any other
                disbursements to customers. This provision should benefit the estate
                and customers by allowing the trustee, without court approval, to port
                customers' positions and associated property to a solvent FCM as
                quickly as possible in a bankruptcy situation. In the event that too
                much customer property (that is, an amount in excess of the ultimate
                pro rata share) is transferred for those customers whose positions are
                being ported, and cannot be offset or clawed back, it could result in
                costs to other customers, for whom less than their pro rata share would
                be available.
                 Section 190.05(e)(2) allows the bankruptcy trustee to invest the
                proceeds from the liquidation of commodity contracts or specifically
                identifiable property, and any other customer property, in obligations
                of or guaranteed by the United States, so long as the obligations are
                maintained in depositories located in the United States or its
                territories or possessions. The revised regulation expands the scope of
                customer property that the trustee is permitted to invest in such a
                manner to include ``any other customer property.'' This change should
                benefit customers, in that additional customer property could be
                invested (in this limited manner).
                 Section 190.05(f) requires the trustee to apply the residual
                interest provisions contained in Sec. 1.11 ``in a manner appropriate
                to the context of their responsibilities as a bankruptcy trustee
                pursuant to'' the Bankruptcy Code and ``in light of the existence of a
                surplus or deficit in customer property available to pay customer
                claims.'' This explicit requirement to continue to apply the residual
                interest requirements set forth in Sec. 1.11 may result in
                administrative costs, since the trustee would require resources to do
                so. However, this provision should benefit customers by
                [[Page 19401]]
                making it more likely that they would receive what they are entitled to
                receive from the debtor's estate. Indeed, Vanguard noted that the
                residual interest requirement is a valuable buffer to protect
                customers.
                4. Regulation Sec. 190.06: Making and Taking Delivery Under Commodity
                Contracts: Consideration of Costs and Benefits
                 Section 190.06 addresses the making and taking of deliveries under
                commodity contracts.
                 Specifically, Sec. 190.06(a)(2) requires the trustee to use
                ``reasonable efforts'' (in contrast to the current ``best efforts'') to
                allow a customer to deliver physical delivery property that is held
                directly by the customer in settlement of a commodity contract, and to
                allow payment in exchange for such delivery, and for both of these to
                occur outside the debtor's estate, where the rules of the exchange or
                clearing organization prescribe a process for delivery that allows
                this.
                 Management of contracts in the delivery positions involves a
                significant degree of tailored administration. Under the best efforts
                standard, the trustee may spend more time (and thus incur higher costs)
                focusing on the needs of a few customers, which could detract from the
                trustee's ability to manage the estate more broadly. Accordingly, the
                change from ``best efforts'' to ``reasonable efforts'' should benefit
                creditors of the estate (as a whole) as the trustee should not need to
                provide a disproportionate amount of individualized treatment to such
                contracts.\258\ However, particular customers that would otherwise have
                received the trustee's focused treatment under the ``best efforts''
                standard could suffer a cost from the change.
                ---------------------------------------------------------------------------
                 \258\ As discussed above in section II.A.1, 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.'' 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.
                ---------------------------------------------------------------------------
                 Section 190.06(a)(3) provides guidance to address situations when
                the trustee determines that it is not practicable to effect delivery
                outside the estate and therefore, delivery is made or taken within the
                debtor's estate. The revisions provide the trustee with the flexibility
                to act ``as it deems reasonable under the circumstances of the case,''
                but set an outer bound to the trustee's discretion in requiring them to
                act ``consistent with the pro rata distribution of customer property by
                account class.'' This provision again will have the benefits and costs
                of enhanced discretion discussed above, but includes an outer bound to
                that discretion.
                 In Sec. 190.06(a)(4), the Commission adds a new provision to
                reflect that delivery may need to be made in a securities account.\259\
                The new provision should benefit customers who require the delivery of
                securities, and the trustee, by permitting those securities to be
                delivered to the proper type of account. By setting limits, the
                provision should mitigate the risk of transferring too much value out
                of the commodity contract account (and creating a risk of an
                undermargin or deficit balance).
                ---------------------------------------------------------------------------
                 \259\ This is only relevant for debtor FCMs that are also
                broker-dealers.
                ---------------------------------------------------------------------------
                 Section 190.06(b) is also new. It creates an account class for
                physical delivery property held in delivery accounts and the proceeds
                of such physical delivery property. This account class is further be
                sub-divided into separate physical delivery and cash delivery account
                subclasses. In general, creating the delivery account class should help
                protect customers with property in delivery accounts following a
                default, because delivery accounts are not subject to the Commission's
                segregation requirements. The further sub-division into sub-classes
                recognizes that cash is more vulnerable to loss, and more difficult to
                trace, as compared to physical delivery property. This will likely
                benefit those with physical delivery claims; customers in the cash
                delivery sub-class would be likely get a pro rata distribution that is
                less. The benefits and costs of creating these sub-classes were
                discussed more fully above in reference to the definition of account
                class in proposed Sec. 190.01.
                5. Regulation Sec. 190.07: Transfers: Consideration of Costs and
                Benefits
                 Section 190.07(a) works to promote transfers of commodity contracts
                from a debtor FCM. It does so by prohibiting any clearing organization
                or self-regulatory organization from adopting, maintaining in effect,
                or enforcing rules that interfere with the acceptance by its members of
                transfers of open commodity contracts and the equity margining or
                securing of such contracts from FCMs with respect to which a petition
                in bankruptcy has been filed, if the transfers have been approved by
                the Commission.
                 The revised regulation includes the provisos that it (1) does not
                limit the exercise of any contractual right of a clearing organization
                or other registered entity to liquidate or transfer open commodity
                contracts, and (2) should not be interpreted to limit a DCO's ability
                adequately to manage risk. The revision modifies, in a balanced
                fashion, the standard for clearing organization and SRO rules that are
                adopted, maintained, in effect, and enforced and where transfers are
                approved by the Commission. While clearing organizations and SROs will
                need to comply with the revised standard, the compliance cost should
                not be different than under the prior standard. The clarification that
                the regulations do not limit contractual risk management rights should
                provide a benefit to clearing organizations and their members in
                clarifying that the regulation will not nullify the contracts in this
                regard, and will not have an associated cost.
                 In Sec. 190.07(b)(1), the Commission clarifies that it is the
                transferee FCM itself who has the responsibility to determine whether
                it would be in violation of regulatory minimum financial requirements
                upon accepting a transfer. It is not the trustee's duty. The Commission
                does not anticipate any material cost from this revision.
                 Section 190.07(b)(3) permits a transferee to accept open commodity
                contracts and associated property prior to completing customer
                diligence requirements, provided that such diligence is completed as
                soon as practicable thereafter, and no later than six months after
                transfer. It is intended to incentivize potential transferees to accept
                transfers by making it more practicable to do so. It recognizes that
                customer diligence processes would have already been required to have
                been completed by the debtor FCM with respect to each of its customers
                as part of opening their accounts. CME, ICI and Vanguard agree that the
                proposal would provide a benefit to customers and transferee clearing
                members and trustees, by facilitating the transfer process.\260\ If
                such flexibility were not provided, under the current regulations,
                transfer might not be accomplished, or may not be accomplished
                promptly. The provision recognizes the importance of the account
                opening diligence
                [[Page 19402]]
                requirements and would mitigate the risk from delay by requiring the
                diligence to be performed as soon as practicable and setting an outer
                limit at six months, unless that time is extended by the Commission.
                ---------------------------------------------------------------------------
                 \260\ The customer diligence requirements in question focus on
                anti-money-laundering requirements and ensuring that risk
                disclosures have been provided to customers and acknowledgements of
                such disclosures have been received. The corresponding costs would
                arise from the possibility that the transferee's diligence would
                have revealed problems that had been missed by the debtor FCM's
                customer diligence process, or arose subsequent to the time that the
                original process was conducted, and that conducting the revised
                diligence more promptly would sooner reveal the concerns, thus
                permitting them to be addressed more expeditiously.
                ---------------------------------------------------------------------------
                 FIA has requested that the Commission provide transferee FCMs with
                more specific relief from applicable law relating to ``customer
                diligence'' and to add specific references to certain rules, in order
                to provide certainty, and to mitigate regulatory risk, to a transferee.
                FIA requested various points of specific relief under five headings:
                (i) Rules relating to anti-money laundering requirements; (ii) rules
                relating to risk and other disclosures; (iii) rules relating to capital
                and residual interest requirements; (iv) rules relating to account
                statements; and (v) rules relating to margin.
                 As discussed in more detail in Section II.B.5 above, the Commission
                has decided that, with respect to certain points of the requested
                relief, providing the relief is warranted, and there are no material
                associated costs from doing so. Thus, for example, Sec. 190.07(b)(3)
                is being amended to refer explicitly to the risk disclosure
                requirements in Sec. 1.65(a)(3).
                 With respect to the other points of requested relief, the comment
                requests relief that the Commission has decided carries unacceptable
                costs. Thus, the Commission is not providing a general exemption from
                undermargined account capital charges in accordance with Sec. 1.17,
                nor is the Commission extending the time to comply with capital or
                residual interest requirements. While such relief might have the
                advantage of further incentivizing FCMs to accept transferred accounts,
                it would do so at the cost of potentially causing or accepting
                financial weakness at transferee FCMs.
                 In a third group of points of requested relief, the Commission
                notes that interpretations of existing regulations should adequately
                address the concerns. Thus, transferred accounts are (based on the
                terms of the regulations) excluded from the Customer Identification
                Program requirements of 31 CFR 1026.220, while the provisions of Sec.
                190.07(b)(3) adequately inform what constitutes ``appropriate risk-
                based procedures for conducting ongoing customer due diligence''
                (emphasis supplied) in the context of 31 CFR 1026.210(b)(5)(i). While
                providing more specific regulatory provisions might enhance regulatory
                certainty (and thus redound to the benefit of transferee FCMs, and
                potentially incentivize FCMs to accept transferred accounts), it
                carries the risk of being under-inclusive or over-inclusive, and thus
                failing to achieve the regulatory goals.
                 Moreover, as to both the second and third categories, there may be
                a more tailored approach to achieving the goal: As the Commission
                explicitly notes above, any further relief that might be appropriate in
                a particular situation can be requested by the transferee in light of
                the relevant facts and circumstances. The Commission observed that its
                staff have traditionally responded to requests for relief in emergency
                situations with great dispatch, and expects, and has instructed staff,
                to continue to do so in this context in the future.\261\ While this
                approach provides less certainty in advance, it has the benefit of
                making tailored relief available (and mitigating the possibility that
                relief leads to unintended consequences).
                ---------------------------------------------------------------------------
                 \261\ See discussion in Section II.B.5 above.
                ---------------------------------------------------------------------------
                 Section 190.07(b)(4) clarifies that account agreements governing a
                transferred account are deemed assigned to the transferee until and
                unless a new agreement is reached. At the request of FIA, the
                Commission is confirming that if there is a pre-existing account
                agreement between a transferred customer and the transferee FCM, that
                pre-existing agreement will govern the relationship rather than the
                agreement between the customer and the transferor (debtor) FCM. The
                provision also confirms that consequences for breaches pre-transfer are
                borne by the transferor rather than the transferee. Section
                190.07(b)(4) provides important transparency regarding the agreement
                between a transferred customer and a transferee FCM pending the
                negotiation of a new agreement between them, or, if such negotiation is
                unsuccessful, until either party decides to terminate the relationship.
                 Section 190.07(b)(5) provides that in the event of transfer,
                customer instructions that are received by the debtor with respect to
                any open commodity contracts or specifically identifiable property
                should be transmitted to the transferee, who should comply with such
                instructions to the extent practicable. The slight revisions to current
                Sec. 190.02(c) are merely clarifications, and there should be no costs
                or benefits associated with such revisions.
                 Section 190.07(c) provides that ``all commodity contract accounts
                (including accounts with no open commodity contract positions) are
                eligible for transfer. . . .'' This recognizes explicitly that accounts
                can be transferred if the accounts are intended for trading
                commodities, but do not include any open commodity contracts at the
                time of the order for relief. The revision clarifies the current
                language and will not change the types of accounts that can be
                transferred. Accordingly, the Commission does not anticipate that there
                will be material added cost associated with the revision.
                 Section 190.07(d) revises special rules for transfers under section
                764(b) of the Bankruptcy Code. The revision is being made to promote
                transfer. Cost and benefit considerations related to transfer are as
                discussed above.\262\ The revised regulation permits partial transfers,
                but (to the extent practicable) not in cases where netting sets for
                spreads or straddles would be broken or where customers' net equity
                claims would increase. The revised regulation should provide a benefit
                to customers by codifying this limitation. This recognizes that there
                may be circumstances where partial transfer is not practicable and
                implies that the trustee makes that decision. It is therefore possible
                that certain customers holding spread or straddle positions could have
                positions liquidated or not transferred under the revised provision, or
                could have spreads or straddles broken because of the trustee's
                exercise of discretion.
                ---------------------------------------------------------------------------
                 \262\ See section III.B.1 above.
                ---------------------------------------------------------------------------
                 The Commission has declined to adopt ICI's suggestion to provide
                guidance to the effect that the trustee should not effectuate a
                transfer that will result in a separately managed account having a
                significant deficit following the porting, in order to avoid a
                circumstance where ``the manager of that account would likely need to
                liquidate the bulk of the account's portfolio and other positions in
                order to eliminate or reduce the deficit.'' While adopting such a
                suggestion might benefit the beneficial owner by enabling the account
                manager to manage the separate account in accord with the account
                manager's investment program, it may instead have the opposite effect,
                in that it may prevent any transfer of the customer's positions before
                the seventh calendar day after the order for relief, in which event the
                trustee will be required to liquidate the entirety of the customer's
                account, promptly and in an orderly manner, causing the very
                disruptions that the transfer provisions (and ICI's suggestion) are
                designed to avoid. Moreover, many FCMs carry hundreds or even thousands
                of separately managed accounts. It may well not be practical for a
                trustee, in addition to their numerous other responsibilities (and in a
                context where they need to learn those responsibilities
                [[Page 19403]]
                in a compressed timeframe) to take ``due account'' of the particular
                circumstances of each of these separately managed accounts in the
                hours, or perhaps a small number of days, that the trustee may be
                allowed by the clearing organizations carrying the FCMs accounts to
                negotiate and effectuate a transfer. Endeavoring to do so might well
                have the cost of diverting the trustee and their assistants from
                carrying out more pressing tasks.
                 Section 190.07(d)(3) permits a letter of credit associated with a
                commodity contract to be transferred with an eligible commodity
                contract account. If the letter of credit cannot be transferred and the
                customer does not deliver substitute property, the provision will
                permit the trustee to draw upon all or a portion of the letter of
                credit and treat the proceeds as customer property in the applicable
                account class. The revised regulation ensures that letters of credit
                are treated in an economically similar fashion to other types of
                collateral and that customers using letters of credit will not receive
                any differential economic advantages, thus serving the goal of pro rata
                distribution. If the trustee does draw upon the letter of credit, there
                may be administrative costs incurred by the estate, as well as costs to
                the customer that posted the letter of credit as collateral. These
                costs may be mitigated if the customer delivers substitute property, as
                set forth in the proposed regulation. Moreover, consistent with Sec.
                190.04(d)(3)(iv), the trustee is directed to ``endeavor to achieve pro
                rata treatment among customer claims in a manner that mitigates, to the
                extent practicable, the adverse effects upon customers that have posted
                letters of credit.'' \263\
                ---------------------------------------------------------------------------
                 \263\ The costs and benefits of allowing the trustee to draw
                upon the letter of credit have been discussed above in section
                III.C.2 with respect to Sec. 190.04(d)(3).
                ---------------------------------------------------------------------------
                 Section 190.07(d)(4) will require a trustee to use reasonable
                efforts to prevent physical delivery property from being separated from
                commodity contract positions under which the property is deliverable.
                While this provision will impose an administrative cost on the estate,
                it is already a best practice for trustees; keeping delivery property
                with the underlying contract positions is necessary for (and thus
                should benefit) the delivery process. Therefore, the additional
                administrative cost from the revised regulation should be minimal.
                 In Sec. 190.07(d)(5), the Commission prohibits the trustee from
                making a transfer that would result in insufficient remaining customer
                property to make an equivalent percentage distribution to all customers
                in the applicable account class (taking into account all previous
                transfers and distributions). The Commission is further clarifying that
                the trustee should make determinations in this context based on
                customer claims reflected in the FCM's records, and, for customer
                claims that are not consistent with those records, should make
                estimates using reasonable discretion based in each case on available
                information as of the calendar day immediately preceding transfer. This
                will support achieving the statutory policy of pro rata distribution
                and give the trustee discretion to make decisions based on the
                overarching principle set forth above, valuing cost effectiveness over
                precise values of entitlement. However, this is designed to work to the
                detriment of any customer who, absent the provision, would otherwise
                benefit from a larger distribution. Moreover, in giving the trustee
                discretion, it carries the risk of mistake or misfeasance.
                 Section 190.07(e) will add language to clarify that certain
                transfers are approved by the Commission pursuant to the procedure set
                forth in the Bankruptcy Code (and thus protected from avoidance) and
                will prohibit the trustee from avoiding such transfers, unless the
                transfer is disapproved by the Commission. These include a transfer
                made by ``a receiver that has been appointed for the FCM that is now a
                debtor.'' The new provision is being added in order to respect the
                actions of a receiver that is acting to protect the property of the FCM
                that has become the debtor in bankruptcy. It will provide certainty to
                the actions of such a receiver, whose duties, among others, include
                protecting the customer property of the FCM. However, to the extent
                that the receiver takes actions that are, considered in retrospect,
                mistaken or ill-advised, the revised provision will prevent the
                correction of such actions unless the Commission acts affirmatively to
                disapprove them.\264\
                ---------------------------------------------------------------------------
                 \264\ Regulation Sec. 190.02(b)(1) explicitly excepts from the
                delegation to the Director of the Division of Clearing and Risk the
                authority to disapprove a pre-relief transfer pursuant to Sec.
                190.07(e)(1).
                ---------------------------------------------------------------------------
                 Section 190.07(f) will clarify that the Commission may prohibit the
                transfer of a particular set or sets of the commodity contract
                accounts, or permit the transfer of a particular set or sets of
                commodity contract accounts that do not comply with the requirements of
                the section. In addition, the Commission is clarifying that the
                transfers of the commodity contract accounts include the associated
                customer property. These revisions are clarifications and should not
                have any associated costs.
                6. Regulation Sec. 190.08: Calculation of Funded Net Equity:
                Consideration of Costs and Benefits
                 In Sec. 190.08, the Commission addresses calculation of funded net
                equity. Section 190.08(a) simply states that a customer's funded net
                equity claim is equal to the aggregate of such customers funded net
                equity claims for each account class.
                 Section 190.08(b) sets forth the steps for a trustee to follow when
                calculating each customer's net equity. SIFMA AMG/MFA requested that
                the Commission amend proposed Sec. 190.08(b)(2)(xii) to treat accounts
                of the same principal or beneficial owner maintained by different
                agents or nominees as separate accounts and not all held in the
                individual capacity of such principal or beneficial owner, suggesting
                that this would have the benefit of reducing the administrative
                difficulties the trustee would face in consolidating all accounts of
                the same principal or beneficial owner, and it would have the further
                benefit of avoiding any confusion as to treatment of separate accounts
                that could arise with the overlay of the time-limited relief provided
                by Letter 19-17.
                 The Commission declined to make this change. The change would not
                achieve those benefits and would have associated costs: First, the FCM,
                to the extent it does treat such accounts separately pursuant to the
                relief set forth in Letter 19-17, will already be consolidating (for
                purposes of certain calculations) all accounts of the same principal or
                beneficial owner, in that the Letter conditions its relief on the FCM
                applying credit limits and stress testing on a combined account
                basis.\265\ Second, given that Letter 19-17 also conditions relief on
                the FCM disclosing that ``under CFTC [p]art 190 rules all separate
                accounts of the beneficial owner will be combined in the event of an
                FCM bankruptcy,'' amending Sec. 190.08(b)(2)(xii) to treat them
                separately would be inconsistent with that disclosure, and would cause,
                rather than relieve, inconsistency with the approach taken under the
                Letter.
                ---------------------------------------------------------------------------
                 \265\ See CFTC Letter 19-17, https://www.cftc.gov/node/217076 at
                4.
                ---------------------------------------------------------------------------
                 While the Commission is making certain revisions in Sec.
                190.08(b)(3), (4), and (5), the Commission views such revisions as non-
                substantive and merely clarifying the text in the current analogous
                provisions. Thus, the Commission does not expect these
                [[Page 19404]]
                changes to result in any costs or benefits.
                 Section 190.08(c) sets forth instructions for calculating each
                customer's funded balance, while in Sec. 190.08(d), the Commission is
                in general implementing changes to provide more flexibility to the
                trustee in valuing commodity contracts and other property held by or
                for a commodity broker. For instance, in Sec. 190.08(d)(5), the
                Commission is deleting the requirement that the trustee seek approval
                of the court prior to enlisting professional assistance to value
                customer property. These changes should benefit the estate by providing
                the trustee with more flexibility to determine how to value certain
                customer property, including whether or not to enlist professional
                assistance in doing so. Likewise, these revisions should serve the goal
                of a pro rata distribution to customers, as the accurate valuation of
                customer property can benefit from the input of a professional. On the
                other hand, affording the trustee increased discretion in how to value
                commodity contracts and other property held by a debtor carries the
                potential cost of mistake, misfeasance, or abuse of discretion by the
                trustee, as discussed above, or possibly by the professional whose
                service is retained.
                 With respect to commodity contracts that have been transferred,
                Sec. 190.08(d)(1)(i) provides that such contracts be valued at the end
                of the last settlement cycle on the day preceding such transfer, rather
                than at the end of the settlement cycle in which it is transferred.
                Again, this revision should benefit both the estate and customers by
                making it practical to calculate the value of the transferred commodity
                contracts prior to the transfer.
                 The Commission has declined to accept ICE's suggestion that it
                adopt a ``more flexible approach'' because ``the market may move
                significantly on the date of the transfer.'' While prices may move
                intra-day during the period between opening and the time of auction,
                they may also move between the time of auction and closing. Therefore,
                there is no ex ante reason to expect that the previous day's price is
                less reflective of the price at the time of the auction than the
                closing price on the auction day. Moreover, an alternative approach,
                using the price set in the auction as the price for individual
                contracts, is unlikely to be practicable. Units auctioned will
                frequently contain a heterogenous (though risk-related) set of
                products, tenors (e.g., contract months), and directions (e.g., long or
                short). Thus, it will often be impracticable to translate an auction
                price for a portfolio to prices for individual contracts within that
                portfolio.
                7. Regulation Sec. 190.09: Allocation of Property and Allowance of
                Claims: Consideration of Costs and Benefits
                 In Sec. 190.09, the Commission is addressing allocation of
                property and allowance of claims. Section 190.09(a)(1) defines the
                scope of ``customer property'' that is available to pay the claims of a
                debtor FCM's customers, and Sec. 190.09(a)(1)(i) sets forth the
                categories of ``cash, securities, or other property or the proceeds of
                such cash, securities, or other property received, acquired, or held by
                or for the account of the debtor, from or for the account of a
                customer'' that are included in customer property. In Sec.
                190.09(a)(1)(i), the Commission is making certain substantive changes
                to the categories listed in current Sec. 190.08(a)(1)(i), as discussed
                below:
                 First, Sec. 190.09(a)(1)(i)(D) is new and provides that
                customer property includes any property ``received by the debtor as
                payment for a commodity to be delivered to fulfill a commodity contract
                from or for the commodity customer account of a customer.'' Clarifying
                this point explicitly should benefit both the estate and customers by
                avoiding confusion or potential litigation.
                 Second, Sec. 190.09(a)(1)(i)(F) provides that letters of
                credit, including proceeds of letters of credit drawn by the trustee,
                or substitute customer property, constitute ``customer property.'' This
                section is being revised to be consistent with the other letters of
                credit provisions that are being added throughout part 190. The
                Commission does not anticipate that this provision will result in any
                material costs or benefits, as current Sec. 190.08(a)(1)(i) already
                includes a provision regarding letters of credit.\266\
                ---------------------------------------------------------------------------
                 \266\ The costs and benefits of the underlying policy decision
                to take steps to ensure that customers posting letters of credit are
                treated (with respect to pro rata allocation of losses) in a manner
                consistent with the manner in which customers posting other forms of
                collateral are treated are discussed in connection with Sec.
                190.04(d)(3) in section III.C.2 above.
                ---------------------------------------------------------------------------
                 Section 190.09(a)(1)(ii) sets forth the categories of ``[a]ll cash,
                securities, or other property'' that would be included in customer
                property. In Sec. 190.09(a)(1)(ii), the Commission is making certain
                substantive changes to the categories listed in current Sec.
                190.08(a)(1)(ii), as discussed below:
                 First, Sec. 190.09(a)(1)(ii)(D) provides that any cash,
                securities, or other property that was property received, acquired or
                held to margin, guarantee, secure, purchase, or sell a commodity
                contract and that is subsequently recovered by the avoidance powers of
                the trustee or is otherwise recovered by the trustee on any other claim
                or basis constitutes customer property. The current version of this
                provision refers only to the trustee's avoidance powers (leaving out
                the possibility for recovery other than through avoidance powers). The
                Commission's revisions to this section will benefit the estate, by
                assuring that any property they recover will be included in the pool of
                customer property, rather than going to some other creditor (to be
                sure, those other creditors will receive correspondingly less).
                 Second, Sec. 190.09(a)(1)(ii)(G) is new, and provides
                that any current assets of the debtor in the greater of (i) the amount
                that the debtor is obligated to be set aside as its targeted residual
                interest amount, pursuant to Sec. 1.11, or (ii) the debtor's
                obligations to cover debit balances or undermargined amounts, pursuant
                to Sec. 1.20, Sec. 1.22, Sec. 22.2, or Sec. 30.7, constitute
                customer property. This new provision will result in administrative
                costs, because the trustee will need to take the extra step of
                determining whether any current assets of the debtor need to be set
                aside as customer property and, if so, how much. This provision should
                benefit public customers (and serve the policy of protecting customer
                collateral), however, because it will mitigate the risk of a shortfall
                in customer funds by ensuring that the trustee fulfills the
                Commission's regulations that require an FCM to put certain funds into
                segregation on behalf of customers. ICI and Vanguard agreed that this
                provision will benefit customers, while CME considered it a
                ``substantial improvement over the current rule.'' This approach will
                result in such funds being included in the pool of customer property,
                rather than going to some other creditor. It will, to the same extent,
                operate to the detriment of general creditors.
                 Third, Sec. 190.09(a)(1)(ii)(K) is also new, and provides
                that any cash, securities, or other property that is payment from an
                insurer to the trustee arising from or related to a claim related to
                the conversion or misuse of customer property constitutes customer
                property. This provision should benefit customers (and, again, the
                policy of protecting customer collateral), since any insurance payment
                as described in this proposed section will enlarge the pool of customer
                property, rather than going
                [[Page 19405]]
                to general creditors.\267\ It could result in administrative costs,
                however, as the trustee will need to spend time and resources in order
                to determine whether any such insurance payments exist, and in
                prosecuting such insurance claims.
                ---------------------------------------------------------------------------
                 \267\ It will, again, to the same extent, act to the detriment
                of general creditors.
                ---------------------------------------------------------------------------
                 Fourth, the second sentence of Sec. 190.09(a)(1)(ii)(L)
                is new, and will provide that customer property for purposes of these
                regulations includes any ``customer property,'' as that term is defined
                in SIPA, that remains after satisfaction of the provisions in SIPA
                regarding allocation of customer property constitutes customer
                property. This provision should benefit commodity customers (and act to
                the detriment of general creditors) because any securities customer
                property remaining after full allocation to securities customers will
                enlarge the pool of commodity customer property. It could result in
                administrative costs, however, since the trustee could need to spend
                time and resources determining the extent to which such property is
                left over after allocation to customers in a SIPA proceeding.\268\
                ---------------------------------------------------------------------------
                 \268\ The Commission further notes that the first sentence of
                Sec. 190.09(a)(1)(ii)(L), which provides that customer property
                includes any cash, securities, or other property in the debtor's
                estate, but only to the extent that the customer property under the
                other definitional elements is insufficient to satisfy in full all
                claims of the debtor's public customers, will impose no new costs or
                benefits because such provision already appears in current Sec.
                190.08, and the only changes to the provision would be non-
                substantive updates to cross-references.
                ---------------------------------------------------------------------------
                 Section 190.09(a)(2) sets forth the categories of property that are
                not included in customer property. In Sec. 190.09(a)(2), the
                Commission has made certain substantive changes to the categories
                listed in current Sec. 190.08(a)(2), as discussed below:
                 First, in Sec. 190.09(a)(2)(iii), the Commission is
                adding explicit language to state that only those forward contracts
                that are not cleared by a clearing organization are excluded from the
                pool of customer property. This revision will benefit customers (and
                act to the detriment of general creditors), since the pool of customer
                property would increase by explicitly including any cleared forward
                contracts.
                 Second, Sec. 190.09(a)(2)(v) provides that any property
                deposited by a customer with a commodity broker after the entry of an
                order for relief that is not necessary to meet the margin requirements
                of such customer is not customer property. The deletion of the word
                ``maintenance'' before ``margin'' will eliminate any distinction
                between initial and variation margin; this deletion will benefit
                customers by ensuring that any amount deposited by a customer after the
                entry of an order for relief that is necessary to meet that customer's
                margin requirements will be included in the pool of customer property.
                This provision would correspondingly act to the detriment of general
                creditors.
                 Third, Sec. 190.09(a)(2)(viii), which is new, provides
                that any money, securities, or other property held in a securities
                account to fulfill delivery, under a commodity contract that is a
                security futures product, from or for the account of a customer, is
                excluded from customer property. This provision avoids conflict with
                the resolution, under SIPA, of claims for securities and related
                collateral.
                 Section 190.09(a)(3), which is new, gives the trustee the authority
                to assert claims against any person to recover the shortfall of
                customer property enumerated in certain paragraphs elsewhere in Sec.
                190.09(a). This provision could impose administrative costs, since the
                trustee could have to expend time and resources to assert and prosecute
                such claims to make up for any shortfall in customer property. The
                provision will, however, benefit customers, since it will ensure that
                the trustee is in a position to recover any such shortfalls and gives
                the trustee authority to act to do so. Moreover, since this provision
                makes explicit what is implicit in current part 190, an additional
                benefit of this provision may be reduced litigation costs over a
                trustee's authority to engage in attempts to recover shortfalls in
                customer property.\269\
                ---------------------------------------------------------------------------
                 \269\ Of course, these recoveries are derived from persons
                against whom such claims are successfully asserted. The transfer to
                customers from these individuals advances the goal of pro-rata
                distribution.
                ---------------------------------------------------------------------------
                 Section 190.09(b) adds the phrase ``or attributable to'' to the
                language that is in current Sec. 190.08(b), when describing how to
                treat property segregated on behalf of or attributable to non-public
                customers, namely, as part of the public customer estate; the addition
                of this phrase, as described above, will clarify that Sec.
                190.09(b)(1) applies both to property that is in the debtor's estate at
                the time of the bankruptcy filing, as well as property that is later
                recovered by the trustee and becomes part of the debtor's estate at the
                time of recovery. This additional phrase would benefit public customers
                and the statutory policy in favor of them (and correspondingly act to
                the detriment of non-public customers and general creditors), since it
                could increase the amount of property that is treated as part of the
                public customer estate. It could impose administrative costs because it
                could take time and resources to properly allocate any property that is
                recovered after the time the bankruptcy is filed.\270\
                ---------------------------------------------------------------------------
                 \270\ Section 190.09(c)(1) will have a similar change in the
                addition of the phrase ``or recovered by the trustee on behalf of or
                for the benefit of an account class,'' which is meant to clarify
                that any property recovered by the trustee on behalf of or for the
                benefit of a particular account class after the bankruptcy filing
                must be allocated to the customer estate of that account class. This
                revision will present similar costs and benefits to those discussed
                above.
                ---------------------------------------------------------------------------
                 Section 190.09(c)(1)(ii) is a new provision that instructs the
                trustee, in the event there is property remaining allocated to a
                particular account class after payment in full of all allowed customer
                claims in that account class, to allocate the excess in accordance with
                proposed Sec. 190.09(c)(2), which in turn sets forth the order of
                allocation for any customer property that cannot be traced to a
                specific customer account class. These provisions will benefit public
                customers who would otherwise face shortfalls (and then, non-public
                customers who would otherwise face shortfalls). Since these provisions
                make explicit what is implicit in current part 190, an additional
                benefit of these provisions will result from the increased clarity over
                what to do with any excess customer property. However, the provisions
                will act to the detriment of non-public customers (relative to public
                customers) and general creditors (relative to both) who, under the
                current regime, could have been more likely to receive any excess
                customer property in the absence of an explicit provision providing
                what to do with any such excess customer property.\271\
                ---------------------------------------------------------------------------
                 \271\ The incentive effects of such preferences are discussed in
                section III.A.2.vi, above.
                ---------------------------------------------------------------------------
                 Section 190.09(d) governs the distribution of customer property.
                The only substantive change in Sec. 190.09(d) from its analog in
                current Sec. 190.08(d) is in Sec. 190.09(d)(1)(i) and (ii), which
                import the concept of ``substitute customer property.'' Whereas current
                Sec. 190.08(d)(1)(i) and (ii) require customers to deposit cash in
                order to obtain the return of specifically identifiable property, Sec.
                190.09(d)(1)(i) and (ii) allow the posting of ``substitute customer
                property.'' This term, which is defined in Sec. 190.01, means cash or
                cash equivalents. This revision will benefit customers because it makes
                it easier for customers to redeem their specifically identifiable
                property by no longer limiting customers to only using cash to do so.
                It could, however, impose administrative costs in the form of time and
                resources of the trustee, who, in the event a customer chooses to post
                cash equivalents to redeem their specifically identifiable property,
                will be required to
                [[Page 19406]]
                value (and potentially to liquidate) such cash equivalents. Moreover,
                while ``cash equivalents'' are required to be assets ``that are highly
                liquid such that they may be converted into United States dollar cash
                within one business day without material discount in value,'' it is
                possible that such assets could nonetheless decrease in value,
                potentially to the detriment of other customers.
                8. Regulation Sec. 190.10: Provisions Applicable to Futures Commission
                Merchants During Business as Usual: Consideration of Costs and Benefits
                 As proposed, Sec. 190.10 addresses provisions applicable to FCMs
                during business as usual. The ABA Subcommittee and CME recommended that
                these ordinary course provisions should be codified in part 1 of the
                Commission's regulations, to be more transparent to FCM compliance
                personnel. As discussed further below, the Commission has accepted that
                suggestion and is adopting in part 1 of its regulations the provisions
                that were proposed as Sec. 190.10 (b), (c), (d), and (e).
                 In the regulation proposed as Sec. 190.10(a), the Commission notes
                that an FCM is required to maintain current records related to its
                customer accounts, consistent with current Commission regulations, and
                in a manner that will permit them to be provided to another FCM in
                connection with the transfer of open customer contracts and other
                customer property. This regulation does not impose new obligations, but
                rather informs the trustee regarding their duties by incorporating
                references to the Commission's existing regulations. Thus, this
                provision is remaining in part 190, and, as the sole remaining
                paragraph, will be codified as Sec. 190.10.
                 The regulation proposed as Sec. 190.10(b) addresses designation of
                accounts as intended for the purpose of hedging. It is being codified
                as Sec. 1.41. An FCM will be permitted to rely upon a customer's
                written representation of hedging intent regarding the designation of a
                hedging account, without being required to look behind that
                representation, thus mitigating administrative costs.
                 Section 1.41(a) requires an FCM to provide a customer an
                opportunity to designate an account as a hedging account when the
                customer first opens the account, allowing for clear instruction to
                FCMs at the outset of the relationship. Clear instruction at the outset
                will facilitate the ability properly to account for customer property.
                There will be some disclosure and accounting costs associated with this
                provision. For those customers that do engage in hedging, it will be
                more cost effective to designate the account at opening than to monitor
                the transactions for the first qualifying transaction to provide the
                opportunity to make the designation, as applicable under the current
                regulation. Thus, the regulation should reduce the probability that the
                opportunity to designate the account as a hedging account will be
                missed.
                 Section 1.41(b) sets forth the conditions for treating an account
                as a hedging account, permitting such treatment upon the customer's
                written representation that their trading would constitute hedging as
                defined under any relevant Commission rule or the rule of a DCO, DCM,
                SEF, or FBOT. There will be record-keeping costs for FCMs and customers
                associated with the provision.
                 Section 1.41(c) provides that the foregoing requirements do not
                apply to commodity contract accounts opened prior to the effective date
                of this final rulemaking, and that an FCM can continue to designate
                such existing accounts as hedging accounts based on written hedging
                instructions obtained under current regulations. This provision should
                mitigate the impact of the changes to current requirements in Sec.
                1.41(a) and (b) by not applying those provisions to already opened
                hedging accounts, instead relying upon the information collected and
                maintained during the current regulatory framework.
                 Section 1.41(d) will permit an FCM to designate an existing
                customer account as a hedging account for purposes of bankruptcy
                treatment, provided that the FCM obtains the necessary customer
                representation. This provision will give FCMs and customers flexibility
                to apply the proposed regulations to existing accounts where the impact
                would not be overly burdensome.
                 The regulation proposed as Sec. 190.10(c) addresses the
                establishment of delivery accounts during business as usual. It is
                being codified as Sec. 1.42, and recognizes that when an FCM
                facilitates delivery under a customer's physical delivery contract and
                such delivery is effected outside of a futures account, foreign futures
                account, or cleared swaps account, it must be effected through (and the
                associated property held in) a delivery account. While there are costs
                associated with the opening and maintenance of delivery accounts, the
                Commission views that the use of such accounts is cost effective in
                facilitating delivery.\272\ The benefit of using such accounts is
                twofold: To protect customer assets during the delivery process, and to
                foster the well-functioning of the delivery process.
                ---------------------------------------------------------------------------
                 \272\ The Commission further understands that it is already
                industry practice to use such accounts, therefore, as a practical
                matter, the cost associated with mandating the use of such accounts
                should be mitigated.
                ---------------------------------------------------------------------------
                 The regulation proposed as Sec. 190.10(d) addresses letters of
                credit, and will prohibit an FCM from accepting a letter of credit as
                collateral during business as usual unless certain conditions are met
                at the time of acceptance and remain true through the date of
                expiration. It is being codified as Sec. 1.43.
                 The first condition is that the trustee must be able to draw upon
                the letter of credit in full or in part in the event of a bankruptcy
                proceeding, the entry of a protective decree under SIPA, or the
                appointment of FDIC as receiver pursuant to Title II of the Dodd-Frank
                Act. Second, if the letter of credit is permitted to be and in fact is
                passed through to a clearing organization, the trustee for such
                clearing organization (or the FDIC) must be able to draw upon the
                letter of credit in full or in part in the event of a bankruptcy
                proceeding for such clearing organization (or where the FDIC is
                appointed as receiver).
                 Section 1.43 will ensure that an FCM's treatment and acceptance of
                letters of credit during business as usual is consistent with and does
                not preclude the trustee's treatment of letters of credit in accordance
                with Sec. Sec. 190.00(c)(5) and 190.04(d)(3). The Commission
                understands that under industry practice, most existing letter of
                credit arrangements are consistent with the Joint Audit Committee Forms
                of Irrevocable Standby Letter of Credit, both Pass-Through and Non
                Pass-Through,\273\ and that these forms are consistent with these new
                requirements. Nevertheless, FCMs will need to review the existing
                letters of credit for consistency with the regulation, and it is
                plausible that some could need to be re-negotiated to be consistent
                therewith.
                ---------------------------------------------------------------------------
                 \273\ See section II.B.8 above.
                ---------------------------------------------------------------------------
                 To mitigate the costs of this change, the Commission has considered
                the extent of the use of letters of credit in the industry and has
                determined that upon the effective date of the regulation, Sec. 1.43
                will apply only to new letters of credit and customer agreements. The
                Commission further is including a transition period of one year from
                the effective date until Sec. 1.43 will apply to existing letters of
                credit and customer agreements. The transition period is intended to
                give FCMs an adequate opportunity to conduct the necessary review of
                existing letters of credit and customer agreements, and to make any
                [[Page 19407]]
                necessary changes. SIFMA AMG/MFA have urged the Commission to shorten
                that one-year transition period, questioning how a (non-conforming)
                letter of credit would be treated if an FCM that is holding such a
                letter of credit went into bankruptcy during that period. Nonetheless,
                the Commission has concluded that the one-year time period
                appropriately balances the goals of mitigating burden on FCMs who are
                required to conduct such reviews, and make such changes, with the goal
                of mitigating the risk that an FCM that has accepted one or more
                letters of credit that do not conform to the new requirements becomes a
                debtor during that transition period. Even if such a situation occurs,
                the risk that the customer who posted that letter of credit would
                obtain treatment that is not consistent with (i.e., better than) pro
                rata treatment (at the expense of other public customers) is mitigated
                by the provision in Sec. 190.04(d)(3)(ii)--which is not subject to the
                one-year transition period--that, for a letter of credit posted as
                collateral, ``the trustee shall treat any portion that is not drawn
                upon (less the value of any substitute customer property delivered by
                the customer) as having been distributed to the customer for purposes
                of calculating entitlements to distribution or transfer.''
                 It is possible that some letters of credit could become more
                expensive for customers to obtain, as there will be an increased
                likelihood that the letter of credit will be drawn upon. (As discussed
                above, this appears to not apply to the majority of existing
                arrangements). As noted in the discussion of Sec. 190.04(d)(3), the
                benefit of the regulation is ensuring that letters of credit are
                treated in an economically consistent manner with other types of
                collateral, thus promoting the goal of pro rata distribution. However,
                it could create incentives for customers who had, or who would prefer
                to, post letters of credit that could not be drawn upon unless the
                customer defaulted, to reduce their participation in transactions
                cleared through FCMs.
                 The provision proposed as Sec. 190.10(e) concerns the disclosure
                statement for non-cash margin, and is being codified as Sec. 1.55(p).
                It largely aligns with the provisions in current part 190 from which it
                was derived; there will be no additional cost or benefit implications.
                9. Section 15(a) Factors--Subpart B
                a. Protection of Market Participants and the Public
                 Subpart B of the revised regulations will increase the protection
                of market participants and the public by clarifying certain provisions
                (thereby promoting transparency for customers, other claimholders, and
                the general public), by providing, in certain other provisions,
                discretion to the trustee in determining how best to achieve the goal
                of protecting public customers as a class, by fostering transfer (and
                therefore mitigating the market risk associated with closing out and
                reopening positions for certain customers), by enhancing the likelihood
                that customer net equity claims will be fully funded, and by promoting
                fairness to customers as a class by achieving pro rata distribution.
                b. Efficiency, Competitiveness, and Financial Integrity
                 Subpart B of the revised regulations will promote efficiency (in
                the sense of both cost effectiveness and timeliness) in the
                administration of insolvency proceedings of FCMs and the financial
                integrity of derivatives transactions carried by FCMs by setting forth
                clear and well-thought-out instructions for a bankruptcy trustee to
                follow in the event of an FCM insolvency, and by ensuring that these
                instructions are and remain consistent with current market practices.
                Moreover, subpart B will provide the bankruptcy trustee with
                discretion, in certain circumstances, to react flexibly to the
                particulars of the insolvency proceeding, guided by the goal of
                protecting public customers as a class, thereby promoting cost-
                effective administration of the proceeding. These effects will, in
                turn, enhance the competitiveness of U.S. FCMs, by enhancing market
                confidence in the protection of customer funds and positions entrusted
                to U.S. FCMs, even in the case of insolvency.
                c. Price Discovery
                 Price discovery is the process of determining the price level for
                an asset through the interaction of buyers and sellers and based on
                supply and demand conditions. The revised regulations work to promote
                the transfer, rather than liquidation, of customer positions. To the
                extent that they therefore mitigate the likelihood of the need for
                liquidations of customer positions, particularly in conditions of
                market distress, they will mitigate the negative impacts of bankruptcy
                proceedings on price discovery.
                d. Sound Risk Management Practices
                 Subpart B of the revised regulations will promote sound risk
                management practices by facilitating the bankruptcy trustee' effective
                management of the risk of the debtor FCM. Subpart B will accomplish
                this by revising the bankruptcy regulations for an FCM insolvency to
                reflect current market practices and thereby make it easier for the
                trustee to act effectively to protect customer property in the event of
                such an insolvency.
                e. Other Public Interest Considerations
                 Subpart B of the revised regulations supports the implementation of
                statutory policy such as promoting protection of public customers and
                ensuring pro rata distribution of customer funds. Moreover, some of the
                FCMs that might enter bankruptcy are very large financial institutions,
                and some are (or are part of larger groups that are) considered to be
                systematically important. A well-structured and effective bankruptcy
                process that efficiently facilitates the proceedings is likely to
                benefit the financial system (and thus the public interest), as that
                process will help to attenuate the detrimental effects of the
                bankruptcy on the financial system and reduce the likelihood that
                uncertainty as to the outcome of the insolvency could cause disruption
                to financial markets.
                D. Subpart C--Clearing Organization as Debtor
                 Subpart C to part 190 is intended to create a tailored set of
                regulations to govern a proceeding under subchapter IV of chapter 7 of
                the Bankruptcy Code in which the debtor is a clearing organization. As
                discussed further below, while these regulations are fitted to the
                context of a commodity broker that is a clearing organization, they are
                principles-based rather than prescriptive, and flexible rather than
                rigid.
                 The overarching benefits of this approach include the following.
                First, uncertainty will be reduced during business-as-usual (thus
                enhancing the ability of both clearing members and their customers
                better to understand their exposures to the possible insolvency of a
                clearing organization, and to tailor their risk management practices
                (and use of clearing services) in light of this enhanced
                understanding). This better understanding may well foster greater trust
                in the cleared derivatives marketplace, and thus greater participation
                therein. To be sure, it is also possible that some market participants,
                upon achieving a greater understanding, may decide not to participate.
                There are other limitations to these benefits, noted below. Second, by
                developing a more detailed, yet flexible, framework and procedures for
                the bankruptcy of a DCO, the costs (to the estate, to clearing members,
                and to
                [[Page 19408]]
                public customers) of the case should be reduced.
                 Third, the resolution regime established under Title II of Dodd-
                Frank provides that the maximum liability of FDIC as receiver of a
                covered financial company to a claimant is the amount the claimant
                would have received if the FDIC had not been appointed receiver and the
                covered financial company had been liquidated under chapter 7 of the
                Bankruptcy Code. By establishing a clearer counterfactual, subpart C
                will: (a) Enhance the ability of FDIC to plan for and to execute its
                responsibilities as receiver; (b) enhance the ability of market
                participants to predict in advance their exposures in the unlikely
                event of the resolution as a DCO; and (c) mitigate the cost of
                litigation over the value of such claims. The Commission notes that
                there can, to a certain extent, be costs imposed by proposed subpart C,
                in that there may be a corresponding reduction in flexibility with the
                addition of rules specifically tailored to address a DCO bankruptcy,
                but the Commission has drafted these proposed rules with the intent of
                maintaining significant flexibility, where warranted.
                 It is apposite to note an important issue that affects incentives:
                A significant group of commenters have expressed strong concerns, both
                in comments to this rulemaking \274\ and elsewhere,\275\ that clearing
                members and their customers have no meaningful role in DCO risk
                governance, and, most relevant here, that DCOs' default rules and
                procedures and recovery and wind-down plans are developed without
                sufficient input from members and their customers. As discussed in
                detail in section II.C above and in this section II.D, subpart C is
                based, in large part, on a debtor DCO's ex ante default rules and
                procedures and recovery and wind-down plans, though applied flexibly by
                the trustee--that is, only to the extent they determine is
                ``reasonable'' and ``practicable.''
                ---------------------------------------------------------------------------
                 \274\ See ACLI, FIA, ICI, SIFMA AMG/MFA, and Vanguard.
                 \275\ See, e.g., A Path Forward for CCP Resilience, Recovery,
                and Resolution (published by a group of prominent clearing members
                and money managers).
                ---------------------------------------------------------------------------
                 Most of those concerns transcend the topic of this rulemaking: As a
                general matter, risk governance is intended to mitigate the possibility
                of default and, where default does occur, to foster the result that it
                is the defaulter that pays for all of the losses; skin-in-the-game
                provides an additional layer of loss-absorbency that (i) comes before
                mutualizing costs to non-defaulters and (ii) creates incentives for
                DCOs to engage in successful risk management. Default rules and
                procedures are intended to, inter alia, ensure that the DCO can take
                timely action to contain losses and liquidity pressures and to continue
                meeting its obligations in the event of a clearing member default.
                Recovery plans address credit losses that exceed the DCO's available
                resources, as well as the manifestation of other risks, as necessary to
                maintain the derivatives clearing organization's viability as a going
                concern, while wind-down involves the actions of the DCO to effect the
                permanent cessation or sale or transfer of one or more services.
                 Commission regulations require DCOs to: Take steps to ensure their
                resilience, have effective rules and procedures to manage defaults,
                address fully any individual or combined default loss, and maintain
                viable plans for recovery in the event that they suffer a default loss
                or any other (non-default) loss.\276\
                ---------------------------------------------------------------------------
                 \276\ See generally part 39 of the Commission's regulations.
                Only SIDCOs, or other DCOs that have elected to become subject to
                the provisions of subpart C of part 39, are required to address
                fully any default loss, or to maintain recovery and wind-down plans.
                However, among DCOs based in the United States, the vast majority of
                activity is conducted on DCOs that fall within one of those two
                categories.
                ---------------------------------------------------------------------------
                 DCOs' rules and arrangements for default management and their
                recovery plans work to allocate losses that are not covered by the
                resources of the defaulter between the DCOs themselves, their clearing
                members, and (in some cases such as gains-based haircutting), will have
                the effect (along with clearing agreements between FCMs and their
                public customers) of allocating certain losses to public customers.
                These include default losses that are not covered by margin posted by
                the defaulter (or the defaulter's own contribution to mutualized loss
                arrangements) or by the DCO's ``skin-in-the-game,'' as well as certain
                investment or custody losses. All of this would occur outside of
                bankruptcy.\277\
                ---------------------------------------------------------------------------
                 \277\ Moreover, among U.S. DCOs (and among all DCOs registered
                with the Commission), no loss has ever been so large that it was
                mutualized.
                ---------------------------------------------------------------------------
                 Those rules, plans, and arrangements--and the extent to which they
                are considered helpful or noxious--thus influence the incentives of
                DCOs, their clearing members, and the customers of those clearing
                members. Accordingly, the concerns that these clearing members and
                money managers have raised with respect to their limited ability to
                influence these rules, plans, and arrangements that have effects
                outside of bankruptcy are likely to have important incentive effects on
                how, and the extent to which, clearing members and their public
                customers (including money managers) are willing to and do participate
                in cleared markets.
                 To the extent that subpart C of part 190 applies those rules, plans
                and arrangements, even if flexibly, then the incentive effects
                described above may be felt more strongly by clearing members and their
                public customers, albeit only marginally so.\278\ The level of that
                enhanced incentive is difficult to measure, since it depends, in
                significant part, on the perception of those entities as to the effect
                of referring to those rules, plans, and procedures in bankruptcy under
                part 190, subpart C: Those rules, plans, and procedures, which they
                dislike, are and will be applicable in cases where the DCO engages in
                either default management or recovery outside of bankruptcy. The
                references to these rules, plans, and procedures in part 190 increases
                the likelihood that they will be used (because bankruptcy represents an
                additional circumstance in which they would be applicable). The
                incentive effects also depend on the perception of clearing members and
                their public customers on the effect of such use in bankruptcy.
                ---------------------------------------------------------------------------
                 \278\ The effects of those rules on incentives for DCOs is even
                more difficult to measure, since a chapter 7 liquidation (the only
                bankruptcy available to a commodity broker, see 11 U.S.C. 109(d)) is
                highly likely to reduce severely, if it does not eliminate, the
                DCO's value to its shareholders.
                ---------------------------------------------------------------------------
                 A note on terminology: As discussed above in section II.C, the
                customers of a clearing organization are its members, considered
                separately in two roles: (1) Each member may have a proprietary (also
                known as ``house'') account at the clearing organization, on behalf of
                itself and its non-public customers (i.e., affiliates). The property
                that the clearing organization holds in respect of these accounts is
                referred to as ``member property.'' (2) Each member may have an account
                for that members' public customers. The property that the clearing
                organization holds in respect of these accounts is referred to as
                ``customer property other than member property.'' Many clearing members
                will have both such accounts, although some may have only one or the
                other.
                1. Regulation Sec. 190.11: Scope and Purpose of Subpart C:
                Consideration of Costs and Benefits
                 Section 190.11(a) will simply state that the new subpart C of part
                190 will apply to a proceeding commenced under subchapter IV of chapter
                7 of the Bankruptcy Code in which the debtor is a clearing
                organization. Therefore, the costs and benefits of Sec. 190.11(a) are
                the overarching costs and benefits stated above.
                [[Page 19409]]
                 ICE and SIFMA AMG/MFA noted that, in the case of the bankruptcy of
                a DCO organized outside the United States, there may be conflicts with
                a bankruptcy proceeding in the home jurisdiction unless the
                applicability of part 190 is limited. For example, there may be
                differing--and irreconcilable--rules for distributing property. Such
                differing rules could incentivize, e.g. a customer of a non-FCM
                clearing member to bring litigation seeking to apply part 190's
                customer protection rules to what they might describe as the customer
                claims of their non-FCM clearing member.\279\
                ---------------------------------------------------------------------------
                 \279\ As noted immediately below, public customers of FCM
                clearing members will benefit from protection under part 190.
                ---------------------------------------------------------------------------
                 The Commission has determined to adopt a suggestion by ICE and, in
                a newly created Sec. 190.11(b), to limit the applicability of part
                190, in the case of a foreign DCO subject to a proceeding in its home
                jurisdiction, to provisions that (a) focus on the contracts and
                property of public customers of FCM members \280\ or (b) general
                provisions, and those that provide notice and reports to the Commission
                and a U.S. bankruptcy trustee.\281\ By limiting the applicability of
                part 190 in this manner, the Commission will foster the goal of
                mitigating such conflicts,\282\ while by including those provisions
                (rather than disapplying part 190 entirely to the bankruptcy of a
                foreign-based clearing organization), the Commission will foster the
                goal of protecting customers of U.S. FCM members of such a foreign-
                based DCO.
                ---------------------------------------------------------------------------
                 \280\ I.e., Sec. Sec. 190.13, 190.17, and 190.18, but only with
                respect to: (1) Claims of FCM clearing members on behalf of their
                public customers; and (2) property that is or should have been
                segregated for the benefit of FCM clearing members' public
                customers, or that has been recovered for the benefit of FCM
                clearing members' public customers.
                 \281\ I.e., subpart A, and Sec. 190.12.
                 \282\ The Commission notes that conflicts involving a DCO based
                outside the United States with the insolvency law in that DCO's home
                jurisdiction as applied to claims of FCM clearing members on behalf
                of their public customers should be mitigated by the fact that,
                pursuant to Sec. 39.27(c)(3) and Exhibit R to appendix A to part
                39, the DCO is required to submit and to keep current a memorandum
                demonstrating, inter alia, the basis for the conclusion that the
                DCO's arrangements to ring-fence the customer funds of FCM clearing
                member are effective under the relevant non-U.S. law in the event of
                the insolvency of the DCO, and the basis for the conclusion that a
                local court or insolvency official in the DCO's jurisdiction of
                domicile would respect the choice of U.S. law in that context, and
                the basis for the conclusion that the DCO would be able to comply
                with relevant provisions of the Bankruptcy Code and Commission
                regulations with respect to pro rata distribution and relevant
                orders of a U.S. court regarding the distribution of customer funds.
                ---------------------------------------------------------------------------
                2. Regulation Sec. 190.12: Required Reports and Records: Consideration
                of Costs and Benefits
                 Section 190.12(a)(1) is analogous to Sec. 190.03(a), in that it
                provides instructions regarding how to give notice to the Commission
                and to a clearing organization's members, where such notice is required
                under subpart C. For a discussion of the costs and benefits of this
                section, please refer to the discussion of the cost and benefit
                implications of Sec. 190.03(a).
                 Section 190.12(a)(2) will revise the time in which a debtor
                clearing organization must notify the Commission of a bankruptcy
                filing. In particular: (1) In the event of a voluntary bankruptcy
                filing, the debtor will be required to notify the Commission at or
                before the time of filing, and (2) in the event of an involuntary
                bankruptcy filing, the debtor must notify the Commission as soon as
                possible, but in any event no later than three hours after the receipt
                of the notice of such filing. These revisions codify expectations that
                (1) in a voluntary bankruptcy proceeding, the debtor clearing
                organization will provide advance notice to the Commission ahead of the
                filing to the extent practicable, and (2) in an involuntary bankruptcy
                proceeding, the debtor clearing organization will notify the Commission
                immediately upon receiving notice of the filing, or within at the most
                three hours thereafter.
                 With respect to a voluntary bankruptcy filing, the Commission
                expects that the DCO will have reported its financial distress in the
                lead-up to a bankruptcy filing in accordance with the mandatory
                reporting requirements in Sec. 39.19(c)(4); the revision in proposed
                Sec. 190.12(a) merely codifies the expectation that the clearing
                organization will notify the Commission of an intent to file for
                bankruptcy protection as soon as practicable before, and in no event
                later than, the time of the filing. In addition, Sec. 190.12(a) also
                will allow a debtor clearing organization to provide the relevant
                docket number of the bankruptcy proceeding to the Commission ``as soon
                as available,'' while not delaying notifying the Commission of the
                filing itself, to account for the potential for a time lag between the
                filing of a proceeding and the assignment by the relevant court of a
                docket number. These revisions will enhance the ability of the
                Commission to perform its responsibilities to support the interests of
                clearing members, customers of clearing members, markets, and the
                broader financial system, by providing the Commission with prompt
                notice of any DCO bankruptcy proceeding.
                 Section 190.12(b) and (c) involve the provision of certain reports
                and records to the trustee and/or the Commission by the debtor clearing
                organization. In particular: Sec. 190.12(b) sets forth the reports and
                records that the clearing organization will be required to provide to
                the Commission and to the trustee within three hours following the
                later of the commencement of the proceeding or the appointment of the
                trustee, and Sec. 190.12(c) sets forth the records to be provided to
                the Commission and to the trustee no later than the next business day
                following commencement of a bankruptcy proceeding. These provisions
                will impose administrative costs on the debtor clearing organization
                and/or the trustee, which will be obligated to spend time and resources
                transmitting copies of the required reports and records to the trustee
                and/or Commission. However, these provisions should both benefit the
                estate, and enhance the Commission's ability to fulfil its
                responsibilities, by providing them with the most current information
                about the clearing organization, and by allowing the trustee to begin
                to understand the business of the clearing organization as soon as
                possible following a bankruptcy filing, which is critically necessary
                to the administration of the debtor clearing organization's estate.
                This would in turn promote confidence in the clearing system in
                particular, and financial markets more broadly.
                 OCC indicated that, while they ``maintain[ ] this information in a
                readily accessible place and do[ ] not foresee any challenge in
                identifying and providing this information without delay,'' they
                believe that the three hour time period is ``overly prescriptive''
                because of the possibility of ``unforeseen delays that could occur on
                the day in which a DCO enters bankruptcy.'' The Commission has declined
                to modify the proposal, because the Commission believes that setting
                this specific deadline will result in significant benefits: Providing
                this information to the trustee and the Commission with much-needed
                expediency, and facilitating DCOs' contingency planning. By comparison,
                the burden of providing the reports, which as the commenter notes, are
                already in existence and are readily accessible, appears modest.
                3. Regulation Sec. 190.13: Prohibitions on Avoidance of Transfers:
                Consideration of Costs and Benefits
                 Section 190.13 implements section 764(b) of the Bankruptcy Code
                with respect to DCOs, and prohibits the
                [[Page 19410]]
                avoidance of certain transfers made either before or shortly after
                entry of the order for relief. While the prohibition of avoidance of
                pre- and post-relief transfers in the context of FCM debtors in Sec.
                190.07(e) applies so long as the transfer is not disapproved by
                Commission, the same prohibition on avoidance of pre- and post-relief
                transfers in Sec. 190.13(a) and (b) will require the affirmative
                approval of the Commission (though such approval can be given either
                before or after the transfer is made). This distinction will impose
                administrative costs on the clearing organization or the trustee, who
                will have to expend time and resources to seek affirmative approval
                from the Commission for such a transfer in the context of administering
                a DCO, respectively, either before or after bankruptcy. As noted
                above,\283\ a clearing organization is mandated to maintain a
                ``balanced book.'' Thus, a transferee clearing organization may only
                accept transfer of all of the transferor's customer positions (or at
                least all positions in a given product set).\284\ Any such transfer
                will have significant effects on the markets cleared, and on the
                broader financial system. There are important benefits from requiring
                the Commission's approval of such a significant transaction, and thus
                permitting the administrative agency responsible for oversight of the
                derivatives markets to maintain a level of discretion which will help
                accomplish the goal of an orderly functioning of the marketplace.
                ---------------------------------------------------------------------------
                 \283\ See section II.C.3 above.
                 \284\ If the transferor clearing organization does not have a
                balanced book, e.g., because of a member default, it could
                nonetheless only transfer a balanced book.
                ---------------------------------------------------------------------------
                4. Regulation Sec. 190.14: Operation of the Estate of the Debtor
                Subsequent to the Filing Date: Consideration of Costs and Benefits
                 Section 190.14(a) provides that the trustee may, in their
                discretion based upon the facts and circumstances of the case, instruct
                each customer to file a proof of claim containing such information as
                is deemed appropriate by the trustee. Allowing the bankruptcy trustee
                to use their discretion in tailoring the proof of claim form to the
                specific facts and circumstances of the case should benefit both the
                trustee and customers by limiting the information requested to only
                that which is necessary for purposes of administering the debtor's
                estate and thereby increasing cost effectiveness, particularly given
                the bespoke nature of a clearing organization bankruptcy. Thus, the
                Commission has not proposed a prescribed proof of claim form. There
                could, however, be corresponding administrative costs to both the
                estate and the customers if the set of information requested by the
                trustee in the exercise of their discretion turns out in retrospect to
                be overly narrow or broad.
                 ICE believed that the proposal did not clearly take into account
                non-CFTC-regulated clearing, and that claims of members with respect to
                such activity should be properly accounted for in bankruptcy and should
                not be disadvantaged. As the Commission noted above,\285\ to the extent
                that the DCO is conducting non-CFTC-regulated activity, the Commission
                expects that the proof of claim form will include the opportunity to
                claim for debts of the DCO related to activity that is not regulated by
                the CFTC. Thus, no change is necessary to address this concern.
                ---------------------------------------------------------------------------
                 \285\ See section II.C.4.
                ---------------------------------------------------------------------------
                 Section 190.14(b) provides that a debtor clearing organization will
                cease making calls for variation settlement or initial margin.\286\
                Under current regulations, it would not be possible to continue the
                operations of a debtor clearing organization for any amount of time
                after entry of the order for relief, as there is no clear and coherent
                mechanism to do so. Thus, Sec. 190.14(b) affirms current legal
                requirements and maintains the status quo. Section 190.14(c)(1)
                provides that the trustee shall liquidate all open commodity contracts
                that have not been terminated, liquidated or transferred no later than
                seven calendar days after the entry of the order for relief. This
                provision will impose administrative costs in that the trustee will
                have a hard deadline for terminating, liquidating or transferring any
                open commodity contracts within a certain timeframe, whereas under
                current part 190 there was no specified timeframe for such termination,
                liquidation or transfer. It could, however, benefit clearing members
                and customers, who will have certainty that their open commodity
                contracts would be liquidated within a particular timeframe rather than
                being held open for an undetermined amount of time. A deadline for
                liquidation or transfer of open contracts may benefit the broader
                financial markets by mitigating uncertainty.
                ---------------------------------------------------------------------------
                 \286\ As originally proposed, Sec. 190.14(b) also contained
                provisions that were intended to provide a brief opportunity, after
                the order for relief, to enable paths alternative to liquidation--
                that is, resolution under Title II of the Dodd-Frank Act, or
                transfer of clearing operations to another DCO--in cases where a
                short delay (i.e., less than or equal to six days) might facilitate
                such an alternative path. The Commission subsequently issued the
                Supplemental Proposal, which withdrew those proposed provisions--
                Sec. 190.14(b)(2) and (3)--and proposed a new alternative to
                facilitate the potential resolution of a SIDCO pursuant to Title II
                of the Dodd-Frank Act. As discussed in section II.C.4 above, the
                Commission is not adopting the Supplemental Proposal.
                ---------------------------------------------------------------------------
                 Section 190.14(c)(2), which is derived from current Sec.
                190.08(d)(3), will provide that the trustee may, at their discretion,
                make distributions in the form of securities that are equivalent to the
                securities originally delivered to the debtor by a clearing member or
                such clearing member's customer, rather than liquidating the securities
                and making distributions in cash. Unlike current Sec. 190.08(d)(3),
                Sec. 190.14(c)(2) will not allow the customer to request that the
                trustee purchase like-kind securities and distribute those instead of
                cash, but instead will leave it to the discretion of the trustee
                whether to do so. This change could impose costs on customers who would
                prefer to have a distribution of equivalent securities rather than
                cash, since it will remove their option to request such a distribution.
                However, it could benefit the estate by allowing the trustee to use
                their discretion as to whether to purchase and distribute equivalent
                securities, rather than being obligated to do so at the request of a
                customer.
                 Section 190.14(d) will require the trustee to use reasonable
                efforts to compute the funded balance of each customer account
                immediately prior to the distribution of any property in the account,
                ``which shall be as accurate as reasonably practicable under the
                circumstances, including the reliability and availability of
                information.'' This requirement applies with respect to accounts of the
                customers of the clearing organization: That is, its members,
                separately in respect of each such member's (1) house account (on
                behalf of the member and its non-public customers and (2) customer
                account or accounts (on behalf of the member's public customers, one
                such account for each account class, to the extent relevant).
                 This requirement will impose administrative costs due to the time
                and effort involved in making such calculations. However, the
                regulation gives the trustee a certain amount of discretion, and this
                calculation will be necessary to achieve the goal of making
                distributions that are consistent with each customer's proportionate
                share.
                5. Regulation Sec. 190.15: Recovery and Wind-Down Plans; Default Rules
                and Procedures: Consideration of Costs and Benefits
                 Section 190.15 provides that (1) the trustee shall not avoid or
                prohibit any
                [[Page 19411]]
                action taken by a debtor that was within the scope of and was provided
                for in the debtor's recovery and wind-down plans; (2) in administering
                a DCO bankruptcy, the trustee shall, subject to the reasonable
                discretion of the trustee and to the extent practicable, implement the
                default rules and procedures maintained by the debtor; and (3) in
                administering a DCO bankruptcy, the trustee shall, to the extent
                reasonable and practicable, and consistent with the protection of
                customers, take actions in accordance with the debtor's recovery and
                wind-down plans.
                 The Commission considered two alternatives to directing the trustee
                to implement the debtor's own default rules and procedures and recovery
                and wind-down plans: First, continuing to allow a bankruptcy trustee to
                develop, in the moment, a plan for liquidating the debtor clearing
                organization, and second, prescribing an across-the-board method for
                liquidating a debtor clearing organization.
                 A number of commenters appeared to support the first alternative
                approach. Some (e.g., ACLI, FIA, ICI, SIFMA AMG/MFA, Vanguard)
                expressed concern that they lack transparency with regard to the DCO
                risk management decisions and DCOs' default rules and procedures and
                recovery and wind-down plans are developed without sufficient input
                from clearing members and their customers. For example, Vanguard argued
                that the existing DCO governance regime provides them with no
                meaningful voice in critical DCO risk management practices and new
                cleared product introductions; and since public customers have only a
                very limited ability to mitigate clearing risks contractually, they
                ``rely heavily on the Commission to protect the interests of [their]
                investors in the mandated cleared market.'' Commenters also expressed
                the concern that there is a risk that, as a DCO begins to fail,
                otherwise prudent DCO rules could be changed without the appropriate
                vetting by clearing members and public customers who, given mutualized
                allocation of losses, bear the risk of poor risk management choices
                undertaken by the DCO.\287\
                ---------------------------------------------------------------------------
                 \287\ With respect to DCO rules adopted as the DCO is on the
                threshold of failure: DCO rules are subject to review by the
                Commission. In all cases, they are subject to review for consistency
                with the CEA and Commission regulations (see Sec. 40.6). In the
                case of SIDCOs, they are additionally subject to review for
                consistency with the purposes of the Dodd-Frank Act or any
                applicable rules, orders, or standards prescribed under section
                805(a) thereof. Moreover, to the extent commenters are concerned
                that such late-enacted rules will be unfair to clearing members or
                their customers, the Commission expects that such unfairness would
                affect the trustee's judgment of the extent to which it is
                ``reasonable'' to apply those rules.
                ---------------------------------------------------------------------------
                 The Commission has considered the potential interplay of the
                amendments to part 190 with other Commission regulations and applicable
                statutes. As noted above, these commenters' concerns predominantly
                relate to the economic interests of clearing members and their
                customers in contexts outside of bankruptcy.
                 A DCO's operations and rules outside of bankruptcy are governed by
                parts 39 and 40 of the Commission's regulations. The Commission, in
                particular through its Division of Clearing and Risk, applies these
                regulations and conducts a rigorous program of oversight of DCOs
                designed to protect the interests of market participants and of the
                financial system, including through careful reviews of their rules
                (including default rules) and their recovery and wind-down plans,
                through detailed daily and periodic risk surveillance, and through in-
                depth remote and on-site examinations addressing a wide spectrum of
                risk management issues.
                 As noted by a commenter above, they ``rely heavily on the
                Commission to protect the interests of our investors in the mandated
                cleared market.'' Over the years, the Commission has taken seriously
                its responsibilities in this regard, through its regulatory,
                surveillance, and examinations programs.
                 As discussed above, there are important costs to addressing, in the
                context of part 190, market participants' concerns regarding DCOs'
                rules, procedures, and plans for allocating losses that apply outside
                of a DCO bankruptcy: Establishing a bankruptcy regime where some market
                participants would be allocated a smaller amount of losses in
                bankruptcy than outside of bankruptcy would risk creating incentives
                for those participants to act in a manner that promotes the likelihood
                that the DCO will enter bankruptcy.
                 In view of these considerations, the Commission believes the
                commenters' concerns are effectively mitigated by the existing
                provisions of parts 39 and 40 of its regulations and by the
                Commission's supervision of DCOs.\288\ Therefore, the adoption of part
                190, subpart C, which is applicable to a DCO's potential bankruptcy,
                appropriately complements parts 39 and 40 and the Commission's ongoing
                supervision, which apply to a DCO's operations and rules outside of
                bankruptcy.
                ---------------------------------------------------------------------------
                 \288\ Nonetheless, the Commission is sensitive to the concerns
                raised by commenters with respect to the development and maintenance
                of DCO recovery and wind-down plans and default rules and
                procedures, and is actively reviewing these issues, in particular
                with respect to governance, as they relate to parts 39 and 40.
                ---------------------------------------------------------------------------
                 Other commenters are concerned with the inclusion in those DCO
                rules and plans of ``drastic measures as Variation Margin Gains
                Haircutting (VMGH) and Partial Tear-Up (PTU) of open positions.'' Gains
                haircutting, however, is part of the ex ante allocation of losses, and
                thus is an inherent part of the way in which losses will be allocated
                in bankruptcy. Moreover, there is a limited amount of customer property
                available. Thus, to the extent the application of VMGH were to be
                disallowed, and some customers would realize corresponding benefits
                through increases in the allowed amounts of their claims (and thus a
                greater share of customer property), other customers would suffer
                corresponding costs, through a decreased share of customer property--
                indeed, the latter customers may receive less than the amount of their
                claims for initial margin.\289\ Accordingly, the Commission concludes
                that it is inadvisable to prohibit VMGH, or to mandate that its effects
                be reversed, in cases of DCO bankruptcy.
                ---------------------------------------------------------------------------
                 \289\ Cf. ISDA: Safeguarding Clearing: The Need for a
                Comprehensive CCP Recovery and Resolution Framework (2017) at 2
                (``Initial margin haircutting should never be permitted.'')
                ---------------------------------------------------------------------------
                 Partial tear-up, on the other hand, is inapplicable in a clearing
                organization bankruptcy: Sec. 190.14(b) prohibits further collection
                of variation margin, while Sec. 190.14(c) requires the trustee to
                liquidate all open commodity contracts. Together, they effectively
                mandate full tear-up of open positions. Thus, the question of whether
                partial tear-up should be prohibited is moot.
                 Other commenters were concerned that these plans do not prescribe a
                specific course of action, but rather ``present a menu of options.''
                See, e.g., FIA, Vanguard. The Commission is of the view that, given the
                complexity of the operations of a DCO, and the need for extremely
                prompt action, having the trustee develop an entire plan in the moment
                would be likely to turn out to be impracticable. By contrast, being
                presented with a ``menu of options'' among which the trustee may select
                (and adapt) in a manner that is ``reasonable and practicable'' provides
                the benefit of a helpful roadmap to determine strategy and tactics.
                 The commenters, and potentially other clearing members and public
                customers who share the concerns of the commenters, appeared to view
                DCO default rules and procedures and recovery and wind-down plans that
                they believe have been adopted with
                [[Page 19412]]
                inadequate input from them as noxious, and thus they may already be
                incentivized to reduce their exposure to such DCOs. Those incentives
                may be (marginally) increased by the fact that the Commission is
                establishing in Sec. 190.15 a model for the trustee that is based on
                those rules, procedures, and plans.
                 Other commenters (CME and ICE) supported the second alternative,
                specifically, a requirement that the trustee cannot override the DCO's
                default rules or deviate from the DCO's recovery or wind-down plans.
                However, given that these rules and plans are designed to operate
                outside of bankruptcy, a requirement to follow them in procrustean
                fashion would have the cost of compelling the trustee to adopt an
                approach that may be poorly tailored to the situation, and the
                Commission will accordingly not adopt such a requirement.
                 Finally, given the differences between DCOs (and potential
                bankruptcy situations), a one-size-fits-all approach prescribed by the
                Commission is likely to prove too rigid, and thus will not be adopted.
                 The Commission is accordingly of the view that, relative to these
                alternatives, directing a trustee to implement the DCO's own default
                rules and procedures, and recovery and wind-down plans, would benefit
                the estate by providing the trustee with a menu of purpose-built rules,
                procedures and plans to liquidate a DCO, which rules, procedures and
                plans the DCO has developed subject to the requirements of the
                Commission's regulations and supervision of the Commission. Adding
                concepts of reasonability and practicability will give the trustee the
                discretion to modify those rules, procedures, and plans where and to
                the extent appropriate. Hence, the Commission believes that an approach
                whereby the trustee would follow the DCO's own purpose-built default
                rules and procedures and recovery and wind-down plans, but have the
                discretion to vary them as appropriate, would be the most cost
                effective.
                6. Regulation Sec. 190.16: Delivery: Consideration of Costs and
                Benefits
                 Regulation Sec. 190.16 addresses delivery in the context of a
                clearing organization bankruptcy. Current part 190 does not contain any
                regulations specific to delivery in that context.
                 Section 190.16(a) provides that a bankruptcy trustee is required to
                use ``reasonable efforts'' to facilitate and cooperate with the
                completion of the delivery on behalf of the clearing organization's
                clearing member or the clearing member's customer. This has the benefit
                of mitigating disruption to the cash market for the commodity and
                mitigating adverse consequences to parties that may be relying on
                delivery taking place in connection with their business operations.
                While the exertion of such reasonable efforts will necessarily involve
                administrative costs (predominantly, time of the trustee or their
                agents), the Commission is of the view that this approach has important
                benefits relative to the two alternatives. Given the importance of
                reliable delivery to physical markets, it would be inappropriate to
                relieve the trustee of the obligation to endeavor to facilitate and
                cooperate with the members' or members' customers' efforts to
                accomplish delivery. On the other hand, mandating that the trustee go
                beyond reasonable efforts would risk compelling the trustee to expend
                unwarranted amounts of resources in this endeavor.
                 While proposed Sec. 190.16(a) applied this approach only to
                contracts that had moved into delivery position prior to the date and
                time of the order for relief, the ABA Subcommittee and CME suggested
                that this approach should be extended to contracts that move into
                delivery position after that date and time, with CME noting that ``it
                is equally important to protect deliveries under [such contracts] to
                avoid disruption to commercial markets and operations.'' The Commission
                has accepted this suggestion and notes that, if any contracts move into
                delivery position after the order for relief, but before being
                terminated, liquidated, or transferred, the benefits and costs of this
                approach are analogous to those of contracts that move into delivery
                position prior to the order for relief.
                 Section 190.16(b) clarifies which property will be part of the
                physical delivery account class and which will be part of the cash
                delivery account class. It is analogous to Sec. 190.06(b) in the FCM
                context, and carries forward the concepts in that section, but has been
                modified for the context of a DCO bankruptcy. Clearly delineating
                between the physical delivery account class and the cash delivery
                account class will benefit customers because it will increase
                transparency in terms of which account class their property belongs in.
                Section 190.16(b) will likely impose administrative costs, since
                accounting separately for physical delivery property and cash delivery
                property will take the trustee's time and resources. As noted
                above,\290\ the sub-division of the delivery account class into the
                physical and cash delivery account classes will recognize that cash is
                more vulnerable to loss, and more difficult to trace, as compared to
                physical delivery property. Therefore, this sub-division will likely
                benefit those with physical delivery claims. Since cash is more
                vulnerable to loss and more difficult to trace, then under this
                approach, clearing members and customers with claims in the cash
                delivery sub-class will be more likely to get a pro rata distribution
                that would be less than those with claims in the physical delivery
                property sub-class.\291\
                ---------------------------------------------------------------------------
                 \290\ See discussion of Sec. 190.06(b) in section II.B.4 above.
                 \291\ Costs and benefits of the separation of the delivery
                account class into physical delivery and cash delivery subclasses
                were also addressed in respect to the costs and benefits section
                addressing the definition of ``account class'' in Sec. 190.01,
                section II.A.2 above.
                ---------------------------------------------------------------------------
                7. Regulation Sec. 190.17: Calculation of Net Equity: Consideration of
                Costs and Benefits
                 Section 190.17(a) clarifies that a member of a debtor clearing
                organization may have claims against the clearing organization in
                separate capacities: On behalf of its public customers (customer
                accounts) and on behalf of its non-public customers (house accounts).
                It further states that net equity shall be calculated separately for
                each customer capacity in which the clearing member has a claim against
                the debtor. In the Commission's view, the provisions in Sec. 190.17(a)
                are clarifications that reflect customer classifications set forth in
                section 766(i) of the Bankruptcy Code, and account classifications that
                have long been used in other contexts, and will not impose any costs or
                benefits on any parties.
                 Section 190.17(b)(1) provides that the calculation of a clearing
                member's net equity claim in the bankruptcy of a clearing organization
                shall include the full application of the debtor's loss allocation
                rules and procedures. It also provides that, with respect to a clearing
                member's house account, this will include any assessments or similar
                loss allocation arrangements provided for under those rules and
                procedures that were not called for before the filing date, or, if
                called for, have not been paid.
                 A number of commenters, including the ABA Subcommittee, CME, FIA,
                and ICE, objected to including assessments that had not been called for
                before the order for relief in the calculation of net equity claims
                where the debtor clearing organization's rules provide that assessments
                cannot be called for after bankruptcy. Taking these commenters'
                preferred approach would benefit the clearing members in circumstances
                where there are both uncalled
                [[Page 19413]]
                assessments, and remaining default losses. As FIA noted in its comment
                letter, the inclusion of uncalled assessments ``appears to have the
                effect of reducing a clearing member's potential recovery.'' However,
                all losses will ultimately be allocated, and if uncalled assessments
                are not taken into account, any remaining losses that haven't been
                covered by other default resources will be allocated through gains-
                based haircutting. Thus, the commenters' preferred approach would be at
                the cost of the customers of clearing members, who would bear
                additional losses even as the clearing members would benefit.
                 Relative to the alternative suggested by these commenters, the
                direct effect of Sec. 190.17(b)(1) is to ensure that the uncalled
                assessment will make up more of the default losses, and conversely that
                haircutting of the gains (of both clearing members and customers) will
                make up less of that loss. Hence, the rule could harm clearing members,
                and correspondingly benefit their customers. In addition, there can be
                indirect effects. While the maximum amount of assessments that clearing
                members are exposed to will not increase, there is a marginally \292\
                increased likelihood that those assessments will be used.\293\ Because
                clearing members' potential assessments are more likely to be used,
                they will have a marginally increased incentive to reduce their level
                of exposure to assessments--for example, by reducing their clearing
                activity for themselves or on behalf of their customers. While it is
                conceivable that clearing members could work to influence DCOs to
                reduce their own assessment powers as a result of these incentives,
                there are mitigants in the Commission's regulations.\294\
                ---------------------------------------------------------------------------
                 \292\ ``Marginal'' because this happens only if (a) there is a
                DCO bankruptcy, (b) there is a default loss suffered by the DCO in
                connection with the bankruptcy, and (c) not all of the assessments
                necessary to address that default loss were called before that
                bankruptcy.
                 \293\ While Sec. 190.17(b)(1) will not result in uncalled
                assessments being ``called''--the clearing members will not have to
                pay them to the estate--uncalled assessments will be ``used'' to
                reduce the clearing member's net equity claim.
                 \294\ For example, Sec. 39.39(b)(1) requires SIDCOs and Subpart
                C DCOs to have viable plans for recovery necessitated by uncovered
                credit losses, and the extent of a DCO's assessment power
                contributes to the viability of its recovery plan. Moreover, the two
                SIDCOs, CME and ICE Clear Credit, already have significant
                assessment powers, and any proposed rule change to reduce those
                powers would need to withstand review under Sec. 40.10 for
                consistency with inter alia, the purposes of the CEA and the Dodd-
                Frank Act, which include the mitigation of systemic risk and the
                promotion of financial stability.
                ---------------------------------------------------------------------------
                 Section 190.17(b)(2) provides that where the debtor's loss
                allocation rules and procedures provide that clearing members are
                entitled to payments due to portions of mutualized default resources
                that are either prefunded, or assessed and collected, but in either
                case not used, or to the clearing organization's recoveries on claims
                against others (including recoveries on claims against defaulting
                clearing members), then ``appropriate adjustments shall be made to the
                net equity claims of clearing members that are so entitled.'' These
                provisions will benefit the estate by providing the trustee with tools
                to act promptly and efficiently, with lower administration costs. The
                trustee will have a clear roadmap to calculate net equity in the
                bankruptcy of a clearing organization and will not be obligated to come
                up with an ad hoc methodology for doing so. The provisions would also
                benefit clearing members (and, therefore, their customers) by providing
                transparency as to how their net equity will be calculated, as well as
                facilitating the efficient administration of the estate.\295\
                ---------------------------------------------------------------------------
                 \295\ See also 17 CFR 39.16 (requiring each DCO to, among other
                things, ``adopt rules and procedures designed to allow for the
                efficient, fair, and safe management of events during which clearing
                members become insolvent or default on the obligations of such
                clearing members to the'' DCO).
                ---------------------------------------------------------------------------
                 In those cases where the debtor has excess mutualized default
                funds, or recovers on claims against defaulters, application of the
                debtor's ``reverse waterfall'' rules will benefit clearing members
                (and, in certain cases, their customers) by increasing the net equity
                claims of the entitled clearing members.
                 In addition to the potential for these transfers between general
                creditors and clearing members and their customers, this rule can
                create incentives for clearing members and their customers. In
                particular, it makes clearing members' contributions to mutualized
                resources (and the possibility that gains-based haircutting will affect
                clearing members and their customers) less onerous, because they
                enhance the possibility that if the clearing member's contribution to
                mutualized default resources (or gains-based haircutting affecting
                clearing members or their customers) is used to meet a default, it
                ultimately will come back to the clearing member or their customers as
                it is recovered by the DCO (or the DCO's trustee) from the (bankruptcy)
                estate of the defaulter.
                 Section 190.17(c) adopts by reference the net equity calculations
                set forth in proposed Sec. 190.08, to the extent applicable.\296\
                ---------------------------------------------------------------------------
                 \296\ For a discussion of the cost and benefit considerations
                for Sec. 190.08, please see section IV.C.6 above.
                ---------------------------------------------------------------------------
                 Section 190.17(d) sets forth a definition of the term ``funded
                balance'' that is taken directly from the relevant Bankruptcy Code
                provisions. Clarifying the meaning of the term ``funded balance'' in
                the context of a clearing organization bankruptcy will benefit clearing
                members, in that they will know ex ante what is and is not included in
                their funded balance and how that amount is calculated. In addition,
                Sec. 190.17(d) adopts by reference the methodology for calculating
                funded balance that is set forth in Sec. 190.08(c).\297\
                ---------------------------------------------------------------------------
                 \297\ For a discussion of the cost and benefit considerations
                for Sec. 190.08(c), please see section III.C.6 above.
                ---------------------------------------------------------------------------
                8. Regulation Sec. 190.18: Treatment of Property: Consideration of
                Costs and Benefits
                 Section 190.18(a) is analogous to Sec. 190.17(a), in that it will
                provide that property of the debtor clearing organization's estate will
                be allocated between member property and customer property other than
                member property in order to satisfy the proprietary and customer
                claims, respectively, of clearing members. In the Commission's view,
                the provisions in Sec. 190.18(a) are mere clarifications and do not
                impose any costs or benefits on any parties.
                 Section 190.18(b)(1)(i) and (ii) set out the scope of customer
                property for a clearing organization, and are largely based on Sec.
                190.09(a).\298\
                ---------------------------------------------------------------------------
                 \298\ For a discussion of the cost and benefit considerations
                for Sec. 190.09(a), please see section III.C.7 above.
                ---------------------------------------------------------------------------
                 Section 190.18(b)(1)(iii) provides that customer property for a
                clearing organization includes any guaranty fund deposit, assessment or
                similar payment or deposit made by a clearing member or recovered by a
                trustee, to the extent any remains following administration of the
                debtor's default rules and procedures, and any other property of a
                member available under the debtor's rules and procedures to satisfy
                claims made by or on behalf of public customers of a member. This
                provision supports the goal of making customers of the clearing
                organization whole, since it clarifies that any property described in
                this section will be included in the scope of customer property, rather
                than ultimately going to some other creditor of the debtor. It would
                result in corresponding costs to non-customer creditors, and could
                result in administrative costs, however, since the trustee could need
                to spend time and resources in order to determine whether any such
                property exists in order to properly allocate such property to
                customers.
                [[Page 19414]]
                 A number of commenters (CME, SIFMA AMG/MFA) have suggested that the
                Commission make it explicit that customer property should include the
                amounts of its own funds a debtor DCO had committed as part of its loss
                allocation rules. The Commission has accepted this suggestion in the
                final rule, incorporating this provision in Sec. 190.18(b)(1)(iv).
                This will benefit customers, who will have additional funds allocated
                to their claims, thereby increasing the payment that they receive on
                their claims and/or increasing the likelihood of full payment of their
                claims (due to an increase in customer property). However, this benefit
                would accrue at the possible expense of general creditors, as there
                will be an equivalent reduction in assets in the general estate. An
                indirect consequence of this change might be to marginally incentivize
                customers to retain open positions in contracts that are cleared by a
                potentially-failing DCO, which might marginally contribute to
                preserving liquidity in those markets.
                 Regulation Sec. 190.18(b)(2) adopts by reference, in the context
                of a DCO as a debtor, the exclusions from customer property applied in
                the context of debtor FCMs in Sec. 190.09(a)(2), as if the term debtor
                used therein would refer to a clearing organization as debtor and to
                the extent relevant to a clearing organization.\299\
                ---------------------------------------------------------------------------
                 \299\ For a discussion of the cost and benefit considerations
                for proposed Sec. 190.09(a)(2), please see section III.C.7 above.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.18(c) sets forth the allocation of customer
                property among customer classes (i.e., allocation between (1) customer
                property other than member property, and (2) member property). This
                provision, in general, applies the principle, consistent with the
                Commission's policy to favor public customers over non-public
                customers, that allocation to customer property other than member
                property is favored over allocation to member property, so long as the
                funded balance in any account class for members' public customers is
                less than one hundred percent of net equity claims. This provision
                would, in the event and at the time it applied, benefit the public
                customers of the debtor's clearing members, since it makes clear that
                allocation to such customers is preferred over allocation to the
                clearing members' house accounts. It imposes corresponding costs on the
                debtor's clearing members and affiliates to the extent that, under the
                current regime, there is a possibility that more customer property
                would be allocated to their house accounts. Overall, this provision
                provides the benefit of ex ante transparency to the estate, the
                debtor's clearing members, and their customers, who would know during
                business-as-usual how customer property would be allocated in the event
                of a bankruptcy.
                 However, the ABA Subcommittee, CME, FIA, and ICE objected to
                proposed Sec. 190.18(c)(1), which would apply the debtor's mutualized
                (and, in general, member-funded) default fund to customer property
                other than member property, that is, to the customer class for members'
                public customers, to the extent the funded balance is less than one
                hundred percent for members' public customers in any account class. CME
                raised a particularly trenchant point: Devoting member-funded guarantee
                funds to purposes other than mutualizing member defaults may result in
                more onerous capital treatment for the contributions of bank- or bank-
                affiliated-members to such funds, increasing the capital charges for
                such exposures manifold.\300\
                ---------------------------------------------------------------------------
                 \300\ As discussed in detail in a footnote in section II.C.8,
                those capital charges could increase by literally hundreds of times,
                for a total impact of billions of dollars in increased capital
                charges.
                ---------------------------------------------------------------------------
                 As noted, the costs and benefits discussed above will only accrue
                if there is both a clearing organization bankruptcy and a shortfall in
                customer funds in one or more of the account classes for members'
                public customers for that clearing organization in that bankruptcy. The
                costs and benefits at that potential future time would be balanced, in
                that the costs to clearing members (whose guarantee funds were devoted
                to claims of the clearing members' customers) would be benefits to
                those customers. By contrast, less favorable capital treatment would
                have a present-day effect, in the form of higher capital costs for
                clearing members. Moreover, those higher costs would not create any
                direct benefit (present day or otherwise) for, e.g., customers. In
                light of these factors, the Commission has decided not to adopt
                proposed Sec. 190.18(c)(1) and to renumber the remaining paragraphs of
                Sec. 190.18(c).
                 Section 190.18(d) sets forth the allocation of customer property
                among account classes. This provision is similar in concept to Sec.
                190.09(c). This provision will benefit clearing members and their
                customers, who will have increased transparency, ex ante, into how
                customer property will be allocated. Prescribing this allocation will,
                however, impose administrative costs, because the trustee will lose
                some amount of flexibility in terms of how to allocate customer
                property between account classes.
                 Section 190.18(e) provides that, where the debtor has, prior to the
                order for relief, kept initial margin for house accounts in accounts
                without separation by account class, then member property will be
                considered to be in a single account class.\301\ This provision will
                benefit the estate in those cases, because the trustee will not be put
                to the considerable task of separating in bankruptcy that which was
                treated as a single account during business-as-usual. Paragraph (e)
                will also benefit the debtor's clearing members, who will have
                increased transparency as to how their member property will be treated.
                ---------------------------------------------------------------------------
                 \301\ ``Account class'' is defined in Sec. 190.01 as meaning
                one or more of each of the following types of accounts, as described
                in greater detail in that provision: (1) Futures account; (2)
                foreign futures account; (3) cleared swaps account; and (4) delivery
                account.
                ---------------------------------------------------------------------------
                 Section 190.18(f) gives the trustee the authority to assert claims
                against any person to recover the shortfall of customer property
                enumerated in certain paragraphs elsewhere in Sec. 190.18, analogous
                to Sec. 190.09(a)(3). This provision could impose administrative
                costs, since the trustee will need to expend time and resources to
                assert claims to make up for any shortfall in customer property. The
                provision will, however, benefit customers, since it will support the
                trustee's efforts to recover any such shortfalls by giving the trustee
                authority to act to do so. Moreover, since this provision will make
                explicit what is implicit in current part 190, an additional benefit of
                this provision is a reduction in potential litigation costs over a
                trustee's attempts to recover shortfalls in customer property.\302\
                ---------------------------------------------------------------------------
                 \302\ As discussed above in section III.C.7, while the persons
                against whom claims are successfully asserted may perceive a
                subjective cost, the Commission does not find these costs relevant
                to the analysis.
                ---------------------------------------------------------------------------
                9. Regulation Sec. 190.19: Support of Daily Settlement: Consideration
                of Costs and Benefits
                 Section 190.19 deals with the treatment of variation settlement in
                a clearing organization bankruptcy, and sets forth the approach for the
                trustee to follow when there is a shortfall in variation settlement
                owed to a debtor clearing organization's clearing members and
                customers. Specifically, Sec. 190.19(a) provides that any variation
                settlement payments received by the clearing organization after entry
                of an order for relief shall be included in customer property, and
                shall promptly be distributed to the member and customer accounts
                entitled to such payments. Section 190.19(b) deals with a situation
                where there is a shortfall in
                [[Page 19415]]
                variation settlement received by the clearing organization, and
                provides that such funds shall be supplemented with four specified
                categories of funds (margin, to the extent permissible under parts 1,
                22, and 30, assets of the debtor, to the extent dedicated to such
                purpose, prefunded guarantee funds, and assessments) in accordance with
                the clearing organization's default rules and procedures and (with
                respect to assets of the debtor) any recovery and wind-down plans
                maintained by the clearing organization.
                 Section 190.19 will benefit clearing members and their customers
                because it will ensure that any variation settlement received by the
                clearing organization will be sent to those member and customer
                accounts that would be entitled to payment of variation settlement, and
                that the trustee would be able to supplement any shortfall in variation
                settlement amounts with the property listed in proposed Sec.
                190.19(b). This approach will also benefit the financial system more
                broadly, by mitigating the effect of the bankruptcy of the debtor on
                settlement payments. There will be corresponding costs to general
                creditors of the clearing organization since, under current part 190,
                it is conceivable that, contrary to the Commission's interpretation of
                the current rules, variation settlement received by the clearing
                organization could be diverted to the pool of general creditors rather
                than becoming customer property (even though such diversion would be
                contrary to the expectations of both the Commission and the industry).
                In clarifying how variation settlement received by the clearing
                organization is to be treated by the bankruptcy trustee, Sec. 190.19
                will also benefit clearing members and their customers by providing
                enhanced transparency.
                10. Section 15(a) Factors--Subpart C
                i. Protection of Market Participants and the Public
                 Subpart C of the part 190 regulations will increase the protection
                of market participants and the public by setting forth a bespoke
                framework for how the bankruptcy trustee is expected to treat the
                property of DCO clearing members and their customers in the event of a
                DCO insolvency, thereby promoting ex ante transparency for such
                clearing members and customers, and by providing, in certain
                provisions, discretion to the trustee in determining how best to
                address the bankruptcy of the DCO, and to achieve the goal of
                protecting public customers as a class. Moreover, the addition in part
                190 of bespoke bankruptcy rules for a DCO bankruptcy will provide
                better protections to market participants by accounting for the unique
                position of clearing members (and the customers of such clearing
                member) of a DCO that is going through an insolvency proceeding.
                Finally, provisions such as Sec. 190.18(c), which preferentially
                allocate excess property in any account class to the customer class
                that benefits public customers, to the extent there is a shortfall in
                any account class in that customer class, will further protect public
                customers.
                ii. Efficiency, Competitiveness, and Financial Integrity
                 Subpart C of the part 190 regulations will promote efficiency (in
                the sense of both cost effectiveness and timeliness) in the
                administration of insolvency proceedings of DCOs, and the financial
                integrity of transactions cleared by DCOs by setting forth clear
                instructions for a bankruptcy trustee to follow in the event of a DCO
                insolvency. Moreover, subpart C will provide the bankruptcy trustee
                with discretion, in certain circumstances, to react flexibly to the
                particulars of the insolvency proceeding, guided by the goal of
                protecting public customers as a class, thereby promoting efficiency of
                the administration of the proceeding. These effects will, in turn,
                enhance the competitiveness of U.S. DCOs and their FCM clearing
                members, by enhancing market confidence in the protection of customer
                funds and positions entrusted to U.S. DCOs through their clearing
                members, even in the case of insolvency.
                iii. Price Discovery
                 Price discovery is the process of determining the price level for
                an asset through the interaction of buyers and sellers and based on
                supply and demand conditions. Because a DCO bankruptcy inevitably leads
                to full close-out of the positions carried at the DCO, the part 190
                regulations will not contribute to avoiding the resultant negative
                impacts on price discovery.
                iv. Sound Risk Management Practices
                 Subpart C of the part 190 regulations will promote sound risk
                management practices by facilitating the bankruptcy trustee's efforts
                to manage effectively the risk of the debtor DCO. Subpart C will
                accomplish this by adding bankruptcy regulations to part 190 for a DCO
                insolvency that reflect current market practices and thereby make it
                easier for the trustee to act effectively to protect customer property
                in the event of such an insolvency. Moreover, subpart C will promote
                sound risk management practices by instructing a bankruptcy trustee to
                implement the debtor DCO's default rules and procedures and to take
                actions in accordance with the debtor DCO's recovery and wind-down
                plans, which rules, procedures and plans are developed and overseen by
                the Commission, though subject to the trustee's discretion. Some
                portions of subpart C may make additional resources available to the
                trustee. On the other hand, some commenters expressed concern about
                changes (such as Sec. 190.15) that they believe might lead to
                inappropriate risk management choices by DCOs.
                v. Other Public Interest Considerations
                 By favoring the implementation of the clearing organization's
                default rules, recovery plans, and procedures established ex ante under
                the supervision of the Commission, and by supporting daily settlement,
                the part 190 regulations will support financial stability. Moreover,
                some of the DCOs that might enter bankruptcy are very large financial
                institutions, and some are considered to be systematically important.
                An effective bankruptcy process that efficiently facilitates the
                proceedings is likely to benefit the financial system (and thus the
                public interest), as that process will help to attenuate the
                detrimental effects of the bankruptcy on the financial network.
                E. Changes to Appendices A and B
                 The Commission is deleting forms 1 through 3 contained in appendix
                A, which contain outdated provisions that require the collection of
                unnecessary information, and is replacing form 4 with a streamlined
                template proof of claim form, which the trustee can use in a flexible
                manner. CME considered the template proof of claim ``a major
                improvement'' over the current version. These changes have the benefit
                of reducing administrative costs, and there are no obvious increased
                costs.
                 Similarly, the Commission is making clarifying changes to framework
                1 of appendix B, and making, consistent with the suggestions of the ABA
                Subcommittee and the Subcommittee Members, a significant set of
                clarifying changes to framework 2. These changes have the benefit of
                having framework 2 work in a more accurate, and less confusing manner,
                thus reducing administrative costs, and there are no obvious increased
                costs.
                F. Technical Corrections to Parts 1, 4, and 41
                 The Commission is making technical corrections to parts 1, 4, and
                41 to
                [[Page 19416]]
                update cross-references. These corrections are clarifying and do not
                have any impact on the substantive obligations related to these
                sections. Thus, there are no increased costs associated with these
                minor technical updates.
                IV. Related Matters
                A. Antitrust Considerations
                 Section 15(b) of the CEA requires the Commission to take into
                consideration the public interest to be protected by the antitrust laws
                and endeavor to take the least anticompetitive means of achieving the
                purposes of the CEA in issuing any order or adopting any Commission
                rule or regulation.\303\
                ---------------------------------------------------------------------------
                 \303\ Section 15(b) of the CEA, 7 U.S.C. 19(b).
                ---------------------------------------------------------------------------
                 The Commission believes that the public interest to be protected by
                the antitrust laws is the promotion of competition. The Commission has
                considered this rulemaking to determine whether it might have
                anticompetitive effects, and has not identified any effect this
                rulemaking, which would apply only in the rare instance of an FCM or
                DCO bankruptcy, would have on competition. Accordingly, the Commission
                has not identified any less anticompetitive means of achieving the
                purposes of the CEA.
                B. Regulatory Flexibility Act
                 The Regulatory Flexibility Act (``RFA'') requires that agencies
                consider whether the regulations they propose will have a significant
                economic impact on a substantial number of small entities and, if so,
                provide a regulatory flexibility analysis on the impact.\304\ The
                regulations being adopted by the Commission affect clearing
                organizations, FCMs, bankruptcy trustees, and customers. The Commission
                has previously established certain definitions of ``small entities'' to
                be used in evaluating the impact of its regulations in accordance with
                the RFA.\305\
                ---------------------------------------------------------------------------
                 \304\ 5 U.S.C. 601 et seq.
                 \305\ 47 FR 18618 (Apr. 30, 1982).
                ---------------------------------------------------------------------------
                 The Commission has previously determined that clearing
                organizations and FCMs are not small entities for purposes of the
                RFA.\306\ In the event of a bankruptcy, a trustee is appointed as
                receiver to manage the estate of the insolvent FCM or clearing
                organization. Accordingly, since the trustee is representing the estate
                of either an FCM or clearing organization, the trustee is not a small
                entity for purposes of the RFA. The Commission recognizes that many
                customers of an FCM or DCO in bankruptcy could be considered to be
                small entities for purposes of the RFA. The Commission believes,
                however, that the amendments to part 190 are designed so that they can
                be implemented without imposing a significant economic burden on a
                substantial number of small entities. These regulations take into
                account existing trading practices and the logistical considerations of
                implementing the regulations.
                ---------------------------------------------------------------------------
                 \306\ See 66 FR 45604, 45609 (Aug. 29, 2001); 67 FR 53146, 53171
                (Aug. 14, 2002).
                ---------------------------------------------------------------------------
                 Accordingly, the Commission Chairman, on behalf of the Commission,
                hereby certifies pursuant to 5 U.S.C. 605(b), that the rule adopted
                herein will not have a significant economic impact on a substantial
                number of small entities.
                C. Paperwork Reduction Act
                 The Paperwork Reduction Act of 1995 (PRA) \307\ imposes certain
                requirements on Federal agencies (including the Commission) in
                connection with their conducting or sponsoring a collection of
                information as defined by the PRA. The regulations adopted herein would
                result in such a collection, as discussed below. A person is not
                required to respond to a collection of information unless it displays a
                currently valid control number issued by the Office of Management and
                Budget (OMB). The regulations include a collection of information for
                which the Commission has previously received control numbers from OMB.
                The title of this collection of information is: OMB Control Number
                3038-0021, ``Regulations Governing Bankruptcies of Commodity Brokers.''
                ---------------------------------------------------------------------------
                 \307\ 44 U.S.C. 3501 et seq.
                ---------------------------------------------------------------------------
                 Information Collection 3038-0021 \308\ contains the reporting,
                recordkeeping and third-party disclosure requirements in the
                Commission's bankruptcy regulations for commodity broker liquidations
                (17 CFR part 190). These regulations apply to liquidations under
                chapter 7, subchapter IV of the Bankruptcy Code.\309\ The Commission
                promulgated part 190 pursuant to the authority of 7 U.S.C. 24. The
                Commission is amending Information Collection 3038-0021 as a result of
                these final regulations to (1) accommodate new information collection
                requirements for FCMs and DCOs, and (2) revise the existing information
                collection requirements for FCMs and DCOs. The Commission did not
                receive any comments regarding its PRA burden analysis in the preamble
                to the proposal.
                ---------------------------------------------------------------------------
                 \308\ There are two information collections associated with OMB
                Control No. 3038-0021. The first includes the reporting,
                recordkeeping, and third-party disclosure requirements applicable to
                a single respondent in a commodity broker liquidation (e.g., a
                single FCM, DCO, or trustee) within the relevant time period. This
                includes both (1) requirements on a single FCM or a single trustee
                in an FCM bankruptcy which correspond to current requirements on a
                single FCM or a single trustee in an FCM bankruptcy, as provided for
                in Sec. Sec. 190.03(b)(1) and (2) and (c)(1), (2), and (4),
                190.05(b) and (d), and 190.07(b)(5); and (2) new requirements on a
                single DCO or a single trustee in a DCO bankruptcy as provided for
                in Sec. Sec. 190.12(a)(2), (b)(1) and (2), and (c)(1) and (2) and
                190.14(a) and (d). The second information collection includes the
                third-party disclosure requirements that are applicable during
                business as usual to multiple respondents (e.g., multiple FCMs).
                These requirements were proposed as Sec. 190.10(b) and (e) (which
                are analogs to current Sec. Sec. 190.06(d) and 190.10(c)), as well
                as a new third-party disclosure requirement provided for in Sec.
                190.10(d) (regarding letters of credit); however, the third-party
                disclosure requirements are being adopted as Sec. Sec. 1.41, 1.43,
                and 1.55(p).
                 \309\ 11 U.S.C. 761 et seq.
                ---------------------------------------------------------------------------
                1. Reporting Requirements in an FCM Bankruptcy
                 Regulation Sec. 190.03(b)(1) requires FCMs that file a petition in
                bankruptcy to notify the Commission and the relevant DSRO, as soon as
                practicable before and in any event no later than the time of such
                filing, of the anticipated or actual filing date, the court in which
                the proceeding will be or has been filed and, as soon as known, the
                docket number assigned to that proceeding. It further requires an FCM
                against which an involuntary bankruptcy petition or application for a
                protective decree under SIPA is filed to notify the Commission and the
                relevant DSRO immediately upon the filing of such petition or
                application.
                 Regulation Sec. 190.03(b)(2) requires the trustee, the relevant
                DSRO, or an applicable clearing organization to notify the Commission
                if such person intends to transfer or apply to transfer open commodity
                contracts or customer property on behalf of the public customers of the
                debtor.
                 Based on its experience, the Commission anticipates that an FCM
                bankruptcy would occur once every three years.\310\ The Commission has
                estimated the burden hours for the reporting requirements in an FCM
                bankruptcy as follows:
                ---------------------------------------------------------------------------
                 \310\ These estimates express the burdens in terms of those that
                would be imposed on one respondent during the three-year period.
                ---------------------------------------------------------------------------
                 Estimated number of respondents: 1.
                 Estimated annual number of responses per respondent: 1.\311\
                ---------------------------------------------------------------------------
                 \311\ The Commission estimates that (1) under Sec.
                190.03(b)(1), an FCM would make two notifications per bankruptcy
                (one to the Commission and one to its DSRO), and (2) under Sec.
                190.03(b)(2), an FCM would make one notification per bankruptcy.
                Dividing those numbers by three (since the Commission anticipates an
                FCM bankruptcy occurring once every three years) results in 0.67
                notifications annually pursuant to Sec. 190.03(b)(1), and 0.33
                notifications annually pursuant to Sec. 190.03(b)(2), for a total
                of one notification annually per respondent.
                ---------------------------------------------------------------------------
                [[Page 19417]]
                 Estimated total annual number of responses for all respondents: 1.
                 Estimated annual number of burden hours per respondent: 1.\312\
                ---------------------------------------------------------------------------
                 \312\ The Commission estimates that (1) the notifications
                required under Sec. 190.03(b)(1) would take 0.5 hours to make, and
                (2) the notification required under Sec. 190.03(b)(2) would take 2
                hours to make. In terms of burden hours, this amounts to (0.5*0.67
                under Sec. 190.03(b)(1)) plus (2*0.33 under Sec. 190.03(b)(2)), or
                a total of one burden hour annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 1.
                2. Recordkeeping Requirements in an FCM Bankruptcy
                 Regulation Sec. 190.05(b) requires the trustee to use reasonable
                efforts to compute a funded balance for each customer account that
                contains open commodity contracts or other property as of the close of
                business each business day subsequent to the order for relief until the
                date all open commodity contracts and other property in such account
                has been transferred or liquidated.
                 Regulation Sec. 190.05(d) requires the trustee to use reasonable
                efforts to continue to issue account statements with respect to any
                customer for whose account open commodity contracts or other property
                is held that has not been liquidated or transferred.
                 Based on its experience, the Commission anticipates that an FCM
                bankruptcy would occur once every three years.\313\ The Commission has
                estimated the burden hours for the recordkeeping requirements in an FCM
                bankruptcy as follows:
                ---------------------------------------------------------------------------
                 \313\ These estimates express the burdens in terms of those that
                would be imposed on one respondent during the three-year period.
                ---------------------------------------------------------------------------
                 Estimated number of respondents: 1.
                 Estimated annual number of responses per respondent:
                26,666.67.\314\
                ---------------------------------------------------------------------------
                 \314\ The Commission estimates that (1) under Sec. 190.05(b), a
                trustee would compute a funded balance for customer accounts 40,000
                times; and (2) under Sec. 190.05(d), a trustee would issue 40,000
                account statements for customer accounts. Dividing those numbers by
                three (since the Commission anticipates an FCM bankruptcy occurring
                once every three years) results in 13,333.33 records annually
                pursuant to Sec. 190.05(b), and 13,333.33 records annually pursuant
                to Sec. 190.05(d), for a total of 26,666.67 records annually per
                respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual number of responses for all respondents:
                26,666.67.
                 Estimated annual number of burden hours per respondent:
                266.67.\315\
                ---------------------------------------------------------------------------
                 \315\ The Commission estimates that each record required under
                Sec. 190.05(b) and 190.05(d) would take 0.01 hours to prepare. In
                terms of burden hours, this amounts to (0.01*13,333.33 under Sec.
                190.05(b)) plus (0.01*13,333.33 under Sec. 190.05(d)), or a total
                of 266.67 burden hours annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 266.67.
                3. Third-Party Disclosure Requirements Applicable to a Single
                Respondent in an FCM Bankruptcy
                 Regulation Sec. 190.03(c)(1) requires the trustee to use all
                reasonable efforts to promptly notify any customer whose futures
                account, foreign futures account, or cleared swaps account includes
                specifically identifiable property, and that such specifically
                identifiable property may be liquidated on and after the seventh day
                after the order for relief if the customer has not instructed the
                trustee in writing before the deadline specified in the notice to
                return such property pursuant to the terms for distribution of customer
                property contained in part 190.
                 Regulation Sec. 190.03(c)(2) allows the trustee to treat open
                commodity contracts of public customers identified on the books and
                records of the debtor has held in an account designated as a hedging
                account as specifically identifiable property of such customer.\316\
                ---------------------------------------------------------------------------
                 \316\ The Commission no longer assigns burden hours to the
                discretionary notice that a trustee may provide to customers in an
                involuntary FCM bankruptcy proceeding pursuant to Sec.
                190.03(c)(3). There have been no involuntary FCM liquidations and
                none are anticipated. Accordingly, continuing to assign burden hours
                to this voluntary requirement would inappropriately inflate the
                burden hours of this information collection.
                ---------------------------------------------------------------------------
                 Regulation Sec. 190.03(c)(4) requires the trustee to promptly
                notify each customer that an order for relief has been entered and
                instruct each customer to file a proof of customer claim containing the
                information specified in Sec. 190.03(e).
                 Regulation Sec. 190.07(b)(5) requires the trustee, in the event
                that specifically identifiable property has been or will be
                transferred, to transmit any customer instructions previously received
                by the trustee with respect to such specifically identifiable property
                to the transferee of such property.
                 Based on its experience, the Commission anticipates that an FCM
                bankruptcy would occur once every three years.\317\ The Commission has
                estimated the burden hours for the third-party disclosure requirements
                applicable to a single respondent in an FCM bankruptcy as follows:
                ---------------------------------------------------------------------------
                 \317\ These estimates express the burdens in terms of those that
                would be imposed on one respondent during the three-year period.
                ---------------------------------------------------------------------------
                 Estimated number of respondents: 1.
                 Estimated annual number of responses per respondent:
                10,003.32.\318\
                ---------------------------------------------------------------------------
                 \318\ The Commission estimates that a trustee would make the
                required disclosures under each of Sec. 190.03(c)(1), (2), and (4)
                10,000 times per bankruptcy. Dividing those numbers by three (since
                the Commission anticipates an FCM bankruptcy occurring once every
                three years) results in 3,333.33 disclosures annually pursuant to
                each of Sec. 190.03(c)(1), (2), and (4). The Commission further
                estimates that a trustee would make the required disclosure under
                Sec. 190.07(b)(5) 10 times per bankruptcy. Dividing this number by
                three results in 3.33 disclosures annually pursuant to Sec.
                190.07(b)(5). This amounts to a total of 10,003.32 disclosures
                annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual number of responses for all respondents:
                10,003.32.
                 Estimated annual number of burden hours per respondent:
                1,336.67.\319\
                ---------------------------------------------------------------------------
                 \319\ The Commission estimates that (1) each disclosure required
                under Sec. 190.03(c)(1) and (2) and (b) would take 0.1 hours to
                prepare; (2) each disclosure required under Sec. 190.03(c)(4) would
                take 0.2 hours to prepare; and (3) each disclosure required under
                Sec. 190.07(b)(5) would take 1 hour to prepare. In terms of burden
                hours, this amounts to (0.1*3,333.33 under Sec. 190.03(c)(1)) plus
                (0.1*3,333.33 under Sec. 190.03(c)(2)) plus (0.2*3,333.33 under
                Sec. 190.03(c)(4)) plus (1*3.33 under Sec. 190.07(b)(5)), or a
                total of 1336.66 burden hours annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 1,336.67.
                4. Reporting Requirements in a Derivatives Clearing Organization (DCO)
                Bankruptcy
                 Regulation Sec. 190.12(a)(2) requires a clearing organization that
                files a petition in bankruptcy to notify the Commission, at or before
                the time of such filing, of the filing date, the court in which the
                proceeding will be or has been filed and, as soon as known, the docket
                number assigned to that proceeding. It further requires a clearing
                organization against which an involuntary bankruptcy petition is filed
                to similarly notify the Commission within three hours after the receipt
                of notice of such filing.
                 Regulation Sec. 190.12(b)(1) requires the debtor clearing
                organization to provide to the trustee, no later than three hours
                following the later of the commencement of a bankruptcy proceeding or
                the appointment of the trustee, copies of each of the most recent
                reports that the debtor was required to file with the Commission under
                Sec. 39.19(c).
                 Regulation Sec. 190.12(b)(2) requires the debtor clearing
                organization to provide to the trustee and the Commission, no later
                than three hours following the commencement of a bankruptcy proceeding,
                copies of (1) the most recent recovery or wind-down plans of the debtor
                maintained pursuant to Sec. 39.39(b), and (2) the most recent version
                of the debtor's default management plan and default rules and
                procedures maintained pursuant to Sec. 39.16 and, as applicable, Sec.
                39.35.
                 Regulations Sec. 190.12(c)(1) and (2) require the debtor clearing
                organization
                [[Page 19418]]
                to make available to the trustee and the Commission, no later than the
                next business day following commencement of a bankruptcy proceeding,
                copies of (1) all records maintained by the debtor pursuant to Sec.
                39.20(a), and (2) any opinions of counsel or other legal memoranda
                provided to the debtor in the five years preceding the bankruptcy
                proceeding relating to the enforceability of the rules and procedures
                of the debtor in the event of an insolvency proceeding involving the
                debtor.
                 Based on its experience, the Commission anticipates that a clearing
                organization bankruptcy would occur once every fifty years.\320\ The
                Commission has estimated the burden hours for the reporting
                requirements in a DCO bankruptcy as follows:
                ---------------------------------------------------------------------------
                 \320\ No U.S. clearing organization has ever been the subject of
                a bankruptcy proceeding, and none has come anywhere near insolvency.
                While there have been less than a handful of central counterparties
                worldwide that became functionally insolvent during the twentieth
                century, none of those were subject to modern resiliency
                requirements. Accordingly, the Commission believes that an estimate
                of one DCO bankruptcy every fifty years is an appropriate estimate.
                These burden estimates express the burdens in terms of those that
                would be imposed on one respondent during the fifty-year period.
                ---------------------------------------------------------------------------
                 Estimated number of respondents: 1.
                 Estimated annual number of responses per respondent: 2.98.\321\
                ---------------------------------------------------------------------------
                 \321\ The Commission estimates that (1) under Sec.
                190.12(a)(2), a clearing organization would make two notifications
                per bankruptcy; (2) under Sec. 190.12(b)(1), a clearing
                organization would provide 40 reports to the trustee; (3) under
                Sec. 190.12(b)(2), a clearing organization would provide 5 reports
                to the trustee and the Commission; (4) under Sec. 190.12(c)(1), a
                clearing organization would provide 100 records to the trustee and
                the Commission; and (5) under Sec. 190.12(c)(2), a clearing
                organization would provide 2 records to the trustee and the
                Commission. Dividing those numbers by 50 (since the Commission
                anticipates a clearing organization bankruptcy occurring once every
                50 years) results in (1) 0.04 reports annually pursuant to Sec.
                190.12(a)(2); (2) 0.8 reports annually pursuant to Sec.
                190.12(b)(1); (3) 0.1 reports annually pursuant to Sec.
                190.12(b)(2); (4) 2 reports annually pursuant to Sec. 190.12(c)(1);
                and (5) 0.04 reports annually pursuant to Sec. 190.12(c)(2), for a
                total of 2.98 reports annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual number of responses for all respondents:
                2.98.
                 Estimated annual number of burden hours per respondent: 0.61.\322\
                ---------------------------------------------------------------------------
                 \322\ The Commission estimates that (1) each notification
                required under Sec. 190.12(a)(2) and (d)(2) would take 0.5 hours to
                make; (2) gathering the reports required under Sec. 190.12(b)(1)
                would take 0.2 hours; (3) gathering the reports required under Sec.
                190.12(b)(2) would take 0.2 hours; (4) gathering the reports
                required under Sec. 190.12(c)(1) would take 0.2 hours; and (5)
                gathering the reports required under Sec. 190.12(c)(2) would take
                0.2 hours. In terms of burden hours, this amounts to (0.5*0.04 under
                Sec. 190.12(a)(2)) plus (0.2*0.8 under Sec. 190.12(b)(1)) plus
                (0.2*0.1 under Sec. 190.12(b)(2)) plus (0.2*2 under Sec.
                190.12(c)(1)) plus (0.2*0.04 under Sec. 190.12(c)(2)), or a total
                of 0.61 burden hours annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 0.61.
                5. Recordkeeping Requirements in a DCO Bankruptcy
                 Regulation Sec. 190.14(d) requires the trustee to use reasonable
                efforts to compute a funded balance for each customer account that
                contains open commodity contracts or other property as of the close of
                business each business day subsequent to the order for relief on which
                liquidation of property within the account has been completed or
                immediately prior to any distribution of property within the account.
                 Based on its experience, the Commission anticipates that a clearing
                organization bankruptcy would occur once every fifty years.\323\ The
                Commission has estimated the burden hours for the recordkeeping
                requirements in a DCO bankruptcy as follows:
                ---------------------------------------------------------------------------
                 \323\ These estimates express the burdens in terms of those that
                would be imposed on one respondent during the fifty-year period.
                ---------------------------------------------------------------------------
                 Estimated number of respondents: 1.
                 Estimated annual number of responses per respondent: 9.\324\
                ---------------------------------------------------------------------------
                 \324\ The Commission estimates that, under Sec. 190.14(d), a
                clearing organization would compute a funded balance for customer
                accounts 450 times during a bankruptcy. This number is based on an
                average of 45 clearing members, each with two accounts (house and
                customer). Dividing that number by 50 (since the Commission
                anticipates a clearing organization bankruptcy occurring once every
                50 years) results in 9 records annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual number of responses for all respondents: 9.
                 Estimated annual number of burden hours per respondent: 0.9.\325\
                ---------------------------------------------------------------------------
                 \325\ The Commission estimates that computing the funded balance
                of customer accounts pursuant to Sec. 190.14(d) would take 0.1
                hours per computation. In terms of burden hours, this amounts to
                (0.1*9), or 0.9 burden hours annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 0.9.
                6. Third-Party Disclosure Requirements Applicable to a Single
                Respondent in a DCO Bankruptcy
                 Regulation Sec. 190.14(a) allows the trustee, in their discretion
                based upon the facts and circumstances of the case, to instruct each
                customer to file a proof of claim containing such information as is
                deemed appropriate by the trustee, and seek a court order establishing
                a bar date for the filing of such proofs of claim.
                 Based on its experience, the Commission anticipates that a clearing
                organization bankruptcy would occur once every fifty years.\326\ The
                Commission has estimated the burden hours for the third-party
                disclosure requirements applicable to a single respondent in a DCO
                bankruptcy as follows:
                ---------------------------------------------------------------------------
                 \326\ These estimates express the burdens in terms of those that
                would be imposed on one respondent during the fifty-year period.
                ---------------------------------------------------------------------------
                 Estimated number of respondents: 1.
                 Estimated annual number of responses per respondent: 0.9.\327\
                ---------------------------------------------------------------------------
                 \327\ The Commission estimates that, under Sec. 190.14(a), a
                trustee would make the disclosure 45 times during a bankruptcy. This
                number is based on an average of 45 clearing members. Dividing that
                number by 50 (since the Commission anticipates a clearing
                organization bankruptcy occurring once every 50 years) results in
                0.9 records annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual number of responses for all respondents:
                0.9.
                 Estimated annual number of burden hours per respondent: 0.18.\328\
                ---------------------------------------------------------------------------
                 \328\ The Commission estimates that instructing customers to
                file a proof of claim pursuant to Sec. 190.14(a) would take 0.2
                hours. In terms of burden hours, this amounts to (0.2*0.9), or 0.18
                burden hours annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 0.18.
                7. Third-Party Disclosure Requirements Applicable to Multiple
                Respondents During Business as Usual
                 As discussed in Section II.B.8 above, the Commission is codifying
                the provisions proposed as Sec. 190.10(b), (d), and (e) in part 1,
                along with other regulations that pertain to an FCM's business as
                usual. Regulation Sec. 1.41, which was proposed as Sec. 190.10(b),
                requires an FCM to provide an opportunity to each of its customers,
                upon first opening a futures account or cleared swaps account with such
                FCM, to designate such account as a hedging account.
                 Regulation Sec. 1.43, which was proposed as Sec. 190.10(d),
                prohibits an FCM from accepting a letter of credit as collateral unless
                such letter of credit may be exercised under certain conditions
                specified in the regulation.
                 Regulation Sec. 1.55(p), which was proposed as Sec. 190.10(e),
                requires an FCM to provide any customer with the disclosure statement
                set forth in Sec. 1.55(p) prior to accepting property other than cash
                from or for the account of a customer to margin, guarantee, or secure a
                commodity contract.
                 The requirements described above are applicable on a regular basis
                (i.e., during business as usual) to multiple respondents. The
                Commission has estimated the burden hours for the third-party
                disclosure requirements applicable to multiple respondents during
                business as usual as follows:
                 Estimated number of respondents: 125.
                 Estimated annual number of responses per respondent: 3,000.\329\
                ---------------------------------------------------------------------------
                 \329\ The Commission estimates that under Sec. Sec. 1.41, 1.43,
                and 1.55(p), an FCM would make the required disclosures 1,000 times
                per year. This amounts to a total of 3,000 responses annually per
                respondent.
                ---------------------------------------------------------------------------
                [[Page 19419]]
                 Estimated total annual number of responses for all respondents:
                375,000.
                 Estimated annual number of burden hours per respondent: 60.\330\
                ---------------------------------------------------------------------------
                 \330\ The Commission estimates that each disclosure required
                under Sec. Sec. 1.41, 1.43, and 1.55(p) would take 0.02 hours to
                make. In terms of burden hours, this amounts to (0.02*1,000 under
                Sec. 1.41) plus (0.02*1,000 under Sec. 1.43 plus (0.02*1,000 under
                Sec. 1.55(p)), or 60 burden hours annually per respondent.
                ---------------------------------------------------------------------------
                 Estimated total annual burden hours for all respondents: 7,500.
                List of Subjects
                17 CFR Part 1
                 Brokers, Commodity futures, Consumer protection, Reporting and
                recordkeeping requirements.
                17 CFR Part 4
                 Brokers, Commodity futures, Consumer protection, Reporting and
                recordkeeping requirements.
                17 CFR Part 41
                 Brokers, Reporting and recordkeeping requirements, Securities.
                17 CFR Part 190
                 Bankruptcy, Brokers, Reporting and recordkeeping requirements.
                 For the reasons stated in the preamble, the Commodity Futures
                Trading Commission amends 17 CFR chapter I as follows:
                PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
                0
                1. The authority citation for part 1 continues to read as follows:
                 Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
                6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
                9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24
                (2012).
                0
                2. In Sec. 1.25, revise paragraph (a)(2)(ii)(B) to read as follows:
                Sec. 1.25 Investment of customer funds.
                 (a) * * *
                 (2) * * *
                 (ii) * * *
                 (B) Securities subject to such repurchase agreements must not be
                ``specifically identifiable property'' as defined in Sec. 190.01 of
                this chapter.
                * * * * *
                0
                3. Add Sec. 1.41 to read as follows:
                Sec. 1.41 Designation of hedging accounts.
                 (a) A futures commission merchant must provide an opportunity to
                each customer, when it first opens a futures account, foreign futures
                account or cleared swaps account with such futures commission merchant,
                to designate such account as a hedging account. The futures commission
                merchant must indicate prominently in the accounting records in which
                it maintains open trade balances whether, for each customer account,
                the account is designated as a hedging account.
                 (b) A futures commission merchant may permit the customer to open
                an account as a hedging account only if it obtains the customer's
                written representation that the customer's trading of futures or
                options on futures, foreign futures or options on foreign futures, or
                cleared swaps (as applicable) in the account constitutes hedging as
                such term may be defined under any relevant Commission regulation or
                rule of any clearing organization, designated contract market, swap
                execution facility or foreign board of trade.
                 (c) The requirements set forth in paragraphs (a) and (b) of this
                section do not apply to a futures commission merchant with respect to
                any commodity contract account that the futures commission merchant
                opened prior to May 13, 2021. The futures commission merchant may
                continue to designate as a hedging account any account with respect to
                which the futures commission merchant received written hedging
                instructions from the customer in accordance with former Sec.
                190.06(d) of this chapter.
                 (d) A futures commission merchant may designate an existing futures
                account, foreign futures account or cleared swaps account of a
                particular customer as a hedging account, provided that it has obtained
                the representation set out in paragraph (b) of this section from such
                customer.
                0
                4. Add Sec. 1.42 to read as follows:
                Sec. 1.42 Delivery accounts.
                 In connection with the making or taking of delivery of a commodity
                under a commodity contract whose terms require settlement via physical
                delivery, if a futures commission merchant facilitates or effects the
                transfer of the physical delivery property and payment therefor on
                behalf of the customer, and does so outside the futures account,
                foreign futures account or cleared swaps account in which the commodity
                contract was held, the futures commission merchant must do so in a
                delivery account, provided, however, that when the commodity subject to
                delivery is a security, a futures commission merchant may, consistent
                with any applicable regulatory requirements, do so in a securities
                account.
                0
                5. Add Sec. 1.43 to read as follows:
                Sec. 1.43 Letters of credit as collateral.
                 A futures commission merchant shall not accept a letter of credit
                as collateral unless such letter of credit may be exercised, through
                its stated date of expiry, under the following conditions, regardless
                of whether the customer posting that letter of credit is in default in
                any obligation:
                 (a) In the event that an order for relief under chapter 7 of the
                Bankruptcy Code or a protective decree pursuant to section 5(b)(1) of
                SIPA is entered with respect to the futures commission merchant, or if
                the FDIC is appointed as receiver for the futures commission merchant
                pursuant to 12 U.S.C. 5382(a), the trustee for that futures commission
                merchant (or, as applicable, FDIC) may draw upon such letter of credit,
                in full or in part, in accordance with Sec. 190.04(d)(3) of this
                chapter.
                 (b) If the letter of credit is passed through to a clearing
                organization, then in the event that an order for relief under chapter
                7 of the Bankruptcy Code is entered with respect to the clearing
                organization, or if the FDIC is appointed as receiver for the clearing
                organization pursuant to 12 U.S.C. 5382(a), the trustee for that
                clearing organization (or, as applicable, FDIC) may draw upon such
                letter of credit, in full or in part, in accordance with Sec.
                190.04(d)(3) of this chapter.
                 (c) A futures commission merchant shall not accept a letter of
                credit from a customer as collateral if it has any agreement with the
                customer that is inconsistent with this section.
                0
                6. In Sec. 1.55:
                0
                a. Revise paragraphs (d) and (f);
                0
                b. Remove the parenthetical control number sentence and parenthetical
                authority citation following paragraph (h);
                0
                c. Remove the paragraph (k) heading; and
                0
                d. Add paragraph (p).
                 The revision and addition read as follows:
                Sec. 1.55 Public disclosures by futures commission merchants.
                * * * * *
                 (d) Any futures commission merchant, or (in the case of an
                introduced account) any introducing broker, may open a commodity
                futures account for a customer without obtaining the separate
                acknowledgments of disclosure and elections required by this section
                and by Sec. Sec. 1.33(g) and 33.7 of this chapter, provided that:
                 (1) Prior to the opening of such account, the futures commission
                merchant or introducing broker obtains an acknowledgement from the
                customer, which may consist of a single signature
                [[Page 19420]]
                at the end of the futures commission merchant's or introducing broker's
                customer account agreement, or on a separate page, of the disclosure
                statements, consents, and elections specified in this section and Sec.
                1.33(g), and in Sec. Sec. 33.7, 155.3(b)(2), and 155.4(b)(2) of this
                chapter, and which may include authorization for the transfer of funds
                from a segregated customer account to another account of such customer,
                as listed directly above the signature line, provided the customer has
                acknowledged by check or other indication next to a description of each
                specified disclosure statement, consent, or election that the customer
                has received and understood such disclosure statement or made such
                consent or election; and
                 (2) The acknowledgment referred to in paragraph (d)(1) of this
                section is accompanied by and executed contemporaneously with delivery
                of the disclosures and elective provisions required by this section and
                Sec. 1.33(g), and by Sec. 33.7 of this chapter.
                * * * * *
                 (f) A futures commission merchant or, in the case of an introduced
                account, an introducing broker, may open a commodity futures account
                for an ``institutional customer'' as defined in Sec. 1.3 without
                furnishing such institutional customer the disclosure statements or
                obtaining the acknowledgments required under paragraph (a) of this
                section, or Sec. Sec. 1.33(g), 1.55(p), and 1.65(a)(3), and Sec. Sec.
                30.6(a), 33.7(a), 155.3(b)(2), and 155.4(b)(2) of this chapter.
                * * * * *
                 (p)(1) Except as provided in Sec. 1.65, no commodity broker (other
                than a clearing organization) may accept property other than cash from
                or for the account of a customer, other than a customer specified in
                paragraph (f) of this section, to margin, guarantee, or secure a
                commodity contract unless the commodity broker first furnishes the
                customer with the disclosure statement set forth in paragraph (p)(2) of
                this section in boldface print in at least 10 point type which may be
                provided as either a separate, written document or incorporated into
                the customer agreement, or with another statement approved under
                paragraph (c) of this section and set forth in appendix A to this
                section which the Commission finds satisfies the requirement of this
                paragraph (p)(1).
                 (2) The disclosure statement required by paragraph (p)(1) of this
                section is as follows:
                 THIS STATEMENT IS FURNISHED TO YOU BECAUSE REGULATION 1.55(p) OF
                THE COMMODITY FUTURES TRADING COMMISSION REQUIRES IT FOR REASONS OF
                FAIR NOTICE UNRELATED TO THIS COMPANY'S CURRENT FINANCIAL CONDITION.
                 1. YOU SHOULD KNOW THAT IN THE UNLIKELY EVENT OF THIS COMPANY'S
                BANKRUPTCY, PROPERTY, INCLUDING PROPERTY SPECIFICALLY TRACEABLE TO YOU,
                WILL BE RETURNED, TRANSFERRED OR DISTRIBUTED TO YOU, OR ON YOUR BEHALF,
                ONLY TO THE EXTENT OF YOUR PRO RATA SHARE OF ALL PROPERTY AVAILABLE FOR
                DISTRIBUTION TO CUSTOMERS.
                 2. THE COMMISSION'S REGULATIONS CONCERNING BANKRUPTCIES OF
                COMMODITY BROKERS CAN BE FOUND AT 17 CODE OF FEDERAL REGULATIONS PART
                190.
                 (3) The statement contained in paragraph (p)(2) of this section
                need be furnished only once to each customer to whom it is required to
                be furnished by this section.
                0
                7. In Sec. 1.65, revise paragraphs (a)(3) introductory text and
                (a)(3)(iii) to read as follows:
                Sec. 1.65 Notice of bulk transfers and disclosure obligations to
                customers.
                 (a) * * *
                 (3) Where customer accounts are transferred to a futures commission
                merchant or introducing broker, other than at the customer's request,
                the transferee introducing broker or futures commission merchant must
                provide each customer whose account is transferred with the risk
                disclosure statements and acknowledgments required by Sec. 1.55
                (domestic futures and foreign futures and options trading) and Sec.
                33.7 of this chapter (domestic exchange-traded commodity options) and
                receive the required acknowledgments within sixty days of the transfer
                of accounts. This paragraph (a)(3) shall not apply:
                * * * * *
                 (iii) If the transfer of accounts is made from one introducing
                broker to another introducing broker guaranteed by the same futures
                commission merchant pursuant to a guarantee agreement in accordance
                with the requirements of Sec. 1.10(j) and such futures commission
                merchant maintains the relevant acknowledgments required by Sec. Sec.
                1.55(a)(1)(ii) and 33.7(a)(1)(ii) of this chapter and can establish
                compliance with Sec. 1.55(p).
                * * * * *
                PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
                0
                8. The authority citation for part 4 continues to read as follows:
                 Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,
                and 23.
                0
                9. In Sec. 4.5, revise paragraph (c)(2)(iii)(A) to read as follows:
                Sec. 4.5 Exclusion for certain otherwise regulated persons from the
                definition of the term ``commodity pool operator.''
                * * * * *
                 (c) * * *
                 (2) * * *
                 (iii) * * *
                 (A) Will use commodity futures or commodity options contracts, or
                swaps solely for bona fide hedging purposes within the meaning and
                intent of the definition of bona fide hedging transactions and
                positions for excluded commodities in Sec. Sec. 1.3 and 151.5 of this
                chapter; Provided however, That, in addition, with respect to positions
                in commodity futures or commodity options contracts, or swaps which do
                not come within the meaning and intent of the definition of bona fide
                hedging transactions and positions for excluded commodities in
                Sec. Sec. 1.3 and 151.5 of this chapter, a qualifying entity may
                represent that the aggregate initial margin and premiums required to
                establish such positions will not exceed five percent of the
                liquidation value of the qualifying entity's portfolio, after taking
                into account unrealized profits and unrealized losses on any such
                contracts it has entered into; and, Provided further, That in the case
                of an option that is in-the-money at the time of the purchase, the in-
                the-money amount as defined in Sec. 190.01of this chapter may be
                excluded in computing such five percent; or
                * * * * *
                0
                10. In Sec. 4.12, revise the section heading and paragraph
                (b)(1)(i)(C) to read as follows:
                Sec. 4.12 Exemption from provisions of this part.
                * * * * *
                 (b) * * *
                 (1) * * *
                 (i) * * *
                 (C) Will not enter into commodity interest transactions for which
                the aggregate initial margin and premiums, and required minimum
                security deposit for retail forex transactions (as defined in Sec.
                5.1(m) of this chapter) exceed 10 percent of the fair market value of
                the pool's assets, after taking into account unrealized profits and
                unrealized losses on any such contracts it has entered
                [[Page 19421]]
                into; Provided, however, That in the case of an option that is in-the-
                money at the time of purchase, the in-the-money amount as defined in
                Sec. 190.01 of this chapter may be excluded in computing such 10
                percent; and
                * * * * *
                0
                11. In Sec. 4.13, revise paragraph (a)(3)(ii)(A) to read as follows:
                Sec. 4.13 Exemption from registration as a commodity pool operator.
                * * * * *
                 (a) * * *
                 (3) * * *
                 (ii) * * *
                 (A) The aggregate initial margin, premiums, and required minimum
                security deposit for retail forex transactions (as defined in Sec.
                5.1(m) of this chapter) required to establish such positions,
                determined at the time the most recent position was established, will
                not exceed 5 percent of the liquidation value of the pool's portfolio,
                after taking into account unrealized profits and unrealized losses on
                any such positions it has entered into; Provided, That in the case of
                an option that is in-the-money at the time of purchase, the in-the-
                money amount as defined in Sec. 190.01 of this chapter may be excluded
                in computing such 5 percent; or
                * * * * *
                PART 41--SECURITY FUTURES PRODUCTS
                0
                12. The authority citation for part 41 continues to read as follows:
                 Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114
                Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
                0
                13. In Sec. 41.41, revise paragraph (d) to read as follows:
                Sec. 41.41 Security futures products accounts.
                * * * * *
                 (d) Recordkeeping requirements. The Commission's recordkeeping
                rules set forth in Sec. Sec. 1.31, 1.32, 1.35, 1.36, 1.37, 4.23, 4.33,
                and 18.05 of this chapter shall apply to security futures product
                transactions and positions in a futures account (as that term is
                defined in Sec. 1.3 of this chapter). The rules in the preceding
                sentence shall not apply to security futures product transactions and
                positions in a securities account (as that term is defined in Sec. 1.3
                of this chapter); provided, that the SEC's recordkeeping rules apply to
                those transactions and positions.
                * * * * *
                0
                14. Revise part 190 to read as follows:
                PART 190--BANKRUPTCY RULES
                Subpart A--General Provisions
                Sec.
                190.00 Statutory authority, organization, core concepts, scope, and
                construction.
                190.01 Definitions.
                190.02 General.
                Subpart B--Futures Commission Merchant as Debtor
                190.03 Notices and proofs of claims.
                190.04 Operation of the debtor's estate--customer property.
                190.05 Operation of the debtor's estate--general.
                190.06 Making and taking delivery under commodity contracts.
                190.07 Transfers.
                190.08 Calculation of funded net equity.
                190.09 Allocation of property and allowance of claims.
                190.10 Current records during business as usual.
                Subpart C--Clearing Organization as Debtor
                190.11 Scope and purpose of this subpart.
                190.12 Required reports and records.
                190.13 Prohibition on avoidance of transfers.
                190.14 Operation of the estate of the debtor subsequent to the
                filing date.
                190.15 Recovery and wind-down plans; default rules and procedures.
                190.16 Delivery.
                190.17 Calculation of net equity.
                190.18 Treatment of property.
                190.19 Support of daily settlement.
                Appendix A to Part 190--Customer Proof of Claim Form
                Appendix B to Part 190--Special Bankruptcy Distributions
                 Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a-1, 12, 12a, 19, and
                24; 11 U.S.C. 362, 546, 548, 556, and 761-767, unless otherwise
                noted.
                Subpart A--General Provisions
                Sec. 190.00 Statutory authority, organization, core concepts, scope,
                and construction.
                 (a) Statutory authority. The Commission has adopted the regulations
                in this part pursuant to its authority under sections 8a(5) and 20 of
                the Act. Section 8a(5) provides general rulemaking authority to
                effectuate the provisions and accomplish the purposes of the Act.
                Section 20 provides that the Commission may, notwithstanding title 11
                of the United States 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. Specifically, the
                Commission is authorized to adopt rules or regulations specifying:
                 (1) That certain cash, securities, or other property, or commodity
                contracts, are to be included in or excluded from customer property or
                member property;
                 (2) That certain cash, securities, or other property, or commodity
                contracts, are to be specifically identifiable to a particular customer
                in a particular capacity;
                 (3) The method by which the business of the commodity broker is to
                be conducted or liquidated after the date of the filing of the petition
                under chapter 7 of the Bankruptcy Code, 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 the Bankruptcy Code; and
                 (5) How a customer's net equity is to be determined.
                 (b) Organization. This part is organized into three subparts. This
                subpart contains general provisions applicable in all cases. Subpart B
                of this part contains provisions that apply when the debtor is a
                futures commission merchant (as that term is defined in the Act or
                Commission regulations). This includes acting as a foreign futures
                commission merchant, as defined in section 761(12) of the Bankruptcy
                Code, but excludes a person that is ``notice-registered'' as a futures
                commission merchant pursuant to section 4f(a)(2) of the Act. Subpart C
                contains provisions that apply when the debtor is registered as a
                derivatives clearing organization under the Act.
                 (c) Core concepts. The regulations in this part reflect several
                core concepts. The descriptions of core concepts in paragraphs (c)(1)
                through (6) of this section are subject to the further specific
                requirements set forth in this part, and the specific requirements in
                this part should be interpreted and applied consistently with these
                core concepts.
                 (1) Commodity brokers. Subchapter IV of chapter 7 of the Bankruptcy
                Code applies to a debtor that is a commodity broker, against which a
                customer holds a ``net equity'' claim relating to a commodity contract.
                This part is limited to a commodity broker that is:
                 (i) A futures commission merchant; or
                 (ii) A derivatives clearing organization registered under the Act
                and Sec. 39.3 of this chapter.
                 (2) Account classes. The Act and Commission regulations in parts 1,
                22, and 30 of this chapter provide differing treatment and protections
                for different types of cleared commodity contracts. This part
                establishes three account classes that correspond to the different
                types of accounts that futures
                [[Page 19422]]
                commission merchants and clearing organizations are required to
                maintain under the regulations in the preceding sentence, specifically,
                the futures account class (including options on futures), the foreign
                futures account class (including options on foreign futures), and the
                cleared swaps account class (including cleared options other than
                options on futures or foreign futures). This part also establishes a
                fourth account class, the delivery account class (which may be further
                subdivided as provided in this part), for property held in an account
                designated within the books and records of the debtor as a delivery
                account, for effecting delivery under commodity contracts whose terms
                require settlement via delivery when the commodity contract is held to
                expiration or, in the case of a cleared option, is exercised.
                 (3) Public customers and non-public customers; Commission
                segregation requirements; member property--(i) Public customers and
                non-public customers. This part prescribes separate treatment of
                ``public customers'' and ``non-public customers'' (as these terms are
                defined in Sec. 190.01) within each account class in the event of a
                proceeding under this part in which the debtor is a futures commission
                merchant. Public customers of a debtor futures commission merchant are
                entitled to a priority in the distribution of cash, securities, or
                other customer property over non-public customers, and both have
                priority over all other claimants (except for claims relating to the
                administration of customer property) pursuant to section 766(h) of the
                Bankruptcy Code.
                 (A) The cash, securities, or other property held on behalf of the
                public customers of a futures commission merchant in the futures,
                foreign futures, or cleared swaps account classes are subject to
                special segregation requirements imposed under parts 1, 22, and 30 of
                this chapter for each account class. Although such segregation
                requirements generally are not applicable to cash, securities, or other
                property received from or reflected in the futures, foreign futures, or
                cleared swaps accounts of non-public customers of a futures commission
                merchant, such transactions and property are customer property within
                the scope of this part.
                 (B) While parts 1, 22, and 30 of this chapter do not impose special
                segregation requirements with respect to treatment of cash, securities,
                or other property of public customers carried in a delivery account,
                such property does constitute customer property. Thus, the distinction
                between public and non-public customers is, given the priority for
                public customers in section 766(h) of the Bankruptcy Code, relevant for
                the purpose of making distributions to delivery account class customers
                pursuant to this part.
                 (C) Where a provision in this part 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 sub-
                goals 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.
                 (ii) Clearing organization bankruptcies: Member property and
                customer property other than member property. For a clearing
                organization, ``customer property'' is divided into ``member property''
                and ``customer property other than member property.'' The term member
                property is used to identify the cash, securities, or property
                available to pay the net equity claims of clearing members based on
                their house account at the clearing organization. Thus, in the event of
                a proceeding under this part in which the debtor is a clearing
                organization, the classification of customers as public customers or
                non-public customers also is relevant, in that each member of the
                clearing organization will have separate claims against the clearing
                organization (by account class) with respect to:
                 (A) Commodity contract transactions cleared for its own account or
                on behalf of any of its non-public customers (which are cleared in a
                ``house account'' at the clearing organization); and
                 (B) Commodity contract transactions cleared on behalf of any public
                customers of the clearing member (which are cleared in accounts at the
                clearing organization that is separate and distinct from house
                accounts).
                 (iii) Preferential assignment among customer classes and account
                classes for clearing organization bankruptcies. Section 190.18 is
                designed to support the interests of public customers of members of a
                debtor that is a clearing organization.
                 (A) Certain customer property is preferentially assigned to
                ``customer property other than member property'' instead of ``member
                property'' to the extent that there is a shortfall in funded balances
                for members' public customer claims. Moreover, to the extent that there
                are excess funded balances for members' claims in any customer class/
                account class combination, that excess is also preferentially assigned
                to ``customer property other than member property'' to the extent of
                any shortfall in funded balances for members' public customer claims.
                 (B) Where property is assigned to a particular customer class with
                more than one account class, it is assigned to the account class for
                which the funded balance percentage is the lowest until there are two
                account classes with equal funded balance percentages, then to both
                such account classes, keeping the funded balance percentage the same,
                and so forth following the analogous approach if the debtor has more
                than two account classes within the relevant customer class.
                 (4) Porting of public customer commodity contract positions. In a
                proceeding in which the debtor is a futures commission merchant, this
                part sets out a policy preference for transferring to another futures
                commission merchant, or ``porting,'' open commodity contract positions
                of the debtor's public customers along with all or a portion of such
                customers' account equity. Porting mitigates risks to both the
                customers of the debtor futures commission merchant and to the markets.
                To facilitate porting, this part addresses the manner in which the
                debtor's business is to be conducted on and after the filing date, with
                specific provisions addressing the collection and payment of margin for
                open commodity contract positions prior to porting.
                 (5) Pro rata distribution. (i) The commodity broker provisions of
                the Bankruptcy Code, subchapter IV of chapter 7, in particular section
                766(h), have long revolved around the principle of pro rata
                distribution. If there is a shortfall in the cash, securities or other
                property in a particular account class needed to satisfy the net equity
                claims of public customers in that account class, the customer property
                in that account class will be distributed pro rata to those public
                customers (subject to appendix B of this part). Any customer property
                not attributable to a specific account class, or that exceeds the
                amount needed to pay allowed customer net equity claims in a particular
                account class, will be distributed to public customers in other account
                classes so long as there is a shortfall in those other classes. Non-
                public customers will not receive any distribution of customer property
                so long as there is any shortfall, in any account class, of customer
                property
                [[Page 19423]]
                needed to satisfy public customer net equity claims.
                 (ii) The pro rata distribution principle means that, if there is a
                shortfall of customer property in an account class, all customers
                within that account class will suffer the same proportional loss
                relative to their allowed net equity claims. The principle in this
                paragraph (c)(5)(ii) applies to all customers, including those who post
                as collateral specifically identifiable property or letters of credit.
                The pro rata distribution principle is subject to the special
                distribution provisions set forth in framework 1 in appendix B of this
                part for cross-margin accounts and framework 2 in appendix B of this
                part for funds held outside of the U.S. or held in non-U.S. currency.
                 (6) Deliveries. (i) Commodity contracts may have terms that require
                a customer owning the contract:
                 (A) To make or take delivery of the underlying commodity if the
                customer holds the contract to a delivery position; or
                 (B) In the case of an option on a commodity:
                 (1) To make delivery upon exercise (as the buyer of a put option or
                seller of a call option); or
                 (2) To take delivery upon exercise (as seller of a put option or
                buyer of a call option).
                 (ii) Depending upon the circumstances and relevant market, delivery
                may be effected via a delivery account, a futures account, a foreign
                futures account or a cleared swaps account, or, when the commodity
                subject to delivery is a security, in a securities account (in which
                case property associated with the delivery held in a securities account
                is not part of any customer account class for purposes of this part).
                 (iii) Although commodity contracts with delivery obligations are
                typically offset before reaching the delivery stage (i.e., prior to
                triggering bilateral delivery obligations), when delivery obligations
                do arise, a delivery default could have a disruptive effect on the cash
                market for the commodity and adversely impact the parties to the
                transaction. This part therefore sets out special provisions to address
                open commodity contracts that are settled by delivery, when those
                positions are nearing or have entered into a delivery position at the
                time of or after the filing date. The delivery provisions in this part
                are intended to allow deliveries to be completed in accordance with the
                rules and established practices for the relevant commodity contract
                market or clearing organization, as applicable and to the extent
                permitted under this part.
                 (iv) In a proceeding in which the debtor is a futures commission
                merchant, the delivery provisions in this part reflect policy
                preferences to:
                 (A) Liquidate commodity contracts that settle via delivery before
                they move into a delivery position; and
                 (B) When such contracts are in a delivery position, to allow
                delivery to occur, where practicable, outside administration of the
                debtor's estate.
                 (v) The delivery provisions in this part apply to any commodity
                that is subject to delivery under a commodity contract, as the term
                commodity is defined in section of 1a(9) of the Act, whether the
                commodity itself is tangible or intangible, including agricultural
                commodities as defined in Sec. 1.3 of this chapter, other non-
                financial commodities (such as metals or energy commodities) covered by
                the definition of exempt commodity in section 1a(20) of the Act, and
                commodities that are financial in nature (such as foreign currencies)
                covered by the definition of excluded commodity in section 1a(19) of
                the Act. The delivery provisions also apply to virtual currencies that
                are subject to delivery under a commodity contract.
                 (d) Scope--(1) Proceedings--(i) Certain commodity broker
                proceedings under subchapter IV of chapter 7 of the Bankruptcy Code.
                (A) Section 101(6) of the Bankruptcy Code recognizes ``futures
                commission merchants'' and ``foreign futures commission merchants,'' as
                those terms are defined in section 761(12) of the Bankruptcy Code, as
                separate categories of commodity broker. The definition of commodity
                broker in Sec. 190.01, as it applies to a commodity broker that is a
                futures commission merchant under the Act, also covers foreign futures
                commission merchants because a foreign futures commission merchant is
                required to register as a futures commission merchant under the Act.
                 (B) 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 as of December 8, 2020.
                 Note 1 to paragraph (b)(1)(i)(B). The Commission intends to adopt
                rules with respect to commodity options dealers or leverage transaction
                merchants, respectively, at such time as an entity registers as such.
                 (ii) Futures commission merchants subject to a SIPA proceeding.
                Pursuant to section 7(b) of SIPA, 15 U.S.C. 78fff-1(b), the trustee in
                a SIPA proceeding, where the debtor also is 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 the provisions
                of SIPA or as otherwise ordered by the court. This part therefore 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 a futures
                commission merchant.
                 (iii) Commodity brokers subject to an FDIC proceeding. Section
                5390(m)(1)(B) of title 12 of the United States Code provides that the
                FDIC 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 in connection with the liquidation of a covered
                financial company or a bridge financial company (as those terms are
                defined in section 5381(a) of title 12) that is a commodity broker as
                if such person were a debtor for purposes of subchapter IV, except as
                specifically provided in section 5390 of title 12. This part therefore
                shall serve as guidance as to such distribution of property in a
                proceeding in which the FDIC is acting as a receiver pursuant to title
                II of the Dodd-Frank Wall Street Reform and Consumer Protection Act
                with respect to a covered financial company or bridge financial company
                that is a commodity broker whose liquidation otherwise would be
                administered by a trustee under subchapter IV of chapter 7 of the
                Bankruptcy Code.
                 (2) Account class and implied trust limitations. (i) The trustee
                may not recognize any account class that is not one of the account
                classes enumerated in Sec. 190.01.
                 (ii) No property that would otherwise be included in customer
                property, as defined in Sec. 190.01, shall be excluded from customer
                property because such property is considered to be held in a
                constructive, resulting, or other trust that is implied in equity.
                 (3) Commodity contract exclusions. For purposes of this part, the
                following are excluded from the term ``commodity contract'':
                 (i) Options on commodities (including swaps subject to regulation
                under part 32 of this chapter) that are not centrally cleared by a
                clearing organization or foreign clearing organization.
                 (ii) Transactions, contracts or agreements that are classified as
                ``forward contracts'' under the Act pursuant to the exclusion from the
                term ``future delivery'' set out in section 1a(27) of the Act or the
                exclusion from the definition of a ``swap'' under section
                [[Page 19424]]
                1a(47)(B)(ii) of the Act, in each case that are not centrally cleared
                by a clearing organization or foreign clearing organization.
                 (iii) Security futures products as defined in section 1a(45) of the
                Act when such products are held in a securities account.
                 (iv) Any off-exchange retail foreign currency transaction, contract
                or agreement described in sections 2(c)(2)(B) or (C) of the Act.
                 (v) Any security-based swap or other security (as defined in
                section 3 of the Exchange Act), but a security futures product or a
                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 this part is not so excluded.
                 (vi) Any off-exchange retail commodity transaction, contract or
                agreement described in section 2(c)(2)(D) of the Act, unless such
                transaction, contract or agreement is traded on or subject to the rules
                of a designated contract market or foreign board of trade as, or as if,
                such transaction, contract, or agreement is a futures contract.
                 (e) Construction. (1) A reference in this part to a specific
                section of a Federal statute or specific regulation refers to such
                section or regulation as the same may be amended or superseded.
                 (2) Where they differ, the definitions set forth in Sec. 190.01
                shall be used instead of defined terms set forth in section 761 of the
                Bankruptcy Code. In many cases, these definitions are based on
                definitions in parts 1, 22, and 30 of this chapter. Notwithstanding the
                use of different defined terms, the regulations in this part are
                intended to be consistent with the provisions and objectives of
                subchapter IV of chapter 7 of the Bankruptcy Code.
                 (3) In the context of portfolio margining and cross margining
                programs, commodity contracts and associated collateral will be treated
                as part of the account class in which, consistent with part 1, 22, 30,
                or 39 of this chapter, or Commission Order, they are held.
                 (i) Thus, as noted in paragraph (2) of the definition of account
                class in Sec. 190.01, where open 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 collateral as part
                of, and consistent with the regulations applicable to, the second
                account class.
                 (ii) The concept in paragraph (e)(3)(i) of this section, that the
                rules of the ``home field'' will apply, also pertains to securities
                positions that are, pursuant to an approved cross margining program,
                held in a commodities account class (in which case the rules of that
                commodities account class will apply) and to commodities positions that
                are, pursuant to an approved cross-margining program, held in a
                securities account (in which case, the rules of the securities account
                will apply, consistent with section 16(2)(b)(ii) of SIPA, 15 U.S.C.
                78lll(2)(b)(ii)).
                Sec. 190.01 Definitions.
                 For purposes of this part:
                 Account class:
                 (1) Means one or more of each of the following types of accounts
                maintained by a futures commission merchant or clearing organization
                (as applicable), each type of which must be recognized as a separate
                account class by the trustee:
                 (i) Futures account means:
                 (A) With respect to public customers, the same definition as set
                forth in Sec. 1.3 of this chapter.
                 (B) With respect to non-public customers:
                 (1) With respect to a futures commission merchant, an account
                maintained on the books and records of the futures commission merchant
                for the purpos