[Federal Register: November 30, 2004 (Volume 69, Number 229)]
[Rules and Regulations]
[Page 69510-69511]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30no04-5]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 190
Interpretative Statement Regarding Funds Determined To Be Held in
the Futures Account Type of Customer Account Class
AGENCY: Commodity Futures Trading Commission.
ACTION: Interpretative statement.
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SUMMARY: This interpretation by the Commodity Futures Trading
Commission is issued to clarify the appropriate means by which to
allocate customer funds held by an insolvent Futures Commission
Merchant (FCM) to account classes (as such term is defined in section
190.01(a) of the Commission's Regulations (17 CFR 190.01(a)) in cases
where money, securities or other property margining, guaranteeing or
securing futures contracts traded on non-domestic boards of trade has
been deposited, pursuant to a Commission Order, in a segregated account
established pursuant to Regulation 1.20 (17 CFR 1.20).
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, Division of Clearing and Intermediary Oversight, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581. Telephone: (202) 418-5092; e-mail
rwasserman@cftc.gov.
* * * * *
Section 20 of the Commodity Exchange Act \1\ empowers the
Commission to provide by rule or regulation how the net equity of a
customer is to be determined:
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\1\ 7 U.S.C. 24.
``* * * 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--(1) that certain cash,
securities, other property, or commodity contracts are to be
included in or excluded from customer property or member property; *
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* * and (5) how the net equity of a customer is to be determined.''
Subchapter IV of the Bankruptcy Code (concerning Commodity Brokers) has
the same effect, explicitly subjecting its definition of ``net equity''
to ``such rules and regulations as the Commission promulgates under the
[Commodity Exchange ] Act.'' \2\
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\2\ 11 U.S.C. 761(17).
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The Commission has exercised this power in promulgating Part 190.
In particular, Net Equity is defined in Regulation 190.07. This
definition includes the concept of ``account classes.'' For example,
Sec. 190.07(b)(2) directs that one of the steps in calculating a
customer's net equity is to ``[a]ggregate the credit and debit equity
balances of all accounts of the same class held by a customer in the
same capacity.'' Similarly, Sec. 190.07(c) defines the ``funded
balance'' as ``a customer's pro rata share of the customer estate
account class available as of the primary liquidation date for
distribution to customers of the same class.'' Commission Regulation
190.01(a) defines account class as follows:
each of the following types of customer accounts which must be
recognized as a separate class of account by the trustee: futures
accounts, foreign futures accounts, leverage accounts, commodity
option accounts, and delivery accounts as defined in Sec.
190.05(a)(2): Provided, however, That to the extent that the equity
balance, as defined in Sec. 190.07, of a customer in a commodity
option, as defined in Sec. 1.3(hh) of this chapter, may be
commingled with the equity balance of such customer in any domestic
commodity futures contract pursuant to regulations under the Act,
the aggregate shall be treated for purposes of this part as being
held in a futures account.
There is a potential ambiguity in how this provision should be
applied in two related contexts. First, where a customer account holds
foreign futures contracts, and/or property margining, guaranteeing, or
securing such contracts, but where the collateral has, pursuant to a
Commission order, been segregated in accordance with Commission
Regulation 1.20 in the
[[Page 69511]]
manner of a domestic futures account, the appropriate ``type of
account'' is ambiguous. One can distinguish between a ``foreign
future'' which is characterized by the place in which it is executed,
and a ``foreign futures account'' which may be characterized by the
calculation of the applicable segregation requirements. A ``futures
account'' is also characterized by the calculation of the applicable
segregation requirement. If the Commission grants Section 4d relief to
permit funds supporting foreign futures to be deposited in a ``futures
account'' calculated pursuant to Section 4d and Commission Regulation
1.20, then it would appear apposite to treat claims on those funds as
belonging to the futures account class of accounts.
Second, where a customer account contains both foreign futures
contracts and domestic futures contracts, with those positions margined
on a portfolio basis, such that the same property margins, guarantees,
or secures both types of contracts in one account, the appropriate
allocation of claims on the collateral between ``futures contracts''
and ``foreign futures contracts'' is, again, ambiguous.
As the Commission noted in the proposing release for Commission
Regulation 190.01,
``The allocation provisions are intended to prefer customers for
which segregation is undertaken over * * * customers holding
accounts of a class for which segregation is not required * * * The
reason for identifying classes of customer accounts is to permit the
implementation of the principle of pro rata distribution so that the
differing segregation requirements with respect to different classes
of accounts benefit customer claimants based on the class of account
for which they were imposed.'' 46 FR 57535, 57536 (November 24,
1981).
Thus, the Commission intended the customers who contribute to a
segregated pool to benefit from that pool. Later in that release the
Commission explained that the distinction in treatment between account
classes sprang from the contrast in segregation requirements:
all property segregated on behalf of a particular class would be
allocated to the class on behalf of which it is segregated. This
approach is consistent with the fact that differing segregation
requirements exist for different classes of accounts. Obviously,
much of the benefit of segregation would be lost if property
segregated on behalf of a particular account class could be
allocated to pay the claims of customers of a different account for
which less stringent segregation provisions were in effect. 46 FR at
57554.
Again, the Commission contemplated that customers would benefit
from the stringency of the segregation regime to which their funds were
subject. To the extent that, subject to a Commission order, customer
margin supporting non-domestic trades is subject to the full stringency
of segregation under Commission Regulation 1.20 rather than the less
stringent Commission Regulation 30.7 secured amount calculation, it is
consistent with the Commission's intentions in adopting the Part 190
scheme that the property in the accounts of these customers be treated
as futures accounts. Conversely, it would be inconsistent with the
Commission's intentions to deny customers who had contributed property
that was, in accordance with Commission Orders, deposited into accounts
segregated pursuant to Commission Regulation 1.20, any participation in
those accounts based on those contributions.
Thus, the Commission intended that the customers who contribute to
a segregated pool benefit from that pool. If customers do not
contribute to a pool, they should not benefit from that pool. The
Commission's intent to tie distribution of funds to the contribution of
those funds, and the ambiguity of how to allocate claims on collateral
that supports both futures and foreign futures positions placed in
domestic segregation, both support the interpretation that, in the
event of an insolvency, collateral supporting foreign futures placed in
domestic segregation pursuant to Commission Order should be treated as
in a futures account, not a foreign futures account, for purposes of
Part 190. Thus, in a situation where by Commission order or direction,
customers are required or allowed to contribute to a Commission
Regulation 1.20 segregated account, those customers also should benefit
from the distribution of that account proportionately to their
contributions in the event of an insolvency. Such claims should be
treated as encompassed within the futures account class as opposed to
the foreign futures account class or an other account class.
* * * * *
Issued in Washington, DC, on October 21, 2004, by the Commodity
Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-26386 Filed 11-29-04; 8:45 am]
BILLING CODE 6351-01-M