[Federal Register: October 2, 2008 (Volume 73, Number 192)]
[Rules and Regulations]
[Page 57235-57237]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02oc08-3]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 190
Interpretative Statement Regarding Funds Related to Cleared-Only
Contracts Determined To Be Included in a Customer's Net Equity
AGENCY: Commodity Futures Trading Commission.
ACTION: Interpretative statement.
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SUMMARY: This interpretation by the Commodity Futures Trading
Commission (``Commission'') is issued to clarify the appropriate
treatment under the commodity broker provisions of the Bankruptcy Code
and Part 190 of the Commission's Regulations of claims arising from
contracts (``cleared-only contracts'') that, although not executed or
traded on a Designated Contract Market or a Derivatives Transaction
Execution Facility, are subsequently submitted for clearing through a
Futures Commission Merchant (``FCM'') to a Derivatives Clearing
Organization (``DCO'').
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, rwasserman@cftc.gov, (202) 418-5092, or Amanda Olear,
Attorney-Advisor, Division of Clearing and Intermediary Oversight,
aolear@cftc.gov, (202) 418-5283, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
[[Page 57236]]
Section 20 of the Commodity Exchange Act \1\ (Act) empowers the
Commission to provide 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; * * * and (5) how the net
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equity of a customer is to be determined.
Subchapter IV of Chapter 7 of the Bankruptcy Code, governing commodity
brokers, has the same effect, explicitly basing the definition of ``net
equity'' on ``such rules and regulations as the Commission promulgates
under the 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 of
its regulations.\3\ In particular, the term ``net equity'' is defined
by Commission Regulation 190.07 \4\ as:
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\3\ 17 CFR Part 190.
\4\ 17 CFR 190.07.
the total claim of a customer against the estate of the debtor based
on the commodity contracts held by the debtor for or on behalf of
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such customer less any indebtedness of the customer to the debtor.
Therefore, the determination of whether claims relating to cleared-only
contracts in Section 4d accounts are properly includable within the
meaning of ``net equity'' is dependent upon whether an entity holding
such claims is properly considered a ``customer.'' This, in turn, as
discussed below, requires an analysis of whether such claims are
derived from ``commodity contracts.''
Cleared-Only Transactions as Commodity Contracts
Commission Regulation 190.01(k) defines ``customer'' through
incorporation by reference of the definition of the term appearing in
Section 761(9) of the Bankruptcy Code, which provides, in relevant
part:
(9) ``Customer'' means--
(A) With respect to a futures commission merchant--
(i) Entity for or with whom such futures commission merchant
deals and holds a claim against such futures commission merchant on
account of a commodity contract made, received, acquired, or held by
or through such futures commission merchant in the ordinary course
of such future commission merchant's business as a futures
commission merchant from or for the commodity futures account of
such entity; or
(ii) Entity that holds a claim against such futures commission
merchant arising out of--
(I) The making, liquidation, or change in the value of a
commodity contract of a kind specified in clause (i) of this
subparagraph;
(II) A deposit or payment of cash, a security, or other property
with such futures commission merchant for the purpose of making or
margining such a commodity contract; or
(III) The making or taking of delivery on such a commodity
contract[.] \5\
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\5\ 11 U.S.C. 761(9) (emphasis added).
Therefore, for an entity to be considered a ``customer'' of an FCM,
such entity's claim must arise out of a ``commodity contract.'' \6\
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\6\ A similar analysis would apply to a customer of a clearing
organization (i.e., a clearing member).
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A ``commodity contract,'' as the term appears within the context of
Section 761(9), is defined in Section 761(4) of the Bankruptcy Code,
which states, in pertinent part:
(4) ``Commodity contract'' means--
(A) With respect to a futures commission merchant, contract for
the purchase or sale of a commodity for future delivery on, or
subject to the rules of, a contract market or board of trade[.] \7\
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\7\ 11 U.S.C. 761(4).
This definition contains two elements: (1) The nature of the contract;
and (2) the nature of the venue whose rules govern the contract.
With regard to the first element, over-the-counter contracts that
are cleared-only contracts are contracts for the purchase or sale of a
commodity for future delivery within the meaning of this section of the
Bankruptcy Code. When cleared, they are subject to performance bond
requirements, daily variation settlement, the potential for offset, and
final settlement procedures that are substantially similar, and often
identical, to those applicable to exchange-traded products at the same
clearinghouse. Cf. 11 U.S.C. 761(4)(F). Although the creation and
trading of these products is outside the Commission's jurisdiction, the
clearing of these products by FCMs and DCOs is within the Commission's
jurisdiction.
With regard to the second element, Section 761(7) of the Bankruptcy
Code states that a `` `contract market' means a registered entity,''
and Section 761(8), in turn, provides that a `` `registered entity' * *
* ha[s] the meaning[] assigned to [that] term[] in the [Commodity
Exchange] Act.'' \8\ Section 1a(29)(C) of the Act defines the term
``registered entity'' as including ``a derivatives clearing
organization registered under section 5b'' of the Act.\9\
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\8\ 11 U.S.C. 761(7) and (8).
\9\ 7 U.S.C. 1a(29)(C).
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Thus, when a contract is cleared through a DCO, such a contract
would be considered a ``commodity contract'' under Section 761(4) of
the Bankruptcy Code.\10\ Therefore, an entity with a claim based on a
cleared-only contract would be a ``customer'' within the meaning of
Section 761 of the Bankruptcy Code. Further, because Part 190 of the
Commission's Regulations defines ``customer'' as having the meaning set
forth in Section 761, such entity with a claim based on a cleared-only
contract would also be a ``customer'' for the purposes of Part 190 of
the Commission's Regulations. Based on the foregoing, such claims
arising out of cleared-only contracts are properly included within the
meaning of ``net equity'' for the purposes of Subchapter IV of the
Bankruptcy Code and Part 190 of the Commission's Regulations.
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\10\ Cf. H.R. REP. NO. 109-31(I) (2005) (emphasizing distinction
between definitions for purposes of Bankruptcy Code and for purposes
of other statutes).
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Portfolio Performance Bond as Net Equity
There is an alternative path to reach the same conclusion. In cases
where cleared-only contracts are held in a commodity futures account at
an FCM and margined as a portfolio with exchange-traded futures (i.e.,
where the Commission has issued an order pursuant to Section 4d(a)(2)
of the Commodity Exchange Act), assets margining that portfolio are
likely to be includable within ``net equity'' even if cleared-only
contracts were found not to be ``commodity contracts'' within the
meaning of the Bankruptcy Code and Part 190 of the Commission's
Regulations.
Where the assets in an entity's account margin (i.e.,
collateralize) both cleared-only contracts and exchange-traded futures,
the entirety of those assets serves as performance bond for each of the
exchange-traded futures and the cleared-only contracts. Therefore, (a)
a claim for those assets constitutes a claim ``on account of a
commodity contract made, received, acquired, or held by or through such
futures commission merchant in the ordinary course of such future
commission merchant's business as a futures commission merchant from or
for the commodity futures account of such entity;'' \11\ (b) the entity
qualifies as a ``customer'' within the meaning of the Bankruptcy Code
as a result of that claim; and (c) those margin assets are properly
included within that entity's net equity.
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\11\ Section 761(9)(A) of the Bankruptcy Code provides that an
entity holding such a claim is a ``customer.'' 11 U.S.C. 761(9)(A).
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The dynamics of futures trading render it unwise to distinguish
between
[[Page 57237]]
an account that currently is portfolio margined and one that was at one
time or is intended to be so in the future. Indeed, Subchapter IV of
the Bankruptcy Code includes as customers entities with certain claims
arising out of property that is not currently margining a commodity
contract. Specifically, Section 761(9)(A)(ii) provides that an entity
can qualify as a ``customer'' based on claims arising out of any of the
following: (I) The ``liquidation, or change in the value of a commodity
contract;'' (II) a deposit of property ``for the purpose of making or
margining * * * a commodity contract;'' or (III) ``the making or taking
of delivery of a commodity contract.'' Accordingly, there is no
requirement that the customer's assets be margining commodity contracts
on the day that the bankruptcy petition is filed. Therefore, all assets
contained in such an account are properly included within the
customer's net equity.
Account Classes
Part 190 of the Commission's Regulations divides accounts into
several classes, specifically: Futures accounts, foreign futures
accounts, leverage accounts, commodity option accounts, and delivery
accounts.\12\
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\12\ See 17 CFR 190.01.
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In October 2004, the Commission issued an interpretation regarding
the appropriate account class for funds attributable to contracts
traded on non-domestic boards of trade, and the assets margining such
contracts, that are included in accounts segregated in accordance with
Section 4d of the Act pursuant to Commission Order.\13\ In that
context, the Commission concluded that the claim is properly against
the Section 4d account class because customers whose assets are
deposited in such an account pursuant to Commission Order should
benefit from that pool of assets. The same rationale supports the
Commission's conclusion that a claim arising out of a cleared-only
contract, or the property margining such a contract, would be
includable in the futures account class where, pursuant to Commission
Order, the contract or property is included in an account segregated in
accordance with Section 4d of the Act.
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\13\ See Interpretative Statement Regarding Funds Determined To
Be Held in the Futures Account Type of Customer Account Class, 69 FR
69510 (Nov. 30, 2004).
Issued in Washington, DC, on September 26, 2008, by the
Commodity Futures Trading Commission.
David Stawick,
Secretary of the Commission.
Concurrence of Commission Michael V. Dunn CBOT Request for an Order
Under Section 4d of the Commodity Exchange Act Related to the Clearing
of OTC Ethanol Products
I concur with granting 4d relief to the Chicago Board of Trade
(CBOT) related to the clearing of OTC ethanol products while
reserving judgment as to whether the Commission in the future should
revisit the determination as to whether ethanol should be considered
an agricultural commodity.
Ethanol markets clearly impact agricultural markets as we all
realize. Even though I recognize that arguments can be made that
ethanol is an energy commodity because it is primarily used as a
source of energy, I don't think that should necessarily be the
deciding factor.
Ethanol is clearly an important part of our agricultural
economy. At some point, I think we may need to reconsider carefully
whether ethanol should be considered an agricultural commodity so
that it would be subject to the highest level of Commission
jurisdiction rather than the lesser jurisdiction that attends energy
commodities.
Despite this, I believe the order should be approved because the
conditions attending the 4d order will bring greater transparency
and accountability to the CBOT's ethanol swaps market than currently
exist.
[FR Doc. E8-23277 Filed 10-1-08; 8:45 am]
BILLING CODE 6351-01-P