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e8-23277

  • FR Doc E8-23277[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

    Last Updated: October 2, 2008



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