The CFTC unanimously approved amendments intended to "comprehensively update" its bankruptcy regulations (Part 190 of the CFTC regulations) to "reflect current market practices and lessons learned from past commodity broker bankruptcies."

The final rules follow a proposal initially issued in April and a supplemental proposal from September. The CFTC indicated that commenters on the original proposal largely supported the revisions to the bankruptcy rules, with several suggestions regarding particular elements, and that the CFTC has adopted "many though not all, of these suggestions." The CFTC did not adopt the supplemental proposal and, according to Chair Heath Tarbert, will engage in "further analysis and development before proposing this, or any other, alternative approach."

The CFTC highlighted, among other things, the following "major themes" in the final rules:

  • further support for the general policy that (i) shortfalls in customer-segregated assets should be made up of futures commission merchant ("FCM") general assets, (ii) "public" customers are favored over "non-public" customers and (iii) public customers are entitled inter se to the pro rata distribution of their claims;
  • changes that continue the CFTC policy preference for the "porting" of public customer positions (rather than liquidation); and
  • the adoption of comprehensive rules governing the bankruptcy of a derivatives clearing organization ("DCO"), including the following:
    • a trustee would generally be required to follow preexisting DCO default management rules and plans previously approved by the CFTC;
    • movement away from paper-based communications to electronic-based communications.
    • technical and cross-reference changes to reflect various market and regulatory changes since the rules were last amended in significant part; and
    • a grant of greater discretion to trustees, among other things, based on the view that speed and the need for quick action are necessary, with the CFTC specifically proposing that "it is more important to be cost-effective and prompt in the distribution of customer property than it is to value each customer's entitlements on an individual basis";
    • amendments to the treatment of letters of credit ("LoCs") as collateral (pre- and post-insolvency) under new Rule 1.43 to ensure that customers posting LoCs suffer the same proportional losses as customers posting cash and other assets;
    • the notation of the applicability of the Securities Investor Protection Act and the Orderly Liquidation Authority of Title II of Dodd-Frank, as applicable in certain circumstances;
    • resources intended to flow through to members as part of "daily settlement" should be used for that purpose rather than be allocated to the general estate.

The final rule goes into effect 30 days after its publication in the Federal Register. The compliance date for new Rule 1.43 for LoCs accepted, and customer agreements entered into, by an FCM within 30 days of the final rule's publication in the Federal Register is one year following the rule's publication in the Federal Register.

CFTC Commissioner Statements

CFTC Chair Heath Tarbert and CFTC Commissioners Brian Quintenz, Rostin Behnam, Dawn Stump and Dan Berkovitz praised the final rule. Mr. Quintenz noted concerns raised by asset managers relating to the recognition of existing DCO rules in insolvencies and urged an "on-going dialogue" between DCOs, their members and customers to address these concerns. Mr. Berkovitz highlighted two particular concerns: (i) those regarding the level of discretion given to bankruptcy trustees and (ii) the direction for a trustee of an insolvent DCO to, within reasonable discretion, follow the insolvent DCO's wind-down plans.

Commentary

In reading the tea leaves from the Commissioners' statements, the CFTC chose not to let the perfect be the enemy of the good in this action. It is likely the case that there was an incentive for the agency to address the rulemaking before the change in administration next year. For example: (i) Chair Tarbert noted the need for further work as to matters covered by the supplemental proposal; (ii) Commissioner Quintenz took time to urge further industry dialogue; and (iii) Commissioner Behnam supported the final rule while suggesting it was adopted too quickly. In short, while the CFTC has taken major steps to change its insolvency regime, a handful of key issues will likely remain subject to discussion and potential agency action in the near future.

Primary Sources

  1. CFTC Voting Draft: Part 190 Bankruptcy Regulations
  2. CFTC Press Release: CFTC Approves Two Final Rules at December 8 Open Meeting
  3. CFTC Statement, Heath P. Tarbert: Statement in Support of Long-Awaited Updates to the CFTC's Bankruptcy Regime
  4. CFTC Statement, Brian Quintenz: Statement regarding Final Rule on Part 190 Bankruptcy Regulations
  5. CFTC Statement, Rostin Behnam: Statement regarding Part 190 Bankruptcy Regulations
  6. CFTC Statement, Dawn D. Stump: Statement regarding Amendments to Part 190
  7. CFTC Statement, Dan M. Berkovitz: Statement on Bankruptcy Rule Amendments

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