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[Federal Register: July 30, 2010 (Volume 75, Number 146)]
[Rules and Regulations]               
[Page 44890-44893]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jy10-6]                         

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 190

RIN 3038-AC90

 
Operation, in the Ordinary Course, of a Commodity Broker in 
Bankruptcy

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'') 
is amending its regulations regarding the operation of a commodity 
broker in bankruptcy, in order to permit the trustee in such bankruptcy 
to operate, with the written permission of the Commission, the business 
of such commodity broker in the ordinary course, including the purchase 
or sale of new commodity contracts on behalf of the customers of such 
commodity broker, under appropriate circumstances, as determined by the 
Commission.

DATES: Effective Date: The final rules are effective as of August 30, 
2010.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, Division of Clearing and Intermediary Oversight, 202-418-
5092, rwasserman@cftc.gov; or Alicia L. Lewis, Attorney-Advisor, 
Division of Clearing and Intermediary Oversight, 202-418-5862, 
alewis@cftc.gov; Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On December 16, 2009, the Commission published a Notice of Proposed 
Rulemaking, which proposed to amend Regulation 190.04(d) to permit a 
trustee, under appropriate circumstances, to operate the business of a 
commodity broker in bankruptcy in the ordinary course, including the 
purchase or sale of new commodity contracts on behalf of the customers 
of such commodity broker (the ``Notice'').\1\ The proposed rule stated 
that the appropriateness of a particular set of circumstances would be 
determined by the Commission in its discretion, and such operation 
would require the written permission of the Commission.
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    \1\ 74 FR 66598 (Dec. 16, 2009).
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    The public comment period on the Notice ended on January 15, 2010. 
The Commission received two comments \2\ during the comment period: (i) 
One from the trustee of a futures commission merchant (``FCM'') that 
was sold as a going concern in bankruptcy\3\ and (ii) one from a 
futures industry trade association.\4\
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    \2\ For purposes of this release, a comment letter is referenced 
by: (i) Its author, (ii) its file number (as shown in the comment 
file associated with the Notice on the Commission's Web site), and 
(iii) the page (if applicable). The comment file associated with the 
Notice is available at http://www.cftc.gov/LawRegulation/FederalRegister/CommentFiles/09-034.html.
    \3\ Albert Togut of Togut, Segal & Segal LLP (Trustee for Refco, 
LLC) (``Refco Trustee'') (CL01).
    \4\ The Futures Industry Association (representing the commodity 
futures and options industry) (``FIA'') (CL02).
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    Collectively, the comments raise the following five (5) concerns 
with the Notice:
     The Commission's proposed rule is premature.
     The Commission staff should not be responsible for 
operating the FCM-related business of an insolvent FCM/broker-dealer.
     The Commission's proposed rule is overly broad as it does 
not specify all circumstances the Commission will consider in 
authorizing a trustee to operate the business of an FCM and provide the 
public with an opportunity to comment on these circumstances.
     The Commission should work with the Securities and 
Exchange Commission and the Securities Investor Protection Corporation 
to develop uniform procedures to guide a trustee of an insolvent FCM/
broker-dealer in the absence of legislative changes.
     The Commission should grant immunity to a bankruptcy 
trustee, who is to operate the business of a commodity broker, in the 
limited operation of the business.
    The Commission will address below each of the five concerns.

II. Concern That the Commission's Proposed Rule Is Premature

    FIA stated that further action on the proposed rule is premature as 
the House of Representatives has passed a financial services reform 
bill which instructs the Commission, in coordination with the 
Securities and Exchange Commission (``SEC'') and several bank 
regulatory authorities, to recommend, within 180 days of the bill's 
enactment, legislative changes to the federal insolvency laws to, among

[[Page 44891]]

others, clarify and harmonize the insolvency law applicable to entities 
that are both FCMs and broker-dealers.\5\ Moreover, FIA urged the 
Commission and the other regulatory authorities to perform a 
comprehensive review of the relevant provisions of the Bankruptcy Code 
(``Code'') and the Commission's bankruptcy rules even if the bill does 
not become law. FIA believes that it would be inappropriate to adopt 
amendments to the Commission's bankruptcy rules when such a review and 
recommendations for comprehensive reform are imminent.
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    \5\ See H.R. 4173, 111th Cong. Sec.  3006 (2009); FIA CL02 at 3.
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    While the FIA comment was relevant when filed, the Commission notes 
that the provision referred to is no longer pending. Moreover, the 
amendments to Regulation 190.04(d) are narrowly designed to address the 
manner in which customer accounts are handled, under appropriate 
circumstances, in a commodity broker bankruptcy, which may occur at any 
time. Accordingly, the Commission will not defer the adoption of the 
final rule based on this concern.
    The Commission notes, that currently, even if a qualified 
transferee for an insolvent commodity broker is identified prior to a 
bankruptcy filing by a commodity broker, a number of steps are 
required, as a practical matter, after the filing of the bankruptcy 
petition and prior to the transfer. The completion of these steps 
requires a measurable period of time, and may occur while the financial 
markets are open and active.\6\
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    \6\ The Commission notes that many markets are open for trading 
five (5) days a week, twenty-three (23) hours a day. Therefore, an 
FCM with world-wide operations may be open and trading continuously 
between Sunday afternoon and Friday evening in the United States.
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    The adoption of the rule would benefit customers of a commodity 
broker in bankruptcy, under appropriate circumstances, by permitting 
those customers to manage their accounts during this time. In addition 
to the flexibility given to customers, the adoption of the rule would 
also provide the Commission with the latitude to handle unanticipated 
events.
    United States futures customers in the Refco \7\ and Lehman \8\ 
bankruptcies were well protected: Due to the timing of the filing (late 
in the day on Friday), and, in Lehman, action by the District Court, 
transfers of all customer accounts took place without a time period 
during which the markets were open but customers were unable to manage 
their accounts. These circumstances will not necessarily be replicated 
in a future bankruptcy. As a result, the Commission believes that the 
adoption of the rule would provide it with the flexibility and 
discretion necessary to protect customers by responding promptly to 
exigent circumstances in future bankruptcies.\9\
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    \7\ See In re: Refco, LLC, No. 05-60134-rdd, Docket No. 5 
(Bankr. S.D.N.Y. Nov. 25, 2005); see also 74 FR 66598, 66599 (Dec. 
16, 2009).
    \8\ See S.I.P.C. v. Lehman Brothers, Inc., No. 08-8119, Docket 
No. 3 (S.D.N.Y. Sept. 19, 2008); see also 74 FR 66598, 66600 (Dec. 
16, 2009).
    \9\ The Commission notes that the permission granted to the 
trustee to operate the business in bankruptcy does not compel a 
clearinghouse or clearing broker to accept and clear the commodity 
broker's trades.
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III. Concern That Commission Staff Would Be Responsible for Operating 
the FCM-Related Business of an Insolvent FCM/Broker-Dealer

    FIA noted the trustee selected by the Securities Investor 
Protection Corporation (``SIPC'') to oversee an insolvent FCM/broker-
dealer may not have sufficient knowledge or experience to operate the 
FCM-related business of a FCM/broker-dealer.\10\ FIA further noted that 
if the rule is adopted, the Commission's Division of Clearing and 
Intermediary Oversight (``DCIO'') would be responsible for operating 
the FCM-related portion of the FCM/broker-dealer business by default. 
FIA questioned the appropriateness of DCIO undertaking this 
responsibility and whether DCIO staff had the requisite expertise to do 
so.
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    \10\ FIA CL02 at 4. FIA noted that 43 of the 50 largest FCMs are 
also registered broker-dealers. Therefore, SIPC would appoint the 
trustee for an insolvent FCM/broker-dealer.
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    In the Commission's experience, trustees appointed by SIPC and the 
U.S. Trustees, and their legal counsel, have financial services 
industry experience and have engaged in formal and informal discussions 
with Commission staff regarding FCMs business as such. The Commission 
expects that such communications will occur in future bankruptcies.
    The Commission also notes that, pursuant to the rule under 
consideration, before a trustee can operate the business of a commodity 
broker in bankruptcy in the ordinary course (including entering into 
new contracts on behalf of customers), the trustee must obtain the 
written permission of the Commission. Moreover, the Commission would 
have the opportunity to determine if the circumstances were appropriate 
to allow such permission. The proposed rule does not mandate the 
Commission to grant this permission. Therefore, the Commission will 
consider the circumstances in deciding whether to permit the trustee to 
operate the commodity broker's business in the ordinary course.

IV. Concern That the Commission's Proposed Rule Is Overly Broad as It 
Does Not Specify All Circumstances the Commission Will Consider in 
Authorizing a Trustee To Operate the Business of an FCM and Provide the 
Public With an Opportunity To Comment on These Circumstances

    In the Notice, the Commission stated that it may consider the 
following factors in authorizing a trustee to operate the business of 
an FCM: ``(1) Whether the commodity broker has entered into an 
agreement providing for the imminent transfer of its customer accounts 
to an entity that is ready, willing and able to accept such transfer 
promptly; (2) whether the commodity broker has sufficient capital, at 
the time it becomes subject to bankruptcy proceedings, to continue 
operating its business in the ordinary course pending the transfer; and 
(3) whether a commodity broker will have sufficient capital, after the 
sale of its assets (including its FCM business), to continue operating 
its business in the ordinary course until all of its customer accounts 
have been transferred.'' \11\ FIA stated that the first and second 
factors ``should be viewed as necessary conditions precedent to the 
exercise of such authority.'' \12\ FIA further stated that ``[i]f the 
Commission believes there are other circumstances in which it may be 
appropriate to authorize a trustee to operate the business of the FCM, 
the public should have an opportunity to comment on those 
circumstances.'' \13\
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    \11\ 74 FR 66598, 66600 (Dec. 16, 2009).
    \12\ FIA CL02 at 5.
    \13\ Id.
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    As each bankruptcy is unique, the Commission notes that future 
bankruptcies of commodity brokers may present new factors for 
consideration. Therefore, it would be impracticable for the Commission 
to present a comprehensive list of factors for public comment. The 
proposed rule seeks to address the distinctiveness of each bankruptcy 
by providing the Commission and trustees with a degree of flexibility 
in dealing with unanticipated events with rapidly-changing 
circumstances.

[[Page 44892]]

V. Recommendation That the Commission Work With the Securities and 
Exchange Commission and the Securities Investor Protection Corporation 
To Develop Uniform Procedures To Guide a Trustee of an Insolvent FCM/
Broker-Dealer in the Absence of Legislative Changes

    FIA recommends that the Commission, SIPC and the SEC work together 
to develop uniform written guidance for a trustee of an FCM/broker-
dealer. While the Commission has engaged in discussions with the SEC 
and SIPC concerning FCM/broker-dealer bankruptcies and contingency 
planning, and Part 190 of the Commission's regulations contains 
extensive guidance for the conduct of an FCM bankruptcy (which is also 
applicable to a SIPC trustee in a SIPA proceeding\14\), the Commission 
believes that the development of specific uniform procedures may be 
impracticable due to the differences between the regimes and to the 
fact that each bankruptcy has its own unique set of facts and 
circumstances.
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    \14\ See Securities Investor Protection Act of 1970 Sec.  7(b), 
15 U.S.C. 78fff-1(b).
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VI. Recommendation That the Commission Grant Immunity to a Bankruptcy 
Trustee Limited to Its Operation of a Commodity Broker's Business in 
Bankruptcy

    The Refco Trustee recommends that Commission expand the proposed 
rule to provide the bankruptcy trustee with relief from personal 
liability and immunity from any suit for personal liability for actions 
or inactions taken by the trustee in good faith in the operation of the 
commodity broker's business. Specifically, the Refco Trustee notes that 
an unintended consequence of the proposed rule is that, ``currently, a 
trustee in bankruptcy may be sued by third parties for acts or 
omissions in connection with the operation of a debtor's business.'' 
\15\ The Refco Trustee expressed concern that the potential for such 
liability to a trustee would deter qualified individuals from being 
willing to serve in that capacity.
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    \15\ Refco Trustee CL01 at 4 (discussing 28 U.S.C. 959(a)).
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    The Commission does not have the authority to grant such immunity. 
However, as the Refco Trustee noted, a trustee in bankruptcy could seek 
a court order which includes such immunity.\16\
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    \16\ Id.
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VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \17\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small businesses. The final rule provides a limited 
exception to Regulation 190.04(d)(2), by permitting a trustee to 
operate, with the written permission of the Commission, the business of 
a commodity broker in bankruptcy in the ordinary course, including the 
purchase or sale of new commodity contracts on behalf of the customers 
of such commodity broker. The final rule does not impose a regulatory 
burden on either a commodity broker pre-bankruptcy or a trustee post-
bankruptcy. Moreover, the final rule will affect only FCMs (including 
certain foreign futures commission merchants).\18\ The Commission has 
previously established certain definitions of ``small entities'' to be 
used by the Commission in evaluating the impact of its regulations on 
such entities in accordance with the RFA.\19\ The Commission has 
previously determined that FCMs are not small entities for the purpose 
of the RFA.\20\ Accordingly, pursuant to 5 U.S.C. 605(b), the Chairman 
certifies, on behalf of the Commission, that the final rule promulgated 
herein will not have a significant economic impact on a substantial 
number of small entities.
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    \17\ 5 U.S.C. 601 et seq.
    \18\ The proposed rule may apply, in the future, to other 
commodity brokers that execute trades and carry accounts for 
clearing on behalf of customers--namely, commodity options dealers 
and leverage transaction merchants. Currently, no such commodity 
brokers exist. Therefore, even if such commodity brokers would 
constitute ``small entities'' for purposes of the RFA, the proposed 
rule can have no current impact on such commodity brokers.
    \19\ 47 FR 18618 (Apr. 30, 1982).
    \20\ Id. at 18619.
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B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \21\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. The 
final rule promulgated in the release does not require the new 
collection of information on the part of any entities that would be 
subject to the final rule. Accordingly, for purposes of the PRA, the 
Commission certifies that the final rule promulgated in this release 
would not impose any new reporting or recordkeeping requirements.
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    \21\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis

    Section 15(a) of the Act \22\ requires that the Commission, before 
promulgating a regulation under the Act or issuing an order, consider 
the costs and benefits of its action. By its terms, Section 15(a) of 
the Act does not require the Commission to quantify the costs and 
benefits of a new regulation or to determine whether the benefits of 
the regulation outweigh its costs. Rather, Section 15(a) of the Act 
simply requires the Commission to ``consider the costs and benefits'' 
of its action.
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    \22\ 7 U.S.C. 19.
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    Section 15(a) of the Act further specifies that costs and benefits 
shall be evaluated in light of the following considerations: (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. Accordingly, the Commission could, in its 
discretion, give greater weight to any one of the five considerations 
and could, in its discretion, determine that, notwithstanding its 
costs, a particular regulation was necessary or appropriate to protect 
the public interest or to effectuate any of the provisions or to 
accomplish any of the purposes of the Act.
    The Commission has evaluated the costs and benefits of the final 
rule promulgated in this release, in light of (i) the comments that it 
has received on the Notice and (ii) the specific considerations 
identified in Section 15(a) of the Act, as follows:
1. Protection of Market Participants and the Public
    In the event of the bankruptcy of a commodity broker, the final 
rule promulgated in this release would benefit the customers of such 
commodity broker, by providing them with the opportunity, under 
appropriate circumstances, to manage their accounts prior to the 
transfer of such accounts to a new commodity broker.
2. Efficiency and Competition
    The final rule promulgated in this release is not expected to have 
an effect on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
    The final rule promulgated in this release will promote financial 
integrity of the futures markets by providing customers of a commodity 
broker in bankruptcy with the opportunity, under appropriate 
circumstances, to manage

[[Page 44893]]

their accounts prior to the transfer of such accounts to a new 
commodity broker.
4. Sound Risk Management Practices
    The final rule promulgated in this release is not expected to have 
a direct effect on the risk management practices of commodity brokers.
5. Other Public Considerations
    Recent events, such as the Refco and Lehman proceedings, have 
demonstrated that the final rule is necessary and prudent.
    Accordingly, after considering the five factors enumerated in the 
Act, the Commission has determined to promulgated the final rules as 
set forth below.

List of Subjects in 17 CFR Part 190

    Bankruptcy, Brokers, Commodity Futures.

0
For the reasons stated in the preamble, the Commission proposes to 
amend 17 CFR part 190 as follows:

PART 190--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for Part 190 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24, 
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise 
noted.

0
2. Add new paragraph (d)(3) to Section 190.04 to read as follows:

Sec.  190.04  Operation of the debtor's estate--general.

* * * * *
    (d) * * *
    (3) Exception to Liquidation Only. Notwithstanding paragraph (d)(2) 
of this section, the trustee may, with the written permission of the 
Commission, operate the business of the debtor in the ordinary course, 
including the purchase or sale of new commodity contracts on behalf of 
the customers of the debtor under appropriate circumstances, as 
determined by the Commission.
* * * * *

    Issued in Washington, DC on July 23, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-18790 Filed 7-29-10; 8:45 am]
BILLING CODE 6351-01-P
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