[Federal Register Volume 66, Number 80 (Wednesday, April 25, 2001)]
[Rules and Regulations]
[Pages 20740-20745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10222]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 190

RIN 3038--AB67


Opting Out of Segregation

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: Pursuant to section 111 of the Commodity Futures Modernization 
Act of 2000, the Commodity Futures Trading Commission (``Commission'' 
or ``CFTC'') is adopting a new rule allowing futures commission 
merchants (``FCM'') to offer certain customers the right to elect not 
to have funds, that are being carried by the FCM for purposes of 
margining, guaranteeing or securing the customers' trades on or through 
a registered derivatives transaction execution facility (``DTF''), 
separately accounted for and segregated. This is sometimes referred to 
as ``opting out'' of segregation. The CFTC is also adopting amendments 
to certain existing rules that would, among other things, govern the 
bankruptcy treatment of a customer that opts out of segregation.

EFFECTIVE DATE: June 19, 2001.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, or Michael A. Piracci, Attorney-Advisor, Division of Trading 
and Markets, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW, Washington, DC 20581. Telephone: (202) 
418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    The Commodity Futures Modernization Act of 2000 (``CFMA''),\1\ 
enacted on December 21, 2000, included a new section 5a of the 
Commodity Exchange Act (the ``Act'') \2\ to permit a board of trade, 
subject to certain conditions, to elect to operate as a registered DTF 
in lieu of seeking designation as a contract market.\3\ In order to 
operate as a registered DTF, the board of trade must meet certain 
requirements as to the underlying commodities traded and must restrict 
access to certain eligible traders. The newly-enacted section 5a(f) of 
the Act provides that a registered DTF may authorize an FCM to offer 
its customers that are eligible contract participants \4\ the right not 
to have their funds that are carried by the FCM for purposes of trading 
on the registered DTF, separately accounted for and segregated. Opting 
out of segregation is not available to a customer who is not also an 
eligible contract participant.
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    \1\ Commodity Futures Modernization Act of 2000, Pub. L. 106-
554, 114 Stat. 2763 (to be codified as amended in scattered sections 
of 7 U.S.C.).
    \2\ 7 U.S.C. 1 et seq. (1994), as amended by Pub. L. 106-554, 
114 Stat. 2763.
    \3\ Commission rules concerning DTFs will be included in a new 
Part 37. See 66 FR 14262 (March 9, 2001).
    \4\ Generally, eligible contract participants are: (1) 
Individuals with more than $10 million in total assets, or more than 
$5 million in total assets if entering into the transaction to 
manage risk; (2) financial institutions, investment companies, and 
insurance companies; (3) companies with more than $10 million in 
total assets, or a net worth exceeding $1 million if entering into 
the transaction in connection with the conduct of their businesses; 
and (4) commodity pools that have more than $5 million in total 
assets. See 7 U.S.C. 1a(12), as amended.
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B. Proposed Rules

1. New Rule 1.68
    On March 13, 2001, the Commission published a proposed new rule 
allowing FCMs to offer certain customers the right to elect not to have 
funds, that are being carried by the FCM for purposes of margining, 
guaranteeing or securing the customers' trades on or through a 
registered DTF, separately accounted for and segregated, sometimes 
referred to as ``opting out'' of segregation.\5\ The Commission 
proposed to add new Rule 1.68 to implement the newly-enacted section 
5a(f) of the Act. The proposed rule provided that an FCM shall not 
segregate a customer's funds where: (i) The customer is an eligible 
contract participant; (ii) the funds are deposited with the FCM for 
purposes of trading on a registered DTF; (iii) the DTF has authorized 
the FCM to permit eligible contract participants to elect not to have 
such funds segregated; and (iv) there is a written agreement signed by 
the customer \6\ in which the customer elects to opt out of segregation 
and acknowledges that it is aware of the consequences of not having its 
funds segregated.\7\ In particular, the agreement would have been 
required to explain that, to the extent a customer has a claim against 
the estate of a bankrupt FCM in connection with trades for which it has 
opted out of segregation,

[[Page 20741]]

the customer would be treated like a general creditor.\8\
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    \5\ See 66 FR 14507 (March 13, 2001).
    \6\ For purposes of satisfying the requirement that the customer 
sign the opt-out agreement, an electronic signature will be 
acceptable provided it satisfies the provisions of Rule 1.4. 
Commission rules referred to herein are found at 17 CFR Ch. 1 
(2000).
    \7\ An FCM may offer benefits to customers who elect not to have 
their funds segregated. In making any such offer, however, an FCM 
may not make any misleading claims or disclosures.
    \8\ Normally, in the event of an FCM's bankruptcy, customer 
claims have priority with respect to customer property over all 
other claims, except claims ``attributable to the administration of 
customer property.'' See 11 U.S.C. 766(h); see also 17 CFR part 190. 
To the extent that the customer has claims against the bankrupt 
FCM's estate for trades to which segregation applies, e.g., trades 
on or subject to the rules of contract markets, or of DTFs for which 
opting out of segregation is not permitted, the customer would be 
eligible for the customer priority. Thus, the same customer may have 
two different kinds of claims against the estate of a bankrupt FCM. 
See 48 FR 8716 (March 1, 1983).
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    Proposed Rule 1.68 also stated that: (1) The FCM could provide the 
customer a single monthly account statement with a notation of trades 
for which segregation does not apply; (2) the FCM's records must 
clearly distinguish those positions subject to the opt-out agreement 
and those that remain subject to segregation; (3) the required 
agreement with a customer to opt out of segregation may provide that it 
covers all DTFs that have authorized FCMs to offer such treatment of 
customer funds; and (4) a customer may revoke its election to opt out 
of segregation by notifying the FCM in writing, which would only be 
effective for trades entered into after the FCM received such notice 
from the customer. These provisions were intended to simplify the opt-
out process for both FCMs and customers. Proposed Rule 1.68 further 
provided that in no event may customer funds related to DTF ``opt-out'' 
trades be commingled with customer funds segregated pursuant to section 
4d of the Act and the Commission rules thereunder.
    The proposed rule would also have provided that a customer who 
chose to opt out of segregation would not be permitted to establish a 
``third-party custodial account,'' sometimes also referred to as a 
``safekeeping account.'' In Financial and Segregation Interpretation 
No. 10 (``Interpretation No. 10''), the Commission's Division of 
Trading and Markets (the ``Division'') set forth guidelines for these 
types of accounts.\9\
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    \9\ Financial and Segregation Interpretation No. 10, 1 Comm. 
Fut. L. Rep. (CCH) para. 7120 (May 23, 1984).
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2. Other Rule Proposals
    The Commission proposed to add Rule 1.3(uu) to define the term 
``opt-out customer'' as a customer who is an eligible contract 
participant and elects not to have funds carried by an FCM for purposes 
of trading on a DTF separately accounted for and segregated, in 
accordance with Rule 1.68. The Commission also proposed to amend Rule 
1.3(gg), which defines the term ``customer funds.'' The Commission 
proposed to amend the rule to make clear that the funds of an opt-out 
customer would not be deemed ``customer funds.''
    Rule 1.17(a)(1)(i) provides the standards for determining the 
minimum adjusted net capital that must be maintained by each person 
registered as an FCM. The Commission proposed to amend Rule 
1.17(a)(1)(i)(B), which contains the volume of business element of 
these standards, to make clear that the funds of an opt-out customer 
are to be included in the computation of the FCM's minimum adjusted net 
capital requirement. The proposed amendment to the rule ensured that 
opt-out customers, by opting out of segregation, do not have an impact 
on the financial condition of the FCM, thereby increasing the risk to 
the other customers of the FCM or to the marketplace. In proposing the 
amendment, the Commission noted that by including the funds of the opt-
out customer for purposes of calculating the minimum adjusted net 
capital, there is no effect on the current minimum capital requirements 
for registered FCMs.\10\
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    \10\ Several other provisions of Rule 1.17 include calculations 
for determining the adjusted net capital required of an FCM in order 
to undertake various actions, such as prepaying subordinated debt. 
The Commission proposed to amend these rules to make clear that the 
funds of an opt-out customer are to be included in calculating the 
FCM's required adjusted net capital in these situations. See Rules 
1.17(e)(1)(ii), 1.17(h)(2)(vi)(C)(2), 1.17(h)(2)(vii)(A)(2), 
1.17(h)(2)(vii)(B)(2), 1.17(h)(2)(viii)(A)(2), 1.17(h)(3)(ii)(B), 
and 1.17(h)(3)(v)(B); see also Rule 1.12(b)(2) (determining the 
``early warning'' level of adjusted net capital).
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    The Commission also proposed amending Rule 1.37. Rule 1.37(a) 
requires an FCM, for each account that it carries, to keep a permanent 
record that shows the name, address, and occupation of the person for 
whom the account is being carried, as well as any person guaranteeing 
the account or exercising trading control with respect to the account. 
The Commission proposed to maintain this requirement and to redesignate 
paragraph ``(a)'' as paragraph ``(a)(1).'' The Commission further 
proposed to add paragraph ``(a)(2),'' to require FCMs to keep a 
permanent record showing a customer's election pursuant to proposed 
Rule 1.68. The FCM would be permitted to indicate such a customer's 
election on the record it is required to keep under redesignated 
paragraph (a)(1).
    Finally, the Commission proposed to amend Rule 190.07(b), which 
defines the term ``net equity'' for purposes of calculating the allowed 
net equity claim of a customer in the event of an FCM bankruptcy. The 
proposed amendment would make clear that the net equity of an opt-out 
customer should not include funds the customer has chosen not to have 
segregated and separately accounted for pursuant to proposed Rule 1.68. 
The Commission's intention was that, to the extent that a customer has 
a claim against the estate of a bankrupt FCM in connection with trades 
for which it has opted out of segregation, the customer would not be 
entitled to the normal customer priority in bankruptcy and would be 
treated as a general creditor.

II. Final Rules

    The 30-day comment period on the proposal expired on April 12, 
2001. The Commission received six comment letters. The commenters were 
the Futures Industry Association (``FIA''), the Chicago Mercantile 
Exchange, Inc. (``CME''), National Futures Association (``NFA''), the 
Chicago Board of Trade (``CBOT''), the Options Clearing Corporation 
(``OCC''), and the Securities Industry Association (``SIA''). The 
commenters generally supported the proposed rules, although each 
suggested some modifications. The Commission notes its appreciation 
that most of the comment letters were submitted on time, and in some 
cases were received earlier than the deadline date. The early 
submission of comment letters was helpful in assisting the Commission 
to meet the statutory deadline for adoption of opt-out rules. 
Additionally, the Commission notes the usefulness of the comment 
letters in that they contained concise and specific suggestions.

A. Bankruptcy Treatment

    FIA, CME, NFA, CBOT, OCC, and SIA all expressed concern that 
customers who choose to opt out of segregation would, in the event of 
an FCM bankruptcy, be treated as general creditors and, therefore, 
would have claims inferior to proprietary accounts carried by an 
FCM.\11\ For purposes of bankruptcy proceedings, proprietary accounts 
are included in the definition of a non-public customer.\12\ Non-public 
customers receive a portion of the customer estate only after all 
public customer claims have been satisfied in full.\13\ Therefore, 
under the proposed rules, a non-public customer would have a priority 
superior to an opt-out customer in the unlikely event that there are 
customer funds in excess of

[[Page 20742]]

the net equity claims of all public customers in the bankrupt estate.
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    \11\ A proprietary account is defined in Rule 1.3(y).
    \12\ See 17 CFR 190.01(bb).
    \13\ 17 CFR 190.08(b).
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    Upon reconsideration of this issue, the Commission agrees that opt-
out customers should be entitled to no less protection than non-public 
customers. Accordingly, the Commission has amended Rule 190.01(bb), the 
definition of a non-public customer for bankruptcy purposes, to include 
opt-out customers. Additionally, the Commission will not amend Rule 
190.07(b), the definition of net equity, as proposed, but will retain 
it as it currently reads. As a result, eligible contract participants 
may have two net equity claims against the estate of an FCM for 
purposes of bankruptcy proceedings: (i) A net equity claim as a non-
public customer for claims based on agreements, contracts or 
transactions traded on or subject to the rules of a DTF for which the 
customer has opted out; and (ii) a net equity claim as a public 
customer based on all other commodity interest transactions with the 
FCM. On the former claims, the customer will have the same priority as 
proprietary accounts; on the latter claim, the customer will have the 
normal preferred customer priority.
    In its comment letter, NFA also recommended that the Commission 
consider what bankruptcy issues may arise for security futures products 
that may be initiated and offset on different markets. Additionally, 
NFA recommended that the Commission consider the need to implement 
rules governing the treatment of customer funds in bankruptcy in the 
event of the insolvency of an exchange or clearing organization. As NFA 
recognizes in its letter, these issues, while certainly important, are 
not of immediate concern. Section 125 of the CFMA requires the 
Commission to undertake a complete study of the Act and the rules 
thereunder and to solicit the views of the public. In light of that 
study and the mandate to promptly adopt an opt-out provision, the 
Commission is deferring addressing these additional bankruptcy issues 
raised by NFA to a later date.

B. Definition of Opt-Out Customer

    Pursuant to proposed Rule 1.3(uu), a customer is deemed an opt-out 
customer only to the extent that the customer has elected to opt out of 
segregation. In its comment letter, FIA indicated its concern that Rule 
1.3(uu) as proposed could be read more broadly. The Commission has 
revised the text of Rule 1.3(uu) to make clear that a customer is an 
opt-out customer only as to those funds for which the customer has 
elected to opt out of segregation and is a customer, as defined in Rule 
1.3(k), as to funds that are separately accounted for and segregated 
pursuant to section 4d of the Act and Rules 1.20-1.30, 1.32 and 1.36.
    FIA, in suggesting language to clarify Rule 1.3(uu), appears to 
indicate that a customer must individually elect to opt out of 
segregation as to each particular DTF. As discussed above, and in the 
proposing release, the agreement entered into between an FCM and a 
customer may provide that it covers agreements, contracts or 
transactions on all DTFs that have authorized opting out. In such a 
case, there would be only one agreement that covers all DTFs on which 
the customer trades. If, however, an FCM chooses to draft the opt-out 
agreement so that it covers only a specific DTF, and, therefore, a 
separate agreement would be required for each DTF on which the customer 
conducts trades, that would also be permissible. However, the 
Commission does not require this latter arrangement in Rule 1.68 as 
adopted.\14\
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    \14\ A customer is of course permitted to request that an FCM 
permit it to opt out of segregation as to trading only on specific 
DTFs. An FCM may grant or deny this request.
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C. Separate Agreements

    Proposed Rule 1.68(e) would have prohibited a customer that elects 
to opt out of segregation from establishing a third-party custodial 
account as described in Interpretation No. 10. This provision was 
intended to prevent an opt-out customer from securing a priority in 
customer funds equal to or greater than that of customers whose funds 
are separately accounted for and segregated. FIA and NFA both suggested 
that the Commission could achieve this purpose in a more 
straightforward manner ``by prohibiting certain contractual provisions 
generally.'' The Commission agrees. Therefore, Rule 1.68 will require a 
customer who elects to opt out of segregation to agree not to enter 
into any agreement or understanding with an FCM that would permit the 
customer to retain a security interest in any assets deposited with the 
FCM that are not subject to segregation. Further, a customer may not 
enter into any agreement or understanding with an FCM relating to the 
manner in which the customer's assets will be held at the FCM that, in 
the event of bankruptcy, would give the customer a priority that is 
equal to or greater than the priority afforded customers whose funds 
are segregated. This prohibition applies to any agreement or 
understanding, whether or not it is the type discussed in 
Interpretation No. 10.\15\
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    \15\ OCC stated that ``an opt-out customer should be able to 
arrange for its own assets to be held separately and not subjected 
to the claims of other customers.'' SIA expressed a similar view. 
The Commission does not believe that such a separate holding 
arrangement would be consistent with opt-out status.
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D. Movement of Funds Between Segregated and Opt-Out Accounts

    Rule 1.68(b) provides that under no circumstances may funds related 
to opt-out accounts be commingled with funds held in segregation. CBOT 
expressed its agreement with this rule and suggested that where a 
customer has both segregated and non-segregated accounts, the 
Commission use the same principles currently applied where a customer 
has both a regulated and non-regulated account. The Commission agrees. 
Where a customer has both a segregated and an opt-out account, any 
positive balance or net liquidating equities in the opt-out account may 
not be used to offset any deficit which may be in the segregated 
account.\16\
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    \16\ See Division Form 1-FR-FCM Instructions at page 10-5.
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    Proposed Rule 1.68(c) would have authorized an FCM to continue to 
hold trades and related funds for which a customer had previously 
elected to opt out of segregation in a non-segregated account after the 
customer revokes its opt-out election. The Commission had provided for 
this approach in proposed Rule 1.68(c) with the intention that the 
procedure would be the least burdensome on FCMs. The FIA, in its 
comment letter, noted, ``that offsetting positions between a customer's 
segregated account and a non-segregated account would be operationally 
difficult at best.'' Accordingly, FIA suggested that when an election 
to opt out of segregation is revoked, an FCM be required to transfer 
trades held in an opt-out account to a customer's segregated account, 
so long as the customer's positions in the non-segregated account are 
fully margined. NFA expressed a similar desire for such a requirement. 
CBOT indicated that this sort of transfer should not be permitted ``if 
the FCM has filed, or is in the process of filing, for bankruptcy.'' 
Because the transfer to a segregated account would result in the 
increased protection of customer assets and would be administratively 
more convenient for FCMs, the Commission has modified Rule 1.68(c) to 
require such a transfer, unless the FCM has filed, or has had filed 
against it, a petition for bankruptcy.
    FIA also expressed a desire for FCMs to be permitted to establish a 
notice period before a customer's decision to revoke its election to 
opt out of segregation would become effective. FIA indicated that FCMs 
require a

[[Page 20743]]

reasonable time period to make the appropriate changes to books and 
records. The Commission recognizes that FCMs need time to make the 
required operational changes where a customer revokes its election to 
opt out of segregation. To avoid disputes as to what may constitute a 
reasonable time period, the Commission is adopting a five-business day 
limit to accomplish the necessary changes.

E. Applicability to Contract Markets

    In their comment letters, CME, OCC, and SIA suggested that the 
choice to opt out of segregation should be extended to eligible 
contract participants trading on a designated contract market as well 
as on a DTF, because a designated contract market is subject to greater 
regulatory scrutiny than a DTF and the focus should be on the type of 
customer rather than the type of market involved. The CFMA, however, 
only provides for opting out of segregation in connection with trades 
executed on registered DTFs. Accordingly, at this time, the Commission 
will defer addressing any extension of opting out to trades on 
exchanges other than registered DTFs. The Commission may, however, 
reconsider this issue in connection with the study of the Act and the 
rules thereunder required by section 125 of the CFMA.

F. Disclosure to Pool Participants

    NFA, in its comment letter, noted its support for the requirement 
that customers electing to opt out of segregation enter into a written 
agreement acknowledging the consequences of such an election. NFA 
indicated that while this will provide adequate disclosure in the 
majority of cases, additional disclosure might be considered in the 
case of commodity pools that qualify as eligible contract participants. 
Specifically, NFA noted that retail investors might be investing in a 
commodity pool that qualifies as an eligible contract participant and 
chooses to opt out of segregation. NFA believes that operators of 
commodity pools that qualify as eligible contract participants and 
intend to opt out of segregation should be required to provide 
prospective pool participants with full disclosure regarding the 
consequences of investing in a pool that opts out of segregation. The 
Commission agrees that such disclosure should be required, but also 
believes that the obligation to do so is implicit in existing 
Commission Rules 4.24(h)(4)(i) and 4.24(w).

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \17\ requires that 
agencies, in promulgating rules, consider the impact of those rules on 
small businesses. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\18\ The Commission has previously determined that FCMs are not 
small entities for the purpose of the RFA.\19\ Additionally, eligible 
contract participants, as defined in the newly-amended Act, by the 
nature of the definition, should not be considered small entities. 
Further, eligible contract participants have the choice as to whether 
or not to exercise the right not to have certain funds segregated from 
the FCM's funds. Furthermore, no comments were received from the public 
on the RFA and its relation to the proposed rules.
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    \17\ 5 U.S.C. 601 et seq.
    \18\ 47 FR 18618 (April 30, 1982).
    \19\ 47 FR at 18619.
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B. Paperwork Reduction Act

    New Rule 1.68 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995,\20\ the Commission 
submitted a copy of the proposed rules to the Office of Management and 
Budget for its review. No comments were received in response to the 
Commission's invitation in the proposed rules to comment on any 
potential paperwork burden associated with this regulation.
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    \20\ Pub. L. 104-13 (May 13, 1995).
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C. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA, 
requires the Commission, before promulgating a new rule under the Act, 
consider the costs and benefits of the Commission's action. The 
Commission is applying the cost-benefit provisions of section 15 for 
the first time in this rulemaking with respect to a final rule and 
understands that, by its terms, section 15 as amended does not require 
the Commission to quantify the costs and benefits of a new rule or 
determine whether the benefits of the rule outweigh its costs.
    The amended section 15 further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (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.\21\ Accordingly, the 
Commission could in its discretion give greater weight to any one of 
the five enumerated areas of concern and could in its discretion 
determine that, notwithstanding its costs, a particular rule 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.
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    \21\ As applied to this rulemaking, price discovery is not a 
relevant concern.
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    The main area of concern relevant to the opt-out rules is the first 
one set forth in the Act, ``protection of market participants and the 
public.'' The Commission believes that those market participants 
eligible to opt out of segregation, eligible contract participants 
trading on a registered DTF, are sophisticated persons that can 
properly evaluate for themselves, in light of the required disclosure 
by, and agreement with, an FCM, whether to opt out of segregation. 
Additionally, FCMs are also able to evaluate whether offering such an 
election to their customers who are eligible contract participants is 
appropriate and consistent with sound risk management practices. As for 
the public interest, the general public and retail customers are 
protected because any eligible contract participant who opts out of 
segregation has a priority no better than a holder of a proprietary 
account in the event of an FCM's bankruptcy. The Commission has 
endeavored to impose minimal costs (i.e., only necessary disclosure and 
recordkeeping) on any of the parties that would be involved in the opt-
out process so that the perceived benefits can be fully realized. The 
Commission further notes that opting out of segregation is not required 
of anyone and has to be a voluntary election of the registered DTF, 
FCM, and eligible contract participant. The Commission also notes that 
the CFMA specifically mandates that the Commission adopt rules to 
facilitate this election. Finally, the Commission did not receive any 
comments that addressed these issues.

List of Subjects

17 CFR Part 1

    Consumer protection, Definitions, Reporting and recordkeeping 
requirements.

17 CFR Part 190

    Bankruptcy, Definitions.

    In consideration of the foregoing and pursuant to the authority 
contained in

[[Page 20744]]

the Commodity Exchange Act and, in particular, sections 2(a)(1)(A), 4d, 
5a(f), and 8a(5) 7 U.S.C. 2(i), 6d, 7a(f), and 12a(5), and 11 U.S.C. 
362, 546, 548, 556 and 761-766, the Commission hereby amends Chapter I 
of Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.

    2. Section 1.3 is amended by adding paragraphs (gg)(3) and (uu) to 
read as follows:


Sec. 1.3  Definitions.

* * * * *
    (gg) * * *
* * * * *
    (3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the 
term customer funds shall exclude money, securities or property 
received to margin, guarantee or secure the trades or contracts of opt-
out customers, and all money accruing to opt-out customers as the 
result of such trades or contracts, to the extent that such trades or 
contracts are made on or subject to the rules of any registered 
derivatives transaction execution facility that has authorized opting 
out in accordance with Sec. 37.7 of this chapter.
* * * * *
    (uu) Opt-out customer. This term means a customer that is an 
eligible contract participant, as defined in section 1a(12) of the Act, 
and that, in accordance with Sec. 1.68, has elected not to have funds 
that are being carried for purposes of trading on or through the 
facilities of a registered derivatives transaction execution facility, 
separately accounted for and segregated by the futures commission 
merchant pursuant to section 4d of the Act and Secs. 1.20-1.30, 1.32 
and 1.36. A customer is an opt-out customer solely with respect to 
agreements, contracts or transactions, and the money, securities or 
property received by a futures commission merchant to margin, guarantee 
or secure such agreements, contracts or transactions, made on or 
subject to the rules of any derivatives transaction execution facility 
that has adopted rules permitting a customer to elect to be an opt-out 
customer and with respect to which the customer has made such an 
election. For all other purposes under the Act and the rules 
thereunder, except where otherwise provided, an opt-out customer shall 
be a customer as defined in Sec. 1.3(k).
    3. Section 1.12 is amended by revising paragraph (b)(2) to read as 
follows:


Sec. 1.12  Maintenance of minimum financial requirements by futures 
commission merchants and introducing brokers.

* * * * *
    (b) * * *
    (2) Six percent of the following amount: The customer funds 
required to be segregated pursuant to the Act and the regulations in 
this part, plus the funds of opt-out customers that, but for the 
election to opt out pursuant to Sec. 1.68, would be required to be 
segregated, plus the foreign futures or foreign options secured amount, 
less the market value of commodity options purchased by such customers 
on or subject to the rules of a contract market or a foreign board of 
trade for which the full premiums have been paid: Provided, however, 
that the deduction for each such customer shall be limited to the 
amount of customer funds in such customer's account(s) and foreign 
futures and foreign options secured amounts;
* * * * *
    4. Section 1.17 is amended as follows:
    a. By revising paragraph (a)(1)(i)(B), and
    b. By amending paragraphs (e)(1)(ii), (h)(2)(vi)(C)(2), 
(h)(2)(vii)(A)(2),(h)(2)(vii)(B)(2), (h)(2)(viii)(A)(2), (h)(3)(ii)(B), 
and (h)(3)(v)(B) by removing the second instance of the word ``and'' 
and adding in its place the words ``, plus the funds of opt-out 
customers that, but for the election to opt out pursuant to Sec. 1.68, 
would be required to be segregated, plus''; the revision as follows:


Sec. 1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

    (a) * * *
    (1) * * *
    (i) * * *
    (B) Four percent of the following amount: The customer funds 
required to be segregated pursuant to the Act and the regulations in 
this part, plus the funds of opt-out customers that, but for the 
election to opt out pursuant to Sec. 1.68, would be required to be 
segregated, plus the foreign futures or foreign options secured amount, 
less the market value of commodity options purchased by customers on or 
subject to the rules of a contract market or a foreign board of trade 
for which the full premiums have been paid: Provided, however, that the 
deduction for each customer shall be limited to the amount of 
segregated customer funds in such customer's account(s) and foreign 
futures and foreign options secured accounts;
* * * * *

    5. Section 1.37 is amended by redesignating paragraph (a) as 
paragraph (a)(1) and by adding paragraph (a)(2) to read as follows:


Sec. 1.37  Customer's or option customer's name, address, and 
occupation recorded; record of guarantor or controller of account.

    (a) * * *
    (2) Each futures commission merchant who receives a customer's 
election not to have the customer's funds separately accounted for and 
segregated, in accordance with Sec. 1.68, shall keep a record in 
permanent form that indicates such customer's election. The record of 
such a customer election may be indicated on the record required by 
paragraph (a)(1) of this section.
* * * * *

    6. Section 1.68 is added to read as follows:


Sec. 1.68  Customer election not to have funds, carried by a futures 
commission merchant for trading on a registered derivatives transaction 
execution facility, separately accounted for and segregated.

    (a) A futures commission merchant shall not separately account for 
and segregate, in accordance with the provisions of section 4d of the 
Act and Secs. 1.20-1.30, 1.32 and 1.36, funds received from a customer 
if:
    (1) The customer is an eligible contract participant as defined in 
section 1a(12) of the Act;
    (2) The customer's funds are being carried by the futures 
commission merchant for the purpose of trading on or through the 
facilities of a derivatives transaction execution facility registered 
under section 5a(c) of the Act;
    (3) The registered derivatives transaction execution facility has 
authorized, in accordance with Sec. 37.7 of this chapter, futures 
commission merchants to offer eligible contract participants the right 
to elect not to have funds that are being carried for purposes of 
trading on or through the facilities of the registered derivatives 
transaction execution facility, separately accounted for and segregated 
by the futures commission merchant; and
    (4) The futures commission merchant and the customer have entered 
into a written agreement, signed by a person with the authority to bind 
the customer, in which the customer:
    (i) Represents and warrants that the customer is an eligible 
contract participant as defined in section 1a(12) of the Act;

[[Page 20745]]

    (ii) Elects not to have its funds separately accounted for and 
segregated in accordance with the provisions of section 4d of the Act 
and Secs. 1.20-1.30, 1.32 and 1.36 with respect to agreements, 
contracts or transactions traded on or subject to the rules of any 
registered derivatives transaction execution facility that has 
authorized such treatment in accordance with Sec. 37.7 of this chapter;
    (iii) Acknowledges that it has been informed, and by making this 
election agrees that:
    (A) The customer's funds, related to agreements, contracts or 
transactions on any registered derivatives transaction execution 
facility that authorizes the opting out of segregation will not be 
segregated from the funds of the futures commission merchant in 
accordance with the provisions of section 4d of the Act and Secs. 1.20-
1.30, 1.32 and 1.36;
    (B) The futures commission merchant may use such funds in the 
course of the futures commission merchant's business without the prior 
consent of the customer or any third party;
    (C) In the event the futures commission merchant files, or has a 
petition filed against it, for bankruptcy, the customer, as to those 
funds that the customer has elected not to have separately accounted 
for and segregated by the futures commission merchant in accordance 
with the provisions of section 4d of the Act and Secs. 1.20-1.30, 1.32 
and 1.36, will not be entitled to the priority for customer claims 
provided for under the Bankruptcy Code and part 190 of this chapter;
    (D) The customer may not retain a security interest in assets 
excluded from segregation in accordance with this section;
    (E) The customer may not enter into any agreement or other 
understanding with the futures commission merchant relating to the 
manner in which the customer's assets will be held at the futures 
commission merchant, that directly or indirectly gives the customer a 
priority in bankruptcy that is equal or superior to the priority 
afforded public customers under the Bankruptcy Code and part 190 of 
this chapter; and
    (iv) Acknowledges that the agreement shall remain in effect unless 
and until the customer abrogates the agreement in accordance with 
paragraph (c) of this section.
    (b) In no event may money, securities or property representing 
those funds that customers have elected not to have separately 
accounted for and segregated by the futures commission merchant, in 
accordance with this section, be held or commingled and deposited with 
customer funds in the same account or accounts required to be 
separately accounted for and segregated pursuant to section 4d of the 
Act and Secs. 1.20-1.30, 1.32 and 1.36.
    (c)(1) A customer that has entered into an agreement in accordance 
with paragraph (a)(4) of this section may abrogate that agreement by so 
informing the futures commission merchant in writing, signed by a 
person with the authority to bind the customer. The effective date of 
the abrogation shall not exceed five business days from the futures 
commission merchant's receipt of the customer's abrogation. The 
abrogation shall not become effective if the futures commission 
merchant files, or has had filed against it, a petition for bankruptcy 
prior to the effective date of the abrogation.
    (2) Upon the effective date of the abrogation, permitted under 
paragraph (c)(1) of this section, provided that the customer's 
positions in the non-segregated account are fully margined and the 
customer is not in default with respect to any of its obligations to 
the futures commission merchant arising out of agreements, contracts or 
transactions entered on, or subject to the rules of, a registered 
entity, as defined in section 1a(29) of the Act, the futures commission 
merchant shall transfer to a customer segregated account:
    (i) All trades or positions of the customer with respect to which 
the customer had previously elected to opt out of segregation; and
    (ii) All money, securities, or property held in such account to 
margin, guarantee or secure such trades or positions.
    (d) Each futures commission merchant shall maintain any agreements 
entered into with customers pursuant to paragraph (a) of this section 
and any abrogations of such agreements, made pursuant to paragraph (c) 
of this section, in accordance with Sec. 1.31.

PART 190--BANKRUPTCY RULES

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

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23, 
and 24, and 11 U.S.C. 362, 546, 548, 556 and 761-766, unless 
otherwise noted.

    8. Section 190.01 is amended by revising paragraph (bb) to read as 
follows:


Sec. 190.01  Definitions.

* * * * *
    (bb) Non-public customer means any person enumerated in 
Sec. 1.3(y), Sec. 1.3(uu) or Sec. 31.4(e) of this chapter, who is 
defined as a customer under paragraph (k) of this section.
* * * * *

    Issued in Washington, DC on April 19, 2001, by the Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 01-10222 Filed 4-24-01; 8:45 am]
BILLING CODE 6351-01-P