20740 Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Rules and Regulations

1Commodity 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.

3Commission 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.

5See 66 FR 14507 (March 13, 2001).

6For 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).

7An 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.

the action: (1) Is not a significant rule

under Executive Order 12866; and (2) is

not a significant rule under Department

of Transportation Regulatory Policy and

Procedures. Also, because this

regulation is editorial in nature, no

impact is expected to result, and a full

regulatory evaluation is not required. In

addition, the FAA certifies that the rule

will not have a significant economic

impact, positive or negative, on a

substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR Part 121

Air Carriers, Aircraft, Airmen,

Aviation safety, Charter flights.

The Amendment

In consideration of the foregoing, the

Federal Aviation Administration

amends part 121 of title 14 of the Code

of Federal Regulations as follows:

PART 121—OPERATING

REQUIREMENTS: DOMESTIC, FLAG,

AND SUPPLEMENTAL OPERATIONS

1. The authority citation for part 121

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40113, 40119,

44101, 44701–44702, 44705, 44709–44711,

44713, 44716–44717, 44722, 44901, 44903–

44904, 44912, 46105.

2. Amend § 121.310 by revising

paragraph (m) to read as follows:

§ 121.310 Additional emergency

equipment.

* * * * *

(m) Except for an airplane used in

operations under this part on October

16, 1987, and having an emergency exit

configuration installed and authorized

for operation prior to October 16, 1987,

for an airplane that is required to have

more than one passenger emergency exit

for each side of the fuselage, no

passenger emergency exit shall be more

than 60 feet from any adjacent passenger

emergency exit on the same side of the

same deck of the fuselage, as measured

parallel to the airplane’s longitudinal

axis between the nearest exit edges.

Issued in Washington, DC, on April 19,

2001.

Donald P. Byrne,

Assistant Chief Counsel, Regulations

Division.

[FR Doc. 01–10238 Filed 4–24–01; 8:45 am]

BILLING CODE 4910–13–M

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.

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.

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,

Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Rules and Regulations 20741

8Normally, 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).

9Financial and Segregation Interpretation No. 10,

1 Comm. Fut. L. Rep. (CCH) ¶ 7120 (May 23, 1984).

10Several 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).

11A proprietary account is defined in Rule 1.3(y).

12See 17 CFR 190.01(bb).

13 17 CFR 190.08(b).

the customer would be treated like a

general creditor.8

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

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

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

20742 Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Rules and Regulations

14A 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.

15OCC 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 optout status.

16See Division Form 1–FR–FCM Instructions at

page 10–5.

the net equity claims of all public

customers in the bankrupt estate.

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

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

D. Movement of Funds Between

Segregated and Opt-Out Accounts

Rule 1.68(b) provides that under no

circumstances may funds related to optout 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

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 nonsegregated 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

Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Rules and Regulations 20743

17 5 U.S.C. 601 et seq.

18 47 FR 18618 (April 30, 1982).

19 47 FR at 18619.

20Pub. L. 104–13 (May 13, 1995).

21As applied to this rulemaking, price discovery

is not a relevant concern.

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 newlyamended 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.

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.

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 costbenefit 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.

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

20744 Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Rules and Regulations

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:

§ 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 § 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 § 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 §§ 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 § 1.3(k).

3. Section 1.12 is amended by revising

paragraph (b)(2) to read as follows:

§ 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

§ 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 § 1.68,

would be required to be segregated,

plus’’; the revision as follows:

§ 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

§ 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:

§ 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 § 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:

§ 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

§§ 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 § 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;

Federal Register / Vol. 66, No. 80 / Wednesday, April 25, 2001 / Rules and Regulations 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 §§ 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

§ 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 §§ 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 §§ 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 §§ 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 nonsegregated 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 § 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:

§ 190.01 Definitions.

* * * * *

(bb) Non-public customer means any

person enumerated in § 1.3(y), § 1.3(uu)

or § 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

POSTAL SERVICE

39 CFR Part 501

Authorization to Manufacture and

Distribute Postage Meters

AGENCY: Postal Service.

ACTION: Final rule.

SUMMARY: This final rule clarifies and

strengthens requirements for

manufacturers of postage meters to

control meters used for demonstration

and loaner purposes.

DATES: This rule is effective April 25,

2001.

FOR FURTHER INFORMATION CONTACT:

James Luff, 703–292–3693.

SUPPLEMENTARY INFORMATION: When

manufacturers do not follow established

policies and procedures for postage

meters loaned to customers for

temporary use (‘‘loaner meters’’) and

those used for demonstration purposes,

there are potential revenue protection

problems as well as costly data entry

errors. The potential for postage meter

misuse and fraud must be eliminated.

To accomplish this objective, the Postal

Service must publish procedures for

handling loaned and demonstration

meters, and manufacturers’ employees,

dealers, and representatives must follow

them.

List of Subjects in 39 CFR Part 501

Administrative practice and

procedure, Postal Service.

For the reasons set out in this

document, the Postal Service is

amending 39 CFR part 501 as follows:

PART 501—AUTHORIZATION TO

MANUFACTURE AND DISTRIBUTE

POSTAGE METERS

1. The authority citation for part 501

continues to read as follows:

Authority: 5 U.S.C. 552(a); 39 U.S.C. 101,

401, 403, 404, 410, 2601, 2605; Inspector

General Act of 1978, as amended (Pub. L. 95–

452, as amended), 5 U.S.C. App. 3.

2. Section 501.22 is amended by

adding new paragraphs (s) and (t) to

read as follows: