COMMODITY FUTURES TRADING COMMISSION 

INTERPRETATION OF CFTC RULE 190

Funds Determined to Be Held in the Futures Account Type of Customer Account Class 

This interpretation by the Commodity Futures Trading Commission is issued to clarify 

the appropriate means by which to allocate customer funds held by an insolvent Futures 

Commission Merchant (FCM) to account classes (as such term is defined in Section 190.01(a) of 

the Commission’s Regulations) in cases where money, securities or other property margining, 

guaranteeing or securing futures contracts traded on non-domestic boards of trade has been 

deposited, pursuant to a Commission Order, in a segregated account established pursuant to 

Regulation 1.20. 

Section 20 of the Commodity Exchange Act1

 empowers the Commission to provide by 

rule or regulation how the net equity of a customer is to be determined: 

“. . . the Commission may provide, with respect to a commodity broker that is a debtor 

under chapter 7 of title 11 of the United States Code, by rule or regulation - (1) that 

certain cash, securities, other property, or commodity contracts are to be included in or 

excluded from customer property or member property; . . . . . . . and (5) how the net 

equity of a customer is to be determined. 

Subchapter IV of the Bankruptcy Code (concerning Commodity Brokers) has the same effect, 

explicitly subjecting its definition of “net equity” to “such rules and regulations as the 

Commission promulgates under the [Commodity Exchange] Act.”2

 

The Commission has exercised this power in promulgating Part 190. In particular, Net 

Equity is defined in Regulation 190.07. This definition includes the concept of “account 

classes.” For example, §190.07(b)(2) directs that one of the steps in calculating a customer’s net 

equity is to “[a]ggregate the credit and debit equity balances of all accounts of the same class 

held by a customer in the same capacity.” Similarly, §190.07(c) defines the “funded balance” as 

“a customer’s pro rata share of the customer estate account class available as of the primary 

liquidation date for distribution to customers of the same class.” Commission Regulation 

190.01(a) defines account class as follows: 

each of the following types of customer accounts which must be recognized as a separate 

class of account by the trustee: futures accounts, foreign futures accounts, leverage 

accounts, commodity option accounts, and delivery accounts as defined in §190.05(a)(2): 

Provided, however, That to the extent that the equity balance, as defined in §190.07, of a 

customer in a commodity option, as defined in §1.3(hh) of this chapter, may be 

commingled with the equity balance of such customer in any domestic commodity 

futures contract pursuant to regulations under the Act, the aggregate shall be treated for 

purposes of this part as being held in a futures account. 

 

1

 7 U.S.C. §24 

2

 11 U.S.C. §761(17) 
 

There is a potential ambiguity in how this provision should be applied in two related 

contexts. First, where a customer account holds foreign futures contracts, and/or property 

margining, guaranteeing, or securing such contracts, but where the collateral has, pursuant to a 

Commission order, been segregated in accordance with Commission Regulation 1.20 in the 

manner of a domestic futures account, the appropriate “type of account” is ambiguous. One can 

distinguish between a “foreign future” which is characterized by the place in which it is 

executed, and a “foreign futures account” which may be characterized by the calculation of the 

applicable segregation requirements. A “futures account” is also characterized by the calculation 

of the applicable segregation requirement. If the Commission grants Section 4d relief to permit 

funds supporting foreign futures to be deposited in a “futures account” calculated pursuant to 

Section 4d and Commission Regulation 1.20, then it would appear apposite to treat claims on 

those funds as belonging to the futures account class of accounts. 

Second, where a customer account contains both foreign futures contracts and domestic 

futures contracts, with those positions margined on a portfolio basis, such that the same property 

margins, guarantees, or secures both types of contracts in one account, the appropriate allocation 

of claims on the collateral between “futures contracts” and “foreign futures contracts” is, again, 

ambiguous. 

As the Commission noted in the proposing release for Commission Regulation 190.01, 

“The allocation provisions are intended to prefer customers for which segregation is 

undertaken over . . . customers holding accounts of a class for which segregation is not 

required. . . . The reason for identifying classes of customer accounts is to permit the 

implementation of the principle of pro rata distribution so that the differing segregation 

requirements with respect to different classes of accounts benefit customer claimants 

based on the class of account for which they were imposed.” 46 Fed. Reg. 57535, 57536 

(November 24, 1981). 

Thus, the Commission intended the customers who contribute to a segregated pool to 

benefit from that pool. Later in that release the Commission explained that the distinction in 

treatment between account classes sprang from the contrast in segregation requirements: 

 

all property segregated on behalf of a particular class would be allocated to the class on

behalf of which it is segregated. This approach is consistent with the fact that differing 

segregation requirements exist for different classes of accounts. Obviously, much of the 

benefit of segregation would be lost if property segregated on behalf of a particular 

account class could be allocated to pay the claims of customers of a different account for 

which less stringent segregation provisions were in effect. 46 Fed. Reg. at 57554. 

Again, the Commission contemplated that customers would benefit from the stringency 

of the segregation regime to which their funds were subject. To the extent that, subject to a 

Commission order, customer margin supporting non-domestic trades is subject to the full 

stringency of segregation under Commission Regulation 1.20 rather than the less stringent 

Commission Regulation 30.7 secured amount calculation, it is consistent with the Commission’s 

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intentions in adopting the Part 190 scheme that the property in the accounts of these customers 

be treated as futures accounts. Conversely, it would be inconsistent with the Commission’s 

intentions to deny customers who had contributed property that was, in accordance with 

Commission Orders, deposited into accounts segregated pursuant to Commission Regulation 

1.20, any participation in those accounts based on those contributions. 

Thus, the Commission intended that the customers who contribute to a segregated pool 

benefit from that pool. If customers do not contribute to a pool, they should not benefit from that 

pool. The Commission’s intent to tie distribution of funds to the contribution of those funds, and 

the ambiguity of how to allocate claims on collateral that supports both futures and foreign 

futures positions placed in domestic segregation, both support the interpretation that, in the event 

of an insolvency, collateral supporting foreign futures placed in domestic segregation pursuant to 

Commission Order should be treated as in a futures account, not a foreign futures account, for 

purposes of Part 190. Thus, in a situation where by Commission order or direction, customers 

are required or allowed to contribute to a Commission Regulation 1.20 segregated account, those 

customers also should benefit from the distribution of that account proportionately to their 

contributions in the event of an insolvency. Such claims should be treated as encompassed 

within the futures account class as opposed to the foreign futures account class or any other 

account class. 

* * * * 

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate Director, 

Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, 

Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. 

Issued in Washington, D.C. on October 21, 2004 by the Commodity Futures Trading 

Commission 

 

/s/ 

Jean A. Webb 

Secretary 

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