CFTC Proposes "Comprehensive Update" to Bankruptcy Regulations

The CFTC proposed amendments intended to "comprehensively update" its bankruptcy regulations (Part 190 of the CFTC regulations) to "reflect current market practices and lessons learned."

In the proposal, the CFTC provided:

• further support for the general policy that (i) shortfalls in customer-segregated assets should be made up of futures commission merchant general assets; (ii) "public" customers are favored over "non-public" customers; and (iii) public customers are entitled inter se to pro rata distribution of their claims;

• changes to continue the CFTC policy preference for "porting" of customer positions (rather than liquidation);

• for adoption of comprehensive rules governing bankruptcy of a derivatives clearing organization ("DCO"), including that:

  • a trustee would generally be required to follow pre-existing DCO default management rules and plans previously approved by the CFTC; and

  • resources intended to flow through to members as part of "daily settlement" should be used for that purpose rather than to the general estate;

• notation of the applicability of the Securities Investor Protection Act and the Orderly Liquidation Authority of Title II as applicable in certain circumstances;

• amendments to the treatment of letters of credit ("LoCs") as collateral (pre- and post-insolvency) to ensure that customers posting LoCs suffer the same proportional losses as customers posting cash and other assets;

• a grant of greater discretion to trustees, among other things, based on the view that speed and need for quick action are necessary, with the CFTC specifically proposing that "it is more important to be cost effective and prompt in the distribution of customer property than it is to value each customer's entitlements on an individual basis";

• technical and cross-reference changes to reflect various market and regulatory changes since the rules were last amended in significant part; and

• movement away from paper-based communications to electronic-based communications.

CFTC Chair Heath P. Tarbert and Commissioners Brian Quintenz, Rostin Behnam, Dawn D. Stump and Dan M. Berkovitz voted in favor of the proposal. Commissioner Berkovitz urged the CFTC to provide more time for public comment, saying that 90 days was insufficient given current circumstances and the length of the proposal.

Comments on the proposal must be submitted within 90 days "after date of approval of the proposal by the [CFTC]."