On July 13, the MFA and SIFMA AMG submitted comments to the CFTC proposal on Part 190 bankruptcy rules. In our letter, we expressed strong support for the CFTC’s effort to comprehensively update Part 190 to reflect current market practices and lessons learned from past commodity broker bankruptcies and to address, ex ante, issues that may arise during the course of a derivatives clearing organization (“DCO”) bankruptcy.
The Associations generally support the CFTC’s Proposal, but highlighted three particular areas of concern:
First, regarding the authority of the trustee and the Commission in the context of a DCO bankruptcy:
- The trustee should not be required to defer to a debtor DCO’s recovery and wind-down plans when implementing such plans, because such plans are not sufficiently prescriptive, are not created with Commission approval or enough market input, and are not publicly disclosed;
- deference should not be granted to a debtor DCO’s implementation of its own recovery and wind-down plans—adding this layer of deference will not enhance ex ante certainty; and
- more explicit authority should be granted to the trustee to conduct the DCO bankruptcy in accordance with the core principles of proposed § 190.00 and the reduction of systemic risk generally.
Second, regarding customer net equity claims and debtor DCO property:
- When determining net equity claims,
- explicit credit should be given to customers for any gains that were haircut during gains-based haircutting; and
- such claims should be calculated as if a debtor DCO has “reverse the waterfall” rules that address each level of the DCO’s waterfall.
- Further, customer property should always include the property a debtor DCO contributes to its default waterfall (such property, the debtor DCO’s “skin in the game”), and all of a debtor DCO’s property should be available to satisfy customer claims in respect of gains haircut and non-default losses (“NDLs”) that were not explicitly allocated under the debtor DCO’s rules.
Finally, with respect to the determination of the under-margined status of a customer of a debtor futures commission merchant (“FCM”):
- It is critical to provide the customer the opportunity to demonstrate that a margin payment was made;
- to the extent any of its gains were haircut, the customer should be given credit for such gains; and
- the timeframe to meet margin calls should reflect what is provided for in the applicable underlying agreements.
The Associations urged the Commission to prioritize finalizing the Part 190 Bankruptcy rules as methodical, transparent and expedient bankruptcy proceedings provide stability and protect market participants and investors.
