Industry commenters offered recommendations on a CFTC proposal to "comprehensively update" its bankruptcy regulations (Part 190 of the CFTC regulations) (see previous coverage of the CFTC proposal).
Highlights from the comments include:
- ISDA supported the proposal. ISDA recommended that the CFTC consider the Part 190 regulations to support close-out netting as a standard practice. In particular, ISDA suggested a revision to the DCO insolvency rules (proposed 190.14(c)(1)) to require, among other things, that a trustee must liquidate all open contracts of a derivatives clearing organization ("DCO") within seven days following an order for relief. ISDA also encouraged the CFTC to consult with market participants and the FDIC to further spell out what would happen in the process of a recovery and resolution, and of a DCO.
- In a joint letter, SIFMA AMG and the MFA (the "group") said they "strongly support" the CFTC effort to update the Part 190 regulations. The group expressed "concern about the policy of requiring a trustee to defer to a DCO recovery plan, given that such plans are not sufficiently certain or publicly disclosed. The group said that customer net equity claims should (i) be given credit for gains haircuts as part of "gains-based haircutting," (ii) be calculated as if the DCO has "reverse the waterfall" rules and (iii) include property a DCO contributes to its default waterfall. Further, the group recommended that all DCO property should be able to satisfy customer claims for gains haircuts and non-default losses not explicitly allocated under the DCO rules. The group also said that when determining the under-margined status of a futures commission merchant ("FCM") customer, the customer should be given the opportunity to demonstrate that relevant margin payments were made, and that the time period for meeting the margin call should reflect the agreement between the FCM and customer.
- The Investment Company Institute ("ICI") supported the FCM-related amendments. However, ICI expressed concern that the DCO-related provisions "would harm public customers and cause uncertainty and market disruption in a time of stress." ICI urged the CFTC not to defer to the current DCO rules in a bankruptcy proceeding, describing the rules as lacking "clarity, transparency, [and not having been subject to] rigorous review."
- The Chicago Board Options Exchange supported the proposal, highlighting the clarity proposed in Rule 190.00(e) to address portfolio margining programs.
- The Intercontinental Exchange ("ICE") raised several issues with the proposal stating that (i) it fails to adequately address issues arising in the context of a non-U.S. DCO or a DCO otherwise "significantly engaged" in cross-border clearing activities; and (ii) it appears to override limitations under DCO rules relating to clearing member liabilities, including separate default waterfalls, guarantee fund resources for certain asset classes or recourse limitations. ICE also suggested that a preference for public customers would be inconsistent with the distribution scheme under the Bankruptcy Code.
- CME expressed support for the proposal. CME suggested, among other things, (1) special considerations for letters of credit posted by a customer, (2) clarification of the designation of hedge accounts and the treatment of delivery accounts for FCMs, and (3) testing of the enforceability of DCO default rules.
A full list of comments on the proposal can be found here.
Originally published July 15, 2020.
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