By Todd Kemp, Senior Vice President, Treasurer
The NGFA on July 13 submitted an official statement to the Commodity Futures Trading Commission (CFTC) responding to its proposal that would update the agency’s rules governing bankruptcy proceedings involving futures commission merchants (FCMs) and designated clearing organizations (DCOs).
The CFTC proposal would be the first update of its bankruptcy regulations since 1983 and would modernize policies and procedures and strengthen existing CFTC practices that have been employed in previous insolvencies.
The proposal was of particular interest to the NGFA and its member companies in the wake of the MF Global bankruptcy in 2011 and the insolvency of Peregrine Financial Group in 2012. In particular, the MF Global episode resulted in significant amounts of segregated customer funds being put at risk and unavailable to customers for an extended period of time. The NGFA was deeply involved in recommending new customer protections following then MF Global episode, and the new CFTC proposal meshes nicely with resulting CFTC customer-protection rules. The new proposal also harmonizes CFTC’s bankruptcy rules with certain provisions of the Commodity Exchange Act and the U.S. bankruptcy code.
Specific elements of the proposal supported by NGFA in its letter included:
- Shortfalls in segregated customer property should be recoverable from general assets of the FCM. This was an issue during the MF Global insolvency. Even though the trustee eventually was able to claw back significant assets from affiliates and proprietary business units, it took a very long time. The NGFA is supportive of changes that result in quicker return of customer property and clarify various sources from the debtor’s estate from which funds can be accessed.
- Priority should be given to public customers over non-public customers as customer property is recovered and distributed on a pro rata basis by account class, consistent with the proposal.
- The proposal also strengthens an existing preference for prompt transfer of customer accounts and positions to another FCM as opposed to liquidating customer accounts.
The full text of the NGFA letter can be accessed here.
Following a review of comments submitted by NGFA and other organizations, the CFTC is likely to move toward approving a final rule in the fall.