On April 14, 2020, the Commodity Futures Trading Commission (the “CFTC”) proposed amendments (the “Proposal”) to its Part 190 regulations (“Part 190”) that govern the liquidation of a “commodity broker,” including a futures commission merchant (an “FCM”) or a derivatives clearing organization (a “DCO”).
The Proposal represents the CFTC’s first attempt to materially revise Part 190 since its original promulgation in 1983. However, as relates to FCMs, the Proposal would constitute more of an update and modernization than a substantive overhaul. The Proposal’s FCM provisions would largely retain the existing Part 190 framework, with adjustments to reduce uncertainty, align procedural and other requirements with regulatory and technological changes over the past four decades, and codify as formal rules many of the CFTC’s previously expressed positions. As a result, with limited exceptions discussed below, the Proposal, if implemented, would not materially change how an FCM bankruptcy is conducted.
Nonetheless, with respect to DCOs, the Proposal represents a material substantive change. Although the Proposal would continue Part 190’s existing approach of applying to an insolvent DCO many of the rules applicable in an FCM liquidation, it would in many instances allow the DCO’s own rules to override those provisions. Specifically, the Proposal would give effect to the DCO’s loss allocation, recovery, and wind-down rules, even if those rules are not consistent with the Part 190 framework. As a result, the Proposal would shift to DCOs the responsibility of developing a workable and equitable liquidation framework. It could also mean that different rules govern the liquidation of different DCOs.
This memorandum provides a brief overview of the regulations applicable to FCM and DCO insolvencies and key takeaways from the Proposal.