17 CFR 190, Appendix B to Part 190 - Special Bankruptcy Distributions
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Appendix B to Part 190—Special Bankruptcy Distributions
Framework 1—Special Distribution of Customer Funds When FCM Participated in Cross-Margining
The Commission has established the following distributional convention with respect to customer funds held by a futures commission merchant (FCM) that participated in a cross-margining (XM) program which shall apply if participating market professionals sign an agreement that makes reference to this distributional rule and the form of such agreement has been approved by the Commission by rule, regulation or order:
All customer funds held in respect of XM accounts, regardless of the product that customers holding such accounts are trading, are required by Commission order to be segregated separately from all other customer segregated funds. For purposes of this distributional rule, XM accounts will be deemed to be commodity interest accounts and securities held in XM accounts will be deemed to be received by the FCM to margin, guarantee or secure commodity interest contracts. The maintenance of property in an XM account will result in subordination of the claim for such property to certain non-XM customer claims and thereby will operate to cause such XM claim not to be treated as a customer claim for purposes of the Securities Investors Protection Act and the XM securities to be excluded from the securities estate. This creates subclasses of customer accounts, an XM account and a non-XM account (a person could hold each type of account), and results in two pools of customer segregated funds: An XM pool and a non-XM pool. In the event that there is a shortfall in the non-XM pool of customer class segregated funds and there is no shortfall in the XM pool of customer segregated funds, all customer net equity claims, whether or not they arise out of the XM subclass of accounts, will be combined and will be paid pro rata out of the total pool of available XM and non-XM customer funds. In the event that there is a shortfall in the XM pool of customer segregated funds and there is no shortfall in the non-XM pool of customer segregated funds, then customer net equity claims arising from the XM subclass of accounts shall be satisfied first from the XM pool of customer segregated funds, and customer net equity claims arising from the non-XM subclass of accounts shall be satisfied first from the non-XM customer segregated funds. Furthermore, in the event that there is a shortfall in both the non-XM and XM pools of customer segregated funds: (1) If the non-XM shortfall as a percentage of the segregation requirement in the non-XM pool is greater than or equal to the XM shortfall as a percentage of the segregation requirement in the XM pool, all customer net equity claims will be paid pro rata; and (2) if the XM shortfall as a percentage of the segregation requirement in the XM pool is greater than the non-XM shortfall as a percentage of the segregation requirement of the non-XM pool, non-XM customer net equity claims will be paid pro rata out of the available non-XM segregated funds, and XM customer net equity claims will be paid pro rata out of the available XM segregated funds. In this way, non-XM customers will never be adversely affected by an XM shortfall.
The following examples illustrate the operation of this convention. The examples assume that the FCM has two customers, one with exclusively XM accounts and one with exclusively non-XM accounts. However, the examples would apply equally if there were only one customer, with both an XM account and a non-XM account.
1. Sufficient Funds to Meet Non-XM and XM Customer Claims:
| Non-XM | XM | Total | |
|---|---|---|---|
| Funds in segregation | 150 | 150 | 300 |
| Segregation requirement | 150 | 150 | 300 |
| Shortfall (dollars) | 0 | 0 | |
| Shortfall (percent) | 0 | 0 | |
| Distribution | 150 | 150 | 300 |
There are adequate funds available and both the non-XM and the XM customer claims will be paid in full.
2. Shortfall in Non-XM Only:
| Non-XM | XM | Total | |
|---|---|---|---|
| Funds in segregation | 100 | 150 | 250 |
| Segregation requirement | 150 | 150 | 300 |
| Shortfall (dollars) | 50 | 0 | |
| Shortfall (percent) | 50/150=33.3 | 0 | |
| Pro rata (percent) | 150/300=50 | 150/300=50 | |
| Pro rata (dollars) | 125 | 125 | |
| Distribution | 125 | 125 | 250 |
Due to the non-XM account, there are insufficient funds available to meet both the non-XM and the XM customer claims in full. Each customer will receive his pro rata share of the funds available, or 50% of the $250 available, or $125.
3. Shortfall in XM Only:
| Non-XM | XM | Total | |
|---|---|---|---|
| Funds in segregation | 150 | 100 | 250 |
| Segregation requirement | 150 | 150 | 300 |
| Shortfall (dollars) | 0 | 50 | |
| Shortfall (percent) | 0 | 50/150=33.3 | |
| Pro rata (percent) | 150/300=50 | 150/300=50 | |
| Pro rata (dollars) | 125 | 125 | |
| Distribution | 150 | 100 | 250 |
Due to the XM account, there are insufficient funds available to meet both the non-XM and the XM customer claims in full. Accordingly, the XM funds and non-XM funds are treated as separate pools, and the non-XM customer will be paid in full, receiving $150 while the XM customer will receive the remaining $100.
4. Shortfall in Both, With XM Shortfall Exceeding Non-XM Shortfall:
| Non-XM | XM | Total | |
|---|---|---|---|
| Funds in segregation | 125 | 100 | 225 |
| Segregation requirement | 150 | 150 | 300 |
| Shortfall (dollars) | 25 | 50 | |
| Shortfall (percent) | 25/150=16.7 | 50/150=33.3 | |
| Pro rata (percent) | 150/300=50 | 150/300=50 | |
| Pro rata (dollars) | 112.50 | 112.50 | |
| Distribution | 125 | 100 | 225 |
There are insufficient funds available to meet both the non-XM and the XM customer claims in full, and the XM shortfall exceeds the non-XM shortfall. The non-XM customer will receive the $125 available with respect to non-XM claims while the XM customer will receive the $100 available with respect to XM claims.
5. Shortfall in Both, With Non-XM Shortfall Exceeding XM Shortfall:
| Non-XM | XM | Total | |
|---|---|---|---|
| Funds in segregation | 100 | 125 | 225 |
| Segregation requirement | 150 | 150 | 300 |
| Shortfall (dollars) | 50 | 25 | |
| Shortfall (percent) | 50/150=33.3 | 25/150=16.7 | |
| Pro rata (percent) | 150/300=50 | 150/300=50 | |
| Pro rata (dollars) | 112.50 | 112.50 | |
| Distribution | 112.50 | 112.50 | 225 |
There are insufficient funds available to meet both the non-XM and the XM customer claims in full, and the non-XM shortfall exceeds the XM shortfall. Each customer will receive 50% of the $225 available, or $112.50.
6. Shortfall in Both, Non-XM Shortfall = XM Shortfall:
| Non-XM | XM | Total | |
|---|---|---|---|
| Funds in segregation | 100 | 100 | 200 |
| Segregation requirement | 150 | 150 | 300 |
| Shortfall (dollars) | 50 | 50 | |
| Shortfall (percent) | 50/150=33.3 | 50/150=33.3 | |
| Pro rata (percent) | 150/300=50 | 150/300=50 | |
| Pro rata (dollars) | 100 | 100 | |
| Distribution | 100 | 100 | 200 |
There are insufficient funds available to meet both the non-XM and the XM customer claims in full, and the non-XM shortfall equals the XM shortfall. Each customer will receive 50% of the $200 available, or $100.
These examples illustrate the principle that pro rata distribution across both accounts is the preferable approach except when a shortfall in the XM account could harm non-XM customers. Thus, pro rata distribution occurs in Examples 1, 2, 5 and 6. Separate treatment of the XM and non-XM accounts occurs in Examples 3 and 4.
Framework 2—Special Allocation of Shortfall to Customer Claims When Customer Funds are Held in a Depository Outside of the United States or in a Foreign Currency
The Commission has established the following allocation convention with respect to customer funds segregated pursuant to the Act and Commission rules thereunder held by a futures commission merchant (“FCM”) or derivatives clearing organization (“DCO”) in a depository outside the United States (“U.S.”) or in a foreign currency. The maintenance of customer funds in a depository outside the U.S. or denominated in a foreign currency will result, in certain circumstances, in the reduction of customer claims for such funds. For purposes of this proposed bankruptcy convention, sovereign action of a foreign government or court would include, but not be limited to, the application or enforcement of statutes, rules, regulations, interpretations, advisories, decisions, or orders, formal or informal, by a federal, state, or provincial executive, legislature, judiciary, or government agency. If an FCM enters into bankruptcy and maintains customer funds in a depository located in the U.S. in a currency other than U.S. dollars or in a depository outside the U.S., the following allocation procedures shall be used to calculate the claim of each customer.
I. Reduction in Claims for General Shortfall
A. Determination of losses not attributable to sovereign action
1. Convert each customer's claim in each currency to U.S. Dollars at the exchange rate in effect on the Final Net Equity Determination Date, as defined in § 190.01(s) (the “Exchange Rate”).
2. Determine the amount of assets available for distribution to customers. In making this calculation, include customer funds that would be available for distribution but for the sovereign action.
3. Convert the amount of assets available for distribution to U.S. Dollars at the Exchange Rate.
4. Determine the Shortfall Percentage that is not attributable to sovereign action, as follows:
B. Allocation of Losses Not Attributable to Sovereign Action
1. Reduce each customer's claim by the Shortfall Percentage.
II. Reduction in Claims for Sovereign Loss
A. Determination of Losses Attributable to Sovereign Action (“Sovereign Loss”)
1. If any portion of a customer's claim is required to be kept in U.S. dollars in the U.S., that portion of the customer's claim is not exposed to Sovereign Loss.
2. If any portion of a customer's claim is authorized to be kept in only one location and that location is:
a. The U.S. or a location in which there is no Sovereign Loss, then that portion of the customer's claim is not exposed to Sovereign Loss.
b. A location in which there is Sovereign Loss, then that entire portion of the customer's claim is exposed to Sovereign Loss.
3. If any portion of a customer's claim is authorized to be kept in only one currency and that currency is:
a. U.S. dollars or a currency in which there is no Sovereign Loss, then that portion of the customer's claim is not exposed to Sovereign Loss.
b. A currency in which there is Sovereign Loss, then that entire portion of the customer's claim is exposed to Sovereign Loss.
4. If any portion of a customer's claim is authorized to be kept in more than one location and:
a. There is no Sovereign Loss in any of those locations, then that portion of the customer's claim is not exposed to Sovereign Loss.
b. There is Sovereign Loss in one of those locations, then that entire portion of the customer's claim is exposed to Sovereign Loss.
c. There is Sovereign Loss in more than one of those locations, then an equal share of that portion of the customer's claim will be exposed to Sovereign Loss in each such location.
5. If any portion of a customer's claim is authorized to be kept in more than one currency and:
a. There is no Sovereign Loss in any of those currencies, then that portion of the customer's claim is not exposed to Sovereign Loss.
b. There is Sovereign Loss in one of those currencies, then that entire portion of the customer's claim is exposed to Sovereign Loss.
c. There is Sovereign Loss in more than one of those currencies, then an equal share of that portion of the customer's claim will be exposed to Sovereign Loss.
B. Calculation of Sovereign Loss
1. The total Sovereign Loss for each location is the difference between:
a. The total customer funds deposited in depositories in that location and
b. The amount of funds in that location that are available to be distributed to customers, after taking into account any sovereign action.
2. The total Sovereign Loss for each currency is the difference between:
a. The value, in U.S. dollars, of the funds held in that currency on the day before the sovereign action took place and
b. The value, in U.S. dollars, of the funds held in that currency on the Final Net Equity Determination Date.
C. Allocation of Sovereign Loss
1. Each portion of a customer's claim exposed to Sovereign Loss in a location will be reduced by:
2. Each portion of a customer's claim exposed to Sovereign Loss in a currency will be reduced by:
3. A portion of a customer's claim exposed to Sovereign Loss in a location or currency will not be reduced below zero. (The above calculations might yield a result below zero where the FCM kept more customer funds in a location or currency than it was authorized to keep.)
4. Any amount of Sovereign Loss from a location or currency in excess of the total amount of funds authorized to be kept in that location or currency (calculated in accord with Section II.1 above) (“Total Excess Sovereign Loss”) will be divided among all customers who have authorized funds to be kept outside the U.S., or in currencies other than U.S. dollars, with each such customer claim reduced by the following amount:
The following examples illustrate the operation of this convention.
Example 1.
No shortfall in any location.
| Customer | Claim | Location(s) customer has consented to having funds held |
|---|---|---|
| A | $50 | U.S. |
| B | €50 | U.K. |
| C | €50 | Germany |
| D | £300 | U.K. |
| Location | Actual asset balance |
|---|---|
| Note: Conversion Rates: 1 = $1; £1=$1.5. | |
| U.S. | $50 |
| U.K. | £300 |
| U.K. | €50 |
| Germany | €50 |
Convert each customer's claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in U.S. dollars |
|---|---|---|---|
| A | $50 | 1.0 | $50 |
| B | €50 | 1.0 | 50 |
| C | €50 | 1.0 | 50 |
| D | £300 | 1.5 | 450 |
| Total | 600.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $50 | 1.0 | $50 | $50 | ||
| U.K. | £300 | 1.5 | 450 | 450 | ||
| U.K. | €50 | 1.0 | 50 | 50 | ||
| Germany | €50 | 1.0 | 50 | 50 | ||
| Total | 600.00 | 0 | 600.00 |
There are no shortfalls in funds held in any location. Accordingly, there will be no reduction of customer claims.
Claims:
| Customer | Claim in U.S. dollars after allocated non-sovereign shortfall | Allocation of shortfall due to sovereign action | Claim after all reductions |
|---|---|---|---|
| A | $50 | $0 | $50 |
| B | 50 | 0 | 50 |
| C | 50 | 0 | 50 |
| D | 450 | 0 | 450 |
| Total | 600.00 | 0.00 | 600.00 |
Example 2.
Shortfall in funds held in the U.S.
| Customer | Claim | Location(s) customer has consented to having funds held |
|---|---|---|
| A | $100 | U.S. |
| B | €50 | U.K. |
| C | €100 | U.K., Germany, or Japan |
| Location | Actual asset balance |
|---|---|
| Note: Conversion Rates: €1=$1. | |
| U.S. | $50 |
| U.K. | €100 |
| Germany | €50 |
Reduction in Claims for General Shortfall
There is a shortfall in the funds held in the U.S. such that only 1/2 of the funds are available.
Convert each customer's claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in US$ |
|---|---|---|---|
| A | $100 | 1.0 | $100 |
| B | €50 | 1.0 | 50 |
| C | €100 | 1.0 | 100 |
| Total | 250.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $50 | 1.0 | $50.00 | $50 | ||
| U.K. | €100 | 1.0 | 100 | 100 | ||
| Germany | €50 | 1.0 | 50 | $50 | ||
| Total | 200.00 | 200.00 |
Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage = (1−200/250) = (1−80%) = 20%.
Reduce each customer's claim by the Shortfall Percentage:
| Customer | Claim in US$ | Allocated shortfall (non-sovereign) | Claim in U.S. dollars after allocated shortfall |
|---|---|---|---|
| A | $100 | $20.00 | $80.00 |
| B | 50 | 10.00 | 40.00 |
| C | 100 | 20.00 | 80.00 |
| Total | 250.00 | 50.00 | 200.00 |
Reduction in Claims for Shortfall Due to Sovereign Action
There is no shortfall due to sovereign action. Accordingly, the customer claims will not be further reduced.
Claims After Reductions
| Customer | Claim in U.S. dollars after allocated non-sovereign shortfall | Allocation of shortfall due to sovereign action | Claim after all reductions |
|---|---|---|---|
| A | $80 | $80.00 | |
| B | 40 | 40.00 | |
| C | 80 | 80.00 | |
| Total | 200.00 | 0 | 200.00 |
Example 3.
Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, not due to sovereign action.
| Customer | Claim | Location(s) customer has consented to having funds held |
|---|---|---|
| A | $150 | U.S. |
| B | €100 | U.K. |
| C | €50 | Germany |
| D | $100 | U.S. |
| D | €100 | U.K. or Germany |
| Location | Actual asset balance |
|---|---|
| Note: Conversion Rates: €1=$1. | |
| U.S. | $250 |
| U.K. | €50 |
| Germany | €100 |
Reduction in Claims for General Shortfall
Convert each customer's claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in US$ |
|---|---|---|---|
| A | $150 | 1.0 | $150 |
| B | €100 | 1.0 | 100 |
| C | €50 | 1.0 | 50 |
| D | $100 | 1.0 | 100 |
| D | €100 | 1.0 | 100 |
| Total | 500.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $250 | 1.0 | $250 | $250 | ||
| U.K. | €50 | 1.0 | 50 | 50 | ||
| Germany | €100 | 1.0 | 100 | 100 | ||
| Total | 400.00 | 0 | 400.00 |
Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage = (1−400/500) = (1−80%) = 20%.
Reduce each customer's claim by the shortfall percentage:
| Customer | Claim in US$ | Allocated shortfall (non-sovereign) | Claim in U.S. dollars after allocated shortfall |
|---|---|---|---|
| A | $150 | $30.00 | 120.00 |
| B | 100 | 20.00 | 80.00 |
| C | 50 | 10.00 | 40.00 |
| D | 200 | 40.00 | 160.00 |
| Total | 500.00 | 100.00 | 400.00 |
Reduction in Claims for Shortfall Due to Sovereign Action
There is no shortfall due to sovereign action. Accordingly, the claims will not be further reduced.
Claims After Reductions
| Customer | Claim in U.S. dollars after allocated non-sovereign shortfall | Allocation of shortfall due to sovereign action | Claim after all reductions |
|---|---|---|---|
| A | $120.00 | $120 | |
| B | 80.00 | 80 | |
| C | 40.00 | 40 | |
| D | 160.00 | 0 | 160 |
| Total | 400.00 | 0 | 400 |
Example 4.
Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action.
| Customer | Claim | Location(s) where customer has consented to have funds held |
|---|---|---|
| A | $50 | U.S. |
| B | €50 | U.K. |
| C | €50 | Germany |
| D | $100. | U.S. |
| D | €100 | U.K. or Germany |
| Location | Actual asset balance |
|---|---|
| Notice: Conversion Rates: €1 = $1; ¥1= $0.01, £1= $1.5. | |
| U.S. | $150 |
| U.K. | 100 |
| Germany | 100 |
Reduction in Claims for General Shortfall
Convert each customer's claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in US$ |
|---|---|---|---|
| A | $50 | 1.0 | $50 |
| B | €50 | 1.0 | 50 |
| C | €50 | 1.0 | 50 |
| D | $100 | 1.0 | 100 |
| D | €100 | 1.0 | 100 |
| Total | 350.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $150 | 1.0 | $150 | $150 | ||
| U.K. | €100 | 1.0 | 100 | 100 | ||
| Germany | €100 | 1.0 | 100 | 50% | 50 | 50 |
| Total | 350.00 | 50.00 | 300.00 |
Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage = (1−350/350) = (1−100%) = 0%.
Reduce each customer's claim by the shortfall percentage:
| Customer | Claim in US$ | Allocated shortfall (non-sovereign) | Claim in U.S. dollars after allocated shortfall |
|---|---|---|---|
| A | $50 | 0 | $50.00 |
| B | 50 | 0 | 50.00 |
| C | 50 | 0 | 50.00 |
| D | 200 | 0 | 200.00 |
| Total | 350.00 | 0.00 | 350.00 |
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, only 1/2 of the funds in Germany are available.
| Customer | Presumed location of funds | ||
|---|---|---|---|
| U.S. | U.K. | Germany | |
| A | $50 | ||
| B | $50 | ||
| C | $50 | ||
| D | 100 | 100 | |
| Total | 150.00 | 50.00 | 150.00 |
Calculation of the allocation of the shortfall due to sovereign action—Germany ($50 shortfall to be allocated):
| Customer | Allocation share | Allocation share of actual shortfall | Actual shortfall allocated |
|---|---|---|---|
| C | $50/$150 | 33.3% of $50 | $16.67 |
| D | 100/$150 | 66.7% of $50 | 33.33 |
| Total | 50.00 |
Claims After Reductions:
| Customer | Claim in U.S. dollars after allocated non-sovereign shortfall | Allocation of shortfall due to sovereign action from Germany | Claim after all reductions |
|---|---|---|---|
| A | $50 | $50 | |
| B | 50 | 50 | |
| C | 50 | $16.67 | 33.33 |
| D | 200 | 33.33 | 166.67 |
| Total | 350.00 | 50.00 | 300.00 |
Example 5.
Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action and a shortfall in funds held in the U.S.
| Customer | Claim | Location(s) customer has consented to having funds held |
|---|---|---|
| A | $100 | U.S. |
| B | €50 | U.K. |
| C | €150 | Germany |
| D | $100 | U.S. |
| D | £300 | U.K. |
| D | €150 | U.K. or Germany |
| Location | Actual asset balance |
|---|---|
| Conversion Rates: €1=$1; £1=$1.5. | |
| U.S. | $100 |
| U.K. | £300 |
| U.K. | €200 |
| Germany | €150 |
Reduction in Claims for General Shortfall
Convert each customer's claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in US$ |
|---|---|---|---|
| A | $100 | 1.0 | $100 |
| B | €50 | 1.0 | 50 |
| C | €150 | 1.0 | 150 |
| D | $100 | 1.0 | 100 |
| D | £300 | 1.5 | 450 |
| D | €150 | 1.0 | 150 |
| Total | 1000.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $100 | 1.0 | $100 | $100 | ||
| U.K. | £300 | 1.5 | 450 | 450 | ||
| U.K. | €200 | 1.0 | 200 | 200 | ||
| Germany | €150 | 1.0 | 150 | 100% | $150 | 0 |
| Total | 900.00 | 150.00 | 750.00 |
Determine the percentage of shortfall that is not attributable to sovereign action: Shortfall Percentage = (1 − 900 / 1000) = (1 − 90%) = 10%.
Reduce each customer's claim by the shortfall percentage:
| Customer | Claim in US$ | Allocated shortfall (non-sovereign) | Claim in U.S. dollars after allocated shortfall |
|---|---|---|---|
| A | $100 | $10.00 | $90.00 |
| B | 50 | 5.00 | 45.00 |
| C | 150 | 15.00 | 135.00 |
| D | 700 | 70.00 | 63.00 |
| Total | 1000.00 | 100.00 | 900.00 |
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, none of the money in Germany is available.
| Customer | Presumed location of funds | ||
|---|---|---|---|
| U.S. | U.K. | Germany | |
| A | $100 | ||
| B | $50 | ||
| C | $150 | ||
| D | 100 | 450 | 150 |
| Total | 200.00 | 500.00 | 300.00 |
Calculation of the allocation of the shortfall due to sovereign action Germany ($150 shortfall to be allocated):
| Customer | Allocation share | Allocation Share of actual shortfall | Actual shortfall allocated |
|---|---|---|---|
| C | $150/$300 | 50% of $150 | $75 |
| D | 150/$300 | 50% of $150 | 75 |
| Total | 150.00 |
Claims After Reductions
| Customer | Claim in U.S. dollars after allocated non-sovereign shortfall | Allocation of shortfall due to sovereign action from Germany | Claim after all reductions |
|---|---|---|---|
| A | $90 | $90 | |
| B | 45 | 45 | |
| C | 135 | $75 | 60 |
| D | 630 | 75 | 555 |
| Total | 900.00 | 150.00 | 750.00 |
Example 6.
Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action, shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, not due to sovereign action, and a shortfall in funds held in the U.S.
| Customer | Claim | Location(s) customer has consented to having funds held |
|---|---|---|
| A | $50 | U.S. |
| B | €50 | U.K. |
| C | $20 | U.S. |
| C | €50 | Germany |
| D | $100. | U.S. |
| D | £300 | U.K. |
| D | €100 | U.K., Germany, or Japan |
| E | $80 | U.S. |
| E | ¥10,000 | Japan |
| Location | Actual asset balance |
|---|---|
| Conversion Rates: £ 1 = $1; ¥1=$0.01, £ 1=$1.5. | |
| U.S. | $200 |
| U.K. | £200 |
| U.K. | €100 |
| Germany | €50 |
| Japan | ¥10,000 |
Reduction in Claims for General Shortfall
Convert each customer s claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in US$ |
|---|---|---|---|
| A | $50 | 1.0 | $50 |
| B | €50 | 1.0 | 50 |
| C | $20 | 1.0 | 20 |
| C | €50 | 1.0 | 50 |
| D | $100. | 1.0 | 100 |
| D | €300 | 1.5 | 450 |
| D | £ 100 | 1.0 | 100 |
| E | $80 | 1.0 | 80 |
| E | ¥10,000 | 0.01 | 100 |
| Total | 1000.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $200 | 1.0 | $200 | $200 | ||
| U.K. | £200 | 1.5 | 300 | 300 | ||
| U.K. | €100 | 1.0 | 100 | 100 | ||
| Germany | €50 | 1.0 | 50 | 100% | $50 | 0 |
| Japan | ¥10,000 | 0.01 | 100 | 50% | 50 | 50 |
| Total | 750 | 100.00 | 650.00 |
Determine the percentage of shortfall that is not attributable to sovereign action:
Shortfall Percentage = (1-750/1000) = (1-75%) = 25%.
Reduce each customer's claim by the shortfall percentage:
| Customer | Claim in U.S.$ | Allocated shortfall (non-sovereign) | Claim in U.S. dollars after allocated shortfall |
|---|---|---|---|
| A | $50 | $12.50 | $37.50 |
| B | 50 | 12.50 | 37.50 |
| C | 70 | 17.50 | 52.50 |
| D | 650 | 162.50 | 487.50 |
| E | 180 | 45.00 | 135.00 |
| Total | 1000.00 | 250.00 | 750.00 |
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, none of the money in Germany and only 1/2 of the funds in Japan are available.
| Customer | Presumed location of funds | |||
|---|---|---|---|---|
| U.S. | U.K. | Germany | Japan | |
| A | $50 | |||
| B | $50 | |||
| C | 20 | $50 | ||
| D | 100 | 450 | 50 | $50 |
| E | 80 | 100 | ||
| Total | 250.00 | 500.00 | 100.00 | 150.00 |
Calculation of the allocation of the shortfall due to sovereign action—Germany ($50 shortfall to be allocated):
| Customer allocation | Allocation share | Allocation share of actual shortfall | Actual shortfall allocated |
|---|---|---|---|
| C | $50/$100 | 50% of $50 | $25 |
| D | 50/100 | 50% of 50 | 25 |
| Total | 50 |
Japan ($50 shortfall to be allocated):
| Customer | Allocation share | Allocation share of actual shortfall | Actual shortfall allocated |
|---|---|---|---|
| D | $50/$150 | 33.3% of $50 | $16.67 |
| E | 100/150 | 66.6% of 50 | 33.33 |
| Total | 50.00 |
Claims After Reductions
| Customer | Claim in US dollars after allocated non-sovereign shortfall | Allocation of shortfall due to soverign action from Germany | Allocation of shortfall due to sovereign action from Japan | Claim after all reductions |
|---|---|---|---|---|
| A | $37.50 | 37.50 | ||
| B | 37.50 | 37.50 | ||
| C | 52.50 | $25 | 27.50 | |
| D | 487.50 | 25 | 16.67 | 445.83 |
| E | 135.00 | 33.33 | 101.67 | |
| Total | 750.00 | 50.00 | 50.00 | 650.00 |
Example 7.
Shortfall in funds held outside the U.S., or in a currency other than U.S. dollars, due to sovereign action, where the FCM kept more funds than permitted in such location or currency.
| Customer | Claim | Location(s) customer has consented to having funds held |
|---|---|---|
| A | $50 | U.S. |
| B | 50 | U.S. |
| B | €50 | U.K. |
| C | €50 | Germany. |
| D | 100. | U.S. |
| D | €100 | U.K. or Germany. |
| E | 50 | U.S. |
| E | €50 | U.K. |
| Location | Actual asset balance |
|---|---|
| U.S. | $250 |
| U.K. | €50 |
| Germany | €200 |
Conversion Rates: 1 = $1.
Reduction in Claims for General Shortfall
Convert each customer's claim in each currency to U.S. Dollars:
| Customer | Claim | Conversion rate | Claim in US$ |
|---|---|---|---|
| A | $50 | 1.0 | $50 |
| B | 50 | 1.0 | 50 |
| B | €50 | 1.0 | 50 |
| C | €50 | 1.0 | 50 |
| D | €100. | 1.0 | 100 |
| D | €100 | 1.0 | 100 |
| E | 50 | 1.0 | 50 |
| E | €50 | 1.0 | 50 |
| Total | 500.00 |
Determine assets available for distribution to customers, converting to U.S. dollars:
| Location | Assets | Conversion rate | Assets in U.S. dollars | Shortfall due to sovereign action percentage | Actual shortfall due to sovereign action | Amount actually available |
|---|---|---|---|---|---|---|
| U.S. | $250 | 1.0 | $250 | $250 | ||
| U.K. | €50 | 1.0 | 50 | 50 | ||
| Germany | €200 | 1.0 | 200 | 100% | 200 | 0 |
| Total | 500.00 | 200 | 300.00 |
Determine the percentage of shortfall that is not attributable to sovereign
Shortfall Percentage = (1-500/500) = (1-100%) = 0%.
Reduce each customer's claim by the shortfall percentage:
| Customer | Claim in US$ | Allocated shortfall (non-sovereign) | Claim in U.S. dollars after allocated shortfall |
|---|---|---|---|
| A | $50 | $0 | $50.00 |
| B | 100 | 0 | 100.00 |
| C | 50 | 0 | 50.00 |
| D | 200 | 0 | 200.00 |
| E | 100 | 0 | 100.00 |
| Total | 500.00 | 0.00 | 500.00 |
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, none of the money in Germany is available.
| Customer | Presumed location of funds | ||
|---|---|---|---|
| U.S. | U.K. | Germany | |
| A | $50 | ||
| B | 50 | 50 | |
| C | 50 | ||
| D | 100 | 100 | |
| E | 50 | 50 | |
| Total | 250.00 | 100.00 | 150.00 |
Calculation of the allocation of the shortfall due to sovereign action—Germany ($200 shortfall to be allocated):
| Customer | Allocation share | Allocation share of actual shortfall | Actual shortfall allocated |
|---|---|---|---|
| C | $50/$150 | 33.3% of $200 | $66.67 |
| D | $100/$150 | 66.7% of $200 | $133.33 |
| Total | $200.000 |
This would result in the claims of customers C and D being reduced below zero.
Accordingly, the claims of customer C and D will only be reduced to zero, or $50 for C and $100 for D. This results in a Total Excess Shortfall of $50.
| Actual shortfall | Allocation of shortfall for customer C | Allocation of shortfall for customer D | Total excess shortfall |
|---|---|---|---|
| $200 | $50 | $100 | $50 |
This shortfall will be divided among the remaining customers who have authorized funds to be held outside the U.S. or in a currency other than U.S. dollars.
| Customer | Total claims of customers permitting funds to be held outside the U.S. | Portion of claim required to be int the U.S. | Allocation share (column B-C/column B Total—all customer claims in U.S.) | Allocation share of actual total excess shortfall | Actual total excess shortfall allocated |
|---|---|---|---|---|---|
| 1 Claim already reduced to $0. | |||||
| B | $100 | $50 | $50/$200 | 25% of $50 | $12.50 |
| C | 50 | 0 | (1) | 0 | |
| D | 200 | 100 | $100/200 | 50% of $50 | 25 |
| E | 100 | 50 | 50/100 | 25% of $50 | 12.50 |
| Total | 450.00 | 50.00 | |||
Claims After Reductions
| Customer | Claim in U.S. dollars after allocated non-sovereign shortfall | Allocation of shortfall due to sovereign action Germany | Allocation of total excess shortfall | Claim after all reductions |
|---|---|---|---|---|
| A | $50 | $50.00 | ||
| B | 100 | 12.50 | 87.50 | |
| C | 50 | 50 | 0 | |
| D | 200 | 100 | 25 | 75.00 |
| E | 100 | 12.50 | 87.50 | |
| Total | 500.00 | 150.00 | 50.00 | 300.00 |
[48 FR 8739, Mar. 1, 1983, as amended at 68 FR 5552, Feb. 4, 2003]
Pt. 190, App. B, Nt.
Effective Date Note:
At 77 FR 6386, Feb. 7, 2012, appendix B was revised, effective April 9, 2012. For the convenience of the user, the revised text is set forth as follows:
Appendix B to Part 190—Special Bankruptcy Distributions
The Commission has established the following distributional convention with respect to customer funds (as § 1.3 of this chapter defines such term) for futures contracts held by a futures commission merchant (FCM) that participated in a cross-margining (XM) program which shall apply if participating market professionals sign an agreement that makes reference to this distributional rule and the form of such agreement has been approved by the Commission by rule, regulation or order:
All customer funds for futures contracts held in respect of XM accounts, regardless of the product that customers holding such accounts are trading, are required by Commission order to be segregated separately from all other customer segregated funds. For purposes of this distributional rule, XM accounts will be deemed to be commodity interest accounts and securities held in XM accounts will be deemed to be received by the FCM to margin, guarantee or secure commodity interest contracts. The maintenance of property in an XM account will result in subordination of the claim for such property to certain non-XM customer claims and thereby will operate to cause such XM claim not to be treated as a customer claim for purposes of the Securities Investors Protection Act and the XM securities to be excluded from the securities estate. This creates subclasses of futures customer accounts, an XM account and a non-XM account (a person could hold each type of account), and results in two pools of segregated funds belonging to futures customers: An XM pool and a non-XM pool. In the event that there is a shortfall in the non-XM pool of customer class segregated funds and there is no shortfall in the XM pool of customer segregated funds, all futures customer net equity claims, whether or not they arise out of the XM subclass of accounts, will be combined and will be paidpro rataout of the total pool of available XM and non-XM customer funds for futures contracts. In the event that there is a shortfall in the XM pool of customer segregated funds and there is no shortfall in the non-XM pool of customer segregated funds, then futures customer net equity claims arising from the XM subclass of accounts shall be satisfied first from the XM pool of customer segregated funds, and futures customer net equity claims arising from the non-XM subclass of accounts shall be satisfied first from the non-XM customer segregated funds. Furthermore, in the event that there is a shortfall in both the non-XM and XM pools of customer segregated funds: (1) If the non-XM shortfall as a percentage of the segregation requirement in the non-XM pool is greater than or equal to the XM shortfall as a percentage of the segregation requirement in the XM pool, all futures customer net equity claims will be paidpro rata;and (2) if the XM shortfall as a percentage of the segregation requirement in the XM pool is greater than the non-XM shortfall as a percentage of the segregation requirement of the non-XM pool, non-XM futures customer net equity claims will be paidpro rataout of the available non-XM segregated funds, and XM futures customer net equity claims will be paidpro rataout of the available XM segregated funds. In this way, non-XM customers will never be adversely affected by an XM shortfall.
The following examples illustrate the operation of this convention. The examples assume that the FCM has two customers, one with exclusively XM accounts and one with exclusively non-XM accounts. However, the examples would apply equally if there were only one customer, with both an XM account and a non-XM account.
Title 17 published on 2012-04-01
The following are only the Rules published in the Federal Register after the published date of Title 17.
For a complete list of all Rules, Proposed Rules, and Notices view the Rulemaking tab.
Title 17 published on 2012-04-01
The following are ALL rules, proposed rules, and notices (chronologically) published in the Federal Register relating to 17 CFR 190 after this date.
