[Federal Register Volume 59, Number 71 (Wednesday, April 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8783]
[[Page Unknown]]
[Federal Register: April 13, 1994]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 190
Distribution of Property of Bankrupt Futures Commission Merchant
That Had Participated in a Cross-Margining Program
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
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SUMMARY: The Commodity Futures Trading Commission (Commission) has
adopted an additional appendix to its bankruptcy rules to govern the
distribution of property where the debtor is a futures commission
merchant (FCM) that holds cross-margin (XM) accounts as well as non-XM
accounts. This new distributional framework is intended to assure that
non-XM customers of such an FCM will not be adversely affected by a
shortfall in the pool of XM funds. The new distributional framework
will become applicable to each non-proprietary XM program at such time
as the relevant clearing organizations submit an amended participant
agreement that makes reference to the new distributional framework and
such agreement is approved by the Commission.
EFFECTIVE DATE: May 13, 1994.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or John C. Lawton, Associate Director, Division of Trading and
Markets, Commodity Futures Trading Commission, 2033 K St. NW.,
Washington, DC 20581. Telephone: (202) 254-8955.
SUPPLEMENTARY INFORMATION:
I. Introduction
On December 28, 1993, the Commission published a proposed
additional appendix to its bankruptcy rules that would govern the
distribution of property where the debtor is an FCM that holds XM
accounts as well as non-XM accounts and allowed thirty days for comment
thereon.1 The Commission received one written comment in response
to the proposal, from the Chicago Board Options Exchange (CBOE), which
expressed support for the proposal. The Commission has carefully
considered this comment and, based upon that review and its own
reconsideration of the issue, has determined to adopt the additional
appendix to its bankruptcy rules essentially as proposed.
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\1\58 FR 68580.
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II. Background of XM Programs
In XM programs, intermarket positions with offsetting risk
characteristics are margined together as a single portfolio. These
intermarket positions include stock index futures, options on stock
index futures and stock index options, as well as foreign currency
futures, options on foreign currency futures and foreign currency
options. Because the related intermarket positions are essentially
offsetting and therefore may effectively serve as margin collateral for
one another, the margin requirement for the combined position may be
lower than if each were margined separately.
Currently, there generally are two types of XM programs--
proprietary and non-proprietary.2 In proprietary programs, XM
treatment is given to intermarket positions in proprietary (i.e., non-
customer) accounts maintained by participating clearing members. With
non-proprietary XM programs, XM treatment is given at the clearing
organization level for intermarket positions maintained by clearing
members for market professionals.
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\2\The Commission has approved a number of proprietary XM
programs between futures clearing organizations and the Options
Clearing Corporation (OCC), a clearing organization for options
listed on the American Stock Exchange, Chicago Board Options
Exchange, New York Stock Exchange, Pacific Stock Exchange and
Philadelphia Stock Exchange. To date, the Commission has approved
proprietary XM programs between the OCC and the following futures
clearing organizations: Intermarket Clearing Corporation (ICC) (June
1, 1988); Chicago Mercantile Exchange (CME) (September 26, 1989);
Board of Trade Clearing Corporation (BOTCC) (October 31, 1991);
Kansas City Board of Trade Clearing Corporation (KCBTCC) (February
25, 1992); and Comex Clearing Association (September 9, 1992). The
Commission has also approved trilateral proprietary XM programs
among the CME, ICC and OCC (June 2, 1993) and among the Commodity
Clearing Corporation (CCC), ICC and OCC (December 28, 1993).
Similarly, the Commission has approved non-proprietary XM
programs between OCC and the following futures clearing
organizations: CME (November 26, 1991); ICC (November 26, 1991);
BOTCC (July 21, 1993); and KCBTCC (July 21, 1993). The Commission
has also approved trilateral non-proprietary XM programs among CME,
ICC and OCC (June 2, 1993) and among CCC, ICC and OCC (December 28,
1993).
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III. Previous Bankruptcy Distribution in the Context of XM Programs
Under the various non-proprietary XM programs, the futures trades
and securities positions of eligible market professionals are deemed to
be customer property under section 4d(2) of the Commodity Exchange
Act3 and any customer net equity claim which a participating
market professional has in respect of XM property held by a clearing
firm in a non-proprietary XM account must be treated as a customer net
equity claim under part 190 of the Commission's rules4 and
subchapter IV of chapter 7 of the Bankruptcy Code (the commodity broker
liquidation provisions).5 In the case of an FCM bankruptcy, the
commodity broker liquidation provisions of the Bankruptcy Code and part
190 of the Commission's rules provide for a pro rata distribution of
assets among the section 4d(2) customers whose accounts are carried by
such FCM. Thus, absent some provision to the contrary, if a
participating clearing member defaulted due to losses in its non-
proprietary XM account, non-XM customers could be forced to share in
those losses.6
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\3\7 U.S.C. 6d(2) (1988).
\4\17 CFR part 190.
\5\Without some contrary provision, the assets of a securities
broker-dealer who cleared the options trades of a cross-margining
market professional would be distributed in the event of a
bankruptcy pursuant to subchapter III of chapter 7 of the Bankruptcy
Code, 11 U.S.C. 741-752 (1988), or the Securities Investors
Protection Act (SIPA), 15 U.S.C. 78aaa et seq. (1988). In order for
a securities broker-dealer to participate in a non-proprietary XM
program, it must elect customer property treatment under part 190 of
the Commission's rules in lieu of under SIPA, as further discussed
below.
\6\11 U.S.C. 761-766 (1988). See, e.g., Commission Order, In the
Matter of the Chicago Mercantile Exchange Proposal to Expand its
Cross-Margining Program with the Options Clearing Corporation to
Include the Cross-Exchange Net Margining of the Positions of Market
Professionals at 9 (November 26, 1991), reprinted in 56 FR 61404,
61406 (December 3, 1991), and Commission Order, In the Matter of The
Intermarket Clearing Corporation Proposal to Expand its Cross-
Margining Program with the Options Clearing Corporation to Include
the Cross-Exchange Net Margining of the Positions of Market
Professionals at 9 (November 26, 1991), reprinted in 56 FR 61406,
61408 (December 3, 1991).
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In order to avoid this possibility, Commission orders approving
each of the current non-proprietary XM programs have required
participating market professionals to execute agreements whereby they
subordinate their XM-related claims to customer claims based on non-XM
positions in the event of the clearing member's bankruptcy. The net
equity claims of non-XM customers thus have been accorded priority over
the net equity claims of XM customers.
The relevant Commission orders approving the various cross-margin
programs and various subordination agreements, as prescribed by
relevant exchange rules, among market professionals, their clearing
members and the clearing organizations involved, established the
previous bankruptcy distribution framework. In the case of the
bankruptcy of a clearing member participating in a non-proprietary XM
program, the trustee would marshal all of the assets that were
available to satisfy customer claims as set forth in Commission Rule
190.08 (whether such funds derived from XM customers, non-XM customers
or any other available source and irrespective of whether the shortfall
in the segregated funds accounts were attributable to XM or non-XM
customers). The trustee would determine if there were sufficient funds
to satisfy in full the net equity claims of all non-XM customers
cleared by the clearing member. If all such net equity claims of non-XM
customers could be satisfied in full, the trustee would make the
appropriate distributions and market professionals who participated in
an XM program would receive any remaining funds to be shared on a pro
rata basis. If there were not sufficient funds to satisfy non-XM net
equity claims in full, the trustee would distribute to the non-XM
customers only whatever funds were available on a pro rata basis and
market professionals participating in the XM program would receive
nothing.
The result of the market professionals' subordination required by
the Commission orders has been that the market professionals' XM-
related assets would be included within the pool of customer funds
available to meet the claims of the clearing member's non-XM
customers.7 Upon satisfaction of these ``regular'' customer
claims, any excess customer property would be distributed to the
various market professionals cleared by the defaulting member based
upon their XM-related claims consistent with the pro rata distribution
scheme of the Bankruptcy Code and part 190 of the Commission's rules.
Thus, non-XM customers would never receive less than they would have
received in the absence of an XM program.8
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\7\Market professionals also would be included within this group
of customers to the extent they had non-XM related customer claims.
\8\Where there is a shortfall in the amount of funds in
segregation attributable to non-XM customers and there are remaining
funds in segregation attributable to XM customers, non-XM customers
could achieve a greater distribution than if there were no XM
program and subordination agreement.
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IV. New Bankruptcy Distribution in the Context of XM Programs
When the Commission adopted its part 190 bankruptcy rules,9 it
included an appendix intended to facilitate a trustee's operation of
the estate of a bankrupt commodity broker. This appendix includes a
schedule of trustee's duties, forms concerning customer instructions
for return of non-cash property and transfer of hedge contracts, and a
proof of claim form. The Commission has now adopted a new appendix to
part 190 to provide further guidance to a trustee of a bankrupt FCM
with respect to the appropriate distribution of property where the FCM
had been a participant in an XM program that includes non-proprietary
positions. As described above, such programs are now numerous and
include non-proprietary positions in certain instances and where they
do so, participating market professionals have been required by
Commission order, among other things, to execute agreements whereby
they subordinate their XM-related claims to the claims of non-XM
customers in the event of bankruptcy in all instances.
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\9\48 FR 8716 (March 1, 1983).
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The new bankruptcy appendix will continue the concept of
subordination for purposes of assuring treatment of the market
professionals' securities included in an XM account as part of the
commodity estate, but will modify the method for distribution of
property of a bankrupt FCM which had participated in an XM program that
includes non-proprietary positions such that the subordination to
futures customers in the event of bankruptcy is more limited. However,
the Commission orders and the clearing organization rules will continue
to require each market professional participating in an XM program to
agree that all of his XM assets carried by his clearing member,
including securities options, will not be deemed to be ``customer
property'' under SIPA and will be treated pursuant to the commodity
broker liquidation provisions of the Bankruptcy Code. Thus, the market
professional will remain removed from the class of customers whose
claims will be disposed of pursuant to SIPA10 and, accordingly,
the market professional's XM assets carried by a securities broker-
dealer would continue to be considered as other than SIPA customer
property, since such property is defined to include only cash or
securities held for the account of a SIPA customer.11
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\1\0Specifically, SIPA excludes a person from the definition of
a SIPA customer ``to the extent that such person has a claim for
cash or securities which by contract, agreement, or understanding,
or by operation of law * * * is subordinated to the claims of any or
all creditors of the debtor * * *.'' 15 U.S.C. 78lll(2)(B)(1988).
\1\115 U.S.C. 78lll(4); Securities Exchange Act Release No. 34-
29991, 56 FR 61458 (December 3, 1991); Securities Exchange Act
Release No. 34-30041, 56 FR 64824 (December 12, 1991). See also
Memorandum Recommending Approval of the Chicago Mercantile
Exchange's and the Intermarket Clearing Corporation's Proposals to
Expand Their Respective Cross-Margining Programs with the Options
Clearing Corporation to Include the Cross-Exchange Net Margining of
the Positions of Certain Market Professionals at 68-69, reprinted in
[1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,190 at
38,504-38,505 (November 21, 1991).
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The guiding principles of the new appendix to part 190 are to
assure that there is generally pro rata distribution to customers of
the customer funds in the bankrupt FCM's commodity interest estate and
that non-XM customers of such an FCM are not adversely affected by a
shortfall in the pool of XM funds. The new appendix preserves the
principle that non-XM customers will never receive less than they would
have received in the absence of an XM program, but the distributional
rule will not require market professionals participating in XM programs
to subordinate claims they may make for customer property in all
instances.
Under the new appendix, a bankruptcy trustee handling the commodity
interest estate of a bankrupt FCM with XM customer funds must first
determine the respective shortfalls, if any, in the pools of XM
customer and non-XM customer segregated funds. The trustee then would
calculate the shortfall in each pool as a percentage of the segregation
requirement for the pool. If there were no shortfall in either of the
two pools; if there were an equal percentage shortfall in the two
pools; if there were a shortfall in the non-XM pool only; or if the
percentage of shortfall were greater in the non-XM pool than in the XM
pool, the two pools of segregated funds would be combined and XM
customers and non-XM customers would share pro rata in the combined
pool.12 However, if there were a shortfall in the XM pool only, or
if the percentage of shortfall were greater in the XM pool than in the
non-XM pool, the two pools of segregated funds would not be
combined.13 Rather, XM customers would share pro rata in the pool
of XM segregated funds, while non-XM customers would share pro rata in
the pool of non-XM segregated funds. To facilitate this distributional
framework, subclasses of customer accounts, an XM account and a non-XM
account, would be recognized.14
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\1\2See Examples 1, 6, 2 and 5 of appendix B to part 190,
Framework 1.
\1\3See Examples 3 and 4 of appendix B to part 190, Framework 1.
\1\4As noted above, CBOE filed the only written comment on the
Commission's proposal, expressing support. However, CBOE also stated
its belief that the two pools of segregated funds should be treated
separately in all instances, which would result in more favorable
treatment of XM customers in Examples 2 and 5.
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As with the previous distribution system for a bankrupt FCM with
XM-related claims, the new appendix ensures that non-XM customers will
never receive less than they would have received in the absence of an
XM program. Of course, without the specific subordination of XM
customer claims to non-XM customer claims in all cases by market
professionals participating in XM programs, non-XM customers will,
depending upon the circumstances, receive either equivalent or less
favorable distributions under the approach of the new appendix than
they would have received under the Commission's previous bankruptcy
distribution for FCMs participating in an XM program. In those cases
where there is no shortfall in the non-XM pool (see Examples 1 and 3),
the distribution to non-XM customers will be the same under the new
appendix as it has been previously. However, in those cases where there
is a shortfall in the non-XM pool, the pro rata distribution across the
combined XM and non-XM pools (see Examples 2, 5 and 6) or the separate
treatment of the XM and non-XM pools and the XM and non-XM account
subclasses (see Example 4) will generally mean a less favorable
distribution to the non-XM customers than has been previously
required.15 This is the result because there will no longer be a
marshalling of all assets available from segregated funds, including
those attributable to XM customers, to satisfy all claims from non-XM
customers before any claim of an XM customer can be satisfied. The
Commission believes these outcomes are fair to all parties involved and
consistent with general bankruptcy principles, and that they eliminate
the need for execution of a separate subordination agreement to comply
with section 4d(2) of the Commodity Exchange Act once participating
market professionals elect ``commodity'' customer treatment for the XM
account.
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\1\5Of course, if there were no segregated funds available at
all attributable to XM customers, which could be the case in extreme
circumstances under Examples 4 or 6, there would also be no
difference in the distribution to non-XM customers as a result of
the new appendix.
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In order for the participants in a particular non-proprietary XM
program to be covered by the new bankruptcy distributional rule, the
clearing organizations operating the program must submit an amended
form of participant agreement deleting the provision requiring that a
customer net equity claim of a participating market professional be
subordinated to the customer net equity claims of ``public customers''
that do not relate to XM property and substituting a reference to the
distributional rule set forth in the new appendix B. As the Commission
indicated when it proposed the new appendix, it is prepared to modify
its orders relating to non-proprietary XM programs accordingly upon
receipt from the relevant clearing organizations of such amended
participant agreements. The Commission believes the procedure requiring
approval of amended participant agreements is necessary to eliminate
any possible confusion for a trustee as to which distributional rule to
follow in the unlikely event of a bankruptcy of an FCM participating in
a non-proprietary XM program after the effective date of the new
appendix B but before an amended participant agreement is approved by
Commission order.
The Commission has consulted with the Securities and Exchange
Commission (SEC) and the Securities Investor Protection Corporation and
believes that this change will not adversely affect continued treatment
of XM funds under the commodity broker, rather than the securities
broker-dealer, liquidation provisions of the Bankruptcy Code. The
Commission also understands that the OCC will submit conforming rule
changes to the SEC to eliminate the subordination to public customer
requirement from its approval order.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. These rules will affect distributees
of a bankrupt FCM's estate where the FCM had participated in an XM
program. Previously, market professionals with an XM account were
required to subordinate their claims in a bankruptcy to those of non-XM
customers in all instances, so the new rules which modify the
subordination requirement should not adversely impact such market
professionals. Further, the distributional framework is intended to
assure that non-XM customers of such FCM will not be adversely affected
by a shortfall in the pool of XM funds and thus there should not be a
significant economic impact on such customers as a result of the
adoption of these rules. Therefore, the action taken herein will not
have a significant economic impact on a substantial number of small
entities. When the Commission published its proposal, it invited
comments from any person or entity which believed that the proposal
would have a significant impact on its operations. No comments on this
issue were filed.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. In compliance with the
PRA, the Commission submitted these rules in proposed form and their
associated information collection requirements to the Office of
Management and Budget. While these rules have no burden, the group of
rules of which these rules are a part has the following burden:
Rules 190.06 and 190.10 (3038-0021):
Average Burden Hours Per Response
.35
Number of Respondents
802
Frequency of Response
occasionally
Copies of the OMB approved information collection package
associated with these rules may be obtained from Gary Waxman, Office of
Management and Budget, room 3228, NEOB, Washington, DC 20503, (202)
395-7340. Copies of the information collection submission to OMB are
available from Joe F. Mink, CFTC Clearance Officer, 2033 K St. NW.,
Washington, DC 20581, (202) 254-9735.
List of Subjects in 17 CFR Part 190
Bankruptcy.
Accordingly, the Commission, pursuant to the authority contained in
the Commodity Exchange Act and, in particular, Sections 1a, 2(a), 4c,
4d, 4g, 5, e, 8a, 15, 19 and 20 thereof, 7 U.S.C. 1a, 2 and 4a, 6c, 6d,
6g, 7, 7a, 12a, 19, 23 and 24 (1988 & Supp. IV 1992), and in the
Bankruptcy Code and, in particular, Sections 362, 546, 548, 556 and
761-766 thereof, 11 U.S.C. 362, 546, 548, 556 and 761-766 (1988),
hereby amends part 190 of chapter I of title 17 of the Code of Federal
Regulations as follows:
PART 190--BANKRUPTCY
1. The authority citation for part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23 and
24 and 11 U.S.C. 362, 546, 548, 556 and 761-766.
2. Section 190.08 is amended by revising the introductory text to
read as follows:
Sec. 190.08 Allocation of property and allowance of claims.
The property of the debtor's estate must be allocated among account
classes and between customer classes as provided in this section,
except for special distributions required under Appendix B to this
part. The property so allocated will constitute a separate estate of
the customer class and the account class to which it is allocated, and
will be designated by reference to such customer class and account
class.
* * * * *
3. Part 190 is amended by designating appendix to part 190 as
appendix A to part 190 and revising the heading and by adding appendix
B to part 190 to read as follows:
Appendix A to Part 190--Bankruptcy Forms
* * * * *
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.
Issued in Washington, DC on April 7, 1994 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-8783 Filed 4-12-94; 8:45 am]
BILLING CODE 6351-01-P
