[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] ======================================================================= ----------------------------------------------------------------------- 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. ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\58 FR 68580. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\48 FR 8716 (March 1, 1983). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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