UPDATE:CFTC Approves Rule To Let Trustees Operate Futures Brokerages In Bankruptcy

Trustees handling commodity brokerage bankruptcies will now be allowed in some cases to continue operating the business so that customers' trading isn't disrupted, federal futures regulators announced Thursday.

The Commodity Futures Trading Commission's new rule, which was proposed late last year, would give the agency discretion to decide when to let a bankruptcy trustee continue buying and selling futures contracts on behalf of customers of the failed brokerage.

Currently, trustees are generally not allowed to immediately start processing trades for customers when the trustee begins a bankruptcy case.

The CFTC said the rule is needed because bankruptcies can be filed when the markets are open, and it can take time to get a trustee in place to begin transferring customers' accounts elsewhere.

"The adoption of the rule would benefit customers of a commodity broker in bankruptcy, under appropriate circumstances, by permitting those customers to manage their accounts during this time," the CFTC said in a Federal Register filing. "The adoption of the rule would also provide the commission with the latitude to handle unanticipated events."

The CFTC's rule follows several big bankruptcies in recent years, including Lehman Brothers Holdings Inc. (LEHMQ) in 2008 and brokerage firm Refco Inc. (RFX) in 2005. In those cases, customers were lucky because agreements to transfer their accounts to other firms were pre-arranged and the deals were finalized without any trading disruptions.

"These circumstances will not necessarily be replicated in a future bankruptcy," the CFTC warned.

The CFTC would have to give written approval to a trustee before the trustee can operate the commodity business.

The CFTC said it would exercise its authority to give trustees the approval only if the brokerage has enough capital to operate and customer funds have been properly segregated.

The new bankruptcy rule will go into effect in 30 days after it is published in the Federal Register.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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