In Re Griffin Trading Co.

MEMORANDUM OPINION

This matter comes before the Court on the motion of the Trustee (the “Trustee”) of the Estate of Griffin Trading Company (“Griffin”), a bankrupt commodities broker incorporated under Delaware law. Griffin’s principal place of business was in Chicago, Illinois, but Griffin also had an established branch in London, England.

Because there is a shortfall in certain of Griffin’s customers’ accounts, the Trustee *294 seeks authority to use all estate assets to pay the claims of Griffin’s customers (the “Customer Claims”) in full, in priority to all other unsecured creditors, pursuant to the provisions of Subchapter IV of Chapter 7 of the United' States Bankruptcy Code, 11 U.S.C. § 101 et seq., the Commodities Exchange Act (the “CEA”), 7 U.S.C. § 1 et seq., and the rules and regulations of the Commodity Futures Trading Commission (the “CFTC”), 17 C.F.R. § 1.1 et seq. The CFTC supports the Trustee’s position: The Customer Claims all arose through trading activities carried out, if not ordered, in Griffin’s London office (the “London Office”). If the Trustee’s motion is granted, all estate assets will be used to pay the Customer Claims; there will be no assets available for distribution to Griffin’s general creditors.

One general (i.e., non-customer) creditor, MeesPierson N.V. (“MeesPierson”), has objected to the motion on two grounds. First, MeesPierson objects to the Trustee’s choice of law, arguing that English, and not United States, bankruptcy law should apply to the distribution of estate assets to customers whose claims all arose as a result of trades executed in London. Secondly, MeesPierson asserts that even if U.S. law applies to the distribution of Griffin’s assets, the CFTC has exceeded its statutory authority to regulate commodity broker bankruptcies, granted in 7 U.S.C. § 24.

Under U.S. law, which the Trustee seeks to apply, customer property comes under the trustee’s control, see 11 U.S.C. § 761(10), 11 U.S.C. § 766. Customers receive the highest priority, subject only to payment of certain administrative expenses, 11 U.S.C. § 766(h), in the distribution of segregated customer accounts and other property that is “customer property,” a term defined in the Code, 11 U.S.C. § 761(10), and in the CFTC Regulations, 17 C.F.R. § 190.08. The CFTC’s definition is considerably broader than the Code’s definition and the parties disagree about which one should apply.

- Under either definition, only after the administrative expenses and customer claims have been paid in full would “customer property” be available to. pay other creditors of the estate. 11 U.S.C. § 766(j)(l). Congress, in drafting § 766(j)(l), admitted that an excess of customer property would be an “unlikely event,” H.R.Rep. No. 95-595, at 393 (1977) reprinted in 1978 U.S.C.C.A.N. 5963, 6349 or a “rare case,” 124 Cong. Rec. H11099 (daily ed. Sept. 28, 1978); S 17416 (daily ed. Oct. 6, 1978) (statements of Rep. Edwards and Sen. DeConcini).

In the far more likely event that there are insufficient funds in customer accounts to pay customer claims in full, the Bankruptcy Code provides that “if a customer is not paid the full amount of such customer’s net equity claim from customer property, the unpaid portion of such claim is a claim entitled to distribution under section 726 of this title.” 11 U.S.C. § 766(j)(2). Section 726 of the Bankruptcy Code sets forth the scheme for distribution of the debtor’s assets to unsecured creditors. However, the CFTC has expanded the Code’s definition of “customer property.” It has provided by regulation that when there is a shortfall in customer property as defined by the Code (“Code Customer Property”), virtually all estate property is to be treated as customer property, thus giving the customers first priority in its distribution, until all customer claims have been paid in full. 17 C.F.R. § 190.08(a)(l)(ii)(J). In this case, the shortfall in customer property exceeds the total amount available for distribution. If U.S. law applies, the customers would receive everything and the general unsecured creditors would receive nothing.

Under English law, customer property in segregated accounts never becomes part of the bankruptcy estate, but remains segregated to the customers to the extent that those accounts are actually funded. However, if there is a shortfall in those accounts, the injured customer is treated as a general unsecured creditor as to the *295 shortfall. Thus, under English law, the customers and MeesPierson would share in a pro rata distribution of estate property. MeesPierson’s $4.7 million dollar claim is by far the largest claim against the estate. If English law applies, the customers would receive a substantially smaller distribution on their claims, but MeesPier-son might receive as much as half of its claim.

In the alternative to its choice of law argument, MeesPierson argues that the CFTC’s definition of “customer property,” 17 C.F.R. § 190.08, impermissibly alters and expands the definition of “customer property” provided in the Bankruptcy Code at 11 U.S.C. § 761(10). MeesPierson further argues that the CFTC’s definition of “customer property” renders meaningless § 766(j)(2) of the Bankruptcy Code, which provides that customer claims not paid out of customer property are claims entitled to distribution only as general unsecured claims. 11 U.S.C. §§ 766(j)(2), 726, 510, 502. It should be noted that except for the provisions of 17 C.F.R. § 190.08(a)(l)(ii)(J) (the “Challenged Regulation”), English and U.S. laws governing the distribution of assets in the event of a shortfall in customer property are functionally equivalent.

For the reasons expressed in the following opinion, the Court concludes that U.S. law is the applicable law in this case. The Court further concludes that the CFTC exceeded its statutory grant of rulemaking authority and that the provisions of 17 C.F.R. § 190.08(a)(l)(ii)(J) are invalid. Pursuant to the provisions of Subchapter IV of Chapter 7 of the Bankruptcy Code, any shortfall in customer property as defined in that Subchapter must be treated as a general unsecured claim. The Trustee’s Motion to Use Estate Assets to Pay Customer Claims in Full is accordingly denied.

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(b) and 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). Venue lies under 28 U.S.C. § 1409.

BACKGROUND

The Basic Mechanics of a Commodities Trade

Griffin was what is known in the U.S. as a “futures commission merchant” (“FCM”) and in the United Kingdom (“U.K.”) as a “futures broker.” The Commodities Exchange Act defines an FCM as:

an individual, association, partnership, corporation, or trust that—

(A) is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market; and

(B) in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.

7 U.S.C. § la(12). In the U.S., Griffin’s trading activities were regulated by the CFTC. In the U.K., Griffin’s trading activities were regulated by the Securities and Futures Authority (“SFA”).

A “future” or “futures contract” is:

an agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) which obligates each party to the contract to fulfill the contract at the specified price; (3) which is used to assume or shift price risk; and (4) which may be satisfied for delivery or offset.

Commodity Futures Trading Commission, The CFTC Glossary: A Layman’s Guide to the Language of the Futures Industry <http://www.cftc.gov/opa/brochures/glos-sary.html >. Futures transactions are highly leveraged and very risky. Commodity Futures Trading Commission, Futures *296 and Options-What You Should Know Before You Trade <http://www.cftc.gov/opa/brochures/fu-tures.html >.

An individual may not trade directly on a commodities exchange unless he or she is a member of that exchange. Further, anyone executing trades in the U.S. must be registered with the CFTC as a floor trader. 7 U.S.C. § 6e. Individuals who want to trade commodities must do so through a “broker” as the broker’s “customers.” A “broker” is a person or entity paid a fee or commission for executing buy and sell orders for a customer. CFTC Glossary <http://www.cftc.gov/opa/brochures/glos-sary.html>. The term “broker” may refer to “floor brokers,” who actually execute trades on an exchange floor, “account executives,” who are the in-office contacts for customers of FCMs, and FCMs themselves. Id.

When a customer places an order with the broker, the broker executes the trade by forming a contract with another exchange member on the appropriate exchange. The buying member and the selling member then “clear” the trade by separately submitting details of the trade for matching by the exchange “clearing house.” A “clearing house” settles exchange transactions and oversees compliance with the exchange’s delivery procedures and financing of the trade. Id. “Clearing” is the novation process through which “the clearing house or association becomes the buyer to each seller of a futures contract and the seller to each buyer, and assumes responsibility for protecting buyers and .sellers from financial loss by assuring performance on each contract.” Id. In other words, where there was one contract formed in the trade between the buyer and the seller, after clearing, there are two contracts: one between the seller and the exchange and the other between the buyer and the exchange.

Once the broker places the customer’s trade, the broker will call upon the customer for an “initial margin” payment. “Initial margin” is generally some small percentage of the total contract price offered as security for contract performance. The broker usually transfers the initial margin from funds which the customer has deposited with it for this purpose. If there are not enough funds in the account to cover the margin call, the broker will require the customer to make an additional deposit.

Only clearing members of an exchange may submit trades to the clearing house for clearing. Not all brokers are clearing members of all exchanges. If a broker is not a clearing member of a given exchange, the broker must submit its trades, including those of its customers, to a clearing member for submission to the exchange’s clearing house. The submitting broker will then owe an initial margin payment to the clearing member, who will owe initial margin to the exchange.

At the close of the trading day, another series of margins falls due. These margins may be “variation margin payments” or “variation margin calls,” depending upon whether the customer has made or lost money on his open position or contract. If the customer has made money, the clearing house will make a variation margin payment to its member, who will pay the submitting broker, who will pay the customer’s account. If the customer has lost money, the clearing house will demand payment of the loss from the clearing member, who will demand payment from the submitting broker, who will debit the customer’s account for the loss or demand payment from the customer if the assets in the customer’s account are insufficient to cover the loss.

Thus, one simple trade ordered by a broker’s customer creates an entire stair-step series of relationships and obligations. An individual or entity trading through a broker is the broker’s customer. If the broker is not a clearing member on a particular exchange, the broker must clear its customers’ orders through a clearing *297 member. The broker becomes the clearing member’s customer. The clearing member is the clearing house’s customer. Each customer owes initial and variation margin to the entity one level up and each entity is responsible for its customer’s obligations, whether or not the customer meets its obligations. Essentially, each broker and clearing member becomes obligated for the debts of the customers on the steps below it.

The Parties

In the U.S., Griffin was a clearing member of and traded on the Chicago Board of Trade (“CBOT”) and the Chicago Mercantile Exchange (“CME”). In London, Griffin was a member of the London Clearing House (“LCH”) and a clearing member of the London International Financial Futures and Options Exchange (“LIFFE”). Griffin also traded on the German exchange, Eurex Deutschland (“EUREX”), but was not a clearing member of this exchange. Therefore, Griffin had to clear both its own trades and those of its customers through an entity that was a clearing member of EUREX. Griffin cleared its EUREX trades through MeesPierson.

The Customer Claims at issue all arose from a shortfall in the customer accounts of Griffin’s London office, where Griffin held customer money to be used for trading on exchanges outside the U.S., including LIFFE and EUREX. 1 Griffin executed all such foreign trades through its London office. This does not mean that all the Customers holding claims were physically present in Griffin’s London office or that they had direct contact with the London office. Mark J. Walsh, Eva Walsh, and Mark J. Walsh Global L.P. (collectively, the ‘Walsh Claimants”) are the customers holding the largest Customer Claim, in the amount of $8,377,220.97. The Walsh Claimants are U.S. citizens residing in the U.S., who contracted with Griffin’s Chicago office, and who placed all their orders through E D & F Man in New York. MDNH Partners (“MDNH”) and Engmann Options (“Engmann”) were Griffin customers who traded primarily on the CME, but who also ordered contracts to be executed on LIFFE. The Walsh Claimants, MDNH, and Engmann all cleared their trades through Griffin. Account statements show that Griffin held money belonging to the Walsh Claimants, MDNH, and Engmann in the London Office’s customer accounts and that these customers were aware that some of their funds were held in London. (Walsh Claimants’ Supplemental Aff. Ex. B; Aff. of Michael Engmann and Herbert Kurlan in Further Support of Trustee’s Motion Exs. A, B, D). Engmann and MDNH signed a contract with Griffin’s London office that expressly provided that money held by Griffin would be treated in accordance with U.K. client money rules. (Aff. of Engmann and Kurlan Ex. C at ¶ 7.6). Griffin provided all customers trading on foreign exchanges with a Risk Disclosure Statement informing them that their funds would be subject to foreign rules. The Walsh claimants state that they did not execute any documents from the London office, but many of the account state *298 ments they have submitted prominently bear Griffin’s London address and the statement “Regulated by the SFA.” (Walsh Supplemental Aff. Ex. B).

U.S. and U.K Account Segregation Principles

Although the laws, rules, and regulations governing commodities trading in the U.K. and in the U.S. are substantially similar, they differ in one important respect: the SFA Ghent Money Rules (the “SFA Rules”) do not address the use of one customer’s money in the transactions of another, while U.S. law expressly forbids such use. Both countries require the FCM or broker to hold its customers’ money in accounts segregated from its own accounts. 2 7 U.S.C. § 6d(2); 17 C.F.R. § 1.22; SFA Client Money Rule 4-55. However, neither country requires that one customer’s funds be segregated from all other customers’ funds; both countries expressly allow the broker to pool or commingle all customer funds in one general customer account. 7 U.S.C. § 6d(2); 17 C.F.R. § 1.20(c); SFA Rule 4-56. In the U.K., a customer may opt to have money held in a “designated client bank account,” completely separate from all other funds. SFA Rules 4-56, 9-1. Designated accounts cost more to maintain than segregated accounts, and are almost never used. Carla Cavaletti, Griffin Lessons of Trading, FutuRes, March 1, 1999, 1999 WL 14051908; Andrew Buncombe and Andrew Garfield, Trader “Sorry” for Losing £6 Million, The Independent-London, Jan. 8, 1999, 1999 WL 5973848. The Customer Claims all arise from a shortfall in funds held in pooled customer accounts segregated under the SFA Rules.

In both the U.S. and the U.K., an FCM or broker requires customers to deposit cash or securities with it to margin or support the customer’s trading activity. The size of the customer’s deposit determines how many “lots” or contracts the customer can buy. In theory, a customer should not exceed the limit imposed by the amount of his deposit, but, in practice, it has happened before, and seems to happen regularly, but briefly, in the normal course of a day’s trading.

A trader’s margin deposit is treated as “equity” in his account. A change in the market price of the contract will increase or decrease the equity. If this equity decreases below the “maintenance margin” amount (generally, 75% of the initial margin requirement), the broker will issue a margin call requiring the trader to increase the account’s equity to the initial margin level.

Howard Schneider, Mary L. Schapiro, Regulation of Commodity Futures and Options Trading, 662 PLI/CoRp. 497, 535-36 (1989). When a trader suffers a loss that reduces his ledger balance to a negative number, his loss will not affect the ledger balances of the other customers whose funds are pooled with his, but the loss will affect, even if only momentarily, the sum total of funds actually on deposit in that account. Thus, one trader’s loss does not change the book balances of other customers, but it does change the amount of money actually available in the segregated account to pay those book balances.

For example, assume that a broker has ten customers who each deposit $100,000. The broker segregates the funds in a customer account containing $1,000,000 ($100,-000 x 10 customers). Customer A places *299 a losing trade that results in a variation margin call of $500,000. Customer A’s loss will be paid from the segregated customer account, leaving the account with an actual balance of $500,000 ($1,000,000 — $500,000). Customer A’s balance in the broker’s ledger will be a negative $400,000 (his original $100,000 deposit — the $500,000 loss), while the other nine customers will still have ledger balances of $100,000 apiece. However, at this point, the actual amount in segregation for the nine other customers is only $500,000 (the original $1,000,000— $500,000), or $55,555.55 apiece ($500,000 * 9). Under ordinary circumstances, the broker will make up the shortage from its own funds and call upon the customer to reimburse it. 3 If the customer is unable to reimburse the FCM, the FCM may bear the loss itself. Both the CFTC Regulations and the SFA Rules permit a broker to deposit its own funds into a segregated customer account to maintain segregation requirements. 17 C.F.R. § 1.23; SFA Rule 4-55(2).

In both the U.S. and the U.K., an FCM must compute its customer funds segregation requirements on a daily basis. 17 C.F.R. § 1.32; SFA Rule 4-67(lA). If a U.S. broker cannot meet its segregation requirements, it must immediately report the deficiency to the CFTC and to its designated self-regulatory organization. 17 C.F.R. § 1.12(h). An FCM in the U.K must report to the SFA; failure to meet segregation requirements may result in the SFA issuing an Intervention Order under SFA Rule 7-12. An Intervention Order may, in its most expansive form, forbid a broker from carrying on its business. SFA Rule 7-15.

Both countries also impose capital requirements on brokers or FCMs. 17 C.F.R. § 1.17; SFA Rules 3-60 et seq. However, pursuant to a 1988 agreement between the CFTC and U.K. regulatory authorities, certain FCMs in the U.K., of which Griffin was one, must comply with U.S., and not U.K., capital requirements. (Reply of the CFTC at p. 4). FCMs must comply with the minimum financial requirements at all times. 17 C.F.R. § 1.17(a)(2)(ii)(3). An FCM that cannot comply or affirmatively demonstrate that it complies “must transfer all customer accounts and immediately cease doing business as a futures commission merchant until such time as the firm is able to demonstrate such compliance.... ” 17 C.F.R. § 1.17(a)(2)(ii)(4).

Events Leading to Griffin’s Bankruptcy

On December 29, 1998, a breach of the SFA Client Money Rules in Griffin’s London Office led the SFA to issue an Intervention Order prohibiting Griffin from doing business. The actions of one rogue trader, John Ho Park (“Park”), on December 21 and 22, 1998, caused a shortfall in the London Office’s segregated customer *300 funds and caused Griffin to be a defaulter under LIFFE and LCH rules. Park, whose funds on deposit with Griffin supported a limit of 900 lots, bought as many as 11,000 lots of German bund futures on EUREX (the “Park Trades”). The Park Trades were a disaster; they lost more than $10,000,000 overnight.

Griffin was unaware that Park had exceeded his limit because, in a manner of speaking, Park slipped the trades through Griffin’s back door. Park himself did not execute the trades through Griffin, in which case Griffin would have known that he was so far in excess of his limit, and would, presumably, have acted to halt his trading. Rather, he executed the trades through a third-party broker, Tullett and Tokyo Futures and Trade Options Limited (“T & T”), which then “gave up” the trades to Griffin. A “give-up” occurs when a customer orders a trade through a third-party broker and directs the third-party broker to clear that trade, not through the third-party’s clearing member, but through the customer’s regular broker. In a give-up situation, the clearing broker may not know who its ultimate customer is; the clearing broker may be aware only of the executing broker’s identity. Carla Cavaletti, A Love-Hate Phenomenon Called Give-Ups, Futures, June 1, 1999; 1999 WL 14052030. Traders often use give-ups to “consolidate many small orders or to disperse large ones.” CFTC Glossary <http://www.cftc.gov/opa/bro-chures/glossary.html >. In this case, Park ordered trades through T & T; T & T, rather than clearing the trades through its own clearing member, presented the trades to Griffin, and Griffin, through MeesPierson, cleared the trades, in the EUREX clearing house.

When the EUREX clearing house called on MeesPierson for the $10,000,000, Mees-Pierson in turn called upon Griffin customer accounts. Griffin, after receiving Park’s assurance that he would deposit additional funds, made a payment to MeesPierson from the pooled customer accounts. In addition, MeesPierson swept the Griffin customer transaction account on deposit with it and met the balance of the call from its own funds. Only a small portion of the funds paid to or collected by MeesPierson belonged to Park; the rest of it belonged to his fellow Griffin customers. MeesPier-son then stair-stepped down to Griffin with the $10,000,000 margin call, which neither Griffin, nor Park, the bottom stair in the series, was able to meet.

As a result of the Park Trades, Griffin was unable to meet the minimum financial requirements imposed both by the SFA and the CFTC. The Intervention Order forced Griffin’s London office to stop operating as an investment business. Griffin reported to the CFTC that it no longer met, and was unable to meet, minimum financial requirements. On December 30, 1998, Griffin was placed into Chapter 7 proceedings in the U.S. On January 5, 1999, this Court authorized the Trustee to consent to the filing of a “winding-up” petition in the U.K with respect to Griffin’s U.K. operations. According to an order issued by the High Court of Justice in the Chanceries Division of the Companies Court in the U.K., the U.K. liquidation was and remains ancillary to the U.S. bankruptcy proceeding. In the Matter of Griffin Trading Co. and In the Matter of the Insolvency Act 1986, Order of the High Court of Justice, Chancery Division, Companies Court ¶ 4 (Jan. 6, 1999).

By December 23, 1998, all Griffin customer accounts with U.S. market positions had been transferred from Griffin to another U.S. FCM. There are no Customer Claims against Griffin resulting from U.S. trading activity. All the Customer Claims at issue here, regardless of the residence or citizenship of any particular customer, arise from trades on foreign markets, executed from accounts that were maintained in Griffin’s London Office.

Rogue Traders in the U.S.

Having said that U.S. law prohibits the use of one customer’s funds for another *301 customer’s transactions, it is necessary to point out that problems similar to those created by Park have arisen in a purely U.S. context. The U.S. prohibition does not fully protect non-defaulting customers from a shortfall in segregated customer funds. In practical effect, U.S. customers are no better protected against a fellow customer’s renegade actions than are customers in the U.K. In either country, the entire segregated account is at risk when one customer places trades that he cannot cover and that are too large for the broker to cover either.

On October 22, 1992, two rogue traders at the CBOT vastly exceeded their trading limits and executed trades that forced one clearing firm, Lee B. Stern & Co. of Chicago, to default on an $8.5 million margin call from its clearing house. U.S. v. Catalfo, 64 F.3d 1070, 1076 (7th Cir.1995). This loss exceeded the firm’s net worth by more than $2 million. Id. The company’s owner saved it from bankruptcy by paying the debt from his personal funds. Jeffrey Taylor, Two Are Indicted for a Wild Spree in CBOT Trading, The Wall Street Journal, July 22, 1993, 1993 WL-WSJ 691608. Lee B. Stern & Co. is still in business.

In 1985, a group of three rogue traders exceeded their limits trading gold futures and caused their clearing broker, Volume Investors Corporation (“VIC”), to default to its clearing house on a $14 million margin call. Wohl v. Westheimer, 610 F.Supp. 52, 53-54 (S.D.N.Y.1985); Andrea M. Corcoran & Susan C. Ervin, Maintenance of Market Strategies in Futures Broker Insolvencies: Futures Position Transfers From Troubled Firms, 44 Wash. & Lee L.Rev. 849, 852-55 (1987) [hereinafter “Maintenance of Market Strategies ”]. The clearing house’s $14 million call exceeded the amount of VIC’s assets. Maintenance of Market Strategies, at 854. This default was caused by the traders’ default to VIC on a $26 million margin call. Id. When VIC could not meet the clearing house’s margin call, the clearing house swept $9.8 million, the full amount of VIC’s customers’ original margin clearing deposits, from VIC’s customer account. Id. VIC went into receivership rather than into bankruptcy proceedings. Westheimer, 610 F.Supp. at 53-54. The receivership obtained a bridge loan, conditioned upon court approval of a settlement of VIC’s claims against the traders, and used the proceeds to pay the shortfall in VIC’s customer accounts. Maintenance of Market Strategies, at 861. In the end, all non-defaulting VIC customers were paid in full. Id.

The Present Position

The U.K. liquidator has distributed or will distribute the funds remaining in Griffin’s London customer accounts- to those customers. However, the Trustee estimates that the shortfall in these accounts amounts, to approximately $4.3 million. The Trustee further estimates that there will be approximately $3.7 million, excluding recoveries from possible causes of action and payment of administrative expenses, in Griffin’s bankruptcy estate for payment to Griffin’s customers and unsecured creditors. (Trustee’s Motion ¶ 12). Griffin has no secured creditors.

DISCUSSION

Congress, recognizing that bankruptcy proceedings for stockbrokers and commodity brokers present “unique problems,” S.Rep. No. 95-989, at 3 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5789 created two special subchapters- of Chapter 7, the liquidation chapter of the Bankruptcy Code, to handle those problems. 4 Id. Subchapter III of Chapter 7, 11 U.S.C. §§ 741-752, addresses stockbroker liquidations and Subchapter IV, 11 U.S.C. §§ 761-766, addresses commodity brokér liquidations. Congress created the separate subchap- *302 ters for securities and commodities brokers because it recognized fundamental differences between the two 5 . Congress further recognized that the Bankruptcy Code would apply to stockbroker liquidations only in very rare cases, but would apply to most commodity broker liquidations.

Although the rationale for customer protection in the area of stockbrokers and commodity brokers is identical, there are several differences between the two subchapters. A primary difference derives from the scope of protection afforded. There is no analogue of SIPC to insure commodity brokers’ customers. Thus the commodity broker liquidation provisions will apply in the vast majority of commodity broker insolvencies in contradistinction to the rare application of the stockbrokers liquidation provisions.

ELR.Rep. No. 95-595, at 271 (1977) reprinted in 1978 U.S.C.C.A.N. 5963, 6229. In introducing the commodity broker sub-chapter, the Senate explained that:

With no cohesive policy for guidance, courts dealing with commodity broker bankruptcies have applied existing laws which are not necessarily consistent with the structure of, and may be potentially disruptive of, commodity futures, options, and leverage markets. The rapid growth of the commodity futures markets in recent years has made the development of statutory guidelines for commodity broker insolvencies all the more imperative. According to the commodity futures trading commission (the “Commission” or “CFTC”), “the Commission now regulates an industry where the value of commodities for which contracts were traded in 1977 exceeds one trillion dollars”.

Id. at 7 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5793.

The CFTC was newly-created 6 when Congress enacted the Bankruptcy Reform Act of 1978. Recognizing that regulation of the industry was in its infancy, Congress avoided drafting statutory sections to cover every possibility, but created instead a framework within which the CFTC could make rules. S. Rep. 95-989, at 7. The CFTC’s rulemaking authority was to be exercised only within the bounds of the policies set in the commodity broker sub-chapter. Id.

The General Provisions of Chapter 1, 11 U.S.C. §§ 101-110, the Case Administration provisions of Chapter 3, 11 U.S.C. §§ 301-366, and the Creditors, the Debtor, and the Estate provisions of Chapter 5, 11 U.S.C. §§ 501-560, all apply to commodity broker liquidations. So do the general liquidation provisions of Chapter 7, except where Subchapter IV makes provisions otherwise.

When a debtor files a petition for relief under any chapter of the Bankruptcy Code, all the debtor’s legal and equitable interests in property become part of the bankruptcy estate. 11 U.S.C. § 541(a). In a Chapter 7 case, a trustee takes charge of the estate, 11 U.S.C. § 701-703. The trustee’s duties include collecting and managing estate assets and paying them out to the debtor’s creditors. 11 U.S.C. § 704.

Several sections of the commodity broker subchapter make express provisions for the treatment of property that is in the debtor’s possession at the time of filing, *303 being held for the debtor’s customers. Such property includes, but is not limited to, funds on deposit with the debtor to margin trades, the profits accrued from trading, and open commodity contracts. See 11 U.S.C. §§ 761(10)(a)(ix) and 766 (defining customer property and ordering its distribution to customers of the debtor). In addition, the CFTC has promulgated regulations to implement the Code’s provisions. 17 C.F.R. §§ 190.01 et seq.

The first issue before the Court is whether U.S. law or English law should govern the distribution of Griffin’s assets to customers who suffered losses stemming from trading activities in Griffin’s London office. If English law applies, then the Court need not reach the second issue. The second question is whether the Challenged Regulation exceeds the CFTC’s authority to regulate, granted in 7 U.S.C. § 24, and is thus invalid.

Choice of Law

MeesPierson first argues that English law should apply to the distribution of Griffin’s assets because: (1) the Customers consented to the application of English law by acknowledging Griffin’s General Terms of Business (the “Terms of Business”), which provide that “[tjhese Terms shall be governed by and construed in all respects in accordance with English Law and the parties agreed to submit to the non-exclusive jurisdiction of the English Courts as regards any claim or matter arising in relation to these Terms” (MeesPierson’s Second Supplemental Response, Ex. B ¶ 16) and (2) other documents, such as Risk Disclosure Statements (MeesPier-son’s Second Supplemental Response, Ex. G), various account statements, and trade confirmations all indicate that trades through the London office would be regulated by the SFA. MeesPierson also argues that English law should apply to the distribution because England has the most significant contacts with the parties and transactions at issue. Finally, MeesPier-son argues that English law should apply for reasons of international comity.

Whether the Customers Consented to the Application of English Bankruptcy Law

Contractual choice of law provisions are generally enforceable if they are reasonable. Spinozzi v. ITT Sheraton Corp., 174 F.3d 842, 846 (7th Cir.1999); Kuehn v. Children’s Hospital, Los Angeles, 119 F.3d 1296, 1301 (7th Cir.1997). However, they should only be enforced in the situations where they apply.

Paragraph 16 of the Terms of Business by its own language applies only to the interpretation of the Terms of Business and not to matters outside those Terms. The Terms of Business set forth the respective responsibilities of Griffin and its customers and state the terms under which broker-customer transactions will be carried out. For example, ¶ 7.2 of the Terms of Business provides in part that “Griffin shall credit to the Customer’s account all profits from Transactions entered into by Griffin with or for the Customer.... Amounts to be credited to the Customer’s account shall be credited as soon as reasonably practical after they have been received by Griffin.” (MeesPi-erson’s Second Supplemental Response ¶ 7.2). If Griffin had failed to credit a customer’s profits in a timely manner, that customer might well have an action against Griffin for breach of the Terms of Business. Paragraph 16 provides that English law would govern that action. It does not provide that English law will govern the entire relationship between the parties or the operation of Griffin. It does not govern every legal proceeding in which Griffin might be involved regardless of the proceeding’s relationship to the Terms of Business.

This is a bankruptcy proceeding and not a suit for breach of the Terms of Business. No Griffin customer has complained to this Court of breach. MeesPierson, who seeks to enforce the choice of law provision, is not a Customer and is not even a party to the Terms of Business. The Terms of *304 Business do not dictate the choice of law in this bankruptcy proceeding.

The Risk Disclosure Statement and the various statements and confirmations are also inapplicable to this proceeding. The Risk Disclosure Statement alerts the potential customer:

The risk of loss in trading foreign futures and foreign options can be substantial. Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade foreign futures or foreign options, you should be aware of the following:

1) Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade.

2) Neither the Commodity Futures Trading Commission, the National Futures Association nor any domestic exchange regulates activities of any foreign board of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law....

8) For these reasons, customers who trade foreign futures and foreign options contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the Commission’s regulations and the rules of the National Futures Association and any domestic exchange.... In particular, funds received from customers for foreign futures or foreign options transactions may not be provided the same protections as funds received in respect of transactions on United States futures exchanges. Therefore, you should obtain as much information as possible from your account executive concerning the foreign rules which will apply to your trading. ...

(MeesPierson’s Second Supplemental Response, Ex. G). Absolutely no statement in this Risk Disclosure Statement can be read as a contractual choice of law provision, much less as a provision that English bankruptcy law will govern in the event of Griffin’s bankruptcy. It is merely a warning that foreign transactions, i.e., the purchase or sale of contracts or options, will be subject to foreign regulations and that the customer will be unable to call upon the CFTC for assistance if something should go wrong with such transactions. Further, it is a warning that foreign brokers may not handle customer money in the same way as U.S. brokers would.

Nor do the account statements and trade confirmations indicate that English bankruptcy law should apply. They indicate only that the Walsh Claimants, MDNH, and all the customers trading through Griffin’s London office knew or should have known that the SFA regulated the London office’s trading activities. Quite simply, bankruptcy proceedings are not trading activities. The Customers did not consent to the application of English bankruptcy law.

Whether U.S. or English Bankruptcy Law Applies Under Conflict of Law Principles

The parties have not addressed the issue of whether state or federal choice of law principles should apply in this case. Federal courts sitting in diversity jurisdiction apply the choice of law rules of the state in which they sit. Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941); Spinozzi, 174 F.3d at 844. However, bankruptcy courts do not have diversity jurisdiction; they have federal question jurisdiction. Several circuits have applied federal common law principles to choice of law questions in federal question cases. See, e.g., Prudential Ins. Co. of America v. *305 John Doe, 140 F.3d 785, 791 (8th Cir.1998); Chan v. Society Expeditions, Inc., 123 F.3d 1287, 1297 (9th Cir.1997); Edelmann v. Chase Manhattan Bank, 861 F.2d 1291, 1294 (1st Cir.1988); Corporacion Venezolana de Fomento v. Vintero Sales Corp., 629 F.2d 786, 795 (2d Cir.1980); see also, Pescatore v. Pan American World Airways, Inc., 97 F.3d 1, 12-13 (2d Cir.1996) (collecting cases and discussing the unsettled state of the law in this area).

This Court need not decide whether to apply state or federal choice of law principles, because, in Illinois, the state and federal analyses are the same. See Excell, Inc. v. Sterling Boiler & Mechanical, Inc., 106 F.3d 318, 320-321 (10th Cir.1997) (declining to decide whether state or federal