[Federal Register: July 9, 2003 (Volume 68, Number 131)]
[Proposed Rules]
[Page 40835-40848]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy03-36]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AB64
Minimum Financial and Related Reporting Requirements for Futures
Commission Merchants and Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend certain of its minimum financial and related
reporting requirements for futures commission merchants (``FCMs'') and
introducing brokers (``IBs''). Regulations currently require FCMs to
maintain minimum adjusted net capital that is the greatest of:
$250,000; 4 percent of customer funds required to be segregated by the
Commodity Exchange Act (``Act'') and the Commission's regulations; the
amount of adjusted net capital required by a registered futures
association; or for those FCMs that also are registered as securities
brokers or dealers with the Securities and Exchange Commission
(``SEC''), the amount of net capital required by specified SEC
regulations. This proposed rule would delete that part of the minimum
adjusted net capital requirement that is based on segregated customer
funds and replace it with an amount based on maintenance margin levels
of futures and options positions carried by an FCM. The proposed
amendment would reflect risk-based capital rules that have already been
adopted by a clearing organization, two exchanges and the National
Futures Association (``NFA'').
The Commission also is proposing to reduce the time periods allowed
before an FCM must take a capital charge for outstanding margin calls.
The Commission is further proposing conforming amendments to capital
computations that FCMs must perform for purposes related to equity
capital, subordination agreements and the Commission's ``early
warning'' requirements. The Commission also is proposing to reduce the
time frames for
[[Page 40836]]
FCMs to report certain events. The proposed time frames would be
consistent with those currently provided in SEC rules applicable to
securities brokers and dealers. The Commission also is proposing to
amend reporting requirements for FCMs or IBs to streamline Commission
procedures and to eliminate unnecessary filing requirements.
DATES: Comments must be received on or before September 8, 2003.
ADDRESSES: Comments may be sent to Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Attn.: Secretariat. In addition, comments may be sent by
facsimile to (202) 418-5521, or by electronic mail to [email protected]. References should be made to ``Proposed Rules for
Risk-Based Capital.''
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director, at
(202) 418-5495 or Thelma Diaz, Special Counsel, at (202) 418-5137,
Division of Clearing and Intermediary Oversight, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581. Electronic mail: ([email protected]) or
[email protected]).
SUPPLEMENTARY INFORMATION:
I. Background--Financial Safeguards
As part of its regulatory responsibilities, the Commission monitors
the financial integrity of the commodity futures and options markets
and the intermediaries that market participants employ in their trading
activities. The Commission's financial and related recordkeeping and
reporting rules are part of a system of financial safeguards that also
includes exchange and clearinghouse risk management and financial
surveillance systems, exchange and clearinghouse rules and policies on
clearing and settlements, and financial and operational controls and
risk management employed by market intermediaries themselves.
Two primary financial safeguards under the Act are: (1) The
requirement that FCMs segregate from their own assets all money and
property belonging to their customers; and (2) the imposition of
minimum capital requirements for FCMs and IBs.\1\ The requirement that
FCMs segregate customer funds is set forth in section 4d(a)(2) of the
Act. Section 4d(a)(2) requires, among other things, that an FCM
segregate from its own assets all money, securities, and other property
held for customers as margin for their commodity futures and option
contracts, as well as any gains accruing to such customers from open
futures and option positions.
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\1\ 7 U.S.C. 1 et seq. (2000).
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Commission Rules 1.20 through 1.30, as well as 1.32 and 1.36
implement the segregation of funds provisions of section 4d(a)(2) of
the Act for FCMs holding funds for customers trading on U.S. commodity
futures and options markets.\2\ These rules require FCMs to maintain,
in segregated accounts, all of the money and other property deposited
by customers to margin their futures and option positions on U.S.
markets, as well as any funds accruing to such customers from open
futures and option positions. The rules are intended to ensure that an
FCM has readily available sufficient funds to meet its obligations, on
a dollar-for-dollar basis, to its customers trading on U.S. futures and
options markets at all times.
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\2\ Commission regulations may be found at 17 CFR Ch. 1 (2002).
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Rule 30.7 sets forth an FCM's obligation to secure funds of U.S.-
domiciled customers trading on non-U.S. futures and options markets.
Rule 30.7 requires an FCM to maintain in secured accounts funds and
other property deposited by a U.S.-domiciled customer that represents
required margin deposits for open futures and option positions on
foreign markets, as well as any unrealized gains accruing on such open
positions. The funds required to be segregated for customers trading on
U.S. commodity markets pursuant to Section 4d(a)(2) and the funds
required to be secured for customers trading on foreign commodity
markets pursuant to Rule 30.7 hereinafter will be referred to jointly
as the ``Segregated Amount.''
Section 4f(b) of the Act provides that in order to register as an
FCM or IB a person must meet such minimum financial requirements as the
Commission may by regulation prescribe. Commission rules that set forth
the minimum financial and related reporting requirements for FCMs and
IBs include Rules 1.10, 1.12, 1.16, 1.17, and 1.18. Commission Rules
1.10 and 1.16 set forth requirements for the periodic reporting of the
financial condition of FCMs and IBs, while Commission Rule 1.12
requires ``early warning'' reporting of predefined events as they
occur. The minimum requirements for the IB's or FCM's adjusted net
capital, equity capital and subordinated agreements are set forth in
Commission Rule 1.17. Rule 1.18 requires FCMs and IBs to prepare and to
maintain formal adjusted net capital computations as of the close of
business each month.\3\
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\3\ In addition, FCMs are required by Rules 1.14 and 1.15 to
maintain and to provide to the Commission certain information
regarding affiliated entities.
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The Commission's minimum financial requirements protect customers
and other market participants by requiring FCMs and IBs to maintain
minimum levels of liquid assets in excess of their liabilities to
finance their business activities. In the event of a shortfall in the
Segregated Amount, the Commission's minimum net capital requirement
provides protection to customers by requiring FCMs to maintain a
minimum level of assets that are readily available to be contributed to
cover the shortfall. The minimum capital requirement also protects
customers and market participants by ensuring that the FCM remains
solvent while waiting for margin calls to be met.
II. Proposed Risk-Based Capital Requirement for FCMs
A. The Commission's Current Capital Requirement
The Commission's net capital requirement is set forth in Rule
1.17(a)(1)(i)(A)-(D) and requires an FCM to maintain adjusted net
capital equal to, or in excess of, the greatest of the following:
a. $250,000;
b. Four percent of the Segregated Amount, less the market value of
options purchased by customers for which the full premiums have been
paid;
c. The amount of adjusted net capital required by a registered
futures association of which the FCM is a member; \4\ or
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\4\ The NFA is a registered futures association that has adopted
minimum capital rules for its member FCMs.
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d. For FCMs that also are registered with the SEC as securities
brokers or dealers, the amount of net capital required by SEC Rule
15c3-1(a).\5\
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\5\ 17 CFR 240.15c3-1(a).
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In addition to the Commission's minimum capital requirements, FCMs
also are subject to minimum capital requirements adopted by the self-
regulatory organizations (``SROs'') of which they are members.\6\ The
SROs' capital requirements are required to be no less stringent than
the Commission's minimum capital requirement.\7\
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\6\ Rule 1.3(ee) defines an SRO as a contract market as defined
in Rule 1.3(h) or a registered futures association under section 17
of the Act.
\7\ For example, New York Mercantile Exchange (``NYMEX'') Rule
9.21 requires clearing members to maintain minimum net capital that
is the greater of $5,000,000 or the minimum capital required by Rule
1.17.
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[[Page 40837]]
The current capital rule generally has worked well as a measure of
the minimum amount of capital an FCM needs in order to augment the
Segregated Amount to provide protection for customer funds and to meet
the FCM's responsibility of maintaining orderly markets. In recent
years, however, the scope of and participants in the commodity business
have changed. Trading is conducted on a 24-hour a day basis on markets
worldwide. FCMs have become significant participants in this global
marketplace as evidenced by increasing numbers of U.S. and foreign
customers trading on U.S. and foreign markets through FCMs and the
increasing amount of customer funds held by FCMs.\8\ The types of
participants in the marketplace also have shifted from primarily
agricultural traders to highly sophisticated money managers and
financial institutions trading a wide variety of products, with the
greatest volume of trading being in interest rate and stock index
contracts.
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\8\ Based upon financial reports filed with the Commission, FCMs
held on behalf of their customers approximately $30 billion as of
September 1995 and approximately $69 billion as of April 2003.
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The framework for the current capital rule was developed in 1978
and now should be modernized to reflect these changes. The current
capital rule does factor in the risk inherent in the positions carried
by an FCM for its customers' accounts to the extent that the amount of
capital required is based on a percentage of the Segregated Amount,
which, in turn, is partly a function of the margin (or performance
bond) required on open futures and option positions. There are,
however, a number of material limitations on the current method used to
calculate required net capital.
A primary limitation is that the Segregated Amount does not fully
reflect the extent to which an FCM is exposed to commodity positions it
carries for both customers and noncustomers.\9\ For example, the
Segregated Amount does not include funds held by an FCM on behalf of
foreign-domiciled customers trading on foreign commodity markets, nor
does it include funds held by an FCM on behalf of noncustomers trading
on either U.S. or foreign futures and options markets. Furthermore, the
Segregated Amount does not include letters of credit deposited as
margin or reflect the additional risks posed by open positions in
customer accounts that liquidate to a deficit. Finally, calculating
minimum capital as a percentage of the Segregated Amount subjects an
FCM to a higher requirement in situations where the FCM requires
additional margin from customers or carries free credit balances for
its customers, despite the risk reducing effect of holding higher
levels of customer funds.
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\9\ Noncustomer accounts are defined in Rule 1.17(b)(4) and
generally are accounts of entities affiliated with the FCM and the
accounts of certain employees of the FCM.
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To address the concerns noted above and to conform the Commission's
capital requirements to those implemented by the NFA, two exchanges and
a clearing organization, the Commission is proposing to adopt a minimum
capital requirement calculated as a percentage of the margin required
on all domestic and foreign futures and option accounts carried by the
FCM on behalf of customers and noncustomers, instead of as a percentage
of the Segregated Amount.
B. Proposed Risk-Based Capital Requirement
1. Overview of the Proposed Risk-Based Capital Computation
Margin-based (or risk-based) capital rules have been adopted and
put into effect by the Board of Trade Clearing Corporation (``BOTCC''),
Chicago Board of Trade (``CBOT''), Chicago Mercantile Exchange
(``CME''), and NFA. BOTCC, CBOT, and CME adopted risk-based components
to their respective minimum capital requirements for clearing member
firms effective January 1, 1998. NFA adopted a risk-based capital
component to its minimum capital requirements for member FCMs effective
October 31, 2000.
Based upon the effectiveness of these rules as implemented at these
organizations, the U.S. commodity exchanges and NFA, through the Joint
Audit Committee (``JAC''), have requested that the Commission amend its
capital rule by eliminating the calculation based on the Segregated
Amount and adopting a calculation based on the required maintenance
margin levels for customer and noncustomer futures and option positions
carried by an FCM.\10\ An additional benefit to FCMs of adopting the
proposed risk-based capital requirement is that it would simplify
adjusted net capital reporting requirements for FCMs. Commission Rule
1.17 includes among the categories from which an FCM's required net
capital is determined ``[t]he amount of adjusted net capital required
by a registered futures association of which [the FCM] is a member.''
Because all registered FCMs that handle customer funds are required to
be members of NFA, the NFA's adoption of a risk based capital
requirement, which is modeled on the requirement implemented by BOTCC,
CBT, and CME, has effectively required almost all FCMs to perform
adjusted net capital computations that are based both on percentages of
maintenance margin levels of futures and options positions and on
percentages of the Segregated Amount.
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\10\ The JAC is comprised of representatives of the audit and
financial compliance departments of the SROs.
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U.S. commodity exchanges and numerous foreign commodity exchanges
use the Standard Portfolio Analysis of Risk (``SPAN'') margining system
for calculating margin requirements on futures and option positions.
SPAN is a system developed and maintained by the CME that calculates
maintenance margin levels in an account containing both futures and
option positions on the basis of overall portfolio risk. Commodity
exchanges attempt to set maintenance margin levels that exceed the one-
day price change for 95 percent to 99 percent of the trading days based
upon statistical analyses of day-to-day price changes over a varied
number of trading days.\11\
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\11\ For more detailed information on the SPAN margining system,
see the report Review of Standard Portfolio Analysis of Risk
(``SPAN'') Margin System as implemented by the Chicago Mercantile
Exchange, Board of Trade Clearing Corporation, and the Chicago Board
of Trade, prepared by the Commission's Division of Trading and
Markets and issued in April 2001. The report is available on the
Commission's Web site: href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov.
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The SPAN maintenance margin level has two components:
1. The risk component, which covers potential future losses in the
portfolio value. Such losses would include a market move against a
futures position or a short (written) option; and
2. The equity component (option premium, marked-to-the market
daily), which reflects the asset represented by long option positions
or the liability represented by short (written) option positions in the
portfolio.
The proposal would set the minimum capital requirement at the
aggregate of eight percent of the risk maintenance margin level on
customer accounts and four percent of the risk maintenance margin level
on noncustomer accounts. The equity component of the SPAN maintenance
margin level would not be included in the capital computation.
Furthermore, as more fully discussed below, the risk maintenance margin
imposed on long option positions that were not hedging other futures or
option positions could be excluded from the computation. Proprietary
(i.e., firm-owned) accounts would be excluded
[[Page 40838]]
from the risk-based capital computation, because such positions
currently are included in the calculation of adjusted net capital to
the extent that uncovered proprietary positions result in a charge or
``haircut'' to net capital based on clearinghouse or exchange margin
requirements.\12\ The proposed computation will hereinafter be referred
to as ``Risk-Based Capital.''\13\
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\12\ See Commission Rule 1.17(c)(5)(x).
\13\ The Commission also would amend the financial Form 1-FR-FCM
if it were to adopt final rules for Risk-Based Capital.
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For purposes of the proposed rule, ``customer accounts'' would
include the account of any customer as defined by Rule 1.17(b)(2),
which includes customers as defined by Rule 1.3(k), option customers as
defined by Rules 1.3(jj) and 32.1(c), and foreign futures and foreign
option customers as defined by Rule 30.1(c), and also would include the
accounts of foreign customers trading on foreign commodity exchanges.
The term ``noncustomer account'' would continue to be defined by Rule
1.17(b)(4) as an account that is not included in the definition of
either customer or proprietary account in Rule 1.17, and would also
include noncustomer accounts for foreign domiciled persons trading on
foreign exchanges. The term ``noncustomer'' generally refers to
accounts of entities affiliated with an FCM, including certain
employees and officers of an FCM.
Generally, there is no risk to the FCM associated with a long
option position because the maximum potential loss is the full option
premium, which is required to be paid by the customer at the inception
of the transaction. As previously noted, however, SPAN computes the
margin for an account on a portfolio basis and long option positions
may hedge other futures and option positions in a portfolio, thereby
reducing the total margin requirement on the portfolio. Accordingly,
SPAN includes a risk maintenance margin component for long option
positions to protect against a decrease in the market value of long
options that may be hedging other futures and option positions.
The propsal would permit an FCM to deduct the risk maintenance
margin on long options that were not hedging other futures or option
positions from the Risk-Based Capital computation. The Commission,
however, understands that, under current back office operating
procedures, calculating the maintenance margin on specific long option
positions included in a portfolio may require a certain amount of
manual processing, which some FCMs may wish to forgo if the amount
would not materially increase their minimum capital requirement.
Accordingly, the rule as proposed would not prohibit an FCM from
including the risk maintenance margin for long options that do not
hedge other futures and option positions in its Risk-Based Capital
computation, if it elected to do so.
The proposal would set the Risk-Based Capital requirement at eight
percent of customer risk maintenance margin and four percent of
noncustomer risk maintenance margin, which are the same percentages
that have been implemented under the existing exchange and NFA risk-
based capital rules. The lower four percent factor applied to risk
margin requirements in noncustomers' accounts is based upon the beliefs
of BOTCC, CBT, CME and the NFA that affiliates and employees pose less
credit risk to FCMs and the clearing system.
If an FCM cannot determine the risk margin associated with cleared
positions, the proposal would require the firm to apply the specified
percentages to the total margin required by the exchange, clearing
organization, other futures commission merchant or entity for the
customer and noncustomer positions carried. This would be consistent
with the approach taken by FCMs today for futures and option positions
that they carry that are executed on foreign contract markets that do
not use the SPAN margining system.
2. Accounts Included in the Risk-Based Net Capital Computation
Calculations of minimum required capital under the current method
based on the Segregated Amount and the proposed Risk-Based Capital
method would differ with respect to the types of accounts included in
the calculation. These differences are summarized in the following
table.
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Are the following types of
accounts factored into the Current segregated Proposed risk-based
calculation of required net amount capital capital requirement
capital? requirement
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U.S.-domiciled customers Yes................. Yes.
trading on U.S. exchanges.
Foreign-domiciled customers Yes................. Yes.
trading on U.S. exchanges.
U.S.-domiciled customers Yes................. Yes.
trading on foreign
exchanges.
Foreign-domiciled customers No.................. Yes.
trading on foreign
exchanges.
Accounts liquidating to a No.................. Yes.
deficit.
Accounts with letters of No.................. Yes.
credit for performance bond.
Noncustomer accounts........ No.................. Yes.
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The proposed Risk-Based Capital computation includes several types
of accounts that affect the risk to an FCM inherent in commodity
positions carried by its customers and noncustomers, and that are not
included in the current Segregated Amount computation. Therefore, the
Commission believes Risk-Based Capital may reflect the actual risk to
FCMs better than the current Segregated Amount calculation of minimum
required capital. Particularly, the proposed Risk-Based Capital
computation would include futures and option positions carried by an
FCM for noncustomers trading on U.S. and foreign commodity markets and
foreign-domiciled customers trading on foreign futures and options
markets, none of which currently are included in the minimum capital
computation.
The proposed Risk-Based Capital computation also would include the
risk maintenance margin on open futures and option positions that are
carried in customer and noncustomer accounts that liquidate to a
deficit. In such situations, an FCM is required to deposit its own
funds into the segregated account in order to cover the customer's
deficit. However, the capital requirement that is based upon the
Segregated Amount does not reflect the positions of the customer that
is in deficit.\14\
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\14\ In computing its adjusted net capital, an FCM is required
by Rule 1.17(c)(2)(i) to exclude from current assets the balance of
any customer account that liquidates to a deficit or contains a
debit ledger balance and such customer fails to answer a margin call
or request for other deposits within one business day.
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[[Page 40839]]
Finally, customer and noncustomer accounts margined by letters of
credit would be included in the Risk-Based Capital computation under
the proposal. Such accounts currently have no effect on a firm's
capital computation, because a letter of credit is not included in the
Segregated Amount until the letter of credit is actually drawn upon.
3. Effect of Certain Events on the Risk-Based Net Capital Requirement
Certain events would have different effects on required capital
under a Segregated Amount-based capital requirement as compared to the
proposed Risk-Based Capital requirement. These differences are
summarized in the following chart.
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Effect on net capital requirement
Event -----------------------------------------------------------------------
Segregated amount-based Proposed risk-based rule
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Excess margin deposited by a customer... Increase................... No effect.
Excess margin withdrawn by customer..... Decrease................... No effect.
Firm increases margin required from a Increase when customer No effect.
customer. deposits extra margin.
Exchange increases margin requirements.. Increase when funds are Immediate increase.
collected from customer.
Customer or noncustomer establishes No immediate effect........ Immediate increase.
riskier positions (indicated by
increased risk margin requirement in
trading account).
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Generally, Risk-Based Capital bases required levels of capital on
the risks inherent in the futures and options positions that the FCM
carries for customers and noncustomers. Conversely, the Segregated
Amount computation is based upon the amount of funds the FCM is
required to segregate or secure on behalf of its customers trading on
U.S. and foreign commodity markets. Thus, an FCM that collects
additional funds from its customer as a cushion for an increase in the
market risks posed by the customer's portfolio is required by
Commission rules to maintain a higher amount of capital, even though
such additional funds reduce the FCM's overall exposure to a default by
such customer. In contrast, an FCM that does not require a customer to
deposit additional margin would not have an increase in its capital
requirement, even though the firm may be more exposed to an increase in
the market risk associated with the customer's portfolio. The proposed
Risk-Based Capital computation, which is based upon a percentage of the
risk maintenance margin on a portfolio of positions, would require the
FCM to have higher minimum capital when the market risks associated
with positions in the portfolio increases regardless of whether the FCM
collected additional margin from the customer. Excess customer funds or
margin held by an FCM would continue to be protected and regulated
under the Commission's segregation requirements.
4. Impact of Adopting Risk-Based Capital
There were 169 registered FCMs as of April 30, 2003, of which 75
also were registered securities brokers or dealers with the SEC. The
required regulatory capital for these 169 firms reflects an increase of
more than $389 million, on a net basis, as a result of replacing
adjusted net capital requirements that are currently based on the
Segregated Amount with the risk-based capital requirements that are
currently implemented by BOTCC, CBT, CME and the NFA. The following
chart details the net increase for both sole FCMs and dually-registered
firms.
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Effect of risk-
based capital on Total for all
total capital firms
requirement
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Number of FCMs also registered as
BDs with SEC:
19........................... Increase........... $244,688,814
2............................ Decrease........... ($415,526)
54........................... No change.......... 0
Total: 75
Number of FCMs not registered as
BDs with SEC:
17........................... Increase........... $171,045,445
24........................... Decrease........... ($25,476,295)
53........................... No change.......... 0
Total: 94
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Of the 75 dually-registered FCMs, 19 had an increase in their
minimum capital requirements totaling approximately $245 million. Two
firms realized a reduction in minimum net capital requirements totaling
approximately $416,000. The minimum net capital for 54 firms did not
change. The minimum capital requirement for these 54 firms was
determined by SEC rules or the Commission's $250,000 minimum.
Of the 94 FCMs that were not dual registrants, 17 had a higher
minimum capital requirement totaling approximately $171 million under
Risk-Based Capital than under the Segregated Amount requirement.
Minimum capital requirements decreased by approximately $25 million for
24 sole FCMs. Fifty-three FCMs had no change in their minimum capital
requirements with the adoption of Risk-Based Capital. These 53 firms
were subject to the Commission's $250,000 minimum.
III. Capital Charge for Undermargined Accounts
Commission Rule 1.17(c)(5)(viii) requires an FCM to take a capital
charge for any customer account that is undermargined if the margin
call issued
[[Page 40840]]
to the customer has not been answered by the third business day
following the issuance of the call. Rule 1.17(c)(5)(ix) similarly
requires a capital charge for noncustomer accounts if a noncustomer
fails to answer a margin call by the second business day following the
issuance of the call. When first adopted, these rules allowed
collection periods of five business days for customer accounts and four
business days for noncustomer accounts following the issuance of a
margin call before a capital charge had to be taken. In 1980, the
number of days was reduced to three business days for customer accounts
and two business days for noncustomer accounts in recognition of the
increased use of electronic communication for issuing and collecting
margin calls.\15\
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\15\ 45 FR 79416 (December 1, 1980). Under the current rule, if
a customer account first experiences a margin deficiency on Monday,
the FCM would issue a margin call to the customer on Tuesday. If the
margin call had not been answered by the close of business on
Friday, the FCM would be required to take a capital charge for its
capital computation as of Friday for the amount of the margin
deficiency on Monday.
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The Commission is now proposing to reduce the collection period
before a capital charge would have to be taken to one business day
following the issuance of a margin call for both customer and
noncustomer accounts. The Commission is making this proposal in
recognition of: (i) The advancements in electronic communications and
the ability to transfer funds electronically which allow market
participants to more easily meet a margin call; (ii) the increase in
the number of products offered on futures markets since 1980, and the
higher volatility associated with some of these products; and (iii) the
expansion in the scope of FCM operations, including outside of the
United States. In addition, the Commission believes the proposed
amendment is consistent with the proposal to adopt a Risk-Based Capital
computation.
An effective margining system is a key component of a sound
financial risk management system. Such financial risk management should
include a correlation between the time permitted for margin collection
and the performance bonds or risk margin levels established for each
contract. Because the Commission is proposing minimum capital
requirements based on a percentage of risk maintenance margin required,
not collected, a corresponding change to the allowed collection period
for margin deficiencies is being proposed.
As noted previously, the SPAN margining system is intended to
result in a level of maintenance margin that is expected to cover the
probable one-day price move for a particular futures or option contract
95 percent to 99 percent of the time. Because price moves of that
magnitude do not occur each day, the Commission believes it is
appropriate to allow an FCM a reasonable period of time to collect the
margin calls from customers and noncustomers prior to imposing a
capital charge. However, with the increased use of electronic
communications and electronic funds transfers, an FCM should be able to
minimize the risks inherent in an account that has become
undermargined. Reducing the period of time for collection to one
business day from the date the margin call was issued for the purpose
of taking charges against net capital would reflect the additional risk
posed by a longer collection time than is necessary to transfer funds
using current technology. It would also serve as an additional
incentive to FCMs to issue margin calls and to collect margin promptly.
An example of when a margin charge would have to be taken is as
follows: on Monday a customer's or noncustomer's account becomes
undermargined for the first time; the FCM makes a call to the customer
or noncustomer for additional margin on Tuesday; if the margin
deficiency is not collected by the close of business Wednesday, then
any capital computation prepared as of the close of business Wednesday
would include a capital charge for the margin deficiency.
IV. Financial Reporting Requirements for FCMs and IBs
A. Introduction
FCMs and IBs are required to be in compliance with the net capital
rule at all times and to be able to demonstrate that compliance
whenever requested to do so. Such close monitoring and awareness of
capital positions is necessary in the high risk, high volatility
futures trading business. Likewise, a sound financial surveillance
program recognizes the need to monitor the financial condition of an
FCM or IB through the regular collection of financial information. The
Commission is proposing several amendments to Rules 1.10, 1.12, 1.16
and 1.18 that: (i) Reflect advances in technology that permit more
rapid reporting, (ii) increase regulatory efficiency by harmonizing
reporting requirements under comparable Commission and SEC rules, (iii)
promote direct supervision of FCMs and IBs by SROs subject to
Commission oversight, and (iv) streamline the Commission's reporting
requirements by eliminating unnecessary filings. The proposed
streamlined procedures and filing requirements are consistent with the
oversight role envisioned for the Commission under the Commodity
Futures Modernization Act of 2000 (``CFMA'') which includes among its
stated purposes ``to transform the role of the [Commission] to
oversight of the futures market'' and ``to streamline and eliminate
unnecessary regulation for the commodity futures exchanges and other
entities regulated under the Commodity Exchange Act''.\16\
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\16\ Section 2 of the CFMA, Pub. L. 106-554, Appendix E, 114
Stat. 2763 (2000).
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B. Monthly Filing of Financial Reports by FCMs
The Commission conducts its monitoring of the financial condition
of FCMs both directly and through coordination with the SROs. Pursuant
to Commission Rule 1.52, an SRO must adopt, submit for Commission
approval, and thereafter enforce minimum financial and related
reporting requirements for its member FCMs.
Commission Rule 1.10 requires an FCM to file an unaudited Form 1-
FR-FCM report on a quarterly basis with the Commission and with its
designated self-regulatory organization (``DSRO'').\17\ FCMs that also
are registered as securities brokers or dealers may elect to file, in
lieu of a Form 1-FR-FCM, a copy of their unaudited Financial and
Operational Combined Uniform Single Report under the Securities and
Exchange Act of 1934, Part II or Part IIA (``FOCUS Report'').\18\ FCM
financial reports must be filed with the Commission and with an FCM's
DSRO within 17 business days of the end of the fiscal quarter.
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\17\ The DSRO is the self-regulatory organization that, pursuant
to Commission Rule 1.52, is primarily responsible for monitoring an
FCM's compliance with minimum financial and related reporting
requirements, receiving and reviewing an FCM's financial reports,
and auditing the FCM's books and records.
\18\ The requirements for the FOCUS Report are set forth in SEC
Rule 17a-5.
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The Commission is proposing to amend Rule 1.10 to require each FCM
to file an unaudited Form 1-FR-FCM or FOCUS Report with the Commission
and with the FCM's DSRO as of the end of each month, including the
FCM's fiscal year end. The FCM would be required to file the financial
reports within 17 business days of the end of each month.
When the Commission initially adopted its financial reporting
rules, quarterly reporting by FCMs was determined to be sufficient for
adequate and timely monitoring of the FCM's financial condition.
Commodity exchanges and NFA, however, have
[[Page 40841]]
since recognized the need for more frequent filing of financial
information by FCMs due to the substantial increase in the volume of
business conducted in the futures and options markets and the high
volatility of the markets in which FCMs operate. The NFA and CME
currently require FCMs for which they are DSRO to file financial
reports on a monthly basis.\19\ Because the Commission receives copies
of all financial reports filed at the SRO level, for most FCMs the
Commission already receives monthly financial reports.
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\19\ Section 1(b) of NFA Rulebook and CME Rule 970C.1.
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The Commission believes it is appropriate to amend its rules to
require FCMs to report their financial condition monthly. Monthly
filing would permit closer financial surveillance for any remaining
entities that file quarterly, and would be consistent with the rules of
the SROs that have already caused monthly reporting to be widely
required. More frequent reporting allows SROs and the Commission to
identify adverse financial trends sooner than is possible with
quarterly filing. In addition, since most FCMs currently file monthly
financial reports with their DSRO, a Commission regulation requiring
FCMs to file monthly financial reports with the Commission and with the
applicable DSRO should pose minimal additional burden on FCMs.
Furthermore, an FCM's preparation of a monthly financial report would
satisfy its requirement to prepare a monthly net capital computation
under Rule 1.18.\20\
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\20\ Rule 1.18(b) requires an FCM to prepare and to maintain a
formal computation of its net capital as of the close of business
each month. The formal net capital computation must be completed
within 17 business days of the end of the month.
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C. Requirements for Oath or Affirmation Filed With Form 1-FR
The Commission also is proposing to ease Form 1-FR filing
requirements for FCMs and IBs by expanding the list of persons from
whom the Commission would accept the oath or affirmation that is
required by Rule 1.10(d)(4).\21\ Pursuant to this rule, the individual
providing the oath or affirmation attests to the truth and accuracy of
the information provided in the Form 1-FR, to the best knowledge and
belief of the individual. The oath or affirmation must be provided by
one of the following individuals: If the FCM or IB is a sole
proprietorship, the sole proprietor; if the FCM or IB is a partnership,
a general partner; or if the FCM or IB is a corporation, the chief
executive officer or chief financial officer.\22\
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\21\ Not all IBs file a Form 1-FR-IB. An IB that operates
pursuant to an FCM guarantee agreement that satisfies the
requirements of Rule 1.10(h) is exempt from filing the form, which
otherwise would be required from the IB pursuant to Rule
1.10(b)(2)(i). Generally, at least two-thirds of registered IBs
operate pursuant to a guarantee agreement.
\22\ Rule 1.10(d)(4) also provides that in the case of a Form 1-
FR filed with the Commission via electronic transmission, such
transmission must be accompanied by the Commission-assigned Personal
Identification Number of the authorized signer and such Personal
Identification Number will constitute and become a substitute for
the manual signature of the authorized signer for the purpose of
making the oath or affirmation.
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The list of individuals that appears in Rule 1.10(d) also appears
in other Commission regulations that designate permitted signatories
for required filings by commodity pool operators (``CPOs'') and
commodity trading advisers (``CTAs''). The Commission recently has
issued a release that proposes to revise these rules for CPOs and CTAs,
as the ``existing list may be unnecessarily restrictive in that it
leaves no room for other organizational structures under which CPOs and
CTAs operate--e.g., limited liability companies.''\23\ The list in Rule
1.10(d)(4) similarly does not address all organizational structures
under which FCMs and IBs operate. The Commission is therefore proposing
to amend the rule to provide that the oath or affirmation may be made
by either (i) a representative duly authorized to bind the FCM or IB,
or, (ii) if the FCM or IB also is registered with the SEC as a
securities broker or dealer, a representative authorized to file the
FOCUS Report for the broker or dealer under SEC Rule 17a-5 (17 CFR
240.17a-5).
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\23\ 68 FR 12622 (March 17, 2003).
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D. Extensions of Time To File Unaudited and Audited Financial Reports
Commission Rule 1.10(f)(1) provides that if an FCM or IB determines
that it cannot file its unaudited Form 1-FR prior to the due date, it
may file an application with the Commission for an extension of time to
a specified date, which may not be more than 90 days after the original
due date. The FCM or IB also is required to file a copy of the
application for extension with its DSRO.
In addition to unaudited filings, Commission Rule 1.10 also
requires that FCMs and IBs file audited financial statements and
schedules on an annual basis. To request an extension of time for
filing the annual audited financial report, the FCM or IB may file an
application with the Commission pursuant to Commission Rule 1.16(f).
Notice of the application must be filed by the FCM or IB with its DSRO.
Several exchanges have adopted rules or procedures to process
requests from their member FCMs for extensions of time to file
unaudited financial statements. In addition, in 1993 the SEC amended
its rules to provide authority to the designated examining authority
(``DEA'') of a broker or dealer to grant or deny a request for
extension of time to file its unaudited FOCUS Report.\24\ This has
resulted in some requests for filing extensions being reviewed and
acted upon by the Commission, DSRO staff and DEA staff.
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\24\ 58 FR 45838 (August 31, 1993).
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The Commission proposes to provide greater clarity and uniformity
to this area by amending Rules 1.10(f) and 1.16(f). The amended rules
would provide that the DSRO of an FCM or IB may approve an application
for an extension of time to file an unaudited or audited financial
report, provided that the FCM or IB files with the Commission a copy of
its DSRO's written approval or denial of the request to extend the time
for filing the Form
1-FR. A registrant must file a copy of its application, and a copy of
any notices it receives from the designated self regulatory
organization to approve or deny its application, with the regional
office of the Commission where the FCM or IB is required to file its
unaudited or audited financial statements.
The Commission also is proposing that if the FCM or IB also is
registered as a securities broker or dealer with the SEC (a ``dual
registrant'') and has filed with its DEA a request for an extension of
time to file its unaudited monthly FOCUS Report or audited annual
financial statements, no separate application to its applicable DSRO
would be required, but the dual registrant would be required to file
with its DSRO and the Commission a copy of the application made to the
FCM's or IB's DEA. Immediately upon the DEA's approval or denial of the
request to extend the time for filing the unaudited monthly FOCUS
Reports or audited annual financial statements, the dual registrant
would be required to file a copy of such approval or denial with the
Commission and its DSRO.
E. Change in Fiscal Year End
Commission Rule 1.10(e) provides that an FCM or IB must continue to
use its elected fiscal year, unless a change is approved upon written
application to the Commission and a notice of the change is filed with
the FCM's or IB's DSRO. The Commission generally has approved such
applications provided that the applicant files certified financial
statements within 15 months of the as of date of its last certified
[[Page 40842]]
financial statements and the certified financial statements cover the
full period from the as of date of the previous certified financial
statements. In addition, SEC rules provide for DEA approval in
connection with changes to the fiscal year or ``as of'' date for the
annual audited financial statements of a broker or dealer.\25\
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\25\ SEC Rule 17a-5(m) requires that a securities broker or
dealer notify its DEA and the SEC offices located in Washington, DC
and the region where the broker or dealer has its principal place of
business ``in the event any broker-dealer finds it necessary to
change its fiscal year.'' The notice must contain a detailed
explanation for the change, and any change in the ``as of'' date for
the annual audit financial statements must be approved by the DEA
under SEC Rule 17a-5(d)(1)(i).
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The Commission is proposing to amend Rule 1.10(e) to provide that a
DSRO may approve an FCM's or IB's application for a change in fiscal
year, provided that the FCM or IB files with the Commission a copy of
its application, and also files a copy of its DSRO's written approval
or denial of a change in fiscal year end, in order to permit Commission
staff to know when certified annual financial reports are to be
filed.\26\ The Commission also is proposing that any dual registrant
that has filed a notice or application with its DEA to request a change
to its fiscal year or ``as of'' date would not need to file a separate
application with its DSRO, but the dual registrant would need to file
with its DSRO and the Commission a copy of the notice or application
filed by the registrant with its DEA. Further, immediately upon the
approval or denial of the request to change the dual registrant's
fiscal year or ``as of'' date, the dual registrant would be required to
file a copy of such approval or denial with the Commission and its
DSRO.
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\26\ Rule 1.10(b)(1)(ii) requires that FCMs file reports that
are ``as of the close of its fiscal year'' and filed ``no later than
90 days after the close'' of the fiscal year, or, if the FCM is also
registered as a securities broker or dealer, no later than the 60
day period provided under SEC Rule 17a-5(d)(5).
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F. Filings by Introducing Brokers of Form 1-FR With NFA
Commission Rule 1.10(b) requires an IB to file with the Commission
and with NFA on a semiannual basis an unaudited Form 1-FR-IB, or its
FOCUS Report if the IB is also registered with the SEC as a securities
broker or dealer. The IBs are required to file the unaudited financial
reports within 17 business days of the as of date of the reports.
The Commission currently has direct access to a database maintained
by NFA that includes the financial information reported by IBs on a
Form 1-FR-IB or FOCUS Report. Therefore, the Commission is proposing to
amend Rule 1.10(c) to provide that an IB must file an unaudited Form 1-
FR-IB solely with NFA.\27\
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\27\ The proposed amendment will be similar to existing
provisions in 1.10(c) that provide that guarantee agreements need be
filed solely with the NFA.
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Furthermore, the Commission invites comment on whether, and under
what conditions, it should amend its rules to permit IBs to file annual
certified financial statements solely with NFA. NFA would input the
financial information into the database and would provide copies of the
annual reports to the Commission upon request.
V. Early Warning Requirements
Commission Rule 1.12 requires an FCM to file notices and meet other
requirements if certain predefined financial events occur that may
raise concerns regarding the FCM's ability to continue its normal
operations and to safeguard customer funds. The requirements in Rule
1.12 are generally referred to as ``early warning requirements.''
A. Adjusted Net Capital That Is Below the Early Warning Level
An FCM whose adjusted net capital falls below a level specified in
Rule 1.12(b), the early warning level, is required to meet the notice
and monthly filing requirements that are set forth in 1.12(b)(4).\28\
The FCM must file written notice within five business days with the
Commission and its DSRO, and the FCM must also file a Form 1-FR-FCM or
FOCUS Report as of the close of business for the month in which the
FCM's adjusted net capital is less than the required early warning
level. Rule 1.12(b) further requires the FCM to continue to file
monthly Forms 1-FR-FCM or FOCUS Reports, as opposed to filing quarterly
reports that would ordinarily be required under Rule 1.10, until the
end of a period of three successive months during which the adjusted
net capital of the FCM remains at a level equal to or greater than the
early warning level.
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\28\ The level of adjusted net capital that is required under
Rule 1.12(b) equals the greatest of the following:
a. $375,000;
b. Six percent of the Segregated Amount, less the market value
of options purchased by customers for which the full premiums have
been paid;
c. 150 percent of the amount of adjusted net capital required by
a registered futures association of which the FCM is a member; or
d. for FCMs that also are registered with SEC as securities
brokers or dealers, the amount of net capital required by SEC Rule
17a-11(b).
The Commission is proposing a technical amendment to Rule
1.12(b) to correct the reference to SEC Rule 17a-11(b), which the
SEC has redesignated as 17a-11(c). 58 FR 37655 (July 13, 1993.)
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The Commission is proposing to eliminate the monthly filing
requirement in Rule 1.12(b), because this provision will become
unnecessary if Rule 1.10 is amended to require that all FCMs file
monthly financial reports with the Commission and with their DSRO. The
Commission also is retaining the requirement under Rule 1.12(b) that
the FCM provide notice to the Commission and to the firm's DSRO that
its adjusted net capital has fallen below 150 percent of its minimum
capital requirement. In addition, the Commission is proposing to amend
Rule 1.12(b) to provide that the early warning notice be filed with the
Commission and with the firm's DSRO within 24 hours, instead of within
five business days. This amendment would make the Commission's rule
consistent with the SEC's early warning rule, which also requires that
notice be provided promptly, within 24 hours.\29\
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\29\ SEC Rule 17a-11(c), (17 CFR 240.17a-11(c)).
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The JAC has requested that the Commission eliminate the early
warning requirement since FCMs will be required to file monthly
financial reports under the amended rules. The Commission, however, is
concerned that eliminating the early warning notice requirement will
diminish the DSRO's and Commission's ability to react promptly to
potential financial crises at an FCM that has experienced a decrease in
capital. The Commission, however, invites interested parties to comment
on this aspect of the proposal, including on whether the 150 percent
early warning level is appropriate or whether it should be adjusted or
eliminated.
B. Failure To Maintain Current Books and Records and of Material
Inadequacy in Internal Accounting Controls
Rule 1.12(c) requires an FCM or IB to notify the Commission if it
fails to maintain current books and records that it is required to keep
pursuant to Commission regulations. The FCM or IB must give such notice
on the same day that the event occurs that causes it to not maintain
current books and records. The notice must specify the books and
records that have not been made or that are not current. The FCM or IB
also is required to file a written report setting forth the steps
taken, or that are being taken, to correct the situation within five
business days of filing the initial notice.
Rule 1.12(d) requires an FCM or IB to notify the Commission within
three business days of discovering or being
[[Page 40843]]
notified by an independent public accountant of a material inadequacy
in its accounting system, internal accounting controls, procedures for
safeguarding customer and firm assets, or other systems. The FCM or IB
also is required to file a written report setting forth the steps
taken, or that are being taken, to correct the material inadequacy
within five business days of the original notice.
The Commission is proposing to amend Rule 1.12(c) and (d) so that
the time frames for reporting a failure to maintain current books and
records and for reporting a material inadequacy in accounting systems
are consistent with the time frames established by SEC rules for
securities brokers and dealers. The Commission and SEC have attempted,
to the extent possible, to develop capital and financial reporting
rules that are consistent in order to simplify and to clarify the rules
and procedures for firms that are dually-registered as securities
brokers or dealers and FCMs or IBs. SEC Rule 17a-11(d) and (e) are
analogous to Commission Rule 1.12(c) and (d). SEC Rule 17a-11(d),
however, requires a broker or dealer to transmit within 48 hours a
report to the SEC stating what the broker or dealer has done or is
doing to correct the situation that has caused it to fail to maintain
current books and records. SEC Rule 17a-11(e) requires a broker or
dealer to notify the SEC within 24 hours of discovering a material
inadequacy in its accounting systems and to transmit a report to the
SEC within 48 hours of such discovery.
The Commission believes that financial surveillance would be
improved if all FCMs and IBs, whether dual registrants or not, were
required to file notices with the Commission in accordance with the
earlier thresholds required by the SEC. The time frames in the
Commission's rules were adopted in 1978 and have not been amended since
then to reflect advances in technology that may help ensure more prompt
reporting. The Commission further believes that FCMs and IBs and
brokers and dealers would benefit if the Commission's and SEC's rules
were harmonized so that the same time frames apply for compliance with
both agencies.
VI. Equity Capital and Subordinated Agreements
The Commission also is proposing to make conforming changes to Rule
1.17(e) and Rule 1.17(h), as these rules also include adjusted net
capital requirements that are based upon percentages of the Segregated
Amount. Pursuant to these rules, an FCM \30\ must maintain adjusted net
capital in excess of its minimum adjusted net capital requirement in
order to undertake or avoid undertaking certain actions in connection
with the FCM's equity capital and subordination agreements.\31\ Thus,
for example, Rule 1.17(e) prohibits the withdrawal of equity capital
from an FCM if, among other conditions, the FCM's adjusted net capital
after giving effect to such withdrawals would be less than the greatest
of:
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\30\ Both FCMs and IBs must maintain specified levels of
adjusted net capital for purposes of the actions that are either
restricted or required under Regulations 1.17(e) and 1.17(h). Only
FCMs, however, are required to include in their capital computations
the funds that FCMs are required to segregate and set aside for the
FCMs' customers. The discussion in this proposal is therefore
limited to FCMs, since the proposed change relates to adjusted net
capital computations that are based on funds required to be
segregated and set aside for the FCMs' customers.
\31\ Subordination agreements that meet the requirements of Rule
1.17(h) will be deemed ``satisfactory subordination agreements,''
thus permitting an FCM, pursuant to Rule 1.17(c)(4)(i), to exclude
the subordinated debt that is governed by these agreements as
liabilities when computing net capital.
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a. 120 percent of the minimum dollar amount in 1.17(a)(1)(i)(A) or
(a)(1)(ii)(A); \32\
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\32\ The Commission redesignated paragraph (a)(1)(ii)(A) of Rule
1.17 as paragraph (a)(1)(iii)(A) in 2001. 66 FR 53510 (October 23,
2001). The Commission therefore also proposes a technical amendment
to Rule 1.17(e) to correct the reference to 1.17(a)(1)(ii)(A) to
read 1.17(a)(1)(iii)(A).
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b. Six percent of the Segregated Amount;
c. 120 percent of the amount of adjusted net capital required by a
registered futures association of which the FCM is a member; or
d. For FCMs that also are registered with the SEC as securities
brokers or dealers, the amount of net capital required by SEC Rule
15c3-1(e).
Similarly, several paragraphs of Rule 1.17 that address
subordination agreements--(h)(2)(vi)(C) (restricting reductions of the
unpaid principal balance under a secured demand note subject to a
subordination agreement); (h)(2)(vii)(A) (restricting prepayments) and
(B) (restricting special prepayments); \33\ (h)(2)(viii)(A) (requiring
suspension of repayment); (h)(3)(ii) (requiring notice of maturity or
accelerated maturity) and (h)(3)(v) (restricting use of temporary
subordinations)--also include adjusted net capital calculations that
refer to specified percentages of the Segregated Amount.\34\ The
required percentages range from six percent to ten percent, all of
which exceed the percentage (four percent) applied to the Segregated
Amount for purposes of the minimum adjusted net capital requirement
under Rule 1.17(a).
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\33\ ``Special prepayments'' is the term used by the rule for
prepayments made under revolving subordinated agreements. Because
revolving agreements may permit prepayments at any time, such
payments ordinarily would conflict with Rule 1.17(h)(2)(vii)
(prohibiting prepayment within one year of the date upon which the
governing subordination agreement became effective.) In 1982, the
Commission determined that special prepayments would be acceptable
if subject to various conditions, including a higher level of
adjusted net capital (10 percent of segregated funds) than is
required for prepayments that are subject to the one-year
restriction (7 percent of segregated funds.) 47 FR 22352 (May 24,
1982).
\34\ The cited paragraphs contain references to
1.17(a)(1)(ii)(A), which has been redesignated. (See discussion in
footnote 31 of this release.) The Commission is proposing a
technical amendment to change the reference to read as
1.17(a)(1)(iii)(A).
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The Commission therefore is proposing to amend paragraphs (e) and
(h) of Rule 1.17 to conform to the risk-based capital requirement that
the Commission is proposing for Rule 1.17(a). The proposed amendments
to paragraphs (e) and (h) of Rule 1.17 would: (i) Eliminate
calculations based on the Segregated Amount; (ii) adopt calculations
based on the required margin for customer and noncustomer futures and
option positions carried by an FCM; and (iii) apply percentage
requirements that reflect the same proportional increase currently
required under 1.17(e) and (h). Thus, for example, where Rule 1.17(e)
included a calculation based upon six percent of the Segregated Amount,
the Commission proposes to eliminate this calculation and require 150
percent of the Risk-Based Capital amount that the Commission is
proposing for FCMs under Rule 1.17(a)(1)(B).
The Commission also is proposing to ``grandfather'' in agreements
that, prior to the effective date of the proposed amendments, have been
determined to be satisfactory subordination agreements pursuant to Rule
1.17(h). The Commission is proposing to amend paragraph (h)(3)(vii) of
Rule 1.17 to provide that any such agreement would continue to be
deemed satisfactory until its maturity, so long as the agreement is not
amended or renewed. If for any reason the agreement is amended or
renewed, such amended or renewed agreement must comply with Rule 1.17
as amended.\35\
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\35\ Rule 1.17(h)(3)(vii) presently applies to satisfactory
subordination agreements that were entered into prior to the date
that Rule 1.17(h) first became effective (December 20, 1978). The
Commission provided a period of up to five years for such agreements
to come into compliance with Rule 1.17(h), and this period has long
since expired. The Commission therefore is also proposing technical
amendments to eliminate provisions in Rule 1.17(h)(3)(viii) that are
applicable to satisfactory subordination agreements that were
entered into prior to December 20, 1978.
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[[Page 40844]]
VII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission previously has
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on such entities in
accordance with the RFA.\36\ The Commission has determined previously
that FCMs are not small entities for the purpose of the RFA.\37\ With
respect to IBs, the Commission has determined to evaluate within the
context of a particular rule proposal whether all or some IBs would be
considered ``small entities'' for purposes of the Regulatory
Flexibility Act and, if so, to analyze the economic impact on IBs of
any such rule at that time.\38\ Several of the proposed amendments
would apply to FCMs only and therefore would have no economic impact on
IBs (proposed amendments to Regulations 1.12(b), 1.17(a), 1.17(c),
1.17(e) and 1.17(h)). The proposed amendments to Regulations 1.10, 1.16
and 1.18 would reduce reporting requirements applicable to IBs, because
financial reports that the IB must now file with both the Commission
and the NFA would be filed with the NFA only. Proposed amendments to
Regulation 1.12, which would shorten reporting time frames to the same
periods required by comparable SEC rules, should have no economic
impact on an IB that is also registered as a securities broker or
dealer with SEC. Moreover, the advances in technology since 1978 would
reduce the effect, if any, of the proposed Rule 1.12 amendments on
those IBs that are not registered with the SEC. Therefore, the
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5
U.S.C. 605(b), that the action proposed to be taken herein will not
have a significant economic impact on a substantial number of small
entities. The Commission invites the public to comment on the
significance of the economic impact of the proposed rules, if any, on
IBs.
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\36\ 47 FR 18618 (April 30, 1982).
\37\ 47 FR at 18619.
\38\ 47 FR at 18618, 18620.
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B. Paperwork Reduction Act
The proposed rulemaking includes information collection
requirements as a result of the proposed amendment to Regulation 1.10,
which would require FCMs to prepare and file unaudited financial
reports on a monthly rather than a quarterly basis. The Paperwork
Reduction Act of 1995 (``PRA'') \39\ 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. Pursuant to the PRA, the Commission has submitted a copy of
this section to the Office of Management and Budget (``OMB'') for its
review.
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\39\ 44 U.S.C. 3507(d).
Collection Of Information. (Regulations and Forms Pertaining to the
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Financial Integrity of the Marketplace, OMB Control Number 3038-0024.)
FCMs currently prepare and file quarterly unaudited financial
reports under Rule 1.10, and they also prepare and file monthly capital
computations under Rule 1.18. Under the proposed amendment to Rule
1.10, FCMs would file unaudited financial reports on a monthly basis,
which would also satisfy the existing monthly reporting requirement of
Rule 1.18. The Commission has therefore determined that the proposed
amendments to Rule 1.10 and Rule 1.18 would increase by 537 hours the
total annual reporting burden associated with the above-referenced
collection of information, which has been approved previously by OMB.
The estimated burden of the proposed amendments to Rule 1.10 and
Rule 1.18 was calculated as follows:
The burden associated with Rule 1.10 is expected to be 5,577 hours
as a result of the proposed amendment to Rule 1.10, which represents an
increase of 3,687 hours:
Estimated number of respondents: 169.
Reports annually by each respondent: 12.
Total annual responses: 2,028.
Estimated average number of hours per response: 2.75.
Annual reporting burden: 5,577.
The existing burden associated with Commission Rule 1.18 is
expected to decline to zero as a result of the proposed amendment to
Rule 1.18, which represents a decrease of 3,150 hours.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW.,
Washington, DC 20581 (202) 418-5160. The Commission considers comments
by the public on this proposed collection of information in--
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used;
Enhancing the quality, utility, and clarity of the information to
be collected; and
Minimizing the burden of the collection of information on those who
are to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses.
Organizations and individuals desiring to submit comments on the
information collection should contact the Office of Information and
Regulatory Affairs, Office of Management and Budget, Room 10235, New
Executive Office Building, Washington, DC 20503, Attn: Desk Officer of
the Commodity Futures Commission. OMB is required to make a decision
concerning the collection of information contained in these proposed
regulations between 30 and 60 days after publication of this document
in the Federal Register. Therefore, a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to
comment to the Commission on the proposed regulations.
C. Cost-Benefit Analysis
Section 15(a) of the Act, as amended by section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new regulation under the Act. By its terms,
section 15(a) as amended does not require the Commission to quantify
the costs and benefits of a new regulation or to determine whether the
benefits of the regulation outweigh its costs. Rather, section 15(a)
simply requires the Commission to ``consider the costs and benefits''
of its action.
Section 15(a) of the Act further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the
[[Page 40845]]
Commission could in its discretion give greater weight to any one of
the five enumerated areas and could in its discretion determine that,
notwithstanding its costs, a particular rule was necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the Act.
The proposed rulemaking consists of several proposed amendments to
regulations pertaining to the minimum financial and related reporting
requirements for FCMs and IBs.\40\ The Commission is considering the
costs and benefits of these various proposed rules in light of the
specific provisions of section 15(a) of the Act, as follows:
---------------------------------------------------------------------------
\40\ Section 4f(b) of the Act prohibits persons from becoming
registered as FCMs or IBs if they do not meet the minimum financial
requirements set forth in either the Commission's regulations or in
such Commission-approved requirements as may be established by the
contract markets and derivatives transaction execution facilities of
which the FCM or IB is a member.
---------------------------------------------------------------------------
1. Protection of market participants and the public. The proposed
amendments to reporting requirements provide the benefit of aiding the
Commission and DSROs to monitor the financial condition of futures
intermediaries and to protect the customers of those firms and the
markets. The Commission anticipates that the costs of compliance with
the proposed reporting requirements would be minimized by proposed
amendments to streamline filing requirements. In addition, the proposed
rules would ``grandfather'' in existing satisfactory subordination
agreements, meaning that FCMs or IBs would incur no costs to comply
with proposed amendments to Rule 1.17, unless such agreements would be
amended or renewed for other reasons.
2. Efficiency and competition. As stated above, the Commission
anticipates that the proposed amendments will benefit efficiency by
eliminating duplicate filings and otherwise streamlining reporting
requirements for FCMs and IBs. The proposed amendments should have no
effect, from the standpoint of imposing costs or creating benefits, on
competition in the futures and options markets.
3. Financial integrity of futures markets and price discovery. The
proposed amendments contribute to the benefit of ensuring that FCMs and
IBs can meet their financial obligations to customers and other market
participants, thus contributing to the financial integrity of the
futures and options markets as a whole. The proposed amendments should
have no effect, from the standpoint of imposing costs or creating
benefits, on the price discovery function of such markets.
4. Sound risk management practices. The proposed capital standards
seek to reflect appropriately the level of risk that different
activities and obligations of FCMs and IBs may pose to their financial
condition. The proposed amendments may therefore contribute to the
sound risk management practices of futures intermediaries.
5. Other public interest considerations. The Commission also
believes that the proposed rules are beneficial in that they harmonize
Commission and SEC rules with respect to time frames for reporting
conditions that may be potentially adverse to the financial condition
of the FCM or IB.
After considering these factors, the Commission has determined to
propose the amendments discussed above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit any data that they may have quantifying the
costs and benefits of the proposal with their comment letters.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
For the reasons presented above, 17 CFR Part 1 is proposed to be
amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000).
2. Section 1.10 is proposed to be amended by:
a. Adding the word ``monthly'' before the words ``financial
reports'' and removing the parenthetical phrase in paragraph
(b)(1)(ii);
b. Removing the last sentence of paragraph (e)(1); and
c. Removing paragraph (f)(2) and
d. Revising paragraphs (b)(1)(i), (b)(2)(i), (c), (d)(4), (e)(2),
and (f)(1) to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(b) Filing of financial reports. (1)(i) Except as provided in
paragraphs (b)(3) and (h) of this section, each person registered as a
futures commission merchant must file a Form 1-FR-FCM as of the close
of business each month. Each Form 1-FR-FCM must be filed no later than
17 business days after the date for which the report is made.
* * * * *
(2)(i) Except as provided in paragraphs (b)(3) and (h) of this
section, and except for an introducing broker operating pursuant to a
guarantee agreement which is not also a securities broker or dealer,
each person registered as an introducing broker must file a Form 1-FR-
IB semiannually as of the middle and the close of each fiscal year
unless the introducing broker elects, pursuant to paragraph (e)(1) of
this section, to file a Form 1-FR-IB semiannually as of the middle and
the close of each calendar year. Each Form 1-FR-IB must be filed no
later than 17 business days after the date for which the report is
made.
* * * * *
(c) Where to file reports. (1) A report filed by an introducing
broker pursuant to paragraph (b)(2)(i) of this section need be filed
only with, and will be considered filed when received by, the National
Futures Association. Other reports provided for in this section will be
considered filed when received by the regional office of the Commission
with jurisdiction over the state in which the registrant's principal
place of business is located (except that a registrant under the
jurisdiction of the Commission's Western Regional Office must file such
reports with the Southwestern Regional Office) and by the designated
self-regulatory organization, if any; and reports required to be filed
by this section by an applicant for registration will be considered
filed when received by the National Futures Association and by the
regional office of the Commission with jurisdiction over the state in
which the applicant's principal place of business is located (except
that an applicant under the jurisdiction of the Commission's Western
Regional Office must file such reports with the Southwestern Regional
Office).
(2) Any report filed pursuant to paragraph (b)(1), (b)(2), or
(b)(4) of this section or Sec. 1.12(a) which need not be certified in
accordance with Sec. 1.16 may be submitted to the Commission in
electronic form using a Commission-assigned Personal Identification
Number, and otherwise in accordance with instructions issued by the
Commission, if the futures commission
[[Page 40846]]
merchant, introducing broker or a designated self-regulatory
organization has provided the Commission with the means necessary to
read and to process the information contained in such report.
(3) Any guarantee agreement entered into between a futures
commission merchant and an introducing broker in accordance with the
provisions of this section need be filed only with, and will be
considered filed when received by, the National Futures Association.
(d) * * *
(4) Attached to each Form 1-FR filed pursuant to this section must
be an oath or affirmation that to the best knowledge and belief of the
individual making such oath or affirmation the information contained in
the Form 1-FR is true and correct. The oath or affirmation must be made
by:
(i) a representative duly authorized to bind the applicant or
registrant; or
(ii) if the registrant or applicant is registered with the
Securities and Exchange Commission as a securities broker or dealer, by
the representative authorized under Sec. 240.17a-5 of this title to
file for the securities broker or dealer its Financial and Operational
Combined Uniform Single Report under the Securities Exchange Act of
1934, part II or part IIA. In the case of a Form 1-FR filed via
electronic transmission in accordance with procedures established by
the Commission, such transmission must be accompanied by the
Commission-assigned Personal Identification Number of the authorized
signer and such Personal Identification Number will constitute and
become a substitute for the manual signature of the authorized signer
for the purpose of making the oath or affirmation referred to in this
paragraph.
(e) * * *
(2) (i) A registrant must continue to use its elected fiscal year,
calendar or otherwise, unless a change in such fiscal year has been
approved pursuant to this paragraph (e)(2).
(ii) A registrant may file with its designated self-regulatory
organization an application to change its fiscal year, a copy of which
the registrant must file with the Commission. The application shall be
approved or denied in writing by the designated self regulatory
organization. The registrant must file immediately with the Commission
a copy of any notice it receives from the designated self regulatory
organization to approve or deny the registrant's application to change
its fiscal year. A written notice of approval shall become effective
upon the filing by the registrant of a copy with the Commission, and a
written notice of denial shall be effective as of the date of the
notice.
(iii) A registrant that is registered with the Securities and
Exchange Commission as a securities broker or dealer may file with its
designated self-regulatory organization copies of any notice or
application filed with its designated examining authority, pursuant to
Sec. 240.17a-5(d)(1)(i) of this title, for a change in fiscal year or
``as of'' date for its annual audited financial statement. The
registrant must also file immediately with the designated self
regulatory organization and the Commission copies of any notice it
receives from its designated examining authority to approve or deny the
registrant's request for change in fiscal year or ``as of'' date. Upon
the receipt by the designated self-regulatory organization and the
Commission of copies of any such notice of approval, the change in
fiscal year or ``as of'' date referenced in the notice shall be deemed
approved under this paragraph (e)(2).
(iv) Any copy that under this paragraph (e)(2) is required to be
filed with the Commission shall be filed with the regional office of
the Commission with jurisdiction over the state in which the
registrant's principal place of business is located (except that such a
notice of approval for a registrant under the jurisdiction of the
Commission's Western Regional Office must be filed with the
Commission's Southwestern Regional Office), and any copy or application
to be filed with the designated self-regulatory organization shall be
filed at its principal place of business.
(f) Extension of time for filing uncertified reports. (1) In the
event a registrant finds that it cannot file its Form 1-FR, or, in
accordance with paragraph (h) of this section, its Financial and
Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934, part II or part IIA (FOCUS report), for any
period within the time specified in paragraphs (b)(1)(i) or (b)(2)(i)
of this section without substantial undue hardship, it may request
approval for an extension of time, as follows:
(i) A registrant may file with its designated self-regulatory
organization an application for extension of time, a copy of which the
registrant must file with the Commission. The application shall be
approved or denied in writing by the designated self-regulatory
organization. The registrant must file immediately with the Commission
a copy of any notice it receives from the designated self regulatory
organization to approve or deny the registrant's request for extension
of time. A written notice of approval shall become effective upon the
filing by the registrant of a copy with the Commission, and a written
notice of denial shall be effective as of the date of the notice.
(ii) A registrant that is registered with the Securities and
Exchange Commission as a securities broker or dealer may file with its
designated self-regulatory organization a copy of any application that
the registrant has filed with its designated examining authority,
pursuant to Sec. 240.17-a5(l)(5) of this title, for an extension of
time to file its FOCUS report. The registrant must also file
immediately with the designated self-regulatory organization and the
Commission copies of any notice it receives from its designated
examining authority to approve or deny the requested extension of time.
Upon receipt by the designated self-regulatory organization and the
Commission of copies of any such notice of approval, the requested
extension of time referenced in the notice shall be deemed approved
under this paragraph (f)(1).
(iii) Any copy that under this paragraph (f)(1) is required to be
filed with the Commission shall be filed with the regional office of
the Commission with jurisdiction over the state in which the
registrant's principal place of business is located (except that a
registrant under the jurisdiction of the Commission's Western Regional
Office must file the required copies with the Commission's Southwestern
Regional Office) (See Sec. 1.16(f) for extension of the time for
filing certified financial statements.)
3. Section 1.12 is proposed to be amended by:
a. Revising paragraphs (b)(1), (b)(2), (b)(4), (c) and (d), and
b. Removing the words ``telegraphic or'' from paragraphs (e),
(f)(1), (f)(2), (f)(3), (f)(4), (f)(5)(i), and (h) to read as follows:
Sec. 1.12. Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(b) * * *
(1) 150 percent of the minimum dollar amount required by paragraph
(a)(1)(i)(A) of Sec. 1.17;
(2) 150 percent of the amount required by paragraph (a)(1)(i)(B) of
Sec. 1.17;
(3) * * *
(4) For securities brokers or dealers, the amount of net capital
specified in Rule 17a-11(c) of the Securities and Exchange Commission
(17 CFR 240.17a-11(c)), must file written notice to that effect as set
forth in paragraph (i)
[[Page 40847]]
of this section within twenty-four (24) hours of such event.
(c) If an applicant or registrant at any time fails to make or keep
current the books and records required by these regulations, such
applicant or registrant must, on the same day such event occurs,
provide facsimile notice of such fact, specifying the books and records
which have not been made or which are not current, and within forty-
eight (48) hours after giving such notice file a written report stating
what steps have been and are being taken to correct the situation.
(d) Whenever any applicant or registrant discovers or is notified
by an independent public accountant, pursuant to Sec. 1.16(e)(2) of
this chapter, of the existence of any material inadequacy, as specified
in Sec. 1.16(d)(2) of this chapter, such applicant or registrant must
give facsimile notice of such material inadequacy within twenty-four
(24) hours, and within forty-eight (48) hours after giving such notice
file a written report stating what steps have been and are being taken
to correct the material inadequacy.
4. Section 1.16 is proposed to be amended by:
a. Revising paragraph (f)(1), and
b. Removing paragraph (f)(2) and redesignating paragraph (f)(3) as
paragraph (f)(2), as follows:
Sec. 1.16. Qualifications and reports of accountants.
* * * * *
(f) Extension of time for filing audited reports. (1) In the event
a registrant finds that it cannot file its certified financial
statements and schedules for any year within the time specified in
Sec. 1.10 without substantial undue hardship, it may request approval
for an extension of time, as follows:
(i) A registrant may file with its designated self-regulatory
organization an application for extension of time, a copy of which the
registrant must file with the Commission. The application shall be
approved or denied in writing by the designated self-regulatory
organization. The registrant must file immediately with the Commission
a copy of any notice it receives from the designated self regulatory
organization to approve or deny the registrant's request for extension
of time. A written notice of approval shall become effective upon the
filing by the registrant of a copy with the Commission, and a written
notice of denial shall be effective as of the date of the notice.
(ii) A registrant that is registered with the Securities and
Exchange Commission as a securities broker or dealer may file with its
designated self regulatory organization a copy of any application that
the registrant has filed with its designated examining authority,
pursuant to Sec. 240.17-a5(l)(1) of this title, for an extension of
time to file audited annual financial statements. The registrant must
also file immediately with the designated self-regulatory organization
and the Commission copies of any notice it receives from its designated
examining authority to approve or deny the requested extension of time.
Upon receipt by the designated self-regulatory organization and the
Commission of copies of any such notice of approval, the requested
extension of time referenced in the notice shall be deemed approved
under this paragraph (f)(1).
(iii) Any copy that under this paragraph (f) is required to be
filed with the Commission shall be filed with the regional office of
the Commission with jurisdiction over the state in which the
registrant's principal place of business is located (except that a
registrant under the jurisdiction of the Commission's Western Regional
Office must file the required copies with the Commission's Southwestern
Regional Office).
5. Section 1.17 is proposed to be amended by:
a. revising paragraphs (a)(1)(i)(B), (b)(4), (e)(1)(ii),
(h)(2)(vi)(C)(1) and (2), (h)(2)(vii)(A)(1) and (2), (h)(2)(vii)(B)(1)
and (2), (h)(2)(viii)(A)(1) and (2), (h)(3)(ii)(A) and (B),
(h)(3)(v)(A) and (B) and (h)(3)(vii);
b. adding new paragraphs (b)(7) and (b)(8);
c. revising the words ``three business days'' to read ``one
business day'' in both the first and second sentences of paragraph
(c)(5)(viii);
d. revising the words ``three business days'' to read ``one
business day'' in both the first and second sentences of paragraph
(c)(5)(ix); and
e. revising the reference to ``(a)(1)(ii)(A)'' to read
``(a)(1)(iii)(A)'' in paragraph (e)(1)(i) to read as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
(a)(1)(i) * * *
(B) The futures commission merchant's risk-based capital
requirement computed as follows:
(1) Eight percent of the total risk margin requirement (as defined
in Sec. 1.17(b)(8)) for all futures and options on futures positions
carried by the futures commission merchant in customer accounts (as
defined in Sec. 1.17(b)(7)), plus
(2) Four percent of the total risk margin requirement (as defined
in Sec. 1.17(b)(8)) for all futures and options on futures positions
carried by the futures commission merchant in noncustomer accounts (as
defined in Sec. 1.17(b)(4)).
* * * * *
(b) * * *
(4) ``Noncustomer account'' means a commodity futures or option
account carried on the books of the applicant or registrant which is
either:
(i) An account that is not included in the definition of customer
(as defined in Sec. 1.17(b)(2)) or proprietary account (as defined in
Sec. 1.17(b)(3)), or
(ii) An account for a foreign-domiciled person trading futures or
options on a foreign board of trade, and such account is a proprietary
account as defined in Sec. 1.3(y) of this title, but is not a
proprietary account as defined in Sec. 1.17(b)(3).
* * * * *
(7) ``Customer account'' means a commodity futures or option
account carried on the books of the applicant or registrant which is
either:
(i) An account that is included in the definition of customer (as
defined in Sec. 1.17(b)(2)), or
(ii) An account for a foreign-domiciled person trading on a foreign
board of trade, where such account for the foreign-domiciled person is
not a proprietary account (as defined in Sec. 1.17 (b)(3)) or a
noncustomer account (as defined in Sec. 1.17(b)(4)(ii)).
(8) ``Risk margin'' for an account means the level of maintenance
margin or performance bond that the exchange on which a position or
portfolio of futures contracts and/or options on futures contracts is
traded requires its members to collect from the owner of the account,
subject to the following:
(i) Risk margin does not include the equity component of short or
long option positions maintained in an account;
(ii) The maintenance margin or performance bond requirement
associated with a long option position may be excluded from risk margin
to the extent that the value of such long option position does not
reduce the total risk maintenance or performance bond requirement of
the account that holds the long option position;
(iii) The risk margin for an account carried by an FCM which is not
a member of the exchange on which the positions are traded should be
calculated as if the FCM were such a member; and
(iv) If a futures commission merchant does not possess sufficient
information to determine what portion of an account's total margin
requirement
[[Page 40848]]
represents risk margin, all of the margin required by the exchange,
clearing organization, or other futures commission merchant or entity
for that account, shall be treated as risk margin.
* * * * *
(e)(1) * * *
(ii) For a futures commission merchant or applicant therefor, 175
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(h)(2)(vi)(C) * * *
(1) 120 percent of the appropriate minimum dollar amount required
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 175
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(h)(2)(vii)(A) * * *
(1) 120 percent of the appropriate minimum dollar amount required
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 175
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(h)(2)(B) * * *
(1) 200 percent of the appropriate minimum dollar amount required
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 250
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(h)(2)(viii)(A) * * *
(1) 120 percent of the appropriate minimum dollar amount required
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 150
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(h)(3)(ii) * * *
(A) 120 percent of the appropriate minimum dollar amount required
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(B) For a futures commission merchant or applicant therefor, 150
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(h)(v) * * *
(A) 120 percent of the appropriate minimum dollar amount required
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
(B) For a futures commission merchant or applicant therefor, 175
percent of the amount required by paragraph (a)(1)(i)(B) of this
section;
* * * * *
(vii) Subordination agreements that incorporate adjusted net
capital requirements in effect prior to [The Effective Date of the Rule
Amendment]. Any subordination agreement that incorporates the adjusted
net capital requirements in paragraphs (h)(2)(vi)(C)(2),
(h)(2)(vii)(A)(2) and (B)(2), (h)(2)(viii)(A)(2), (h)(3)(ii)(B), and
(h)(3)(v)(B) of this section as in effect prior to [The Effective Date
of the Rule Amendment] and which has been deemed to be satisfactorily
subordinated pursuant to this section prior to [The Effective Date of
the Rule Amendment] shall continue to be deemed a satisfactory
subordination agreement until the maturity of such agreement. In the
event, however, that such agreement is amended or renewed for any
reason, then such agreement shall not be deemed a satisfactory
subordination agreement unless the amended or renewed agreement meets
the requirements of this section.
6. Section 1.18 is proposed to be amended by revising paragraph (b)
to read as follows:
Sec. 1.18 Records for and relating to financial reporting and monthly
computation by futures commission merchants and introducing brokers.
* * * * *
(b)(1) Each applicant or registrant must make and keep as a record
in accordance with Sec. 1.31 formal computations of its adjusted net
capital and of its minimum financial requirements pursuant to Sec.
1.17 or the requirements of the designated self-regulatory organization
to which it is subject as of the close of business each month. Such
computations must be completed and made available for inspection by any
representative of the National Futures Association, in the case of an
applicant, or of the Commission or designated self-regulatory
organization, if any, in the case of a registrant, within 17 business
days after the date for which the computations are made, commencing the
first month end after the date the application for registration is
filed.
(2) An applicant or registrant that has filed a Form 1-FR or
Statement of Financial and Operational Combined Uniform Single Report
under the Securities Exchange Act of 1934, Part II or Part IIA (FOCUS
report) in accordance with the requirements of Sec. 1.10 will be
deemed to have satisfied the requirements of paragraph (b)(1) of this
section.
Issued in Washington, DC, on July 1, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-17218 Filed 7-8-03; 8:45 am]
BILLING CODE 6351-01-P