[Federal Register: August 28, 2000 (Volume 65, Number 167)]
[Proposed Rules]
[Page 52051-52054]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28au00-19]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AB54
Minimum Financial Requirements for Futures Commission Merchants
and Introducing Brokers; Amendment to the Capital Charge on Unsecured
Receivables Due From Foreign Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend Rule 1.17(c)(5)(xiii) which requires a futures
commission merchant (``FCM'') or an independent introducing broker
(``IBI''), when computing its adjusted net capital, to take a capital
charge for certain unsecured receivables due from foreign brokers.\1\
The capital charge is equal to five percent of the unsecured receivable
[[Page 52052]]
balance. In computing the capital charge, however, the FCM or IBI may
exclude that portion of the unsecured receivable that represents the
amount required to be on deposit to maintain futures and option
positions (i.e., margin or performance bond requirements) on a foreign
board of trade provided that certain conditions are met. The foreign
broker must have received confirmation of ``comparability relief''
pursuant to Rule 30.10 from the Commission and the margin deposit must
be held by the foreign broker itself, by another foreign broker granted
Rule 30.10 ``comparability relief,'' or by a depository in the same
jurisdiction as either foreign broker that would qualify as a
depository for funds under Rule 30.7. In addition, to be exempt from
the capital charge, customer funds must be held by the foreign broker
in compliance with any conditions imposed by the applicable Rule 30.10
order.
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\1\ Commission regulations cited herein may be found at 17 CFR
Ch. I (2000).
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The proposal would amend the current rule by increasing the amount
of the unsecured receivable that is eligible to be exempt from the
capital charge from the minimum amount required to maintain futures and
option positions to the greater of: 150 percent of the amount required
to maintain the current futures and option positions in the account; or
100 percent of the greatest amount required to support futures and
option positions in the account at any time during the preceding six-
month period. The proposal also would continue to require the foreign
broker to receive Rule 30.10 ``comparability relief'' but would not
condition the exemption on the margin deposits be held by the foreign
broker itself, another foreign broker granted Rule 30.10
``comparability relief,'' or with a depository in the same jurisdiction
as either foreign broker that would qualify as a depository for funds
under Rule 30.7.
DATES: Comments must be received on or before September 27, 2000.
ADDRESSES: Comments should be mailed to: Jean A. Webb, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, N.W., Washington, D.C. 20581. In addition, comments may be sent
by facsimile to (202) 418-5521, or by electronic mail to
[email protected]. Reference should be made to ``Capital Charge on
Unsecured Receivables Due from Foreign Brokers.''
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581;
telephone (202) 418-5495; electronic mail [email protected]; or Henry J.
Matecki, Financial Audit and Review Branch, Division of Trading and
Markets, Commodity Futures Trading Commission, 300 South Riverside
Plaza, Suite 1600 North, Chicago, IL 60606; telephone (312) 886-3217;
electronic mail [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
In 1978, the Commission implemented major revisions to its
regulations governing the minimum financial requirements for FCMs.\2\
As part of these revisions, the Commission adopted Rule
1.17(c)(5)(xiii) which required an FCM, in computing its adjusted net
capital, to take a capital charge for unsecured receivables resulting
from commodity futures and option transactions executed on foreign
boards of trade and which were due from foreign brokers that were not
registered with the Commission as FCMs or with the Securities and
Exchange Commission (``SEC'') as securities brokers or dealers. The
capital charge was equal to five percent of the unsecured receivable
balance.
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\2\ 43 FR 39956 (September 8, 1978).
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The Commission had minimal interaction with foreign regulators and
limited experience with trading on foreign futures and option markets
when it adopted Rule 1.17(c)(5)(xiii). The capital charge reflected the
Commission's concern that unsecured receivables from foreign brokers
represented a greater risk to an FCM's financial condition than
comparable receivables due from registered FCMs or securities brokers
or dealers which, under Commission and SEC capital rules, are required
to maintain sufficient liquid assets to cover liabilities associated
with funds received to maintain or carry futures and option positions
on foreign boards of trade.
Subsequently, the Commission gained greater experience with foreign
futures and option trading. In this regard, in 1987 the Commission
adopted Part 30 of its regulations to govern the domestic offer and
sale of futures and option contracts traded on foreign boards of
trade.\3\ Furthermore, in 1996 the Commission, citing an enhancement of
capital standards monitoring and an increased cooperation among
regulators globally, amended Rule 1.17(c)(5)(xiii) to exclude from the
five percent capital charge that portion of the unsecured receivable
that represented amounts required to be on deposit to maintain futures
and option positions transacted on foreign boards of trade.\4\ Deposits
in excess of required margin or performance bond continued to be
subject to the capital charge. In addition, to be exempt from the
capital charge, the receivable had to be due from a foreign broker that
had received confirmation of ``comparability relief'' in accordance
with a Commission order issued under Rule 30.10 and the margin deposits
had to be held by the foreign broker itself, another foreign broker
that had received confirmation of Rule 30.10 ``comparability relief,''
or at a depository that qualified as a depository pursuant to Rule 30.7
and which was located within the same jurisdiction as either foreign
broker.\5\
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\3\ 52 FR 28980 (August 5, 1987). The Part 30 rules generally
extended the Commission's existing customer protection requirements
for products offered or sold on contract markets in the United
States to foreign futures and option products sold to United States
customers by foreign firms. Specifically, the Part 30 rules include
requirements with respect to registration, risk disclosure, capital
adequacy, protection of customer funds, recordkeeping and
transaction reporting, sales practices and compliance procedures
that are generally comparable to those applicable to transactions
conducted on or subject to the rules of U.S. contract markets.
\4\ 61 FR 19177, 19184 (May 1, 1996).
\5\ Under Rule 30.10 and Appendix A thereto, the Commission may
exempt a foreign firm from compliance with certain Commission rules
provided that a comparable regulatory system exists in the firm's
home country and that certain safeguards are in place to protect
U.S. customers, including an information-sharing arrangement between
the Commission and the firm's home country regulator or self-
regulatory organization (``SRO''). Once the Commission determines
that the foreign jurisdiction's regulatory structure offers
comparable regulatory oversight, the Commission issues an order
granting general relief subject to certain conditions. Foreign firms
seeking confirmation of this relief must make certain
representations set forth in the Rule 30.10 order issued to the
regulator or SRO from the firm's home country. Appendix C to Part 30
lists those foreign regulators and SROs that have been issued a Rule
30.10 order by the Commission.
Rule 30.7(c) sets forth acceptable depositories for funds
deposited by U.S. customers with foreign brokers for futures and
option trading on foreign boards of trade.
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II. Proposal
The Joint Audit Committee (``JAC'') has asked the Commission to
amend Rule 1.17(c)(5)(xiii) to expand the capital charge exemption on
unsecured receivables from a foreign broker that has received
``comparability relief'' under Rule 30.10, but is not a registered FCM
or a registered securities broker or dealer.\6\ Specifically, the JAC
has asked that the exemption be expanded to include balances in excess
of required
[[Page 52053]]
margin deposits. In support of its request, the JAC has stated that
FCMs and IBIs generally deposit amounts in excess of required margin
with foreign brokers as part of prudent risk management policies. In
addition, the JAC has stated that increasing the amount of the deposit
subject to the exclusion would allow FCMs to leave more funds on
deposit with a foreign broker, thereby reducing costs associated with
frequent transfers of funds between an FCM or IBI and a foreign broker.
Accordingly, the JAC has asked that the amount exempted from the
capital charge be expanded to a ``reasonable amount of funds'' to
support the commodity futures and option trading activity conducted
through the foreign broker.
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\6\ The JAC is comprised of representatives of the audit and
compliance departments of the domestic SROs and the National Futures
Association. The JAC coordinates the industry's audit and ongoing
surveillance activities to promote a uniform framework of self-
regulation.
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The Commission agrees with the JAC in principle and is proposing to
amend Rule 1.17(c)(5)(xiii) in this regard. The Commission believes,
however, that the phrase ``reasonable amount'' is overly broad and
subject to a wide range of interpretation. Therefore, for purposes of
Rule 1.17(c)(5)(xiii), the maximum amount eligible for exclusion from
the five percent capital charge is proposed to be the greater of: (1)
150 percent of the amount currently required to support futures and
option transactions in an account; or (2) 100 percent of the maximum
amount required to support futures and option transactions at any time
during the preceding six-month period. The Commission believes that the
proposed amendment would provide the cash management flexibility that
the JAC has requested on behalf of its member FCMs and IBIs without
unnecessarily broadening the capital charge exemption. The Commission
further believes that the proposal would provide greater legal
certainty than the phrase ``reasonable amount.''
The JAC also has asked the Commission to amend Rule
1.17(c)(5)(xiii) to eliminate the requirement that an FCM or IBI be
responsible for monitoring the ultimate destination of funds deposited
with a foreign broker in order for such funds to be exempt from the
capital charge. As set forth above, to be exempt from the capital
charge, the funds must be held in accordance with the mandates of the
applicable Rule 30.10 order by the foreign broker itself, another
foreign broker that has received confirmation of Rule 30.10
``comparability relief,'' or at a depository that qualifies as a
depository pursuant to Rule 30.7 and is within the jurisdiction of
either foreign broker. In support of its request, the JAC has stated
that requiring FCMs and IBIs to monitor the flow of funds deposited
with a foreign broker is impractical from an operational standpoint and
overly burdensome.
By granting Rule 30.10 ``comparability relief'' to a foreign
broker, the Commission has made a determination that the foreign broker
is subject to a regulatory structure that is comparable to the
regulatory structure imposed on entities that operate on U.S. exchanges
by the Commodity Exchange Act and Commission regulations.\7\ Of
particular relevance to the relief requested by the JAC, the
Commission, as part of the Rule 30.10 petition process, assesses the
extent to which a foreign regulator's or SRO's regulatory program
imposes bona fide minimum financial requirements on its regulatees or
members as well as the protections afforded customers by the
segregation of funds and the bankruptcy rules.\8\ The Commission's
determination that standards and protections exist pursuant to the
foreign regulatory structure supports an easing of the capital charge.
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\7\ U.S.C. 1 et seq. (1994).
\8\ The specific elements examined in evaluating whether a
particular foreign regulatory program provides a basis for
permitting substituted compliance for purposes of exemptive relief
pursuant to Rule 30.10 are set forth in Appendix A to Part 30.
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Furthermore, the proposed amendments to the capital rule do not
alter a foreign broker's obligation to comply with the applicable Rule
30.10 order when dealing with the funds of U.S. customers trading on
foreign futures and option markets nor an FCM's or IBI's obligation to
comply with applicable provisions of Part 30. Accordingly, the
Commission is proposing to amend Rule 1.17(c)(5)(xiii) to eliminate the
requirement that, to be exempt from the capital charge, margin deposits
must be held by the foreign broker itself, another foreign broker
granted Rule 30.10 ``comparability relief,'' or a depository in the
same jurisdiction as either foreign broker that qualifies as a
depository for funds under Rule 30.7.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments discussed herein
would affect registered FCMs and IBIs. The Commission has previously
determined that, based upon the fiduciary nature of FCM/customer
relationships, as well as the requirement that FCMs meet minimum
financial requirements, FCMs should be excluded from the definition of
small entity.\9\
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\9\ 47 FR 18618-18621 (April 30, 1982).
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With respect to IBIs, the Commission stated that it is appropriate
to evaluate within the context of a particular rule whether some or all
introducing brokers should be considered to be small entities and, if
so, to analyze the economic impact on such entities at that time.\10\
The proposed amendments to Rule 1.17(c)(5)(xiii) do not impose
additional requirements on an IBI. Thus, on behalf of the Commission,
the Chairman certifies that the proposed amendments will not have a
significant economic impact on a substantial number of small entities.
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\10\ 48 FR 35248, 35275-78 (August 3, 1983).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. (Supp.
I 1995), imposes certain requirements on federal agencies (including
the Commission) to review rules and rule amendments to evaluate the
information collection burden that they impose on the public. The
Commission believes that the proposed amendments to Rule
1.17(c)(5)(xiii) will impose a minimal information collection burden on
the public, namely those FCMs and IBIs who wish to take advantage of
the exemption will be required to maintain a record of the margins
required to be on deposit with a foreign broker over the preceding six
month period. However, this burden is believed to be minimal when
compared to the capital savings to be generated by the exclusion of
increased amounts from the capital charge.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures.
In consideration of the foregoing and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, Sections
4(b), 4f, 4g and 8a(5) thereof, 7 U.S.C. 6(b), 6d, 6g and 12a(5), the
Commission hereby proposes to amend Chapter I of Title 17 of the Code
of Federal Regulations 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, 2a, 4, 4a, 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.
2. Section 1.17 is proposed to be amended by revising paragraph
(c)(5)(xiii) to read as follows:
[[Page 52054]]
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(c) * * *
(5) * * *
(xiii) Five percent of all unsecured receivables includable under
paragraph (c)(2)(ii)(D) of this section used by the applicant or
registrant in computing ``net capital'' and which are not due from:
(A) A registered futures commission merchant;
(B) A broker or dealer that is registered as such with the
Securities and Exchange Commission; or
(C) A foreign broker that has been granted comparability relief
pursuant to Sec. 30.10 of this chapter, Provided, however, that the
amount of the unsecured receivable not subject to the five percent
capital charge is no greater than 150 percent of the current amount
required to maintain futures and option positions in accounts with the
foreign broker, or 100 percent of such greater amount required to
maintain futures and option positions in the accounts at any time
during the previous six-month period, and Provided that, in the case of
customer funds, such account is treated in accordance with the special
requirements of the applicable Commission order issued under Sec. 30.10
of this chapter.
* * * * *
Issued in Washington D.C. on August 23, 2000 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-21904 Filed 8-25-00; 8:45 am]
BILLING CODE 6351-01-P
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